What Exactly is a Walk Away Agreement?
Depending on the circumstances, a walk away agreement (also known as a mutual release, mutual waiver, bilateral waiver or agreed order) between two or more parties can mitigate damage and potentially prevent a more protracted dispute. Essentially, a walk away agreement is a two-way stipulation. For example, A, B and C may agree not to move forward with a lawsuit that A intends to file and in exchange, A is released from any individual liability under a breach of contract theory. In other words, one of the parties takes responsibility for the alleged harm, and the other walks away from the table without further ado .
In the business context, walkaway agreements are frequently used to amicably end an employment contract or partnership. A company may enter into a walkaway agreement with an employee to end an employment relationship and the concurrent legal dispute between them. Or, the parties may agree to end a contractual partnership.
In the personal context, people typically use walkaway agreements to settle their affairs in older age. It is common for individuals to agree to divide personal property as they get older or to formally accept the division in status after a divorce. Only by signing a walk away agreement can an individual have a signed, enforceable concession.
The Legal Framework of Walk Away Agreements
In light of the need for some liquidity and time for the corporation to restructure, some creditors will agree to mostly defer payments and take no collection activity against the debtor’s non-dividend liabilities, if the bankrupt agrees to meet specific post-filing conditions and to move forward quickly with a restructuring, such as making sure that all necessary information is provided, holding board meetings to authorize the filings, and moving quickly once viability has been determined. It is usually one lender who has agreed to "tolerate" some immediate non-payment of interest in exchange for some assurance that the corporation will restructure quickly. This lender can be credited with helping the company get some liquidity, but this may have been a short, one-time process. The bankruptcy body of case law on the enforceability of collateral agreements to postpone repayment of debts generally, and to forgive accrued but unpaid pre-filing interest particularly, is that such agreements are enforceable and do not constitute preferential payments, provided the affirmative requirements of section 547(c) are met, i.e., the agreement was not made to prefer the corporate debtor which would otherwise be required to repay the debt, and the new value substantially outweighs the amount of the liability being forgiven.
When Should a Walk Away Agreement be Chosen?
Walk away agreements can be valuable in a variety of situations. Here are a few examples of when a walk away agreement may be appropriate:
Business Relationships
If your business relationship is breaking down, you may want to consider a walk away agreement. In many cases, the business owner is seeking a way out and the other side believes that there is still potentially a great future for the business. In instances like this, the owner in control may create a walk away agreement to provide the out-party with a clean exit and allow the business to continue without conflict from the out-party.
Investment deals are another situation where walk away agreements may be used to iron out the terms for an investor who wants out. The Investor may be suffering from losses and experiencing a bitter battle with the other partners. The parties may decide that they want to part ways quickly rather than enduring a lengthy, expensive dissolution.
Incorporations may also benefit from a walk away agreement, especially if doing so will preserve the corporate form and keep assets in the corporation. Walk away agreements can avoid ugly court battles that might result in the corporate form being dissolved.
Personal Relationships
Walk away agreements can successfully help an individual to exit a relationship with minimal ongoing conflict. For example, in a marriage context, if the parties do not have any children or joint assets to divide, they may simply wish to split amicably. It may be more problematic if the parties do have children or assets to divide. In these contexts, it is usually preferable to divide assets and property to avoid years of child support payments. In these situations, a single agreement to divide the money a year from now instead of now may be in the parties’ best interest as it will save on legal fees and take the property division process out of play while the parties take the time they need to move on.
Clearly, walk away agreements have a place in a variety of circumstances. It is important to consult a professional for expert advice on how to negotiate a reasonable agreement for both parties to avoid future litigation.
The Essential Elements of a Walk Away Agreement
In order to create a walk away agreement, there are several key components that will be needed to be included. The first is the termination terms, also called the T3. This will include information about when separation will occur, for example upon signing of the agreement or at a future date, as well as any other contractual obligations that will be expected afterwards.
The second element is a confidentiality clause. This clause should list what types of information cannot be disclosed and by whom. For example, the clause may state that you cannot share any of your business secrets with the public through social media. Or it may be a legal requirement to disclose financial information for a few years after the agreement is signed with the Pearl River property manager.
The last major key element is asset distribution. Many business owners sell part or all of their assets during their exit associated with a walk away agreement, so the division of assets is critical. What percentage of the total assets do you expect to keep after the agreement? You may ask to receive a set dollar amount as your portion, rather than a percentage of all assets. Or you may require received payments over time or have them placed in trust for children.
Pros and Cons of Walk Away Agreements
There are both advantages and disadvantages to entering into a walk away agreement. Often times for the employee, the primary benefit is to get separation benefits equal to or greater than what he or she would get by way of severance. In some cases, the employer may be paying the employee more in the short term, but has been able to resolve one or more claims, like age and disability discrimination, which may have been very costly down the road.
In other scenarios, the employee may prefer to get out of the employment relationship immediately in order to start a new job. Sometimes, if the company believes the employee is going to leave anyway, it may be beneficial to let him or her leave immediately, rather than having a competitor quietly woo the employee away with an 18-month non-compete period remaining .
For the employer, the downside to a walk away agreement may be the loss of employment for someone who does not want to leave. Even though the parties have agreed to the separation, there continues to be an emotional and often times practical impact to the individual who is being asked to separate, even if he or she is receiving additional compensation.
Whether a walk away agreement is advantageous or not needs to be considered on a case-by-case basis. Often, the benefits of a walk away agreement are not seen until years later when employers can save costs on protracted litigation and employees are able to move on to better opportunities.
Common Pitfalls to Avoid
Many common mistakes can be made when walking away from a business situation through the use of a walk away agreement. Minimizing or eliminating these mistakes can save you money and heartache down the road.
One of the most frequently encountered problems involves not identifying the key assets of a business in the agreement. Failing to make a thorough list of tangible and intangible business assets can lead to disputes. Typical assets include equipment, furniture, customer lists, leases, vendor contracts, and intellectual property. Some of the items may have to be evaluated to determine their true value so that an equitable division of the ownership can be made. Consulting appropriate financial experts can minimize the potential for misunderstandings and subsequently embarrassing and costly litigation. It is a good idea to spell out how the agreement will resolve disputes involving the ownership of specific assets.
Another common mistake is not choosing the appropriate types of business entities for the transition. For example, it may be better to use an asset purchase rather than a stock purchase or a limited liability company, or a limited partnership. Each of these types of business entities has pros and cons that must be considered in light of the applicable laws and the specific business situation. Appropriate professionals can help decisions be made about the type of entity that best fits the circumstances.
Often the process of dividing the ownership of a business can be a contentious and emotional one. Generally speaking, it is a good idea for the parties to include a temporary process in the walk away agreement so that tensions are diffused. Including a mediator, an advisory board, an expert, or a consultant in the process can assist in minimizing potential liabilities.
Walk Away Agreements: Real Life Applications
Overall, walk away agreements have played a significant role in resolving complex legal disputes in a cost-effective and efficient manner. Some notable examples of walk away agreements in action include:
- The dispute between Coca-Cola and Red Bull in the 1990s led to an agreement that allowed both companies to coexist in the energy drink market. This agreement enabled both brands to not only continue their operations in North America but also expand their market reach globally.
- A walk away agreement in a real estate development dispute helped a developer reach a mutually beneficial resolution with a neighboring property owner. The neighboring owner had concerns about the impact of the proposed development on their own property values . The walk away agreement allowed the developer to move forward with their plans while addressing the concerns of their neighbor, who received compensation and agreed to maintain the property by landscaping or planting trees.
- In a contract dispute over the licensing of a new software product, the parties reached a walk away agreement that allowed them to both retain rights to their respective intellectual property. This agreement also clarified the terms of their licensing agreement, which had been under dispute for a number of years. By reaching this full agreement, the parties were able to avoid costly litigation and uncertainty over their rights.