Bennett v. Shinoda Floral, Inc. , 108 Wash. 2d 386 ( 1987 )

Durham, J.

In these two consolidated cases, the plaintiffs brought actions for damages for personal injuries. In both cases, the trial courts granted defense motions for summary judgment on the ground that the plaintiffs had executed releases of all claims.¹ The issue we must decide is if the victims are bound, as a matter of law, by releases executed when they knew they had been injured, but did not know the extent or consequences of the injuries. The releases signed by both plaintiffs stated:

It is understood and agreed that this is a full and final release of all claims of every nature and kind whatsoever, and releases claims that are known and unknown, suspected and unsuspected.

We hold that such releases are binding.

Bennett v. Shinoda Floral

On August 23, 1982, James Bennett was driving his automobile when it was struck from behind by a Shinoda Floral, Inc. truck driven by George Wasilche in the course of his employment. Following the collision, Bennett felt back pain. On the day of the collision, he consulted Dr. L. C. Hoover, an osteopathic physician and surgeon. Dr. Hoover diagnosed a lumbosacral and dorsal sprain. Dr. Hoover told Bennett that although his injury would temporarily disable him from working at his job as a truck driver at Safeway Stores, it would heal within a reasonable period of time, allowing him to go back to work. Bennett expected that he would be able to return to work.

Aetna Casualty and Surety Company represented Wasilche and Shinoda Floral. About 2 weeks after the collision, Floyd Barker, a claims adjuster for Aetna, contacted Bennett. Barker assured Bennett that Aetna would pay his medical expenses and lost wages while he was unable to work.

During the fall of 1982, Dr. Hoover continued to treat Bennett for his back pain. In October 1982, Barker received a report from Dr. Hoover stating that Bennett's prognosis, as well as the date he could return to work, was undetermined.

In early December 1982, Barker informed Bennett that Aetna was terminating his wage loss payments. On December 6, 1982, Barker told Bennett that Aetna wanted to settle his claim and offered $5,000 as a final payment, telling Bennett that this was all Aetna would pay. Bennett discussed the offer with his wife. The Bennetts thought that the $5,000, along with vacation pay due him from Safeway in January 1983, would be sufficient to meet their needs until Bennett could return to work. The same day the offer was made, Bennett accepted it and signed a release "of all claims of every nature and kind whatsoever . . . that are known and unknown, suspected and unsuspected."

In the early spring of 1983, Bennett's back condition worsened. Dr. Hoover eventually concluded that, as a result of the collision, Bennett had a herniated intravertebral disc in his low back, and that this was a different and much more serious condition than the sprain which was originally diagnosed. Dr. Hoover concluded that this condition would prevent Bennett from returning to any kind of employment.

In March 1984, Dr. James Mowry, an orthopedic surgeon, examined Bennett and diagnosed degenerative disc disease of the lumbar spine. Dr. Mowry determined that this condition had been slowly progressive for many years, developing as a result of innumerable injuries, and that the violence of the August 23, 1982, accident "finally produced enough symptomatology to prevent his returning to work." Dr. Mowry also observed that

[t]he nature and extent of his injuries as well as their permanence were not readily apparent in December, 1982 . . . [I]t would not have been unreasonable for Mr. Bennett to have believed in December, 1982, that he would recover and be able to return to work. . . . Given his history of prior back problems and successful recovery from them, it would not have been reasonable or possible to have predicted the course of his injuries in December, 1982.

Dr. Mowry concluded that Bennett is permanently and totally disabled.

In April 1983, Bennett brought this action for damages against Wasilche and Shinoda Floral, who asserted the release as an affirmative defense. The trial court granted the defendants' motion for summary judgment and dismissed the action. The Court of Appeals reversed. This court granted the defendants' petition for review.

Hoggatt v. Jorgensen

On March 2, 1980, James T. Hoggatt, Jr. was injured when the motorcycle he was riding left the roadway while he was attempting to pass an automobile driven by Timothy L. Jorgensen. Liability is disputed. Hoggatt was hospitalized and was diagnosed as having compression fractures of two vertebrae. His physicians found that there was no evidence of spinal cord compression or any other complications from these fractures. According to Hoggatt, his physicians told him that the injuries would heal and he would be able to return to work.

Within a few weeks of the accident, Hoggatt began settlement negotiations with Perneo, Jorgensen's automobile insurance carrier. Hoggatt authorized Pemco to contact his physicians and obtain his medical records, and a Pemco claims adjuster received information from his physicians. In a May 13, 1980 letter to Pemco, Hoggatt told Pemco that since the date of the accident he had been in constant pain and was required to take medication; that he had to wear a back brace; that he was unable to bend over to put on shoes; that he had lost VÁ inches in height as a result of the accident; and that he had been unable to function in his business since the accident. In the letter, he offered to grant a full release to Jorgensen if Pemco would pay him the liability insurance policy limits. On May 15, 1980, Hoggatt and Pemco reached an agreement. In exchange for a cash settlement of $26,500, Hoggatt signed a release providing: "It is understood and agreed that this is a Full and Final Release of all claims of every nature and kind whatsoever, and releases claims that are known and unknown, suspected and unsuspected."

After the release was executed, Hoggatt continued to consult various physicians. There was no change in diagnosis until March 9, 1982, when he was examined by Dr. John Mullins, a neurologist. Dr. Mullins diagnosed a probable spinal cord injury with an associated mild paraparesis. Dr. Mullins indicated that the mild spinal cord injury "may well have been due to a contusion or concussion of the spinal cord at the time of [Hoggatt's] accident in March of 1980." On September 22, 1982, Hoggatt was found to be disabled for purposes of receiving social security disability benefits.

In February 1983, Hoggatt brought this action for damages against Jorgensen, who raised the release as an affirmative defense. The trial court granted Jorgensen's motion for summary judgment of dismissal. The Court of Appeals affirmed. This court granted Hoggatt's petition for review.

Analysis

In these cases, we must decide if injury victims are bound, as a matter of law, by releases executed when they knew they had been injured, but did not know the extent or consequences of the injuries. To resolve this issue, we must determine the scope of the decision by this court in Finch v. Carlton, 84 Wn.2d 140, 524 P.2d 898 (1974). In order to establish a context for understanding Finch, we begin our analysis by reviewing Washington law prior to Finch on the voidability of releases.

Before Finch, this court established that traditional contract principles applied in deciding if an injured person could avoid a release that he had signed. Where the release was not induced by fraud, misrepresentation or overreaching, it could be set aside only if there was clear and convincing evidence of mutual mistake in its execution. See Beaver v. Estate of Harris, 67 Wn.2d 621, 626-27, 409 P.2d 143 (1965); Pepper v. Evanson, 70 Wn.2d 309, 312-14, 422 P.2d 817 (1967), overruled on other grounds in Simonson v. Fendell, 101 Wn.2d 88, 675 P.2d 1218 (1984). In Beaver, the injured plaintiff believed he had a strained back at the time he signed a release, and sought to avoid the release after it was determined that he had a herniated disc. We sustained the release, holding that because the insurer's only information about the plaintiff's condition came from the plaintiff himself, the insurer did not independently make a mistake and, thus, there was no mutual mistake. Beaver, at 628-29. In Pepper, the injured plaintiff signed a release after experiencing pains in the right side of his neck and in his right arm. Later, he sought to avoid the release when a new disability arose on his left side. We upheld the release, concluding that there was no mutual mistake because the insurer depended on the injured plaintiff's assessment of his injuries. Pepper, at 316-17.

The later case of Finch v. Carlton, supra, presented facts that differed significantly from those in Beaver and Pepper. While the plaintiffs in the prior cases had been aware that they were injured at the time they executed releases, the plaintiff in Finch had no knowledge whatsoever of any personal injury when he signed a release.

On March 7, 1970, plaintiff Finch was involved in an automobile accident in which his vehicle collided with defendant's. About 3 days later, Finch met with an insurance adjuster for defendant's insurance company and filled out a claim form. At that time, Finch claimed no personal injuries. He knew, however, that his automobile had been damaged in the collision. On April 7, 1970, 1 month after the accident, Finch signed a release of all claims resulting from the accident, whether on account of bodily injury or property damage, in exchange for the insurer's payment of the cost of repairing his automobile. At the time he signed the release, Finch was not aware that he had any physical injury. In June 1970, he became ill, consulted physicians, and learned that he had internal injuries resulting from the accident. He then brought an action for damages for such injuries.

In considering if the release could be avoided, we recognized that Finch's case was unlike prior cases such as Pepper, because it involved "a situation where the parties presumably did not contemplate the possibility of latent injuries." Finch, at 143. We concluded that a release may be avoided "where later-discovered injuries were clearly not contemplated by the parties at the time of release." Finch, at 144. We stated:

The rationale employed by a majority of jurisdictions does not permit the avoidance of a release merely because of the discovery of a previously unknown injury, but instead allows an inquiry into whether the release was fairly and knowingly made.

Finch, at 145-46. We remanded the case to the trial court to determine if the release was fairly and knowingly made, based on a list of several factors. See Finch, at 146.²

In the present case, the plaintiffs argue that the Finch "fairly and knowingly made" test should apply not only to situations where the releasor is unaware of any injury at the time he signs the release, but also where the releasor knows he has been injured but does not know the extent or consequences of the injury when he executes the release. We conclude, however, that Finch must be limited to its facts.³

As we recognized in Finch, there are two competing policies which must be considered in deciding the voidability of releases. On one hand, the law favors the just compensation of accident victims. Finch, at 145. On the other hand, the law favors the private settlement of disputes and gives releases great weight in order to support the finality of such settlements. Finch, at 145. See also Haller v. Wallis, 89 Wn.2d 539, 544, 573 P.2d 1302 (1978); Mutual of Enumclaw Ins. Co. v. State Farm Mut. Auto. Ins. Co., 37 Wn. App. 690, 693, 682 P.2d 317 (1984).

When a person signs a release of all claims and has no knowledge that he has any personal injury, as in Finch, it is supportable to permit avoidance of the release once it is found that the release was not executed fairly and knowingly. As this court indicated in Finch, at 145, in such a case the policy favoring just compensation of accident victims outweighs the policy favoring finality of private settlements. Because the plaintiff is unaware of any personal injury at the time he signs the release, it is unjust to hold him to the release where it is clear that he did not contemplate the possibility that an injury would arise in the future.

In contrast, when a person signs a release knowing that he has been injured, he assumes some risk that his condition may worsen. As we stated in Beaver v. Estate of Harris, 67 Wn.2d 621, 629, 409 P.2d 143 (1965): "[I]t is common knowledge that few diagnoses and prognoses concerning injuries to the human body can be reduced to mathematical certainty." By signing a release when he knows he is injured, a person is aware that there is a chance that he could be left insufficiently compensated if the prognosis changes. He knowingly takes a gamble in agreeing to a settlement. This risk that circumstances will change is inherent in the settlement process.

If we allowed a challenge to the validity of the releases in these cases, we would severely impair the policy favoring private settlements and promoting their finality. In every case where the known circumstances of the injury changed after settlement, the validity of the release would be open to question. The parties to many more settlement agreements would be put through the delay and expense of litigation. See Beaver, at 627. The absence of finality would greatly reduce the incentive to settle personal injury claims, thus impeding timely compensation to injury victims and adding to the congestion crisis in our courts.

In summary, we conclude that the balance between the policies favoring private, final settlement and the just compensation of accident victims can be properly maintained only if the Finch test is limited to its facts. We hold, therefore, that the Finch test applies only to situations where there is no known injury at the time the release is executed. Because both Bennett and Hoggatt knew they were injured when they executed releases, Finch does not apply to their cases.

We must next decide if the releases in these cases are voidable under the law of contracts. It is undisputed in both of these cases that there is no evidence of fraud, misrepresentation, or overreaching. Thus, the releases can be set aside only if there is clear and convincing evidence of mutual mistake.

A contract is voidable on grounds of mutual mistake when both parties independently make a mistake at the time the contract is made as to a basic assumption of the contract, unless the party seeking avoidance bears the risk of the mistake. PUD 1 v. WPPSS, 104 Wn.2d 353, 362, 705 P.2d 1195 (1985); Restatement (Second) of Contracts § 152 (1981). A party bears the risk of a mistake when "he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient". Restatement (Second) of Contracts § 154(b) (1981). See also PUD 1, at 362; Armco, Inc. v. Southern Rock, Inc., 696 F.2d 410, 412-13 (5th Cir. 1983); United States v. McBride, 571 F. Supp. 596, 610 (S.D. Tex. 1983); Covich v. Chambers, 8 Mass. App. Ct. 740, 749, 397 N.E.2d 1115 (1979). In such a situation there is no mistake. Instead, there is an awareness of uncertainty or conscious ignorance of the future. PUD 1, at 362; see also Restatement (Second) of Contracts § 154, comment c (1981). Professor Corbin recognizes that this concept of known risk is relevant when a claimant seeks to avoid a release of a personal injury claim on grounds of a mistake:

In the absence of misrepresentations, the claimant must show that an injury existed that was outside of his contemplation when he executed the release. In settling any such claim, the claimant knows that there is some degree of uncertainty. In so far as he is aware of uncertainty respecting his future harm and loss, he is consciously exchanging this uncertainty for the liquidated amount received in settlement. To this extent the release is not voidable for mistake.

3 A. Corbin, Contracts § 598 (1960).

We believe that in the present cases, the releasors bore the risk of mistake. Both releasors knew that there was uncertainty surrounding the extent or consequences of their injuries at the time they signed the releases. Bennett's back pain had continued for over 3 months from the day he was injured until he signed the release. He entered into the settlement agreement knowing that he was not cured. Likewise, Hoggatt knew that his injury had not healed when he signed the release. He was still in pain and his physical activity was seriously limited because of the accident. By entering into the releases knowing that they were not completely recovered, the releasors here accepted a known risk that the extent or consequences of their injuries might change in the future. Because the releasors bore the risk of mistake, the releases are not voidable due to mutual mistake.

We hold that Bennett and Hoggatt are bound by the releases they signed. The trial courts in both cases are affirmed.

Pearson, C.J., Brachtenbach, Andersen, and Callow, JJ., and Cunningham, Hamilton, and James, JJ. Pro Tern., concur.

1 Each case was reviewed by a different panel at Division One of the Court of Appeals. The trial court's judgment in Bennett v. Shinoda Floral, Inc., 43 Wn. App. 504, 717 P.2d 1379 (1986), was reversed by an "ABLE" panel sitting pursuant to CAR 26. In Hoggatt v. Jorgensen, 43 Wn. App. 782, 719 P.2d 602 (1986), the trial court's judgment was affirmed.

2 These factors are: "(1) the peculiar dignity and protection to which the law cloaks the human person, as contrasted with articles of commerce; (2) the inequality of the bargaining positions and relative intelligence of the contracting parties; (3) the amount of consideration received; (4) the likelihood of inadequate knowledge concerning future consequences of present injury to the human body and brain; and (5) the haste, or lack thereof, with which release was obtained." Finch v. Carlton, 84 Wn.2d 140, 146, 524 P.2d 898 (1974) (quoting Finch v. Carlton, 10 Wn. App. 32, 39, 516 P.2d 212 (1973) (McInturff, J., dissenting)).

3 The Finch opinion itself is ambiguous as to whether this test was intended to apply to situations beyond the facts that existed in that case. On the one hand, the court explicitly distinguished the facts of Finch from the prior Washington cases involving releases where there were known injuries, observing:

The instant case does not involve ... an informed, negotiated assumption of known injuries subsequently compounded by later-discovery of more serious injuries as in Pepper v. Evanson, supra. Unlike prior cases, this action presents a situation where the parties presumably did not contemplate the possibility of latent injuries.

Finch v. Carlton, 84 Wn.2d at 143. On the other hand, in some of the cases from other jurisdictions cited in Finch, the "fairly and knowingly made" test was applied to situations where there were known injuries with unknown consequences. See Ranta v. Rake, 91 Idaho 376, 421 P.2d 747 (1966); Denton v. Utley, 350 Mich. 332, 86 N.W.2d 537 (1957). In addition, Finch's list of criteria to be considered in deciding if the release was fairly and knowingly made includes the following factor: "the likelihood of inadequate knowledge concerning future consequences of present injury to the human body and brain". Finch, at 146.

The ambiguity of Finch's intended scope is underscored by the divergent approaches taken by the Court of Appeals since Finch in cases involving known injuries with unknown consequences. In Bennett, the Court of Appeals applied the Finch test, see 43 Wn. App. 504, 717 P.2d 1379 (1986), while in Hoggatt it applied traditional contract principles, see 43 Wn. App. 782, 719 P.2d 602 (1986). In Stottlemyre v. Reed, 35 Wn. App. 169, 174, 665 P.2d 1383, review denied, 100 Wn.2d 1015 (1983), the court stated that the rule permitting avoidance of a release had not been expanded to include cases where, at the time of the release, the parties were mistaken about future development of a known injury. In Woods v. Gamache, 14 Wn. App. 685, 686-87, 544 P.2d 144 (1975), where the plaintiff signed a release knowing his knee was injured, and further problems developed in the knee after the release, the court held the case was controlled by Pepper and distinguishable from Finch. It is interesting to note that Woods was written by Judge Mclnturff, who had originally proposed applying the "fairly and knowingly made" test in Finch's case in a dissent at the Court of Appeals. See Finch v. Carlton, 10 Wn. App. 32, 39, 516 P.2d 212 (1973) (Mclnturff, J., dissenting).