Contract Must Be Construed As A Whole So As To Give Effect To Every Part, If Reasonably Practicable
Rodriguez v. Oto, 212 Cal.App.4th 1020 (2013) held language unambiguously releasing “all persons” from liability extended to third parties, entitling a stranger to summary judgment that the stranger had been released, in the absence of countervailing evidence. In Epic Communications, Inc., v. Richwave Technology, Inc., H037884 (6th Dist. June 23, 2015) (Rushing, Elia, Walsh) (published), the trial judge agreed with defendants Richwave and Wong that a broadly worded release in a settlement agreement between Epic and ALi was unambiguous and released Richwave and Wong from further liability.
The release language released ALi’s “past, present, and future . . . assignees, . . . shareholders, . . . [and] employees.” Wong and Richwave argued Wong was a past employee of ALi, and Richwave was “an assignee and shareholder of ALi”, such that both were covered by the release and free from liability.
Epic did well by appealing.
The Court of Appeal found that the release, when viewed in light of the entire agreement, was not unambiguous on its face. For example, the recitals suggested that the release was limited to matters arbitrated between Epic and ALi, and thus did not include claims against Richwave and Wong that were not arbitrated. The agreement provided for confidentiality, raising an issue as to how third parties could be intended to take advantage of a confidential agreement.
The Court found “something of a smoking gun” in agreement language providing, “No other person or entity other than the Parties hereto shall be entitled to claim any right or benefit under this” – at which point the paragraph ended without punctuation.
Once the language was found by the Court to be ambiguous, the barn door opened wide to let in extraneous evidence inconsistent with an intent to release Richwave and Wong. For example, ALi never objected to Epic’s further legal action against Richwave and Wong, and refused to release confidential documents at the request of Richwave and Wong, unless the court issued an order.
DRAFTING TIPS: The Court observes that “whether the parties intended to confer enforceable rights on the party now asserting them,” is a pivotal question in cases such as this one. Parties should therefore give this question attention when drafting releases – though sometimes parties are reluctant to flag an issue when ambiguity may work in their favor.
The Court suggests that, had the parties intended to extinguish Epic’s pending claims against Wong and Richwave, “they might have been expected to express the purpose of the settlement agreement more broadly, e.g., as extinguishing all existing and potential claims arising from the events giving rise to the suit and the award.” Recitals can be a useful tool to expand or contract the scope of an agreement.
The Court also notes that the use of the term “successor” in the release was “at best . . . ambiguous”. “Successor” could refer to someone who claims to succeed to certain rights previously owned by another party, or refer to a successor to all the rights under the settlement agreement. The same problem can exist with the word “assignee” – an assignee of a specific asset, versus an assignee of all the rights under the agreement. Beware when using the boilerplate phrase “successors and assigns.”