| The New Hampshire Business Court recently held that while a party can negotiate for a valid release of some future claims, it cannot obtain a release for frauds it might commit in the future. The case of Sabbow & Co., Inc. v. Citizens Bank provided the court with the opportunity to review the validity of a contractual prospective waiver clause in commercial loan documents. Sabbow and Citizens Bank entered into a series of commercial loans. Several years after the loan documents were signed, Sabbow acknowledged the existence of breakage fees, fees to be paid upon prepayment or default under the loans. The parties ultimately agreed to modify the loans, and Sabbow signed a waiver clause that purported to release Citizens Bank from liability for to claims that were "known and unknown" to Sabbow at the time of the modification. Several months later, Sabbow signed an amendment to the modification that also included a release of all "known and unknown" claims it had against Citizens Bank.
Sabbow ultimately sued Citizens Bank. Sabbow alleged in one of its claims that a representative of Citizens Bank intentionally misrepresented the breakage fees due under the loans. The facts demonstrated, however, that Sabbow had actual knowledge of the breakage fee clauses before it signed the two waivers of all claims against the bank. Citizens Bank argued that Sabbow released any claims it might have had against the bank when it signed the loan modification and amendment to the loan modification. Sabbow argued that while it knew that the bank representative misrepresented the breakage fee clauses when it signed the waivers, Sabbow did not know that the bank representative intentionally misrepresented the breakage fee terms. Sabbow claimed that it did not discover that the misrepresentations were intentional until after it purportedly released all claims against the bank. In turn, the bank argued that Sabbow's release of "unknown" claims extinguished its ability to sue, even if it discovered the frauds after signing the releases.
Clauses in which a party purports to release future, or "unknown" claims must pass three tests to be valid: (1) the prospective release must not offend public policy; (2) a reasonable person reviewing the release must have understood that he/she was releasing future claims; and (3) the released claims must have been within the contemplation of the parties at the time they signed the contract. The second and third tests were easily satisfied in this case. As to the first test, however, the court ruled that prospective waivers of fraud claims violate New Hampshire's public policy and are therefore invalid.
While contractual waivers of "known and unknown" claims can be useful, businesses should understand their limitations. The holding of the Business Court creates a general and blanket rule that parties cannot release unknown claims for future frauds. The logic of the case, though, might cause courts to find that other claims should be protected as a matter of public policy. What really makes a claim for fraud more worthy of protection than a claim for negligent misrepresentation or simple negligence? New Hampshire's Constitution guarantees parties the right to recovery for their injuries. Extending the logic of the Sabbow case too far would vitiate the three-part test announced by the New Hampshire Supreme Court, and lead to the invalidation of all prospective waiver clauses. The lesson for now is to examine waiver clauses closely and understand the risk that waivers of future claims might not be ironclad.
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