Probably every California lawyer knows Section 1542 of the Civil Code, which reads: "General Release - Claims Extinguished: 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 settlement with the debtor."
This statute has stood without amendment since 1872.
Perhaps ever since 1872 and certainly in recent decades, settlement agreements generally contain waivers of the rights granted by Section 1542. A typical such waiver is reprinted in Butler v. Vons Companies, Inc., 140 Cal.App.4th 943 (2006): "The Grievant [Butler] understands and agrees that as a condition of this agreement, the Grievant is waiving any rights he may have under Section 1542 of the California Civil Code. Section 1542 provides that 'A General Release Does Not Extend To Claims Which The Creditor Does Not Know Or Suspect To Exist In His Favor At The Time Of Executing The Release, Which If Known By Him Must Have Materially Affected His Settlement With The Debtor.' With full awareness and understanding of the above provision, and after having an opportunity to confer with the Union [t]he Grievant hereby waives all rights which the above provision may provide."
It is also common for settlement agreements to recite that the waiving party has had the opportunity to consult with counsel of his or her choice, or has in fact so consulted.
The scope and effect of these waivers - written as broadly as the imagination of counsel can suggest - has often been litigated when the releasor asserts further claims. Until now, the issues in such litigation have primarily been whether the waivers were complete or whether they contained some ambiguity. See Winet v. Price, 4 Cal.App.4th 1159 (1992). In Winet, the court reviewed various cases in which a party was permitted to avoid the terms of a comprehensive release, noting cases where such waivers of unknown claims were not honored in "special treatment of releases for personal injuries," or where the evidence about the breadth of the waiver was ambiguous, as in Butler. Casey v. Proctor, 59 Cal.2d 97 (1963) Generally, waivers of Section 1542's prohibition against the release of unknown claims have been upheld, as Winet and Butler explain.
Some claims may not be waived at all. The Supreme Court held in Edwards v. Arthur Anderson LLP, 44 Cal.4th 937 (2008) that where a statute confers rights that by their terms are unwaivable, even a specific, identified waiver of such rights will not be enforced.
The right involved in the Edwards case was the employer's duty under Labor Code Section 2802, to indemnify an employee "for all necessary expenditures and losses incurred by the employee in direct consequence of the discharge of his or her duties." Nothing in Section 2802 declares those rights to be nonwaivable. Presumably the Supreme Court decided without expressly so stating that the waiver could not be enforced because it would violate Civil Code Section 1668, which provides: "All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."
A long line of cases, of which Tunkl v. Regents of the University of California, 60 Cal.2d 92 (1963), is probably the most prominent, have applied Section 1668 to strike down contractual commitments that the courts believe to be "against the policy of the law."
Thus, generic and specified waivers of unknown claims, even by parties represented by counsel, may not be enforceable where the claim is one particularly favored as a matter of public policy - or where the releasor was seen as unsophisticated in a non-contractual setting (cases discussed in Winet), or where the release is (or the court finds it to be) ambiguous as in Butler, or where the contract is contrary to public policy. A recent decision added an additional dimension to this list.
In Hoffman v. Lloyd, 2009 DJDAR 10727, the 9th Circuit faced a well-drawn, unambiguous release of unknown claims signed by the defendant with advice of counsel, but ruled that for public policy reasons, it did not cover a certain specified claim. The claim whose release was asserted was one whose release the California Legislature allowed only on particular specified conditions that had not been met in this case. The court therefore declined to enforce the waiver, quoting District Judge Marilyn Hall Patel that "[t]his kind of backdoor loophole is inequitable and frustrates the purposes" of the state law.
The law in question was the California Home Equity Sales Contract Act, California Civil Code Section 1695. That law describes in detail the conditions under which a homeowner may sell his or her real property while it is in foreclosure, requiring, among other things, a precisely prescribed and placed notice in the sales contract, advising the seller of his right to rescind the contract within five days. The Legislature specifically noted its concern that sellers in such circumstances are particularly vulnerable to scam deals.
Whether such notice had been properly provided and signed by the foreclosure-facing seller was a disputed issue of fact in Hoffman, which the bankruptcy court decided in the seller's favor; but the district court and the appellate court found it unnecessary to reach that issue. They found that the underlying sale documents did not include a notice of the right of rescission in the precise form prescribed by the California Civil Code, and that therefore the rescission right remained. That right was not overcome by the seller's subsequent waiver of any and all claims, including his unknown rights under Section 1542.
After the foreclosure seller had sold the property, he remained as a tenant but soon fell behind on his lease payments. The landlord then began an unlawful detainer suit. It was in settling that suit - allowing the seller/tenant a short further time to repurchase the residence or to sell it - that the parties executed the release and waiver in issue. There was no question that the waiver was clear and unambiguous. It provided that the parties "hereby mutually release and forever discharge each other ... [of] claims of every kind and nature whatsoever, whether known or unknown, ... arising from the [unlawful detainer action] or arising from or related to the Property, the purchase by [buyer], the Lease, the Option or the Repurchase Agreement ... [the parties] and each of them, expressly waive the provision of California Civil Code section 1542."
The court held that this did not include a waiver of the right to rescind the sale that had taken place a year earlier. The right to rescind the sale within five days under the Home Equity Sales Contract Act ran from the date when the notice of that right was given. The court ruled that since this notice was never given, the right remained open for the seller's exercise now, many years later.
The bankruptcy court had further found that although the buyer/landlord had expended substantial sums while in title to the property, equity did not require any restitution on the seller/tenant's part.
The moral: Although specific waivers of all claims known and unknown are a common staple of dispute settlements and specific and detailed waivers of Civil Code Section 1542 are universal, the courts will not enforce such waivers where the claimed right is one strongly protected by public policy. A right protected by public policy, if it is waivable at all, would have to be recited and specifically identified in the later waiver. That waiver would thus become a waiver of a known, rather than an unknown, right.
The Legislature has identified many rights as specifically protected and requiring particular acts of waiver after specified advice of this right, often prescribed in terms of content, placement and size of type, in order to be enforceable at all. Under Hoffman, such rights cannot be terminated by a broad and general waiver, no matter how comprehensive its language.
Kurt Melchior is a partner at Nossaman in the firm's San Francisco office, where he practices litigation, chairs the insurance practice and serves as general counsel.