The Enforceability of Non-Suit Agreements Explained

What is an Agreement Not to Sue?

An agreement not to sue is a pact among parties that does not require either party to commence a lawsuit against the other, so long as a certain condition is met. For example, this agreement may arise where one party is responsible for the negligent actions of an injured party, but wishes to avoid legal action in exchange for the payment of damages that constitute the same or a greater amount as any possible future judgment or settlement under C.R.S. § 8-41-203. The agreement may also be used to settle a claim or liability with one employee, who then agrees not to sue an employer for suits the employee might bring against the employer.
For an agreement not to sue to be valid, it must address specific issues, such as remedies, releases, consideration, confidentiality, and contract language . If any of these issues are not expressly addressed in the agreement, it raises the risk that it will not be enforceable. Colorado courts have recognized enforceability of such agreements, provided they meet the requisite conditions, but disputes do arise regarding the enforceability of the agreements, particularly when one party has failed to fulfill its obligations, misleading statements are made, and when there is an argument that the agreement was signed under duress.
An important note with regard to agreements not to sue is that the scope and subject matter of the agreement must be clear and unambiguous. Ambiguous language can give rise to an argument that the agreement is not enforceable, or at least not as to certain claims.

Rules Regulating Agreements Not to Sue

The enforceability of an agreement not to sue turns on fundamental principles of contract formation, breach, and abandonment. Contract formation requires an offer, acceptance, and consideration. Offer involves the manifestation of an intent by one party to be bound to an identified performance. Acceptance requires a manifestation of assent by another party to the terms of the offer. Consideration involves the existence of a benefit to the promisor and detriment incurred by the promisee. An agreement not to sue is not a release from liability for the damages resulting from the alleged wrongful act; rather, such an agreement merely suspends the right to bring an action until the condition triggering the right to sue. If the condition is not fulfilled, the promise to refrain from suing continues in effect, and after expiration of the period of deferral gives rise to substantive rights to which the promisee may be entitled under the agreement.
Under § 26 of the Restatement (Second) of Contracts, the general rule is that "if the requirements of [contract] formation are met, a promise modifying an earlier promise is binding if the modification is fair and equitable in view of the circumstances which did not appear when the contract was made." Although there are few published decisions interpreting this provision as it relates to settlement agreements, courts consistently have enforced non-suit agreements with similar language, applying covenant not-to-sue principles. Courts have held that a promise not to sue entered into during the course of a judicial proceeding remains binding if supported by consideration, and that the specific consideration needed for a release of claims is often less than what is required for an enforceable contract. For purposes of the statute of frauds, however, the provision generally requires the proffered promise to be in writing and signed by the party to be bound. Because many settlement agreements involve the compromise of existing litigation where the parties are represented or are otherwise known to each other, the statute of frauds is not often raised.

Requirements for Enforceability

To be enforceable, an agreement not to sue must be supported by adequate consideration. The common law requires that a promise or act made in consideration for a waiver of Chancery jurisdiction to be something more than mere technical benefit; it must be some benefit in fact. See Riddleehuber v. Riddlebuber, 289 S.W.2d 415 (1956); see also Fondren v. Bryson, 148 Pa. 261 (1891). The benefit to be derived from the agreement must be sufficient to induce a prudent man to make it – not that the amount to be paid be sufficient to move a court of equity to grant relief; but that it be sufficient, according to the ordinary impulses of human nature, to induce a prudent man to act. Wallace v. Wallace, 37 Misc. 422 (N.Y. Prefix 1930). An agreement may be validly made in Barain Unions for the purpose of avoiding suits. See 2 Pomeroy’s Equity Jurisprudence, at 985-986 (5th ed. 1941). In fact, the English courts have defended this principle in the face of the very strongest suggestions to the contrary, for example in one case involving an agreement to compromise and discontinue a suit for condition of paying a sum of money, provided the suit was duly prosecuted. See McKay, et al. v. Macon [1837] 3 Beavan 221.

Common Issues and Limitations

Common challenges to their enforceability include the argument that no contract existed between the parties, for various reasons. Most commonly, one party may assert that they lacked capacity; however, several other defenses have relatively similar chances of success. For instance, the defendant may claim to have been under duress, and therefore unable to consent. Parties have also challenged agreements not to sue by asserting that they were incapable of forming a meeting of the minds and, therefore, that no contract existed at all. Finally, parties have claimed that their agreement lacked consideration, arguing that there was no exchange of something of value.

Case Examples: How Courts Have Interpreted Them

In the case of Smith v. Cole, 192 So. 2d 149 (Ala. 1966), the Alabama Supreme Court held that an agreement not to sue for personal injuries entered into with a joint tort-feasor as part of a settlement was valid, thus barring Smith’s claim against Cole. Although in ABS v. Davis, 540 So. 2d 758 (Ala. 1988), the Alabama Supreme Court held that an injured party’s acceptance of payment from both his employer and a joint tort-feasor extinguished the injured party’s claims against the employer. The Alabama Supreme Court refers to the Smith decision as a "known exception" to that rule of ABS.
ABS is not the only Alabama case holding that an injured party’s receipt of compensation from one tort-feasor waives the injured party’s claims against other tort-feasors. In Dean v. Green Tree Acceptance, Inc., 555 So. 2d 1096 (Ala. 1989), the Alabama Supreme Court held that when an injured party received payment from State Farm in full satisfaction of his claims arising out of an accident, the injured party’s acceptance of the payment barred his claim against the other tort-feasors. This notwithstanding a joint tort-feasor’s argument that the injured party’s acceptance of compensation from another joint tort-feasor was "tendered in trust" and State Farm’s nicely-drafted letter offering the injured party the choicest of three options of acceptance waiving his claims.
Even though courts often refer to the action of an injured party’s acceptance of payment from one joint tort-feasor as settlement, the actions of Dean and Smith were neither proffered nor packaged as settlements. Neither was there any indication that the defendant tort-feasor sought or induced the plaintiff tortfeasor’s action in order to extinguish the injured party’s claims against all defendants. On the contrary, the Smith court actually noted that the defendant tort-feasor’s written offer contained no reference to or expression of intent to enter into a compromise or settlement.
In Pugh v. Merchants National Bank, 74 F.3d 402 (11th Cir . 1996), the United States Court of Appeals for the Eleventh Circuit relied on Dean in holding that the injured party’s payment of a $500,000 settlement sum under a "satisfaction piece" to her direct tort-feasor operated to extinguish her right to collect the remaining $325,000 owed by her joint tort-feasor. Pugh’s acceptance of her direct tort-feasor’s tender was deemed binding despite Pugh’s claim that her direct tort-feasor intended the satisfaction piece to merely be a "partial satisfaction" of Pugh’s claims.
In Reddy v. Carpenter, 590 So. 2d 154 (Ala. 1991), the Alabama Supreme Court relied upon Smith, Dean, and Pugh in refusing to enforce an agreement not to sue between husband and wife, holding that such an agreement violates public policy where it results in the division of funds and treatment of the non-injured spouse as a surety to the joint tort-feasors.
Given the foregoing caselaw, furthermore, it is clear that the term "release" does not appear to require language expressly releasing claims generally nor does it imply as such. In fact, the court in Smith specifically questioned "whether Smith’s release constitutes a ‘general release’ which has effect of discharging all alleged joint tort-feasors." Smith argued that his contract with the primary tort-feasor was void because it constituted a general release or settlement agreement. Smith argued that the general release not only violates public policy but also that all joint tort-feasors must consent before a release can be effective against them all. The Alabama Supreme Court rejected Smith’s arguments and upheld the enforcement of the agreement.
The court in Pugh also held that: Partial satisfaction of a claim by one defendant does not preclude the plaintiff from pursuing the unsatisfied portion of the claim against a joint tortfeasor. However, if the parties execute a settlement agreement, the terms of which extinguish and/or limit the liability of all joint tortfeasors, the settlement is valid and enforceable as to all joint tortfeasors if all joint tortfeasors consent by some express or implied act.

Tips for Drafting Agreements Not to Sue

Keep it short and sweet.
Agreements not to sue can be complicated, but they don’t have to be. If possible, keep the agreement to a page or two, and use clear, simple language. Be direct and to the point.
Do not overlook the importance of consideration.
Non-suit agreements are contracts. As such, they are enforceable only when supported by consideration. Consideration is something of value exchanged as the basis for entering into a contract. With respect to a non-suit agreement, an exchange of promises between the parties usually suffices. In other words, the parties would promise not to sue one another. The parties should avoid lumping numerous promises on one another into a single sentence. For example, promising both not to file suit could be ineffective consideration for a promise not to file suit, and vice versa.
Consult consumer protection statutes before drafting an agreement not to sue.
Each state has consumer protection statutes barring lawsuits that act as a de facto waiver of known liability. Often, the enforcement of non-suit agreements would violate those statutes.
Consider negotiating and including a statement of governing law and forum selection clauses.
Many agreements not to sue omit governing law and forum selection clauses. This is unfortunate, because if the agreement is silent on governing law and forum selection, a court in litigation over its enforcement may be compelled to apply that court’s own choice of laws rules to determine which jurisdiction’s laws apply, and the laws in those jurisdictions may differ from the laws in the jurisdiction where the agreement was entered.

Non-Suit Agreements Alternatives

When a lawsuit appears inevitable, there are several alternatives to non-suit agreements that both parties and their attorneys should consider in deciding whether an agreement not to sue is appropriate. Generally, these alternative measures involve decisions concerning discovery of the underlying records, evidence presented and positions taken in court. By way of example, the use of orders granting "attorney’s eyes only" access to particular attorneys permits outside consulting attorneys or in-house attorneys who have no outside litigation responsibility to review and analyze the contents of those documents without obtaining a copy of the documents for their files. These agreements must be negotiated with opposing counsel when the production of the records is at issue. Depending on the circumstances of a case, attorney’s eyes only agreements may satisfy best corporate practices, including Sarbanes-Oxly and other requirements for disclosure.
Another alternative is to negotiate a settlement agreement, with or without the primary defendant being a party. A settlement agreement might even be useful prior to commencement of litigation to condition commencement on the fulfillment of certain conditions . A settlement agreement can set parameters on the period of time in which the claims may be brought, the manner in which claims may be made (payment of a percentage of the loss suffered by the company, payment of a multiplier of some market indicator, based on multiples of revenue, book value, or some predictor of future earnings), the extent of discovery permitted as to financial results, and the involvement of outside attorneys in analyzing documents when necessary. A settlement agreement can also address the payment of legal fees when the originating investigation leads to litigation. Having the benefit of a settlement agreement can influence the approach the parties take in any subsequent litigation, including the willingness of parties to seek motions for protective order to limit discovery or the production of documents.
Still another measure is the implementation of whole or partial arbitration clauses in commercial contracts that are the sources of potential litigation. Given that binding arbitration clauses are generally enforceable, a decision to arbitrate from the beginning rather than commence litigation may prove helpful if the other sources of potential litigation fail. Arbitration clauses can facilitate the resolution of disputes by avoiding any uncertainty in the event of a conflict between the forum selection provisions of the arbitration agreement and the forum selection provisions contained in the company’s constituent documents.