By Bruce D. Rudman, Abdulaziz, Grossbart & Rudman
Over the years, we have cautioned our clients about release language contained within documents that are presented on a regular basis. One recent Court of Appeal case brings this issue into the forefront, holding that a release in a purchase agreement is effective to waiving any future defect claims, even where other statutory protections might have applied.
As background, California has a policy that a release generally does not waive unknown claims. However, it is a simple matter to insert language that waives unknown claims. All one has to do is insert a waiver of Civil Code section 1542 and the right to make a claim against the other party for any claims that are not even addressed in the agreement can be effective. Section 1542 was enacted in 1872, and the language of it is so ambiguous that it may not alert one to know what they are waiving. Section 1542 provides, "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." When a contract specifically states that it waives this language, then the person is waiving every claim, known or unknown, related to their dispute.
In a case from the Court of Appeal entitled SI 59 LLC v. Variel Warner Ventures, LLC, the contract at issue concerned the purchase of an 85-unit apartment complex. The apartment complex was constructed by a contractor, using subcontractors, for the seller, Variel Warner Ventures. The purchase agreement was entered into even before the construction was completed. The agreement called for escrow not to close until "final completion," which among other things, was defined as "all improvements have been constructed in substantial accordance with all plans and specifications and other applicable provisions of the general construction contract." The purchase agreement also contained a general release stating that the buyer should rely solely on its own knowledge of the property based on its investigation of the property as well as its inspections. Except as to the general contractor warranty, all claims were released that the buyer may have had against the seller, including claims for breach of representations, warranties and covenants for fraud. In a typical residential purchase agreement, this might not be enforceable due to the duty to disclose. However, since the seller was selling the commercial property before construction was completed, it is unlikely one could ever prove it failed to disclose something.
When the buyer sued the seller for construction defects, among other claims, the Court dismissed the lawsuit, relying upon the release language. The argument made to the Court was that another Civil Code section prohibits contracts, which would exempt someone from responsibility for his or her own fraud or willful injury to the personal property of another. Interestingly, the Court held that this statute was intended to apply to future actions by the parties and not past events.
In this case, it is unknown who reviewed the documents and whether the release language was negotiated. However, more to the forefront concerning our construction clients, it is becoming very routine to see this type of release language to include in common documents such as a change order. Indeed, on larger public works projects, it is very common to see a change order, including those given to a contractor by a public entity, include a waiver of unknown claims. When there is pushback on those issues, it is almost always explained to the person that they want to sign the change order that this is only talking about claims related to the specific change order request, and is intended to make that change order all inclusive. A court could impose a much broader effect of the release.
One must be very careful limiting the wording of any release, or the language of the agreement might waive all other claims they might have. As an example of one way to try to limit the effects of the release, if the release specifically states that this release only applies to those matters asserted in a change order, then the release may not be interpreted to be broader than it sounds. On the other hand, broad release language in any agreement that includes a waiver of Section 1542 could very well waive in and all claims.
The point of the foregoing is that one must be very careful about documents that are presented to them. There are some people who think that if they do not read it, then it cannot be held against them. That is not the law. The law is that if you sign something, it is assumed that you read it and agreed to it.
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Bruce Rudman has been practicing in the area of California construction law for 20 years. He is an acknowledged expert in the area of contractor's licensing and has represented hundreds of contractors over the years before the Contractor's State License Board. Bruce has been published on numerous occasions and is a respected speaker on Construction Law, including licensing and contract requirements, Mechanic's Liens and other construction related issues and remedies.
Abdulaziz, Grossbart & Rudman provides this information as a service to its friends & clients and it does not establish an attorney-client relationship with the reader. This document is of a general nature and is not a substitute for legal advice. Since laws change frequently, contact an attorney before using this information.
Bruce Rudman can be reached at Abdulaziz, Grossbart & Rudman: (818) 760-2000 or by
E-Mail at bdr@agrlaw.com or at www.agrlaw.com