Watch Out For That Waiver!

Part 2

In the first part of this series we discussed legal concepts that come into play to create waivers of legal rights.  The concepts “accord and satisfaction,” “compromise and settlement,” “waiver” and “estoppel” are standard defenses asserted in contract actions, as well as, other types of claims. 

At the core of each is that a party has waived or otherwise altered previously existing rights, possibly in favor of new or different rights.

In this article, we will discuss various documents which are utilized to settle disputes, memorialize parties’ agreements, facilitate payment or provide for security to one party or the other.  The first of these documents is the standard “settlement agreement.” 

Most frequently used to resolve pending litigation, it is also used pre-litigation and is essentially a record that documents all of the terms and conditions to which the parties have agreed to settle their disputes. 

The settlement agreement itself, once signed by the parties, takes the place of all previous agreements and disputes by the parties.  It is a new contract that can be enforced should one party default.  It is also possible to use the settlement agreement to preserve certain rights and actions should one party default.  The settlement agreement should be tailored to fit the circumstances. 

In the event of a default, it is necessary to consult the terms of the settlement agreement to determine what options and rights the non-defaulting party may have as a result of the default. While not required, it is best to have any settlement agreement in writing.  It is not necessary that the document be titled “settlement agreement” as there are various types of agreements that can operate as settlements of disputed claims and that may be entered into by the parties to put an end to disputes.

The second type of document we will discuss is the “promissory note.”  The definition of a promissory note is a written document in which one party promises to pay a stated sum on a specified date or on demand.  Promissory notes are for set sums of money.

The amount of the note must be apparent on the face of the note or it must be readily calculable from the terms of the note.  That includes such provisions as interest, but does not allow for conditional payment or for variations in the amount due based on conditions that must be met by the parties.  While the language of most promissory notes is fairly standard, there is no set form. 

The document must be in writing and must be signed by the party making the promise to pay.

Promissory notes appear to be regularly used by businesses to reduce open account balances to writing combined with a payment plan.  This is an acceptable use of the promissory note.  The benefit is that promissory notes have fewer defenses than your garden-variety breach of contract claim. 

Once the party commits to pay a certain amount through the promissory note, they can no longer allege defenses that may have been applicable previously.  For instance, business sells customer a box of parts. 

Customer claims that some parts are defective. Business disagrees.  Customer ultimately agrees to sign a promissory note for less than the full amount due, but not the amount he believes he should pay.  Customer has now admitted the debt in the amount of the promissory note and can no longer go back and argue that he is entitled to more credits for the defective parts. 

On the business side, the business has agreed to accept that amount and the promissory note supersedes any terms and conditions that might have been in effect before.  The promissory note is now the governing document.

The downside to substituting an existing contract with a promissory note is that a party may be waiving other rights that it may have.  For instance, if a party has lien or bond claim rights that arose out of the sale of goods on an open account, that party is waiving those rights by subsequently entering into a promissory note for the balance due. 

Since promissory notes don’t allow for conditional payment, if a party wishes to reserve certain rights you are better served by using a settlement agreement rather than the promissory note.

One document that is often used in conjunction with settlement agreements and promissory notes is the “Confession of Judgment.”  Confessions of Judgment are used as security for a payment plan. They are not filed and do not become public unless a party defaults in its obligations to make payments. 

Like promissory notes and settlement agreements, confessions of judgment act to waive already existing rights.  Each of these documents takes the place of your original written contract or credit agreement.  They may waive payment terms and accrual of interest.  You must actively reserve rights if you wish to exercise them at a later date.  It is also important to keep in mind that a default in a settlement agreement, promissory note or confession of judgment does not make these documents go away.

You don’t get to just say: “Well, they didn’t pay me so I get to go back to my original credit terms.”  These documents supersede your original agreement and are now your only remedy, unless you have specifically preserved other rights.

Other less formal agreements also have the potential to waive rights.  It is quite common for businesses to enter into monthly payment arrangements with customers to pay off past due debt.  It is also quite common for these agreements to be made orally. 

Oral agreements are enforceable.  It is not possible to enter into a monthly payment arrangement and then back out and proceed with collection on the original terms. As long as the debtor is in compliance with the payment plan, the creditor is bound to the payment plan.  In the event of a default, the creditor can proceed with collection.    

In the construction industry there are industry specific agreements and actions that also can impact the rights of the creditor.  The use of joint check agreements or any other agreement with the general contractor may waive rights that the creditor has against either their customer or the project to which materials are being supplied. 

Creditors should be careful of joint check agreements that purport to waive lien rights and instead should act to preserve those rights in the agreement. 

Payments received from the general contractor, whether pursuant to the joint check agreement or in conjunction with some other agreement with the general contractor, must be applied to that specific project and as directed by the general contractor. 

A creditor cannot apply the payments simply to the oldest invoice on the customer’s account.  In the event that a creditor has a past due balance for materials supplied to a construction project and seeks to enter into an agreement with the general contractor, it is imperative that the creditor not waive other rights that it may have with respect to the project or against its customer.

To sum up, preservation of rights is the key when entering into new agreements with customers and other debtors.  A default in one of the above agreements does not make the agreement disappear. 

Thus, creditors must make sure to keep any and all rights from their original agreement that are beneficial and transfer those rights to the new agreement.  The best way to accomplish this is to get it in writing.  An experienced attorney can help a creditor analyze the agreements, discuss future events that may impact the creditor, protect the creditors’ rights and memorialize the agreement in writing.     

The foregoing is written for educational purposes only and should not be relied upon as legal advice. It should not be utilized as a substitute for the professional services of an attorney.  If legal advice is required, the services of a professional should be sought.  Please contact Kurtz Law, PLLC for assistance with legal matters.