Legal Updates

A waiver entered into under fraud or lack of good faith may not be binding

December 18, 2019

A dispute between siblings regarding ownership of companies and assets ended with a comprehensive settlement agreement which also included a wide waiver of claims, contentions and deamds, whether or not the known at such time. After signing the agreement, the sister contended to have rights to a particular real estate project because during the settlement negotiations her brother misled her about the status of the project.
The Supreme Court held that the waiver is invalid if was entered into with fraud in the inducement. As any contract, a waiver is subject to interpretation and may be attacked with contentions as to its legal validity including, among others, bad faith, mistake and fraud in the inducement, unconscionability and coercion. However, the hurdle that must be passed to cancel a waiver is high. Here, the sister signed a waiver stating that she is also waiving any cause of action that is unknown to her but this wide waiver may be valid because parties to the contract may agree that one them takes on the responsibility of examining the state of affairs and assume the risk of misunderstanding the reality and thus is the situation in every AS-IS transaction. However, a waiver, however broad, may not waive contentions of fraud or misleading that were not known at the time of the settlement and relate to a material detail of the agreement. Similarly, a clause in the agreement, drafted by the Brother, which states that the parties waive the rule of contra proferentem (interpretation against the draftsman) is not valid, in the same manner that a waiver of the obligation not to defraud or the obligation to act in good faith will be invalidated. Therefore, the contentions of fraud in the inducement must be substantially examined and the result may be the cancellation of the entire settlement agreement because the particular project is an essential part of the indivisible settlement agreement and partial cancellation thereof is not possible.