Settlement Agreements: Civil Code Section 1668 Negates Contractual Clause Eliminating Liability For Fraud When Tortious Elements Are In The Past

But Civil Code Section 1668 Does Negate Contractual Clause Exempting Party From Responsibility When Elements Of Tort Are Concurrent Or Future Events When Contract Is Signed.

    Until Lingsch v. Savage, 213 Cal.App.2d 729 (1963) and Orlando v. Berkeley, 220 Cal.App.2d 224 (1963) came along, sellers attempted to remove liability for the condition of property by using "as-is" conditions in contracts, taking advantage of the ancient rule, "caveat emptor" or "buyer beware." As a consequence of those cases, interpreting as-is clauses so as to be consistent with Civil Code section 1668¹, which does not allow one to exempt oneself from one's own fraud, an as-is provision is ineffective to relieve the seller of fraud. And so argued the assignee of an apartment complex purchased earlier from a developer when suing the developer and related entities for defective construction. SI 59 LLC v. Variel Warner Ventures, LLC et al., B285086 (2/2  11/15/18) (Ashmann-Gerst, Chavez, Hoffstadt).

    In affirming dismissal of Plaintiff/Appellant's complaint, the Court explains the temporal limitation of section 1668: "section 1668 negates a contractual clause exempting a party from responsibility for fraud or a statutory violation only when all or some of the elements of the tort are concurrent or future events at the time the contract is signed. Contrariwise, we hold that section 1668 does not negate such a clause when all the elements are past events. Regarding the element of damages, which is necessary for tort liability, this means that at least some form of economic or physical damage has occurred." Thus, with a suitable disclaimer, one can be off-the-hook for past fraud, but not fraud occurring concurrently with or after the contract is signed.

    COMMENT: This is a slippery area, and the ruling, particularly with regard to damages, could invite future litigation. One can foresee future argument arising over whether a statutory violation that arguably led to a diminution in market value before a contract was signed, and which was known to the seller but not to the buyer, and subsequently led to physical injury after the contract was signed, nevertheless allows for a complete release of liability, despite Civil Code section 1668, because some damage by way of diminution of value occurred before the contract was signed.

¹ Section 1668 provides: "All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law."