The Scope of Releases When Ending Contracts: Disputed Payments, Defects That Emerge Later, and Rights That Must Be Reserved
In many construction, supply, and service contracts, the parties sign a document called a “final release” at the end of their relationship. It is treated as closing the matter and confirming that outstanding obligations have been discharged. Yet this seemingly conclusive document can contain considerable ambiguity. What does the release actually extinguish? And what remains enforceable after it is signed?
The issue is not the parties’ intentions. It is the scope of the release. Many companies treat a release as an absolute endpoint. In practice, however, some claims survive, some rights are not extinguished, and some defects may emerge years later. Every decision-maker should therefore ask: Did the release your company signed close off all claims, or only some of them?
A Release Is a Contract, Not an Absolute Endpoint
In legal doctrine, a release is a contract under which a party relinquishes a right or claim in exchange for a payment or other consideration. It differs from a gratuitous discharge, which involves relinquishing a right without consideration. A release transfers ownership or extinguishes an obligation, but it does not extinguish matters that were unknown when it was signed.
Article 94 of the Civil Transactions Law establishes that a contract is binding on its parties. If a release is a contract, its scope is determined by its wording. A general release may be interpreted as covering all known claims. A specific release may be limited to the matters agreed upon.
A general release is not, however, unlimited. It does not extinguish rights that cannot be waived, claims that were unknown when it was signed, or rights arising from latent defects that could not have been discovered.
Disputed Payments: Are They Extinguished by a Release?
In many construction contracts, disputes arise over amounts that have not been paid in full. If the contractor signs a final release, does it lose the right to claim those disputed amounts?
The answer depends on the wording of the release. If it states that the contractor has received all amounts due, it may be understood to include disputed amounts. However, if the dispute existed when the release was signed and the contractor reserved its rights, the claim may survive.
In one case, a contractor signed a release stating that it had received all amounts due. Months later, it claimed additional payment for extra work. The project owner argued that the release extinguished all claims. The court examined the release and found that it did not mention the extra work and that the dispute over that work existed when the release was signed. It held that a release does not cover disputed amounts if they were unknown or unspecified.
Latent Defects: What Emerges After Signing
In construction, supply, and maintenance contracts, defects may emerge after a release is signed. These may be latent defects: defects that were not apparent at delivery and that the buyer could not have discovered through an ordinary inspection.
Article 337 of the Civil Transactions Law establishes the seller’s liability for latent defects that reduce the value or usefulness of the goods sold. Legal doctrine and judicial practice require the defect to have existed before delivery, to affect value or usefulness, and to have been unknown to the buyer.
This liability is not unlimited. Article 343 of the same Law allows the parties to agree to exclude or limit the seller’s warranty against third-party title claims, except where the matter arises from the seller’s own act or was deliberately concealed by the seller. This means that the seller cannot exclude liability for a latent defect it deliberately concealed. If deliberate concealment is established, the release does not protect the seller, and its liability remains.
In one case, an equipment supply contract provided a one-year warranty. After that year ended, the buyer signed a final release. The buyer later discovered a latent defect in the equipment. The court held that the release did not extinguish the latent defect claim because the defect was unknown when the release was signed.
Decennial Liability: An Obligation That May Extend for Ten Years
Construction contracts are subject to a special form of liability extending for ten years from delivery. Under this liability, the contractor and supervising engineer are jointly and severally liable for any total or partial collapse, or any defect that appears in the building during that period.
A release does not extinguish this liability if the defect was latent and unknown when the release was signed. This principle has been applied in several cases brought years after project delivery, in which courts held that decennial liability is not extinguished unless the defect was apparent, the project owner knew of it, or the defect resulted from misuse.
Rights That Are Not Extinguished by a Release
Certain rights are not extinguished by a release. These include rights relating to confidentiality, intellectual property, non-compete obligations, and obligations that survive the end of the contract.
Article 113 of the Civil Transactions Law provides that dispute resolution and confidentiality clauses survive rescission of the contract unless otherwise agreed. This means that a confidentiality clause remains effective after the contract ends, even if a release has been signed. If the other party uses confidential information obtained during the contractual relationship, the release does not extinguish a claim for breach of confidentiality.
For non-compete obligations, Article 83 of the Labor Law requires the restriction to be in writing and defined in terms of time, geographical scope, and type of work. Its duration must not exceed two years from the end of the employment relationship. A vague clause does not protect the employer. A valid non-compete obligation is not extinguished by a release.
How Do You Draft a Release That Protects Your Company?
Protection starts with specificity. Do not sign a general release. Define precisely what it extinguishes. If a dispute is ongoing, expressly reserve your rights in relation to it. If defects may emerge, reserve your right to bring claims concerning them. If certain rights must survive, state them expressly.
Second, maintain records. Keep a copy of the release, the correspondence preceding it, and the documents defining what was agreed.
Third, obtain legal review. Do not sign a release without having it reviewed. The difference between a carefully drafted release and a loosely worded one may be a dispute months later.
Fourth, look ahead. Do not view a release solely as closing out the past. Consider claims that may arise in the future, and reserve your right to pursue them where necessary.
Frequently Asked Questions
Does a final release extinguish all claims?
No. A final release extinguishes known claims that have been waived. It does not extinguish rights that cannot be waived, claims that were unknown when it was signed, or latent defect claims.
Does a release extinguish claims concerning defects that emerge later?
No, if the defects were latent and unknown when the release was signed. Article 337 of the Civil Transactions Law establishes the seller’s liability for latent defects. Article 343 prevents the exclusion of liability for a latent defect deliberately concealed by the seller.
Can a release extinguish the right to bring a confidentiality claim?
No. Article 113 of the Civil Transactions Law states that a confidentiality clause survives rescission of the contract unless otherwise agreed. If a release is signed without addressing confidentiality, the right to bring a claim for breach of confidentiality remains.
What is the difference between a release and a gratuitous discharge?
A release is a contract under which a party relinquishes a right or claim in exchange for a payment or other consideration. A gratuitous discharge involves relinquishing a right without consideration. A release may transfer ownership or extinguish an obligation, whereas a gratuitous discharge only extinguishes an obligation.
What should a company document before signing a release?
It should document ongoing disputes, disputed claims, potential defects, and rights that must survive. It should also retain copies of the correspondence and documents defining what was agreed.
