August 16, 2018

A settlement release is a contract whereby one or more parties agree to abandon, or give up, rights or claims that otherwise could be pursued or enforced.  These releases are commonly incorporated into settlement agreements, or can be prepared as stand-alone documents in connection with the settlement of claims in litigation.  They are governed by the same principles of contract formation, interpretation, and enforceability that apply to all contractual agreements.  The parties are free to negotiate the scope of the release (i.e., whether it will be a general release of all claims or specific to the subject matter), its contents, and whether it will be unilateral or mutual concerning the parties.

Although settlement release agreements typically apply to all known and unknown claims, in California “[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.” [Civ. Code § 1542.] The intent of this statute is to prevent the person releasing claims from inadvertently waiving unknown claims merely by signing a general release.  [Casey v. Proctor (1963) 59 Cal.2d 97, 109.]

For this reason, in California a “Section 1542 Waiver” is needed if the settling parties wish to include both known and as yet unknown claims in a general release.

Merely reciting that Civil Code section 1542 is waived, or that the parties intend to waive unknown claims, is not sufficient.  There must be independent evidence that the releasing party intended to release unknown claims.  [McCray v. Casual Comer, Inc. (C.D. Cal. 1992) 812 F.Supp. 1046, 1048.]

The contract drafter should include separate lines for initials or signatures by the parties to the waiver, indicating their acknowledgment of the Civil Code section 1542 waiver, along with a statement that the releasing parties are aware of the meaning of the statute and intend, by signing the release, to waive and relinquish any and all rights and benefits which they may have under the statute and to assume the risk of any then-existing but as yet unknown claims.

Having the parties sign a release of known and unknown claims is very important.  Without having such a release, the litigation may never end.  By signing and releasing claims that are unknown to them at the time they signed the settlement agreement, they will not be able to bring another lawsuit once they become aware of a condition that had not yet manifested itself at the time they signed the settlement release.

However, you can void a settlement release if you can show that you were induced to grant the release by fraud, mistake, or undue influence.  [Kaufman & Broad-South Bay v, Unisys Corp. (N.D. Cal. 1993) 822 F. Supp. 1468, 1474.]

Be very careful, when you sign an agreement that contains a Section 1542 waiver, to fully understand what you are waiving.  For example, say you are injured on the job, make a workers’ compensation claim, and eventually agree to settle the claim with your employer’s insurer.  You sign a Compromise and Release form that includes a Section 1542 waiver, so now you have released all known and unknown claims you have against the employer.  Later, you realize you could have brought a civil lawsuit against that employer for discrimination, a claim you did not realize you had at the time you signed the Compromise and Release form.  You may be unable to bring that civil suit because of the Section 1542 waiver.

For another example, say you are fired and your employer offers you severance pay if you will sign a release.  The release contains a Section 1542 waiver.  You sign the release because you need the severance pay.  Later, you realize you had grounds for a wrongful termination lawsuit, which could have brought you more money than the severance pay.  The Section 1542 waiver may prevent you from ever bringing a wrongful termination lawsuit against that employer.

Any time you are asked to sign a document containing a release or waiver of claims, you and an attorney should review it carefully.  If you think you may have future rights to claims, and you wish to preserve those rights, you should either negotiate a release that does not waive those claims, or else refuse to sign the release or waiver at all.

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This article is based on the law as of the date posted at the top of the article. This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.