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Firm Prevails in Employment Action, June 2011

SAN FRANCISCO, CA - Plaintiff-construction workers alleged they were employees and not independent contractors. The Firm represented the Defendants, property owners, who, after a four-week trial in the San Francisco Superior Court, not only defeated all of Plaintiffs' six causes of action but were awarded $250,000 against the lead Plaintiff on Defendants' cross-complaint for violations of the California Contractor Licensing Statute.

 

 

 

 

 

 

 

Using Limitation of Liability Clauses and
Release Agreements Effectively
by Timothy F. O’Leary

In an effort to limit their liability, real estate companies ask their clients to sign numerous documents seeking to exonerate them from a broad range of potential claims. Typically, these “hold harmless” or “general release” documents are signed by the buyers as part of the escrow process without either party giving much thought to them. They are rarely enforced by attorneys or the court, each of whom recognizes that their breadth is part of the reason that they are unenforceable.

A selective use of limitation of liability and release agreements would assist real estate companies in limiting their exposure in certain cases. This article defines and distinguishes the two agreements, and identifies the best opportunities for using them effectively. While such agreements rarely can be counted on to exonerate a real estate professional entirely, they can minimize the extent of that liability considerably.

UNDERSTANDING THEIR USES

A. Limitation of Liability Clauses are Ineffective Unless they Define the Scope of the Professional’s Duty.

Limitation of liability clauses attempt to exonerate a real estate professional from liability before the transaction has concluded. California Civil Code § 1668 provides that such clauses are invalid if their intent is to “exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent.” Broad limitation of liability clauses included as an addendum to the purchase agreement or signed by the buyers prior to closing escrow are generally unenforceable as against public policy. Blankenheim v. EF Hutton Company (1990) 217 Cal. App. 3d 1463 (holding that a “hold harmless” agreement in a stock purchase agreement violated public policy).

While broad limitation of liability clauses are unenforceable, real estate agents effectively can define the scope of their responsibilities. In Carleton v. Tortosa (1994) 14 Cal. App. 4th 745, the court of appeal held that a real estate agent was not liable for failing to advise the buyer how to structure a tax deferred exchange. The purchase documents included clauses advising the buyer that the real estate agent could not provide tax advice. The court held that these clauses were a valid limitation on the agent’s responsibilities because they did not exculpate the agent from violating duties that the agent owed. This language simply clarified that the agent had no duty to provide tax advice.

These decisions provide that limitation of liability clauses can be effective if narrowly drafted. For example, Civil Code § 2079.3 provides that the real estate agent owes no duty to inspect public documents. Including that language as part of an addendum would have a better chance of being effective than a broadly drafted clause that seeks to “release” the professional from every known and unknown defect with the property. A clause that seeks to exonerate the agent for failing to perform duties which the agent owes would not be effective. For example, language exonerating the agent for failing to detect roof leaks is ineffective because agents owe a duty to look for “red flags” indicating past or current leaks.

Real estate companies should review their standard disclosures to ensure that they are consistent with the scope of the real estate agent’s duties. Seeking to exonerate an agent from a broad range of responsibilities which the law imposes on the agent renders the clause ineffective. Sometimes more is less. Drafting a narrowly-tailored clause which accurately describes the limitations of the agent’s duties has a better chance of being successful.

B. Release

A release agreement is a document signed by a buyer which releases the agents or sellers from liability after the transaction has concluded. Asking buyers to sign “release” agreements before escrow has closed is generally ineffective. Jue v. Smiser (1994) 23 Cal. App. 4th 312 (buyer can close escrow with knowledge of material defects and still sue seller and agents for damages).

The case of San Diego Hospice v. San Diego (1995) 31 Cal. App. 4th 1048, demonstrates the benefits of a carefully-drafted release agreement. A buyer of commercial property discovered asbestos contamination after escrow closed. The buyer made a claim against the City of San Diego. That claim was settled and the buyer signed a release. The release included all known and unknown claims, including the discovery of any additional contamination. After the settlement agreement was entered, the buyer discovered an underground storage tank. The buyer then brought suit against the City of San Diego, contending that the release agreement did not apply to the unrelated contamination caused by the underground storage tank.

The court of appeal held in favor of the City of San Diego. The fact that the buyer had a subjective intent not to include unknown claims did not defeat the effectiveness of the plain language in the release agreement. Winet v. Price (1992) 4 Cal. App. 4th 1159, 1173. The court noted that the release identified the possibility of additional contamination that was presently unknown.

If a company is aware of a potential claim after the transaction has closed, the company (after notifying its insurer) should intervene actively to resolve the matter before it triggers expensive and time-consuming litigation. If a settlement is reached, companies should draft the release language to include all known claims and a waiver of unknown claims under civil Code Section 1542. The release agreement also should recite that the settlement was entered into in good faith to protect the real estate company from potential cross-claims by non-settling parties.

Unlike the limitation of liability clause, the release agreement should be drafted broadly and should identify the existence of potential, additional claims that the buyer is waiving by signing the release. This provision will take some creativity because, by their very nature, since these claims are “unknown,” they may be challenging to describe. Experienced real estate professionals recognize the typical categories of defects that might manifest themselves later. Under the San Diego decision cited above, describing the categories of potential claims that the buyer is waiving should be sufficient to preclude the buyer from later making claims on unknown and unrelated defects. The advantage of release agreements is that the limitation that such clauses cannot violate public policy, which apply to limitation of liability clauses, does not apply when enforcing release agreements signed after the transaction has closed.

CONCLUSION

Limitation of liability clauses and release agreements historically have been misused by real estate companies. Limitation of liability clauses should be drafted narrowly to define accurately the scope of the agent’s responsibility and to clarify what services the agent is not obligated to perform. Release agreements are only effective after escrow has closed. To be effective, the releasor should be represented by counsel; the agreement should waive unknown claims; and an effort should be made to identify the categories of potential, unknown claims that the buyer is releasing. A better grasp on the usefulness and distinctions among these clauses will help real estate agents maximize their effectiveness and minimize the agents’ exposure.