It’s an increasingly common scenario – you engage in multiple rounds of settlement negotiations and mediations and finally, very late in the day, the parties reach agreement and sign aMemorandum of Understanding (“MOU”). The MOU states that it is enforceable under California Code of Civil Procedure (CCP) section 664.6. A key deal point is that your client gets the house in exchange for the other party taking the business. A few months later, perhaps while you are still arguing with the other side about the form of the final Marital Settlement Agreement(“MSA”), or perhaps after a judgment has been entered on the MOU or a long-form MSA, your client believes she has information that the business taken by her ex-husband was grossly undervalued. Maybe the husband hid something, maybe neither party knew something that was important to the valuation, maybe the valuation expert made a mistake. She wants out of the deal.
This article reviews what you – wife’s counsel in our scenario – do next to pursue your client’s concerns.
The first issue is whether your remedy is (a) rescission, (b) a motion to set-aside or (c) both. If a judgment has not been entered, your remedy is rescission – “self-help” rescission by notice under Civil Code section 1689 and/or a motion/RFO to rescind the MOU. If a judgment has been entered, your remedy is a motion to set-aside under Family Code sections 2120-2129. If a judgment has been entered but the settlement documentation or judgment provide that an underlying agreement is not “merged” into the judgment, the safest course is to move to rescind and set-aside. The rescission remedy is used to attack a contract. A set-aside motion is used to attack a judgment.
A. How Do You Rescind A MOU Or MSA Before Entry Of Judgment?
Rescission’s roots are in equity, although the doctrine is now codified in Civil Code sections 1688-1693. The Family Code specifically preserves contract remedies: “Nothing in this chapter changes existing law with respect to contract remedies where the contract has not been merged or incorporated into a judgment.” Note that Family Code sections 3690-3693 are separate set-aside provisions for support orders.
Although all rescissions now derive from Civil Code sections1688-1693, there remain two basic approaches to rescission: “self-help” and court-ordered rescission. In self-help rescission, the party who seeks rescission sends the other side a notice in compliance with Civil Code section 1691 and need not file an action or motion. In court-ordered or “judicial” rescission, the rescinding party files an action or motion in court to obtain/validate a rescission and/or to obtain restitution of a contract benefit conferred on the non-rescinding party. Under Civil Code section 1691, the filing of a pleading seeking rescission is itself deemed a sufficient rescission notice. The decision whether to pursue self-help, court-ordered rescission or both is tactical, based on the strength of the grounds for rescission and an assessment of the other side’s likely response. A party who sends a notice of rescission and refuses to perform a contract is often faced with a claim of breach, and possibly liability for damages, specific performance and other contract remedies. If a notice of rescission is sufficiently well-founded, however, the non-rescinding party may accede to the rescission. In that case, the notice of rescission will have turned out to be a dramatically low-cost way to void a deal. If the rescinding party already has performed, a rescission notice may not be enough to avoid a court case: action may be required to obtain a restitution order.
Due to the risks of liability, self-help rescission must be used with great caution, usually in these circumstances:
When self-help is warranted, the rescinding party often should take steps to reduce potential breach liability (i.e., lower the risk to the rescinding party of an incorrect refusal to perform a contract). Until it is certain that the rescission was proper or accepted, the rescinding party reduces risk by taking affirmative steps to reduce the consequences of a rescission to the non-rescinding party. Even in self-help rescission, the rescinding party’s counsel should consider filing a confirmatory judicial action (e.g., declaratory relief) to have the rescission validated. The benefit of such an action is that it avoids a lengthy period in which the rescinding party must wait to determine whether the rescission will be challenged – during which breach damages may mount.
When self-help rescission is not warranted, a court-ordered rescission claim is how rescission is accomplished. In family court the rescission claim would most likely be brought as a “Request for Order Rescinding [Identify Agreement] on Grounds of [State Grounds].” Beyond the costs and delays of judicial proceedings, protracted rescission litigation may raise complex issues of what performances are due during the proceedings, and how the parties and courts can ensure that if rescission is granted the parties will be restored to their prior positions and how, if rescission is denied, the non-rescinding party can obtain the full benefit of the contract.
B. Do Not Count On Partial Rescission.
The general rule is that a contract must be rescinded in its entirety – and there is authority that “partial rescission” does not exist under California law. Civil Code section 1692, however, begins “When a contract has been rescinded in whole or in part . . .”, which suggests that partial rescission exists. Some courts have held that partial rescission is available if the rescinded clause is severable from other provisions. Whether a contract provision is severable is a question of fact to be determined by the court according to the intention of the parties. It is difficultin most cases to predict with confidence that a contract provision is severable. Therefore, a party who seeks rescission ordinarily should assume the whole deal is at risk. We note that the Family Code post-judgment set-aside statutes expressly permit a court to set-aside part of a judgment, and in this sense the set-aside law is clearer on the issue.
C. What Time Limits Apply To Seeking Rescission Of An Agreement?
It is important to remember that the applicable statutes of limitation for bringing a rescission action are, in most cases, virtually irrelevant to how a rescission claim will play out: rescission is subject to a variety of defenses which mandate that rescission claims be asserted promptly. These defenses include laches, estoppel, acquiescence, consent, ratification and other defenses mostly based upon the non-rescinding party’s reliance on the existence of a binding contract. Civil Code section 1691specifically provides that rescission must be sought “promptly.” Of course, many rescission claims are based on fraud, which cannot be pursued until it is discovered. But once a party discovers possible grounds for rescission, there should be no delay.
Under CCP section 339(3), the statute of limitations for bringing a claim to rescind an oral contract is two years. Under CCP section 337(3), the statute of limitations for bringing a claim to rescind a written contract is four years. Due to possible defenses, these limitations periods should be regarded as outer limits, subject to the principle that a party who seeks rescission should move promptly and not be perceived to be enjoying the benefits of a transaction that the party seeks to undo. A rescission claim may be barred by time or conduct well before the statutory period expires.
D. Restoration Of Benefits To The Non-Rescinding Party.
The goal of the rescission remedy is to place the parties in the position they occupied before the rescinded contract was made. Upon a grant of rescission, a court will seek to place both parties in the position they were in before the contract was entered, typically through restitution orders. Even when the rescinding party uses a rescission notice, Civil Code section1691 requires the rescinding party to restore or offer to restore value received under the contract. In a judicial proceeding, the court has broad discretion to make adjustments to the relationship between the parties so as to avoid unjust enrichment due to the rescission. In any case, a party who is considering a rescission should be advised that any benefits received under the contract are at risk.
E. Grounds For Rescission.
Among the grounds for rescission commonly asserted in family cases, rescission is available for fraud, mistake, duress, undue influence and/or failure of consideration. Each ground requires a different showing, and more than one potential ground for rescission may exist in a family law settlement:
Once a settlement agreement is entered as a judgment, the Family Code set-aside statute applies. The proper remedy to avoid the deal is a motion to set aside the judgment. There are two statutory frameworks for a family court to set aside a judgment: CCP section 473(b) and Family Code sections 2120-2129. Note that there is no equivalent to “self-help” rescission. A family law judgment may be set aside only by an order of the family court upon granting of a set aside motion.
A. Set-Aside Due To A “Mistake” – General CCP Section473(b) Relief.
CCP section 473(b) allows courts to grant relief from a judgment entered into by “mistake, inadvertence, surprise, or excusable neglect.” The motion must be brought within “a reasonable time” but not longer than six months after the entry of judgment or dismissal. CCP section 473(b) has historically tended to be invoked when there is a default, and is not specifically tailored to the types of issues that arise in family law settlements. Under CCP section 473(b), you must act as soon as you know there is a potential problem, or the court could determine that the delay was not reasonable and deny the motion on the ground that it was untimely (even if it is brought within six months).
B. Set-Aside Rules Specific To Family Law.
Family Code sections 2121 and 2122 offer a more comprehensive basis on which to seek to set aside a family law judgment. Family Code section 2121 provides that the court may “on any terms that may be just” relieve a party from a judgment adjudicating support or division of property. Family Code section 2122 provides that a party may move to set aside a judgment based on fraud, perjury, duress, mental incapacity, mistake or failure to comply with family law disclosure requirements. The time limitations, described below, are more generous than CCP 473(b)’s six months.
In deciding whether to set-aside a judgment, the Court has discretion to fashion an equitable result, including:
C. Time Limits for Family Code Set-Aside.