There are a number of legal considerations that should be taken into account when drafting a Deed of Release. A Deed of Release is a legally binding agreement between two or more parties used either to resolve dispute or to prevent one from ever arising. This article will discuss some of the common questions relating to commercial disputes and what to consider when entering a Deed of Release.
Parties to the Deed of Release
Each party that may have a claim in the matter is expected to enter the Deed of Release and release that claim. In a contractual dispute, the relevant parties would be the contracting parties, however it is not always so simple. If an entire group within a company was wronged, each person is expected to enter the Deed of Release. Ultimately, a Deed of Release will be sought from any aggrieved party. In terms of competency (capacity) to give a release, if the individual is a minor, or is unable to manage his or her own affairs because of some physical or psychological infirmity, who will enter a Deed of Release on their behalf? How about a public company looking to release an officer or director of the company, is this permitted under the Corporations Act? These are important questions that you should be asking your contract lawyer, as the answer will change depending on the individual circumstances of each case. In terms of solvency, if a party enters a Deed of Release and ends up paying money despite his or her insolvency, a liquidator or a trustee that is appointed after the party has given its release may unwind this transaction. Again, this is something you should discuss with your contract lawyer. Keep in mind that you may get out of a Deed of Release if another party induced you to enter the agreement by fraud, undue influence or unconscionable conduct.
Releasing different types of claims
In most contracts, each party will have numerous claims against the other, even in the simplest of agreements. This might be for a breach of a term, party misconduct during negotiations, or improper conduct in performing the contractual obligations. Claims can be purely contractual, based on civil wrongs (known as tort), or statutory (based on legislation). Sometimes there are several contracts that a Deed of Release will need to cover, such as in financial matters that involve mortgages, guarantees, and loan agreements. Not all claims can be released, as some matters might be criminal. This means that the party releasing the wrongdoer will not prevent potential police investigation, or investigations by regulatory bodies like the Australian Prudential Regulation Authority (“APRA”), the Australian Competition and Consumer Commission (“ACCC”), and the Australian Securities and Investment Commission (“ASIC”). When drafting a Deed of Release, it is good practice to draft the release broadly, so that unanticipated claims will also be covered. If the matter goes to Court, however, the Court may read down (limit its application) the generality of the clause to cover what the parties actually believed they were releasing. That said, provided the parties are clear about the “unknown” claims they are releasing, the terms of the Deed of Release may still apply.
What happens if only one wrongdoer is released?
If two people are jointly liable and one enters into a Deed of Release, by law the other will also be released. If they are severally liable (not jointly), a Deed of Release will only release the party that enters the agreement. If you are in a dispute and another party that committed the same wrong has entered into a Deed of Release without you, you may still have a ‘right of contribution’ from the released party, should you need to ‘make good’ the wrong. The right of contribution is the sharing of a loss by the two parties who are jointly liable for wronging a third party. Make good means to right the wrong.
Click here for part two on how to draft a Deed of Release to resolve a commercial dispute. It will discuss the binding nature of a release, what happens after it is effective, as well as the specific clauses and provisions that should be considered when drafting a Deed of Release.