A settlement agreement is a contract. When parties to pending litigation enter into a settlement, they enter into a contract. Such a contract is subject to the general law governing all contracts. (T. M. Cobb Co. v. Superior Court (1984) 36 Cal.3d 273, 280 [204 Cal. Rptr. 143, 682 P.2d 338] [offers by a party to compromise under Code Civ. Proc., § 998].) Courts seek to interpret contracts in a manner that will render them “lawful, operative, definite, reasonable, and capable of being carried into effect’” without violating the intent of the parties. (Robbins v. Pacific Eastern Corp. (1937) 8 Cal.2d 241, 272–273; Kaufman v. Goldman,  (2011) 195 Cal. App. 4th 734, 745.

A settlement agreement like a contract is a document that is typically negotiated between the parties to the agreement and it is up to the parties to determine its terms. Settlements take time and sometimes negotiating the settlement terms takes longer. This is especially true in complex litigation and multiparty matters where negotiating the settlement terms is just as contentious as litigating the matter. Just like contracts, in a settlement agreement the parties cannot agree to terms that violate public policy. A contract is thought to be against public policy if it results in a breach of law, harms citizens, or causes injury to the state. Contracts that are voided on public policy grounds carry no legal obligations. For example, an employer cannot force an employee to sign a contract that forbids the worker from joining a union.

In the construction defect arena, one example of a term that should not be included in a settlement agreement is a term that prohibits a party in the dispute from filing, continuing, or cooperating on a complaint against the other party with a board, bureau, or program within the Department of Consumer Affairs.

It has become more and more common in construction defect actions that a Plaintiff in addition to filing a civil action against a developer, general contractor, or subcontractor files a complaint against the contractor’s license with the California Contractors State License Board (“CSLB”). Sometimes the Plaintiff files a complaint against the license before filing the civil action. Others the complaint is filed during the litigation or after the litigation resolves.

The CSLB conducts its own independent investigation of the complaint separate from the civil action. If the civil action resolves via settlement, the contractor/developer/subcontractor’s goal is to have all matters related to the project resolved including the claims against their license. However, pursuant to California Business & Professions Code section 143.5, adding a provision in a settlement agreement that requires the Plaintiff to dismiss their complaint against the license or agree that one will not be filed, is not only prohibited but may invalidate the settlement agreement.

Business & Professions Code section 143.5(a) specifically states as follows:

(a) No licensee who is regulated by a board, bureau, or program within the Department of Consumer Affairs, nor an entity or person acting as an authorized agent of a licensee, shall include or permit to be included a provision in an agreement to settle a civil dispute, whether the agreement is made before or after the commencement of a civil action, that prohibits the other party in that dispute from contacting, filing a complaint with, or cooperating with the department, board, bureau, or program within the Department of Consumer Affairs that regulates the licensee or that requires the other party to withdraw a complaint from the department, board, bureau, or program within the Department of Consumer Affairs that regulates the licensee. A provision of that nature is void as against public policy, and any licensee who includes or permits to be included a provision of that nature in a settlement agreement is subject to disciplinary action by the board, bureau, or program.

California has a strong public policy favoring the voluntary settlement of disputes. Settlement agreements are highly favored as productive of peace and good will in the community and reducing the expense and persistence of litigation. Notwithstanding that policy, courts can declare settlement agreements and releases, which the law treats like any other contracts, void and unenforceable on the basis of other public policies, illegality, or unfairness. The court may reject a stipulated settlement that is contrary to public policy or that incorporates an erroneous rule of law. Courts cannot endorse or enforce a provision in a settlement agreement or stipulation which is illegal, contrary to public policy, or unjust. Rheinhart v. Nissan North America, Inc. (2023),92 Cal. App. 5th 1016, 1016. Therefore, caution should be taken when drafting settlement agreements to assure that their terms will not result in an agreement that is later voided and will undo the hard work that went into settling the matter in the first place.

Although settling the civil action does not guarantee a withdrawal of the complaint against the license, per Business & Professions Code section 143(5)(b), if the CSLB take disciplinary action against the licensee based on the complaint, and that party has settled for monetary damages that resulted in a full and final satisfaction of the civil action, the CSLB may not require its licensee to pay any additional sums to the benefit of any plaintiff in the civil action as this would potentially result in double recovery by the plaintiff.

In conclusion, while the courts encourage settlements and freedom of contract is an important principle, the courts can exercise their power to void a settlement agreement if its terms violate public policy. Drafter beware!