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Ethics/Professional Responsibility, Contracts, California Courts of Appeal, Appellate Practice

Dec. 18, 2017

Beware boilerplate settlement agreement language

A cautionary tale on the perils of "plugging in" those standard settlement terms when more careful drafting is warranted.

In Iqbal v. Ziadeh, 10 Cal. App. 5th 1 (2017), the California Court of Appeal took a look at some of the common settlement language civil litigators have become accustomed to using. The end result is a cautionary tale on the perils of "plugging in" those standard settlement terms when more careful drafting is warranted.

It all began when a used car lot hired Plaintiff to determine why one of their cars, which had just recently been towed to its lot, would not start. Plaintiff checked to make sure the car was in "park" before he crawled underneath to investigate the mechanical problem. Plaintiff did not know, however, that the tow truck operator left the transmission shift linkage disconnected. When Plaintiff tested the electrical connection for the starter, the car took off and ran him over. The car dragged him through the lot, ultimately crushing his spine.

Plaintiff sued the used car lot, Yosemite Auto, and the tow truck operator. Both defendants were dismissed with prejudice when Yosemite Auto's liability carrier agreed to pay its $1 million policy limit. The parties entered into a typical settlement agreement which released all defendants from liability "including, without limitation, any and all known or unknown claims." As would be expected, the release also extended beyond the two settling defendants to the benefit of their "affiliates" and "all other persons, firms, or corporations, with whom any of the former have been, are now or may hereafter be affiliated." The settlement agreement expressly released, as most do, "present and future officers, directors, stockholders, attorneys, agents, servants, representatives, employees, subsidiaries, affiliates, partners, predecessors and successors in interest, and assigns and all other persons, firms, or corporations, with whom any of the former have been, are now or may hereafter be affiliated." These are typical settlement terms.

With little delay after receiving his settlement funds, Plaintiff filed a second lawsuit based upon the same facts, and for the same damages. This time, however, Plaintiff sued Yosemite Auto's lessor -- the party who owned the property where the accident occurred. As before, Plaintiff alleged negligence and premises liability.

The property owner filed a motion for summary judgment arguing that it was released as an "affiliate" under the prior settlement agreement between Plaintiff and Yosemite Auto. Yosemite Auto's attorney even offered a declaration stating that he meant for the property owner to be one of the parties included in that prior release. But Plaintiff's counsel also submitted a declaration. Plaintiff's counsel pointed out that the property owner was not identified in the settlement agreement and was never even mentioned in any settlement negotiations. Although the trial court granted summary judgment for the property owner, the Court of Appeal reversed. First, the Court of Appeal decided to define an "affiliate" as a party that is part of, dependent upon, or under the control of a larger or more established organization or group. To be an "affiliate," said the court, requires more than mere contractual privity. The appellate court also noted that Plaintiff and the former defendants expressly agreed to a confidentiality provision promising that, unless otherwise agreed to in writing, they would never reveal any terms of the settlement agreement "to anyone." Comporting with customary practice, the document stated that the parties' attorneys and representatives were also bound by the same confidentiality provision. Noting this, the court reasoned that the property owner, who was not entitled to even know about the settlement agreement, could not reasonably be expected to benefit from it.

Following the Ziadeh opinion, attorneys should be on the lookout for those settlement scenarios where the potential remains for an additional lawsuit against a third party in contractual privity with the settling defendant. If a chance exists for that additional lawsuit, then a chance exists for the settling defendant and/or its insurance carrier to be drawn back into the litigation on an express indemnity claim or additional insured endorsement. Under Ziadeh, a typical settlement agreement and release may not bar those additional claims. The ruling should be taken as a reminder for attorneys to consider the standard and boilerplate provisions in their settlement documents. Too frequently, certain standard language is cut and pasted, over and again, from old settlement agreements. Now is the time to consider whether those standard provisions have become outdated.

From the Ziadeh ruling, there are at least two settlement terms requiring some more careful attention. First, additional specificity may be needed where the release parties are defined to include the defendant's affiliates, agents, representatives, etc. Attorneys should consider whether any other parties -- particularly those in contractual privity with the defendants -- should be expressly named and released. Second, attorneys should consider whether confidentiality is really necessary, or even worthwhile. As the Ziadeh court points out, broadly worded confidentiality provisions may be a double-edged sword for some defendants. Perhaps the better practice is to draft a provision that is not only more precise, but more contemporary. Following a contentious lawsuit, the settling parties may be best served with a simple provision stating that they "agree to not publicize the lawsuit or the settlement agreement, and will not disparage or criticize one another, including through the use of on-line or social media."

The Ziadeh court reminds us we ought not to be too comfortable with the old settlement language attorneys have grown so accustomed to. The better practice is to at least occasionally reconsider and update whatever contract terms have become standard, boilerplate provisions over the course of time.

#345315

Ben Armistead

Daily Journal Staff Writer
ben_armistead@dailyjournal.com

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