When Consideration Fails: Third Circuit Recognises Rescission of Settlement Agreements Where a Dependent Covenant Is Breached

1. Introduction

Point Blank Protective Apparel & Uniforms LLC (“Point Blank”) and Vertical Source Inc. (“Vertical Source”) entered into a 2018 joint-venture that ultimately collapsed. After Point Blank brought suit in 2022, the parties executed a Settlement Agreement containing mutual releases in exchange for a series of sequential (i.e., dependent) obligations. Vertical Source’s first—and foundational—obligation was to deposit funds into an escrow account. That funding never occurred because it was contingent on an undisclosed outside event that failed to materialise.

Relying on the Settlement Agreement’s release language, the District Court dismissed Point Blank’s revived contract and tort claims. On appeal, the United States Court of Appeals for the Third Circuit was asked to decide whether Point Blank’s allegations, if true, entitled it to treat the Settlement Agreement as rescinded and, consequently, to pursue the previously released claims.

2. Summary of the Judgment

The Third Circuit (Judges Krause, Bibas and Montgomery-Reeves, J.) held:

Point Blank sufficiently pleaded a breach-of-contract claim predicated on Vertical Source’s failure to fund the escrow—an obligation the court characterised as a “dependent covenant” that went “to the whole consideration of the contract.”
Under Florida law, breach of such a dependent covenant allows the non-breaching party to seek the equitable remedy of rescission. If rescission is ultimately granted, the mutual releases evaporate, and previously released claims (Counts I, II, IV, V and VI) may proceed.
The District Court therefore erred in dismissing those “Released Claims” with prejudice; the judgment was vacated in part and the matter remanded.
However, the District Court properly dismissed Point Blank’s fraudulent-inducement claim (Count VII) because the Settlement Agreement contained clear, three-fold disclaimers of reliance on any fraudulent representations—disclaimers enforceable under Florida law.

3. Analysis

3.1 Precedents Cited and Their Influence

Steak House, Inc. v. Barnett, 65 So.2d 736 (Fla. 1953) – Recognises that breach of a “dependent covenant” going to the entire consideration entitles the aggrieved party to rescind.
Billian v. Mobil Corp., 710 So.2d 984 (Fla. Dist. Ct. App. 1998) – Reaffirms Steak House and clarifies that rescission is available when performance of one party’s promise is the sine qua non for the other’s obligations.
Deauville Hotel Mgmt., LLC v. Ward, 219 So.3d 949 (Fla. Dist. Ct. App. 2017) – Sets out the basic Florida elements for a breach-of-contract claim, which the Third Circuit applied.
Cintas Corp. No. 2 v. Schwalier, 901 So.2d 307 (Fla. Dist. Ct. App. 2005) – Applied to refute Point Blank’s alternative argument that total failure of consideration made the contract void ab initio; the court instead treated the contract as valid but potentially rescindable.
Oceanic Villas, Inc. v. Godson, 4 So.2d 689 (Fla. 1941) – Supports enforcement of explicit contractual disclaimers barring fraud claims.
Pleading & procedural authorities such as Connelly v. Lane Construction, 809 F.3d 780 (3d Cir. 2016) and In re Lipitor, 855 F.3d 126 (3d Cir. 2017) – Cited for liberal notice-pleading principles, enabling the court to recognise an unlabelled breach claim embedded in the complaint.

Collectively, these cases provided the doctrinal scaffolding for the court’s twin conclusions: (1) a well-pleaded breach existed; and (2) rescission—and hence revival of released claims—was a legally cognisable remedy at the Rule 12(b)(6) stage.

3.2 Legal Reasoning

The opinion’s logic unfolds in three steps:

Pleading Sufficiency. Despite Point Blank’s “less-than-ideal” pleading style (the breach count lacked its own heading), substantive allegations identified the contract, the material term (escrow funding), the breach, and resulting damage. Under Rule 8’s liberal standard, that sufficed.
Characterising the Escrow Obligation as a Dependent Covenant. Because the Settlement Agreement’s consideration schedule required Vertical Source to fund escrow first before Point Blank’s obligations ripened, the covenant was “dependent” and “goes to the heart of the bargain.” Steak House therefore permitted rescission when the covenant was breached.
Effect of Rescission on the Releases. Rescission treats the contract “as though it never existed.” If ultimately granted, the releases shielding Vertical Source disappear and the pre-settlement litigation claims are reinstated. Dismissing those claims now would prematurely cut off relief that might become available after adjudicating the breach.

Conversely, the court upheld dismissal of fraudulent inducement because Point Blank expressly disclaimed reliance on any representations outside the four corners of the Settlement Agreement—a bar Florida courts consistently enforce.

3.3 Likely Impact of the Decision

Although designated “Not Precedential” under Third Circuit I.O.P. 5.7, the reasoning is persuasive and likely to reverberate in several ways:

Emphasis on Dependent Covenants. Parties drafting settlements must evaluate which obligations are truly conditions precedent and specify consequences of non-performance.
Pleading Flexibility. The court reiterated that substance trumps form in federal pleading; litigants may succeed even when claims are imperfectly labelled—though practitioners are cautioned not to rely on judicial charity.
Strategic Use of Rescission. Litigants faced with counterparties who renege on settlement obligations may invoke this case when arguing that rescission revives previously released claims.
Fraud Disclaimers. The affirmance on Count VII underscores the potency of anti-reliance clauses in Florida-governed contracts, encouraging parties to include robust integration and waiver provisions.
Due Diligence Before Settlement. Counsel will likely demand greater transparency regarding a counter-party’s ability to perform “day-one” funding obligations, especially where those obligations form the foundation for mutual releases.

4. Complex Concepts Simplified

Dependent Covenant: A promise in a contract that is so fundamental that the other party’s promises depend on its performance. If it is not performed, the entire contract may fail.
Rescission: An equitable remedy that “unwinds” a contract, restoring parties to the positions they held before the agreement—effectively erasing it.
Mutual Release: A clause whereby both parties agree to give up (i.e., release) past or existing claims against each other, usually in exchange for consideration.
Anti-Reliance/Fraud Disclaimer: A contractual statement that a party has not relied on any representations outside the agreement and waives any fraud claims based on extra-contractual statements.
Notice Pleading: The federal pleading standard (Fed. R. Civ. P. 8) requiring only a “short and plain statement” to notify the defendant of the claim; labels and headings are helpful but not mandatory.

5. Conclusion

The Third Circuit’s decision in Point Blank Protective Apparel & Uniforms LLC v. Vertical Source Inc. clarifies that, under Florida law, a material breach of a dependent covenant within a settlement agreement can open the door to rescission, thereby reviving claims thought to be forever extinguished by mutual releases. At the same time, the judgment reaffirms Florida’s robust enforcement of clear fraud-disclaimer provisions. For practitioners, the case is a cautionary tale: ensure settlement obligations—especially funding milestones—are both feasible and transparently disclosed, and draft releases and disclaimers with precision. Failure to do so may unwittingly resurrect the very claims a settlement sought to lay to rest.