Introduction:
A release is a legal agreement in which one party (the releasor) gives up a right or claim against another party (the releasee). It is, essentially, a contract between the parties, subject to all the laws of contract, and is binding upon the parties who execute it.
It is one of the most common contracts entered into between parties since almost every legal case or claim ends in settlement, which, in turn, requires a release of claims in return for settlement payment.
A well-written release will extinguish any and all causes of action and claims between the parties related to the subject matter of the lease. The purpose is to “buy peace,” namely, to eliminate existing claims once and for all between the parties.
A central question for releases is how far they extend. What claims do they cover, and what parties receive the protection of the release? Key to that question is the issue as to whether claims between the parties, unknown at the time of execution of the release, are also extinguished by the release.
The releasor may claim that the settlement payment could not possibly cover claims not yet known by the releasor when executed. The releasee could claim that, in buying peace, to allow claims unknown at the time of the execution makes the value of the release minimal and leads to the difficult question as to how to prove what the releasor knew.
That issue is what led to the passage of California Civil Code Section 1542, which is the subject of this article.
Basic Law of Release:
Key Elements of a Release Agreement
Any release should have the following issues fully delineated.
Parties Involved: the release clearly and completely identifies the releasor and the releasee.
Scope of the Release: The release defines the claims being released, whether specific or general. A general release pertains to any and all claims between the parties. A specific release pertains to the identified subject area. Thus, in a specific release, I could release you from all claims based on your purchase of my property, but I would not release any claims I might have against you for personal injury or the like.
Consideration: The exchange of something of value (e.g., money or services, or abandonment of other claims).
Effective Date: Specifies when the release becomes effective.
And in California, the waiver of the protections of Civil Code Section 1542.
Section 1542 Release:
California Civil Code Section 1542 states that a general release does not extend to unknown claims that the releasor does not know or suspect to exist at the time of signing the release.
If the parties intend to release unknown claims, they typically include a waiver of Section 1542 in the settlement agreement. This waiver clarifies that the release covers all claims, known or unknown, arising from the specific events or transactions.
Good practice has a clause in the release along the following lines:
THE PARTIES AGREE THAT THIS RELEASE FOREVER WAIVES AND EXTINGUISHES ALL CLAIMS BETWEEN THE PARTIES, KNOWN AND UNKNOWN, FOR ALL TIME AND EXPRESSLY WAIVES THE PROVISIONS OF SECTION 1542 WHICH PROVIDES AS FOLLOWS:
Section 1542. A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.
What happens if the above clause is not part of the release? The issue, if there is a later dispute, is whether the releasor “knew or suspected” that a claim existed at the time of signing, and typically the releasor states he/she did not, and the released party tries to prove by extrinsic evidence that the releasing party must have known. Communications to the releasing party are the usual place where the releasee seeks such evidence, such as emails, letters, etc. This requires interrogatories, depositions, requests for production of documents, and all the other tools available to a party in litigation in the United States.
The cost of such a dispute can be substantial. It can take years in court and massive discovery, and the entire purpose of entering into a settlement is lost. Hence, waiver of the above clause is critical for any party seeking to avoid future problems.
If you are the releasing party, know that the courts will enforce that waiver, and you can be held to have released claims entirely unknown to you when you sign the settlement.
As an example, one client came to our office deeply upset that he had settled a breach of contract action as to defective parts delivered to him and later resold, only to find out five months after the settlement that the actual number of defects in that shipment was not 40% of the units but 55% of the units. There was no way he could have known this: the products were only delivered to the angry customer after execution of the settlement and were in transit when he settled. Clearly, he should have waited to settle until he fully investigated the extent of the damage, but he needed the settlement for cash flow. If he had not waived Section 1542 in the Settlement Agreement, he could have brought a later claim. As it was, he was stopped.
What if the releasee knew that the ratio of defects was higher than 40% but kept that secret from the releasing party? If the releasee intentionally lied to the releasor, an argument could be made that the settlement was achieved via fraud. It would be a hard case to prove, and the waiver of Section 1542 would still be a major obstacle to overcome. But if neither party knew of the true state of the defects, the odds are good that any court would enforce the waiver fully since that waiver was a bargained-for aspect of the settlement.
Practical Solutions:
Clearly, every party seeking a release will want to impose the waiver described above in any settlement agreement. The party giving up rights must do a full due diligence of every likely or even possible claim that may arise in the future. This is particularly true if a third-party claim might arise.
In the above case, the buyers of the defective parts would certainly seek relief against the party who has foolishly waived his own rights by waiving Section 1542, and there would be no relief available to him even if the defective parts were not manufactured by that party.
It is thus essential to slow down and carefully consider whether there is any possibility of future claims arising and, if so, demand that such claims must not be part of any release now executed. There is no reason to ask in writing for the party seeking the release to guarantee that no further claims are known to that party. If they refuse to make that commitment, it is time to think long and hard about what they know that you should know before waiving rights.
Conclusion:
An elderly client, seconds before signing a contract for a multimillion-dollar purchase, turned to the writer and commented, “This is somehow strange. I simply put my name on this line and suddenly the world changes. I have to pay millions of dollars. All because of this little signature.” He grinned and signed.
The power to contract is central to our way of life. It is the underpinning of most commercial transactions. But it is centered on the ability of a party to make a commitment that will be enforced by the courts. That includes releases.
CC 1524 was passed to protect people from releasing unknown claims because of the immediate cash settlement dangling before their eyes. It was consumer protection and commercial protection, and should be viewed as such.
But like any law passed to protect one class of persons, it opens up dangers to another class. To pay good money out for a settlement to only have a claim return down the road with the payee claiming ignorance can destroy a company that thought it was done with such a claim. Hence, the ability to waive the clause.
It is close to malpractice for any lawyer representing the payor not to have this waiver of 1524 in any settlement, so be prepared to confront that issue before receiving the settlement sums.