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Make Sure that Your Release Means What It Says

Title page from the California Civil Code enacted in 1872 for a post about the potential effect of Civil Code Section 1542 on a contractual release

Title page from the California Civil Code enacted in 1872 and published in 1880

I recently prepared a Stock Redemption Agreement pursuant to which one of the founders would leave a corporation (my client). The agreement included a General Release by which the parties would release one another from all liability. The corporation’s CEO had a difficult time understanding the need for, and the significance of, a provision that cited a particular Section of the California Civil Code.

California Civil Code Section 1542 says:

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.

This statute is a potential threat to any general release: At some point down the road, a party may be able to compromise thwart the parties’ original expectations by saying “I would not have signed the release, had I known that!”

That is why, in California, a properly-prepared general release usually will include a provision along the line of the following:

It is the intention of each party in executing this General Release that it will be effective as a bar to each and every claim, demand and cause of action arising from or related to [the issue in question] that the party may have. In furtherance of this intention, each party expressly waives any and all rights and benefits conferred upon it by the provisions of Section 1542 of the California Civil Code, and expressly consents that this Agreement will be given full force and effect according to each and all of its express terms and provisions, including as well those relating to unknown and unsuspected claims, demands and causes of action, if any, and those relating to any other claims, demands and causes of action specified above.

With this provision, the parties waive their rights under Section 1542 and maximize the likelihood that the release will be enforced as the parties intended.

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Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
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Contracts