What is a Release Agreement?

A release agreement is a legal contract drafted in which one party relieves the other of liability, releasing any rights to legal claims arising out of a given situation. Such agreements are generally enforced by a court of law, provided that there is adequate consideration and that the release is reasonable. Consideration on the part of both parties is required for a release agreement to be valid. In other words, for the court to enforce the release agreement and prohibit someone from suing based upon it, both sides must have exchanged something valuable.

Release agreements are common in two main situations. The first occurs when a person leaves a job and is offered a settlement or release agreement in exchange for any rights to sue for claims arising out of the employment or employment termination. The second occurs when parties settle a lawsuit out of court.

The first situation generally occurs when someone is terminated or asked to leave a position. The company requesting that the person leave may believe that there is a possibility the departing employee will sue for wrongful termination or some other employment violation. The company will exchange a monetary settlement — often referred to as a severance package — in exchange for the departing employee's signature on such an agreement. The terms of the agreement generally state that the employee releases the company from any and all potential liability; this means he may not sue his employer and accepts the severance or settlement package.

The second situation occurs when one party files a lawsuit against another or experiences a situation in which he potentially could file a lawsuit. For example, a person might become involved in an accident at a store. The person could potentially file a personal injury action against the store arising out of the injuries he experienced. Instead, the store offers the injured victim a settlement or a set amount of monetary compensation. The victim of the accident accepts that payment and gives up any and all rights to sue as a result of the accident that occurred.

It is common for many lawsuits to settle out of court, either through private negotiation by the parties and their attorneys or through mediation that is suggested by the court. During the process, the plaintiff and defendant will negotiate how much money is to be paid to the potential plaintiff. The plaintiff will accept the offer and sign the release agreement and the defendant will pay the plaintiff the monetary amount agreed upon.