• CorVel v. Schaffer: A Cautionary Tale on General Release Agreements
  • July 2, 2010
  • Law Firm: Alston Bird LLP - Atlanta Office
  • The Delaware Court of Chancery recently provided important guidance to practitioners drafting release agreements. In CorVel Enterprise Comp., Inc. v. Schaffer, the parties contested the scope of a release executed to resolve a dispute over an earn-out provision in a stock purchase agreement. At issue was whether the release agreement was limited to the subject matter of the earn-out provision or also released the parties’ obligations under a noncompetition agreement executed several years prior to the release, at the time the stock purchase agreement was entered into. The release stated, in pertinent part, that CorVel “fully releases” Schaffer from “any and all claims ¿ including without limitation, any claims ¿ arising out of any relationship between [Schaffer] and CorVel, including but not limited to any claims or counterclaims that were or could have been asserted in the Pending Case.” The “Pending Case” referred to the earnout dispute.

    The court held that the release was broad enough as a matter of law to “fully encompass[] the entire breadth of the relationship between” the parties. The court relied on Delaware contract law to interpret the plain language of the release in the manner that an “objective, reasonable third party would do.” It began by noting that the language of the release was “broad” and “very general.” Specifically, the court read the phrase “including but not limited to” as mandating the conclusion that the release “cannot be limited to the Earn Out dispute.”

    While Vice Chancellor Noble may have been sympathetic to the fact that the parties might not have intended this result, he noted that “[w]hether CorVel really intended to release its rights under the Noncompetition Agreement 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.”

    The message for the practitioner is loud and clear: pay careful attention to the scope of all release agreements. Any time an agreement releases “any and all claims” and combines that with an expansive qualifier like “including” or “not limited to,” there is a strong likelihood that a court (especially a Delaware court) will take the parties at their word and interpret the agreement to encompass their entire relationship. Unless this is the client’s intention, it should be avoided. One way to avoid such a result would be to carve out specific obligations that are excluded from the scope of the release agreement, and there can be a number of post-closing obligations and relationships existing in the context of a business combination. Had the parties in CorVel explicitly exempted the noncompetition agreement from the scope of the release, their intent would likely have been reflected in the court’s decision. As always, careful drafting and attention to the legal effect of the words chosen in an agreement are important considerations for the transactional practitioner.