Make Sure The General Release Language In Your Settlement Agreement Is Current.
As of January 1, 2019, Senate Bill No. 1431 (“SB 1431”) amended California Civil Code Section 1542 as follows: “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.”
Previously Section 1542 read as follows:
“A general release does not extend to claims which the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release, which and that, if known by him or her, must would have materially affected his or her settlement with the debtor or released party.”
Section 1542 provides a releasing party to a settlement agreement with protection from releasing then-existing unknown claims. However, courts have held that the protection afforded by Section 1542 is waivable. Consequently, waivers are, or should be, present in every settlement agreement. From the released party’s perspective, this provides finality to the matter; the releasing party, assumedly, knowingly and voluntarily waives all then-existing unknown claims to which he/she may be entitled. From the releasing party’s standpoint, these claims are just that, unknown. The releasing parties are inherently unaware of the magnitude of the claims they are releasing. This is a significant waiver and one that many releasing parties blindly sign in order to get their settlement check.
The Legislature indicated that these amendments were declaratory of existing law and thus intended to be non-substantive changes. However, if a drafter were to copy and paste the old Section 1542 language, the results may be significant. SB 1431 added “releasing party” and “released party” to clarify that Section 1542 does not only apply to debtors and creditors releasing monetary claims, but also claims that are not monetary in nature. If the drafter failed to include the new language, courts may narrowly interpret the language to hold that it only releases unknown claims between a creditor and debtor, which may not apply to the party’s situation. For example, non-monetary claims include: (1) whether the contractor is entitled to a time extension; (2) a claim requiring the interpretation of the project contract; or (3) if the releasing party is eligible to collect unemployment benefits. In addition, the Legislature replaced “must” with “would,” which may be construed to be broader than the previous language. If a drafter failed to make the replacement, he/she may have inadvertently raised the standard for the types of claims that were waived. The worst case scenario would be for a court to throw out the waiver completely if it does not include the updated Section 1542 language.
As was the best practice with the previous version of Section 1542, anyone drafting a settlement agreement should include a separate line for the parties to initial and sign below the Section 1542 waiver. The drafter should include an acknowledgement that the parties understand the Section 1542 waiver and intend to release any and all rights and benefits afforded to him/her by Section 1542. Drafters must stay vigilant about remaining up-to-date with the current language to ensure their settlement agreements are ironclad and fully enforceable.
For more information contact :
Richard J. Wittbrodt
or Ashley Tullius