So what if the waiver was fraudulently induced? You waived your rights!

So what if the waiver was fraudulently induced? You waived your rights!

Doron Afik, Esq.
February 20, 2021

The CEO of a food manufacturing company that employs workers with disabilities was caught breaching his fiduciary duties when he covertly signed an exclusive distribution agreement to the United States with a small and unworthy distributor in exchange for shares in the distributor. A lawsuit was filed but after the CEO contended that it was all a misunderstanding and he never took funds, a compromise was reached, which included a mutual waiver of the company and the CEO of claims against each other. Only months after the end of his employment, the company discovered that over a long period of time the CEO embezzled huge amounts by forging company signature on checks received from clients and “laundering” the embezzled funds. In a new lawsuit filed against him, the CEO admitted to taking the money but contended that the company waived its rights in the settlement agreement and the only way to sue him is to cancel the settlement and allow him to file a counterclaim against the company. Can a thief escape liability only because he fraudulently induced a waiver?

The main way in the case of a fraudulently induced waiver is to claim for its annulment and even in the labor courts it has already been determined that the annulment of a compromise agreement that has received the validity of a Court verdict will only be in very exceptional cases. A waiver can naturally also constitute a waiver of unknown facts and will be valid even if not all the facts were known at the time of execution thereof. Thus, for example, an investment transaction in a company on "As Is" basis is in fact a waiver of any claim. However, is it logical to demand a shareholder who has invested in the company based on a scam to give up his shares (which may today be worth much more than the purchase price) and give a reward to the fraudster, as a precondition for filing a claim as to the fraud? Or, let’s take a more delusional example, does it make sense to require a divorced woman to cancel the divorce agreement (which stipulated a mutual waiver in exchange for the portion of the property) and remarry her fraudster divorcee only because she discovered that he was hiding an expensive real estate he purchased during the marriage?

In a case heard at the Supreme Court in 2015 regarding the Africa Israel public company, the question arose as to whether one may file a derivative claim against directors after a debt settlement included an waiver from liability. The Court allowed the filing of a derivative claim only on the claims of fraud, and held that although the waiver is wide, a Court will not construe this as waiving unknown fraudulent acts, which were not explicitly recorded in the waiver. Similarly, in late 2017, the Supreme Court also allowed the filing of a limited claim for fraud in the IDB public company case, also despite a debt settlement that included a waiver of claims.

A case decided by the Supreme Court at the end of 2019 deals with a dispute between siblings over ownership of companies and assets, which ended in a comprehensive settlement that included a sweeping waiver of claims, including those for which the cause of action is unknown. Despite this, a sister claimed that she had rights in a certain real estate project because in the compromise negotiations her brother defrauded her about the status of the project. Here, too, the Court held that the waiver does not apply to causes of action that were not known due to intentional misrepresentation. Moreover, even if the parties had expressly waived claims of unknown fraud the Court would not have honored such waiver.

In the example above, the CEO's waiver of rights from the company was against the company's waiver of claims as to the breach of fiduciary duties of which it was aware. Regarding the embezzlement revealed only months later, the CEO stated at the signing of the waiver that he never took funds and thus the waiver is not part of the settlement, or it may be separated from the other concessions and revoked. In addition, instead of partially canceling the waiver or suing only on grounds of fraud (as allowed by the Supreme Court) the CEO can be sued for the damage (the waiver) caused by his fraud and the company can reach a similar result.

And what should you do in cases of waiver of claims? Before signing compromise and waiver agreements make sure that all the facts are known and that lawyers who specialize in the field (and are also commercial lawyers) have examined the cause of action, as a waiver of cause of action will probably be irreversible. And as for frauds (beyond the fact that it is not recommended to do business with fraudsters)? The good news is that probably no Court will recognize a defense claim of "I defrauded and therefore I am exempt from liability" as contended by such CEO.