Coffee Beans, Mars and the 50 States: Civil Code 1542 Waivers and Latent Defects
A few years ago, Pulitzer Prize-winning reporter Charles Duhigg wrote a book that was on the New York Times bestseller list for over 60 weeks, The Power of Habit: Why We Do What We Do in Life and Business. As its title suggests, the book is about habits, but more importantly about how we can change our habits to make ourselves happier, healthier and more productive.
In his book, Duhigg talks about how habits are “encoded into the structures of our brain” and how this is an advantage because, as an example, “it would be awful if we had to relearn how to drive after every vacation.”
Duhigg’s driving example made me think about how much we assume as well, and how, from a practical perspective, it is almost essential that we do so. Using his car example, when we put our key into the ignition and turn it, we assume that the engine will start, and further assume that when we put our foot on the gas pedal that the car will move. If we didn’t or couldn’t assume this, and the many other things we assume in our daily lives, our brains would likely go into overload.
There are, however, some things that we commonly take for granted that aren’t in fact true:
- Like coffee beans. Coffee beans aren’t actually beans, but seeds. While all beans are seeds, not all seeds are beans, and coffee beans, while they’re seeds, aren’t beans. Lay down that knowledge on your local barista.
- Mars, also known as the “Red Planet,” isn’t red. It’s actually more of a butterscotchish color. It just looks red because of the haze of dust that surrounds it which, you can turn around and tell the astrophysicist standing behind you in line at that same coffee shop, is because of the spectral properties of the nanophase ferric oxides in Martian dust.
- Technically, there aren’t 50 states in the United States. And this isn’t because I’m not counting territories like Puerto Rico. Actually, there are 46 states and 4 commonwealths in the United States, with Kentucky, Massachusetts, Pennsylvania and Virginia comprising the latter. A commonwealth emphasizes a government based on the common consent of the people as opposed to one legitimized because they were a former royal colony. Constitutionally, however, there is no distinction between states and commonwealths.
Fortunately though, most things we assume as true are in fact true as the next case highlights.
Civil Code Section 1542 Waivers
If you’ve been involved in litigation and settled a case you’ve likely run across a provision in a settlement agreement which purports to “waive” Civil Code section 1542. Section 1542 simply states that a release by one party of another party or a release by two or more parties as to one another does not act as a release of claims which they did not know or suspect to exist at the time of executing the release:
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.
Civil Code §1542.
A settlement agreement is a form of release (i.e., the payment of money or other consideration in exchange for a release of claims). However, because a party paying money or other consideration in a settlement agreement wants to make sure that they are settling all claims they will typically insist on a Civil Code section 1542 waiver. Here’s a typical 1542 waiver provision:
Plaintiff hereby waives Civil Code section 1542 which 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.”
But does a 1542 waiver truly waive unknown claims which may later rear their ugly heads? How about latent defects? And how about latent defects in new residential construction? The California Court of Appeal for the Second District, in Belasco v. Wells, Case No. B254525 (February 17, 2015), answered these questions. And their answer was . . . well . . . what most of us assumed.
The Belasco v. Wells Case
The facts of the case are pretty straightforward:
- In 2004, David Belasco (an attorney) purchased a new single-family home in Manhattan Beach, California from builder Gary Loren Wells. In 2006, Belasco filed a complaint against Wells with the California Contractors State License Board alleging various construction defects.
- During the course of the dispute, Wells and Belasco entered into a settlement agreement whereby Wells paid Belasco the sum of $25,000. The settlement agreement included a 1542 waiver.
- However, in 2012, years after the settlement agreement was entered, Belasco filed suit against Wells and others alleging defects with the roof which he alleged were discovered in 2011.
- Wells filed a motion with the court contending that Belasco’s claim was barred because Belasco had signed a settlement agreement in which he waived Civil Code section 1542. The trial court agreed and Wells appealed.
The Court of Appeal Decision
On appeal, Belasco argued that because his claim involved a construction defect claim arising from new residential construction that the Right to Repair Act (Civil Code §§ 895 et seq.) applied, that under Civil Code section 929 of the Right to Repair Act a builder can “obtain a reasonable release in exchange for [a] cash payment,” but that the release contained in the settlement agreement he signed was not “reasonable” if it were construed to extend to unknown latent defects.
Strike one: The Court of Appeal disagreed stating, “[t]he agreement was explicit – in return for cash payment of $25,000, Belasco released Wells of ‘any and all claims’ . . .and expressly waived ‘all rights under section 1542 of the Civil Code of California.'”
Belasco next argued that under Civil Code section 932 of the Right to Repair Act, the introductory sentence states that “[s]ubsequently discovered claims of unmet standards shall be administered separately under this chapter, unless otherwise agreed to by the parties,” and that because problems with the roof were not discovered until after the settlement agreement was entered into it did not bar his subsequent lawsuit in 2012.
Strike two: Again, the Court of Appeal disagreed stating, “section 932 must be read in conjunction with the express language of section 929,” and because “[s]ection 929, not section 932, controls this situation, the 2006 settlement bars all subsequent actions.”
Finally, Belasco argued that the 1542 waiver contained in the settlement agreement should not act as a bar to claims arising from subsequently discovered latent defects on public policy grounds because the Right to Repair Act was intended to protect purchasers of new single family residences from defects, whether such defects were patent or latent.
Strike three: Once again, the Court of Appeal disagreed stating that because “[s]ection 929 specifically allows the parties to negotiate a reasonable settlement in return for a cash payment,” and there is no “prohibition against releases in the context of repairs to settle claim under the [Right to Repair] Act,” that it is “apparent that there is no state policy that would prohibit a release and section 1542 waiver.”
And, yer out!
Conclusion
One could argue that application of the Belasco case should be limited because Belasco was an attorney and essentially “should have known better.” One could also argue that the Belasco case should be limited to settlement agreements involving claims under the Right to Repair Act. And, I’m sure these arguments will be made by someone, sometime.
However, I think the rationale of the Court suggests a broader application and, that is, that a settlement agreement which includes a 1542 waiver acts as a bar to any subsequent claim including a claim of latent defects which may later be discovered, absent of course, fraud or adhesion.
California Construction Law Blog | Nomos LLP 
One Response to “Coffee Beans, Mars and the 50 States: Civil Code 1542 Waivers and Latent Defects”
That’s a milestone published Cal.App. case! I have been pondering this very question recently – now I can stop wondering.