A potential ambush, concealed within every settlement agreement and release, awaits the attorney, client, business person, and consumer in the form of a waiver of California Civil Code Section 1542. Look at any general release with a California nexus, and you will likely see a waiver of rights under California Civil Code Section 1542, thereby releasing unknown claims. One is likely to encounter a general release of claims with a Section 1542 waiver in the context of settling a business dispute, a consumer claim, or any civil litigation.
This Article is designed to elevate awareness of Section 1542 and how it impacts releases by providing insight and commentary through an examination of the application, interpretation, and pitfalls of waiving the rights afforded by Section 1542. This Article is not only germane to those conducting legal, business, and personal affairs in California, but Section 1542 is so pervasive that it also permeates settlement agreements and general releases in other jurisdictions.
California's 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 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.
Although Section 1542 offers automatic statutory preservation of "unknown" claims, California courts have interpreted the protections of Section 1542 to be waivable.A release of unknown claims and waiver of Section 1542 is a journey into the great unknown. Counsel and clients who, like automatons, blithely cut and paste a waiver of Section 1542 into a general release are inviting disaster. A meaningful evaluation is required to carefully determine the scope of claims being released as well as the risk, potential, and magnitude of any unknown (or known) claim which needs to be preserved.