The 150-Year Itch: California Legislature Amends Civil Code Section 1542 but Creates More Questions in the Process

alifornia Civil Code Section 1542 (“Section 1542”) is ubiquitous in documents relating to California deals, parties, or litigations.  For instance, nearly every severance or settlement agreement entered into in California and/or involving a California person, company, or claim, will include a Section 1542 waiver provision. The main purpose of the Section 1542 statute is to prevent the inadvertent waiver of unknown claims by signing a general release (and at least in the context of settlement and release agreements, Section 1542 often appears in the context of a waiver of the rights granted by the statute).  After nearly 150 years on the books, Section 1542 has just been revised, likely piquing the interest of any lawyer whose practice touches the State of California.

The original language of Section 1542 read:

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.

In other words, a general release under California
law, no matter how broad, does not extend to claims that were unknown at the
time of executing the release. Absent an express waiver of Section 1542, broad
release language will not prevent these claims from being brought.

Some of the language, however, has led to debate over
interpretation throughout the years.  When
the statute was codified in 1872, it referred solely to monetary claims in the
context of creditors and debtors. Modern case law, however, has interpreted
Section 1542 to not only include monetary claims in the limited debtor/creditor
context, but also in many other types of claims and scenarios, for instance, in
workers compensation proceedings, personal injury cases, and employment
cases. 

In an effort to clarify Section 1542, the statute was amended
effective January 1, 2019 to now read:

A general release does not extend to claims which 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, which  and that if known by him or her, must would have materially affected his or her settlement with the debtor or released party.

As stated in Section 3 of California Senate Bill No.
1431, these additions of “or releasing party” and “or released party” were
meant to reflect the interpretations of the terms in Section 1542 as
interpreted in existing case law. The revisions are intended to ameliorate
confusion as to which types of cases are covered by Section 1542 and are meant
to provide greater clarity to a releasing party choosing to waive their Section
1542 rights on the scope and ramifications of that waiver. The newly amended
statute now gives notice to releasing parties that Section 1542 definitively
encompasses more than just monetary claims, and that if they waive their
Section 1542 rights, they are waiving their ability to bring a broader swath of
claims.

While the additions of “or releasing party” and “or
released party” serves to indicate the full scope of Section 1542’s
application, whether the changes from “which” to “that” and “must have
materially affected” to “would have materially affected” make a difference to
the statute’s application remains uncertain. Similarly, it is unclear whether
courts will find a Section 1542 waiver using the old language but executed
after January 1,2019 valid. 
Due to this particular uncertainty, the amended version of Section 1542
should be used moving forward to avoid potential invalidation of a Section 1542
waiver, including in settlement agreements, contracts and amendments, and other
transactional documents. A failure to do so may result in potentially costly
litigation over statutory interpretation that could have been easily
avoided.  Further, the continued use of
the old language, even if found to be enforceable, could potentially lead to
the same type of confusion regarding scope that the Section 1542 amendment was
meant to fix. The potential costs in time and resources can be easily prevented
by updating the provision to its amended language.

The amendment of Section 1542 appears to mark an
effort by the California legislature to adapt to the litigious environment in
the Golden State. Parties entering into an agreement that includes a Section
1542 waiver should ensure they know what they are agreeing to and should consult
counsel for the avoidance of any doubt in light of the recent statutory
amendments. Due to the uncertainties raised by the amendment, it may have the
unintended (and ironic) side-effect of causing further litigation over
statutory interpretation. This section may ultimately require further
clarifications and the amendment may have paved the way for even more
legislation to streamline Section 1542’s application.