Contracts Not to Sue: A Definition
A Contract Not to Sue is a contract whereby the parties agree not to institute litigation against one another unless the parties first submit the dispute in question to voluntary mediation. Essentially, prior to either party having the right to sue in court, they must first try to mediate their respective grievances before an independent third party who is unbiased, and without any stake in the outcome.
A Contract Not to Sue is considered an alternative dispute resolution (ADR) device. ADR agreements are generally defined as "a written provision in any agreement to submit to arbitration any controversy thereafter arising out of such agreement."
In the event that the named parties disagree on whether their disagreement has been subject to a binding Contract Not to Sue, it will be up to the court to determine its applicability. Courts will enforce a Contract Not to Sue in all but extraordinary situations. In the case of Jaffke v. Redmond (1962) , the Supreme Court of Illinois stated that, "If the terms of the contract are clear and specific, they must be enforced as written." Also, in Furex, Inc. v. Superior Court (1965), the California courts enforced a Contract Not to Sue that determined that "any controversy" is not necessarily limited to a contractual dispute, but clearly included fraud and unfair trade practices claims. The result was beyond the control of either party, and therefore, the court held that such a contract is enforceable.
A Contract Not to Sue is generally subject to fundamental contract law and is enforceable if the following elements are generally met:
The most common context in which Contracts Not to Sue tend to appear are in the context of commercial leases. For example, landlords and commercial tenants often use supplemental agreements to their leases that require the named parties to mediate any grievances they might have against one another prior to filing suit.
Elements of a Contract Not to Sue
To ensure that the agreement is legally enforceable and that it clearly sets forth the agreed-upon terms, the Contract Not to Sue should include several key components. The presence of these elements in the Contract Not to Sue removes the possibility of ambiguity that would make the contract open to judicial interpretation or even challenge as void.
Clarity
One of the most important aspects of a Contract Not to Sue is the clarity with which the terms are expressed. When drafting or evaluating a contract to settle a claim or dispute, both parties must be sure to define the affected areas of their potential liability as well as all agreed terms so there are no areas for misconstruing its demands. Since the purpose of this contract is to limit the exposure of the parties involved, it is in the best interest of both that the terms of the contract are crystal clear so that future litigation will be avoided.
Mutual Consent
The Contract Not to Sue should make full disclosure of each party’s existing obligations – be they local, state or federal – to one another so that mutual consent can be established. With this, there can be no question that an outside jurisdictional entity can come in and enforce particular aspects of contract that may overlap with those obligations each party has already established elsewhere. If a conflict does arise between these circumstances, legal intervention can be sought to enforce compliance with the Contract Not to Sue while simultaneously not placing further limitations on a party’s ability to comply with preexisting obligations.
Consideration
Almost every deal or trade requires that a person or entity make some form of exchange in order to receive the desired payoff. The same is true for the transfer of liability restrictions that occurs in a Contract Not to Sue. Each party involved should be aware of what they are gaining and selling so that they can arrange a mutually beneficial deal. In some cases, for instance, it is useful for a previously responsible party to take on the role of a guarantor for another entity and thereby be substituted for that entity in the agreement with the expectation that the newly exposed party will take an action on the behalf of the original party that alleviates their losses.
Legal Enforceability
The provisions in a Contract Not to Sue should be clear and composed in writing so that a court can review and verify these terms to be sure they are reasonable and legal. It is very important to outline the terms precisely so as to avoid ambiguity. If terms are defined in a certain way, then they should not be construed to have any other meaning.
Legal Implications and Possible Advantages
Understanding Contracts Not to Sue: A Comprehensive Guide
In most cases, a Contract Not to Sue is a better alternative than litigation. Minimizing costs and ensuring confidentiality can pay off significantly in the long run. For example, contracts not to sue are more likely to be enforced by the courts than a verbal agreement. In addition, the Plaintiff and Defendant will more likely be able to predict the outcome of their case, which may make it easier to settle your case without having to go to trial. On top of that, contracts not to sue form the basis of the court judgment giving the parties (the plaintiff and the defendant) the best chances at collection in the event that any future enforcement action is necessary.
Distinctions Between a Contract Not to Sue and Other Types of Contracts
When compared with other legal agreements, contracts not to sue have several key differences. To start, a contract not to sue is generally limited in scope to the dispute at hand and can only be enforced between the parties to that agreement. In contrast, indemnity agreements and releases may impose obligations on third parties. For example, a release may also prohibit a party from bringing a lawsuit against third parties, such as a contractor, whose alleged wrongdoing led to a lawsuit against one of the other parties to the release.
Because they have a narrower scope than other legal agreements, a contract not to sue is typically more efficient to draft. Even though a contract not to sue "carries the negative implication that you will be sued if you were to violate," the contract "doesn’t typically contain any language of obligation," such as willful misconduct or negligence. Moreover, unlike indemnity agreements and releases, which are often based on a party’s fault, a contract not to sue "is not driven by questions regarding fault[.]"
Lastly, a contract not to sue is "frequently used as a last step before litigation." When negotiating a contract not to sue, parties attempt to resolve a dispute without resorting to litigation. Should that fail, contract not to sue is the next best thing to having the dispute resolved by a court.
How to Create an Enforceable Contract Not to Sue
In order to ensure that a contract not to sue is legally binding and enforceable, it is important that the parties take proper steps in drafting it. There are many terms that are fundamental to an enforceable contract not to sue. Even though the parties may be already in agreement over the terms of the litigation, anything less than a complete understanding of the parties’ obligations could lead to a dispute, potentially rendering the contract invalid and subject to challenge.
There are several fundamental terms that are necessary for the enforceability of a contract not to sue. First and foremost, the consideration should be clearly definitized. Consideration for a contract may amount to many things, but the court’s analysis of the validity of the contract will focus on whether the consideration is adequate and sufficient. Also, the contract must be in writing so that it satisfies the Statute of Frauds.
The second step is the accurate identification of the litigants involved. The parties signing the contract must have the legal authority to execute the contract . The parties must include all of the parties involved in the underlying litigation; otherwise, the contract may be challenged and declared invalid. It is not uncommon for a party to enter into an agreement with one party without knowledge that there may be other parties to the transaction.
The third step is completion of the exchange of value and execution of the contract. This step is particularly important because it is the consideration that is exchanged between the parties. When parties contract to exchange money, the funds must change hands simultaneously. That means that the funds should be deposited in an escrow account with a third party. Finally, the parties should try to reduce the terms of the contract to writing. In addition, the parties to a contract not to sue should consider using counsel experienced in drafting these type of agreements. Counsel can provide a neutral opinion on the adequacy of the consideration as well as evaluate the parties’ capacity and competency to enter into the agreement.
Potential Issues and Enforcement Difficulties
Despite their seemingly straightforward nature, contracts not to sue can be ripe for attacks. A common challenge to enforcement is an alleged public policy conflict. The question is whether the contract creates an obstacle to achieving a public good and/or muzzles an important government actor (like the Attorney General). See, e.g., Boston Edisco Co. v. Dist. of Columbia, D.C. Circuit No. 14-cv-01542, 2014 U.S. App. LEXIS 21706 (4th Cir. Nov. 6, 2014) (holding that a consent decree is not a compromise of a public interest claim under the doctrine of parens patraie); United States v. Iron Mountain Mines, Inc., 170 F. Supp. 2d 955, 966 (E.D. Cal. 2001) (holding that the context in which the defendants and the government agreed not to sue was important to the question whether defendants were entitled to contribution from third parties); Hartley v. Bank of New York, 954 F. Supp. 192, 195 (S.D.N.Y. 1996) ("In negotiating settlements concerning weak claims, parties should be mindful that the settlement agreement may be ruled against public policy.").
Another common challenge is that the contract is invalid because it is a waiver of a legal right. As long as the contract is supported by "consideration," contracts not to sue are generally valid, but broad waivers of crime victims’ rights or waivers of habeas corpus rights could be invalidated as against public policy. See, e.g., Benjamin v. Fraser, 264 F.3d 175, 184 (2d Cir. 2001).
Contracts not to sue generally do not create a prohibition on the prosecution of a case. See Greenspun v. Del E. Webb Develop. Co., 540 P.2d 703, 710 (Nev. 1975). But whether a Contract Not to Sue creates such a prohibition should be tested in the specific context of particular facts.
Case Examples and Practical Applications
In this section, we will examine some real-world examples and case studies where Contracts Not to Sue have either been utilized effectively or have been contentious. By analyzing the outcomes of these select cases, we will shed light on the best practices for drafting a valid and enforceable Contract Not to Sue.
Case Study 1: Health Care Disputes
In a dispute between an insurer and a health care provider, the parties entered into a settlement agreement that included a Contract Not to Sue. Arising out of a contractual dispute, the settlement agreement formed the basis for a breach of contract action. The insurer then launched suit against an insured, allegedly covered under the agreement. In the hands of the appellate court, the insurer supported its claims by presenting evidence that the insured had the "right" to defend the insured’s position pursuant to its obligation under the agreement. The court found that this right to defend in the absence of coverage did not constitute a "legal injury."
Case Study 2: Intellectual Property
In another example, two tech firms, TechCo and HardwareCo, entered into a Contract Not to Sue as a condition of settlement in which HardwareCo waived its right to enforce its communal intellectual property rights over certain products. TechCo then secured financing with an outside investor. HardwareCo objected to TechCo’s capital raise and notified TechCo of its intent to sue the company for copyright infringement, as its license and right to collect royalties did not extend to TechCo’s new investors. Pursuant to the terms of the Contract Not to Sue, TechCo sought a declaratory relief barring its partner from suing the corporate entity.
Case Study 3: Land Use
In yet another example, a land use applicant presented the Zoning Board with a Contract Not to Sue where the applicant agreed to withdraw its application if a third party joined its dispute with the agency. The Board approved the application without the third party’s consent. Subsequently, the third party refused to consent to a framing of the dispute. The agency then initiated an inverse homestead claim against the third party. While the Land Use Board hustled to limit its own liability, the third party attempted to unsuccessfully intervene. Eventually, the agency’s claim was unsuccessful.
While the Contract Not to Sue is a valuable toll gate approach to indemnifying indemnity payments and securing your rights, it may result in a loss of leverage in future negotiations. In the event you wish to pursue broad exclusionary language akin to that used by the insurer in the first case, you’ll want to have a good faith reason for pursuing that approach.
Things to Keep in Mind Before Signing a Contract Not to Sue
Before signing a Contract Not to Sue (CNS) or other dispute resolution document, individuals and businesses should consider a few important factors, such as:
1. Have You Already Sued?
Even if there has not yet been a formal Complaint filed with the Court, most Courts will deem a document entitled "Notice of Claim" or "Notice of Lawsuit" as a "Complaint." As such, if, for example, Plaintiff has filed an action against you and subsequently offers to settle that action for $20,000. The offer includes a CNS where Plaintiff will release you from liability, file a Satisfaction of Judgment, and withdraw its pending action as long as you pay Plaintiff the $20,000. In this scenario, you need to know that, even if the document referred to is not called a "Complaint" (that is an "unfiled document"), it does not preclude you from filing your own claim against Plaintiff later. It is important that you consider future claims that you may have against your opponent before accepting a CNS.
2. Will You Still Be Able To Sue Later?
Whether you are the plaintiff or defendant in a lawsuit, what happens if your right to file suit is barred by the passage of time known as the statute of limitations? Essentially, even if you believe a claim is valid, it may not be able to be pursued in the future due to the statute of limitations. In California for example, if you do not file a lawsuit for a breach of contract within two years (for written contracts) or four years (for oral contracts), your lawsuit will be barred.
3. Are You Barred By The Terms of the CNS?
Whether you are the plaintiff or defendant in a lawsuit, if you have signed a CNS stating that you will never sue the attorney who represented you in a particular action , but in fact you now have claims that you would like to pursue against that attorney, you need to know you may be barred from pursuing those claims in Court.
4. Are You Barred By The Terms of a Prior Settlement?
If you have an existing settlement agreement where you have waived your right to pursue a lawsuit against your opposing party in the future, you may be barred from pursuing that lawsuit.
5. Is It Consistent With Your Existing Settlement Agreement?
It is not uncommon to include several terms within a single settlement agreement where Plaintiff is releasing Defendant from numerous claims. For example, if you are the Plaintiff, you may have released a Defendant from liability in an existing settlement agreement for not only the original lawsuit but also for intellectual property claims and employment claims. However, if you are the Defendant and are now being offered a CNS to resolve the existing litigation, you may want to ensure that you are not inadvertently releasing other claims to which you felt you were entitled to more rights.
6. Are You Providing Adequate Consideration In Exchange For The Release Of Liability?
And last, but certainly not least, have you considered whether your payment to the opposing party is relative to the amount of harm done? If your claim was for $5 million dollars as a result of an explosive chemical that burned down all of your buildings, and the offer to resolve the case is to have a CNS where you only pay $2,500 to get out of the litigation is very unlikely consideration. While we would all like to resolve valid claims in exchange for less than they are worth, this type of contact giving up valuable rights without protections can lead to severe future issues.