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Release Agreements: Shielding Small Businesses from Legal Risks 

Release Agreements: Shielding Small Businesses from Legal Risks 

(Note: This post was initially published on LinkedIn, and the following iteration is a syndicated version of the same.)

When we think of release agreements our thoughts usually turn to mutual releases in which the parties agree the contract is terminated and all duties and obligations under the contract are cancelled.

Often labeled a mutual rescission and release agreement, this familiar document allows all parties to a contract to agree to cancel the contract and terminate obligations to fulfill any of its remaining terms.

Since the long-term success of mutually beneficial relationships is never guaranteed, this release is a good document for any business – large or small – to have.

Protecting Business Owners: The Role of Release Agreements

A well-drafted release agreement can protect a business owner from a lawsuit.

For example, many businesses pay severance to terminated employees to end an employment relationship on a positive note. However, if the terminated employee does not sign a release in exchange for the severance money, then she could sue the business on the grounds of discrimination, harassment, unpaid wages, or other claims.

If the employee does sign a release in exchange for severance money, then the employee has agreed to release any potential claims she had against the business, and any lawsuit filed is likely to be dismissed.

Another example where a release can protect a business owner from a lawsuit involves vendors.

Let’s say the vendor claims the business owes it $1,000.  The business counters that it owes the vendor only $500. The business offers the vendor $750 to settle the dispute.

Without a release, the vendor could agree to the settlement, take the business’s $750 and sue for the balance.  But, if the business owner gets the vendor to sign a release agreement in exchange for the $750 payment, then the vendor cannot later sue for the balance.

Accordingly, a release protects a business, its assets and possibly even the business owner. The lesson is: negotiate a specific release when you are or believe you may be involved in a dispute that could result in litigation…and judgment.

Understanding the Scope of Release Language

By specific release, you need to ensure that the language releases specific claims.

Many times, generic or boilerplate releases are so broadly drafted that they go beyond the matter at hand, release parties that should not be released, or fail to actually be mutual (i.e., each party releases the other).

A business should not offer individuals a release without having a solid understanding of their legal rights and what they would be giving up by the release.

Small businesses are particularly at risk of relying on generic releases. Consider these scenarios involving activities, premises, and marketing which small businesses deal with every day.

Liability Protection for Small Businesses: A Case Study Approach

Think about a small business exterminator who slips and falls on a customer’s premises. A general release protects a small business from liability when providing services on property owned by another person or business.

What about an independent restaurant that hosts a customer’s social event? An activity release of liability protects a business from liability for injuries or damages that occur during an activity the business hosts.

How about a local real estate agent who enters a property to take photographs to list it for potential buyers? A release by the property owner gives permission to photograph and may limit liability in the event of damage or injury.

Small business owners often need a photo or testimonial from a longtime customer for marketing purposes. A customer release gives permission to use them in marketing materials like a website or brochure.

Finally, many small businesses use contests to drive business. A business that runs a contest needs a release for permission from the winner to use their name and likeness in marketing materials.

Common Rationalizations: Overcoming Barriers to Release Agreements

In our experience, small business owners will rationalize not having proper releases in place on two grounds:

  • One, they’ll argue that much of what we’ve discussed only poses some financial risk. Common sense tells us that some risk isn’t no risk (and some risk can bankrupt a business!), so keep those releases in your company’s “tool kit”.
  • Second, they’ll contend they don’t need to release claims because they have liability insurance.

While it is true that each lawsuit stands on its own merits, the best practice is to minimize, if not eliminate, claims by having releases in place, and the place to start is with a well-drafted release agreement.

Always ask a lawyer if you have questions about a specific claim of liability.

But if you need to draft, negotiate, and execute specific types of releases, look for contract management professionals with subject matter expertise in release agreements.

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