In settlement agreements, one or more parties may waive their right to pursue recourse against other parties to the agreement in return for some form of consideration, such as a payment of money. However, what if a party is unaware of certain claims they may have against the party they are releasing–could they then accept the described consideration and still turn around and pursue legal action against the released party once they become aware of the grounds for their claim? Is a waiver of “unknown” claims enforceable in California? We explore the answers to these questions in this article.
California Civil Code §1542
A good place to begin our analysis is by reviewing the language of Section 1542, which reads:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.”
In short, this section of the Code creates rights—the right of a releasing party’snon-waiver of unknown claims. In other words, a releasing party is presumed NOT to have waived claims which are not known. Therefore, California courts will interpret a general waiver of claims as not waiving unknown claimsof the releasing party.
Enforceable Waivers of Unknown Claims
However, it is well established that a general release that explicitly covers unknown claims and specifically waives the provisions of California Civil Code §1542 is “completely enforceable and act[s] as a complete bar to all claims (known or unknown at the time of the release) despite protestations by one of the parties that he [or she] did not intend to release certain types of claims.” San Diego Hospice v. County of San Diego (1995) 31 Cal.App.4th 1048, 1053.
At the same time, waivers of unknown claims are not absolute, but are subject to attack like many other contractual provision. Some of the more common grounds for challenging the enforceability of such waivers includes, fraud in the inducement, duress, and mistake. The scope of the release must also be fairly definite to ensure enforceability. As the Court noted in Kaufman & Broad-S. Bay v. Unisys Corp., 822 F. Supp. 1468, 1474 (N.D. Cal. 1993):
“California Civil Code section 1542 provides that a general release does not extend to unknown or unsuspected claims. The parties to a release may be bound by a waiver of the section’s protection if they understand and consciously agree to the waiver. However, if the parties have not dealt at arms’ length and the releasor has relied on fraudulent statements or misrepresentations by the releasee, then the release is binding only to the extent actually intended by the releasor. In order to void the release, the releasor must show that its entry into the release was induced by fraud, undue influence, mistake or deceit.”[Emphasis Added].
While specific and express waivers of unknown claims are generally enforceable in California, since they may be subject to legal challenges by a releasing party, it is wise to consult with a business or civil litigation attorney to ensure any specific release, taken together with the contract as a whole, is likely to be enforced. Your attorney will apply contract principles when drafting your contract that many laypersons are simply unaware exist, and which can help ensure your intentions are clearly and expressly enunciated and enforced if they become the subject of a dispute.
The business litigation lawyers at Gehres Law Group, P.C. have decades of experience representing clients in business-related disputes and work diligently to protect the interests of clients above all else. Contact us today for a free evaluation of your business-related matter.
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