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Covenants Not to Sue Come with Unwritten Attorney’s Fees Shifting in Virginia

April 28, 2021 By James S. Liskow

Separate and apart from a release of a claim or claims contained in a settlement agreement, parties can agree not to sue one another. So-called “covenants not to sue” are important inclusions in settlement agreements, barring parties to such agreements from bringing litigation against one another in addition to releasing claims. On April 1, 2021, the Supreme Court gave teeth to such provisions, ruling that a party that breaches a covenant not to sue is liable for attorney’s fees, even when there is no express provision providing for fee shifting. In Bolton v. McKinney, two former business partners entered into a settlement agreement releasing all claims against one another, with one partner paying the other $25,000.00. Less than a year later, the recipient of the monies breached the agreement twice by bringing suit against the other partner in state court and in federal court. The other party alleged he spent in excess of $80,000.00 defending against such litigation and filed suit in state court to recover same alleging the costs were incurred due to the other partner’s breach of the covenant not to sue.

The Supreme Court held that while the “American Rule” provides that parties to litigation will bear their own costs, in order to place the non-breaching party in the same position as it would have been but-for the breach, the non-breaching party can claim attorney’s fees as a damage. This is to place the non-breaching party in the same position as if the breach did not occur. The Supreme Court reaffirmed its adherence to the “American Rule” and stated that, as a matter of first impression, it would recognize such claim for a breach of a covenant not to sue.