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What happens to a contract when a dispute arises?

Fri Jun 14, 2019

By Michael C. Geraghty and Daniel O. Culicover

© Originally published in Alaska Contractor Magazine Summer 2019

The Alaska Supreme Court answered an important question many contractors face in their career: What happens to your contract or subcontract once you enter into a settlement agreement that purports to releases the parties from “any and all claims”?  As the Alaska Supreme Court held, such a settlement agreement supersedes any obligations arising from a subcontract or contract that are inconsistent with the settlement agreement.

The case at issue is SMJ General Construction,  Inc. v. Jet Commercial Construction, LLC.  At issue was the construction of the Kona Grill.  Jet Commercial Construction contracted to build the Kona Grill and executed a subcontract with SMJ General Construction.

The subcontract between the parties contained a dispute resolution provision. As it turned out, the parties needed this provision.  The parties had several disputes throughout the course of the contract and eventually went to mediation to try to settle their disputes.

At the end of their mediation, the parties executed a three-paragraph settlement agreement on a yellow legal pad.  The first paragraph of the settlement agreement provided that, “Each party hereby absolutely releases the other of and from any and all claims, demands and obligations of any kind arising from contract.”

Two weeks after the mediation, SMJ filed an action seeking to void the agreement.  Jet filed a motion to dismiss, claiming that the trial court lacked jurisdiction because of the subcontract’s dispute resolution provision.  The trial court agreed.  SMJ then appealed to the Alaska Supreme Court.

On appeal, the Supreme Court reversed the trial court.  It found that the settlement agreement—that released both parties from “any and all claims”—superseded the dispute resolution clause in the subcontract.  In particular, the Court found that the three-paragraph settlement agreement obliviated the inconsistent provisions in the subcontract.  It found: “The phrase ‘any and all claims, demands and obligations of any kind arising from [the subcontract]’ could hardly be broader.”  (emphasis added).  Thus, the Supreme Court found that the settlement agreement was “direct and unambiguous,” and rendered the subcontract—and its dispute resolution provision—of no force or effect.

This case should be read for two points.  First, written contracts are not as rock-solid as you may think or hope.  Parties can always replace—or novate—a contract with a new contract if they choose.  Second, be careful what your settlement agreement says.  If your settlement agreement contains the phrase “any and all claims” you’re likely releasing the other party from any claim you may have and all claims you may have—no matter what those claims or disputes are about.  And anything not in your agreement will be left out of the agreement.