Watch Your Words When Drafting a Settlement and Release
Say what you mean and mean what you say.
That’s the message from the Delaware Court of Chancery in a recent case involving an agreement between two parties to settle their dispute.
When the parties then began to fight over exactly what they had agreed to settle, the court dissected their agreement word for word.
The case started when CorVel Enterprise Comp, Inc. (“CorVel”) acquired The Schaffer Companies, Ltd. As part of the deal, Christopher Schaffer (“Schaffer”) signed a Noncompetition Agreement which prohibited him from competing with CorVel for a certain period.
After the deal closed, CorVel and Schaffer could not agree on the earn out payment that Schaffer was supposed to receive. They resolved their dispute by signing a Settlement and General Release Agreement (the “Release”).
After signing the Release, Schaffer starting working with a company that CorVel considered to be a competitor, prompting CorVel to sue Schaffer in order to enforce his Noncompetition Agreement.
Schaffer claimed that the Release relieved him of his duties under the Noncompetition Agreement, while CorVel countered that the Release dealt exclusively with the earn out dispute.
In finding in favor of Schaffer, the Court focused its analysis on the plain reading of the Release, pinpointing specific words and phrases all along the way. The operative Release language used by the Court in its decision was as follows:
CorVel fully releases, acquits, and forever discharges the shareholders [i.e., Schaffer] from any and all claims, actions, causes of actions, . . . grievances, obligations, rights, . . . losses or liabilities of whatever nature, whether known or unknown, disclosed or undisclosed, asserted or unasserted, in law and equity, contract or tort, or otherwise, including without limitation, any claims arising under federal, state or local law, and any claims arising out of any relationship between the shareholders [including Schaffer] and CorVel, including but not limited to any claims or counterclaims that were or could have been asserted in the Pending Case. Further, CorVel intends that this Release shall fully discharge the shareholders to the maximum extent permitted by law.
The Court noted the broad and general language of the Release –particularly highlighting the “including but not limited to” provision – in concluding that the Release was not limited to the earn out dispute, but rather covered Schaffer’s duties and obligations under the Noncompetition Agreement as well.
Other examples of common language found in the Release and used by the Court to support the determination that the scope of the Release included Schaffer’s noncompetition obligations include:
- The release and discharge from “any claims arising out of any relationship”, as well as the termination of Schaffer’s and CorVel’s “contractual relationship”.
- The use of the word “including” from a whereas clause.
- The provision that the Release “sets forth the entire agreement between the parties concerning the subject matter hereof” –which CorVel tried to use to argue its position, but instead the Court turned it around to say the “subject matter” included the noncompetition obligations.
Attorneys and their clients should learn a lesson from the Court’s ruling in CorVel. The Release’s words and phrases used by the Court in its analysis are commonly used in releases and settlements and could sometimes even be considered “boilerplate”. As a result, too often, these words do not receive the proper care and attention. Even the wording of a whereas clause, which could regrettably not be given the proper time of day, was used in the Court’s dissection of the Release and CorVel’s arguments.
As the Court concluded in its analysis, whether the parties truly intended a particular outcome “is one of those subjective questions that the Court neither can answer nor may even ask. Instead, courts must read the words for what they say.” Learn the lesson of CorVel, draft carefully and take no words (or intentions) for granted.
Craig Tzvi Gherman is a member of the Corporate Practice Group at Schwell Wimpfheimer & Associates. His clients range from individuals and start-ups to Fortune 500 public companies. His practice focuses on public and private company stock and asset based acquisitions and sales, mergers, tender offers, joint ventures and corporate governance/Sarbanes-Oxley compliance. He can be reached at cgherman@swalegal.com or 646 328 0788.
The information contained in this publication is not intended as legal advice or as an opinion on specific facts. For more information about these issues, please contact Craig Tzvi Gherman. The invitation to contact is not to be construed as a solicitation for legal work. Any new attorney/client relationship will be confirmed in writing.
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