Rescission as a Remedy for Breach of Contract

One of the primary benefits of using written contracts in California is there are several remedies available in a breach of contract action that are easier to prove with a written contract, including rescission.  A claim for damages is not inconsistent with a claim for relief based upon rescission, and the plaintiff can be awarded complete relief, including restitution of benefits and consequential damages.

Under California's Civil Code §§ 1688 and 1689, a contract is extinguished by its rescission, and a contract may be rescinded if:

            a.         All the parties thereto consent;

            b.         The consent of the party rescinding was given by mistake, or obtained through duress, menace, fraud, or undue influence;

            c.         The consideration for the obligation of the rescinding party fails, through the fault of the other party;

            d.         The consideration for the obligation of the rescinding party becomes entirely void from any cause;

            e.         The consideration for the obligation of the rescinding party, before it is rendered, fails in a material respect from any cause;

            f.          The contract is unlawful for causes that do not appear in its terms or conditions;

            g.         The public interest will be prejudiced by permitting the contract to stand; or

            h.         Under circumstances provided in the Civil Code, Corporations Code and Insurance Code, or any other statute providing for rescission.

Failure of consideration is the failure to execute a promise, the performance of which has been exchanged for performance by the other party. Not every breach or failure to perform, however, will warrant the remedy of rescission, and the failure must be material, or go to the essence of the contract.

As discussed in the recent case of Guan v. Hu, plaintiff Guan and defendant Hu entered into a written contract under which Guan paid the purchase price for a Malibu residence (property) to be held by Hu as the “nominal owner.” Hu agreed to sell the property upon receiving instructions to do so, and to distribute the sale proceeds between the parties according to a mathematical formula in the contract. After receiving instructions to sell, Hu failed to sell the property. 

Guan sued Hu for causes of action arising from Hu's breach of the contract, and for fraud. Guan sought, among other relief, rescission of the contract, the return of the money Guan paid to purchase the property, a declaration that Hu is a constructive trustee of the property for Guan's benefit, and damages. 

The case was tried to the court, which rejected Guan's fraud claim, but found that Hu had breached the contract. The trial court denied Guan's request for rescission, but ordered that the property be sold and the proceeds apportioned between the parties in accordance with the contract. The trial court charged Hu's share with imputed rent and credited to Hu the payments she made for property-related expenses.

Hu contended that the court, after finding that Guan failed to prove fraud or the right to rescission, erred by granting Guan relief based on Hu's breach of the contract. The Court of Appeal disagreed.

Although fraudulent inducement is one ground for rescission, a party to a contract is also entitled to rescission when the other party's breach constitutes a material failure of consideration. 

The Appellate Court agreed with the position Hu took in the trial court proceedings that Guan's rescission cause of action was actually a claim for breach of contract. 

Generally, a cause of action is the right to obtain redress for a harm suffered, regardless of the specific remedy sought or the legal theory advanced. Thus, although a breach of contract may be redressed in various ways, such as by rescission, specific performance, declaratory relief, the payment of damages, or injunctive relief, the remedy is not the cause of action. When various remedies are sought for the same breach, there is a single cause of cause of action for breach of contract, and the seeking of different kinds of relief does not establish different causes of action.

Rescission is not a cause of action; it is a remedy. To determine the nature of a cause of action, the court looks at the facts alleged, not its label. It is an elementary principle of modern pleading that the nature and character of a pleading is to be determined from its allegations, regardless of what it may be called.   The subject matter of an action and issues involved are determined from the facts alleged rather than from the title of the pleadings or the character of the damage recovery suggested in connection with the prayer for relief.

The allegations in Guan's first cause of action for “rescission” established a cause of action for breach of contract, regardless of its label or the remedies he sought.Also, the court, having found that Guan was not entitled to the remedy of rescission, could nevertheless award damages based upon Hu's breach. 

Because the court found that Hu had breached the contract and thereby caused Guan harm, the court reasonably determined that although Guan was not entitled to rescission, he was entitled to relief in the form of money damages under the circumstances.

The Guan case illustrates how a trial court, and appellate court, can find a remedy for a cause of action, even if the title of the cause of action is not consistent with the requested remedy.  Courts often use their equity power to fashion a remedy for an aggrieved plaintiff, and it can be difficult to predict how that power will be used.  The existence of a written contract is often an important factor in the court's decision and the remedy awarded, and agreements should always be reduced to an executed written document.

Elder Abuse and Real Property

California's statute on elder abuse is set forth in its Welfare and Institutions Code, and it has great significance in the ownership of real property because the elderly, and many others for that matter, are easily deceived as to the true meaning of real estate transactions and documents and can easily become financial victims.  The area of real estate has its own vocabulary and specialized documents that require preparation specific to each transaction, and the detrimental effect of executing a fraudulent document can be catastrophic to the finance health of the elder abuse victim.

The California Legislature acted to protect elders by providing enhanced remedies to encourage private, civil enforcement of laws against elder abuse and neglect.An“elder” means any person residing in California who is 65 years of age or older. (§ 15610.27)  

Abuse of an elder or dependent adult includes financial abuse, and the financial abuse provisions are, in part, premised on the Legislature’s belief that in addition to being subject to the general rules of contract, financial agreements entered into by elders should be subject to special scrutiny.

Financial abuse occurs when a person or entity does any of the following:

            1. Takes, secretes, appropriates, obtains, or retains real property of the victim for a wrongful use or with intent to defraud, or both.

            2. Assists in taking, secreting, appropriating, obtaining, or retaining real property of the victim for a wrongful use or with intent to defraud, or both. 

            3. Takes, secretes, appropriates, obtains, or retains, or assists in taking, secreting, appropriating, obtaining, or retaining, real property of a victim by undue influence. (§ 15610.30)

“Undue influence” means excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will and results in inequity, and it can take many forms. (§ 15610.70)

In determining whether a result was produced by undue influence, all of the following shall be considered:

            

            1. The vulnerability of the victim. Evidence of vulnerability may include, but is not limited to, incapacity, illness, disability, injury, age, education, impaired cognitive function, emotional distress, isolation, or dependency, and whether the influencer knew or should have known of the alleged victim’s vulnerability.

            2. The influencer’s apparent authority. Evidence of apparent authority may include, but is not limited to, status as a fiduciary, family member, care provider, health care professional, legal professional, spiritual adviser, expert, or other qualification.

            3. The actions or tactics used by the influencer. Evidence of actions or tactics used may include, but is not limited to, all of the following:

                        a.  Controlling necessaries of life, medication, the victim’s interactions with others, access to information, or sleep.

                        b.  Use of affection, intimidation, or coercion.

                        c.  Initiation of changes in personal or property rights, use of haste or secrecy in effecting those changes, effecting changes at inappropriate times and places, and claims of expertise in effecting changes.

            4.  The equity of the result. Evidence of the equity of the result may include, but is not limited to, the economic consequences to the victim, any divergence from the victim’s prior intent or course of conduct or dealing, the relationship of the value conveyed to the value of any services or consideration received, or the appropriateness of the change in light of the length and nature of the relationship. However, evidence of an inequitable result, without more, is not sufficient to prove undue influence.

The defendant is deemed to have taken, secreted, appropriated, obtained, or retained property for a wrongful use if, among other things, the defendant knew or should have known that this conduct was likely to be harmful to the victim.

The taking occurs when the victim is deprived of any property right, including by means of an agreement, will, or trust, regardless of whether the property is held directly or by a representative of the victim. A “representative" includes a conservator, trustee, or other representative of the estate of the victim, and an attorney-in-fact who acts within the authority of the power of attorney.

If it is proven by a preponderance of the evidence that a defendant is liable for financial abuse, in addition to compensatory damages and all other remedies otherwise provided by law, the court is required to award to the plaintiff reasonable attorney’s fees and costs, which include reasonable fees for the services of a conservator devoted to the litigation of an elder abuse claim. (§ 15657.5(a))

If it is proven by a preponderance of the evidence that a defendant is liable for financial abuse, and it is proven by clear and convincing evidencethat the defendant has been guilty of recklessness, oppression, fraud, or malice in the commission of the abuse, the limitations imposed on recovery after death do not apply. (§ 15657.5(b))

In addition to compensatory damages (e.g., loss of value of real property or interest therein), the plaintiff can request an award of punitive damages.

Any money judgment for elder abuse must include a statement that the damages are 

awarded based on a claim for financial abuse of an elder or dependent adult, and if only part of the judgment is based on that claim, the judgment shall specify what amount was awarded on that basis.

  

An action for financial abuse must be commenced within four (4) years after the plaintiff discovers or, through the exercise of reasonable diligence, should have discovered, the facts constituting the financial abuse.

Because of the heinous nature of committing financial elder abuse, such an action allows compensatory damages, punitive damages, damages that accrue after death, and attorney fees.  

Whether such a claim is appropriate in a specific case requires through consideration of many factors and issues that can be provided by an attorney experienced in the many forms of elder abuse regarding real estate transactions.

A Partition Action in California Can Include Recovery of Attorney Fees

Two or more parties contributing funds to purchase real property as an informal partnership or joint venture is common in California which has increasing home values, and prudent investors agree in a writing how the parties will support the home and pay the other costs associated with joint ownership.  Such written agreements are essential to clarify the rights and duties of the parties, and if they include an attorney fee provision, it needs to be carefully prepared to include recovery of attorney fees if a partition action is filed.

The recent decision in Orien v. Lutz clarified some of the issues involved in a partition action for the sale of jointly owned real property, and the right to recover attorney fees under the statute providing for partition, or under a contract between the owners.   

The trial court found that an attorney fee provision in an earlier settlement agreement between the owners applied to the partition action, and it awarded all fees to plaintiff under Civil Code § 1717 (contractual attorney fee provision), rather than apportioning the costs of partition under Code of Civil Procedure §§ 874.010 and 874.040 (statutory attorney fee provision).

However, the Court of Appeal in Orien ruled that the partition action did not fall within the terms of the agreement's attorney fee provision because it was limited to the purpose of enforcing or preventing the breach of any provision of the agreement, including but not limited to instituting an action for a declaration of such party's rights or obligations hereunder, or for any other judicial remedy.

Because the agreement provided that the owners may sell the property at any time they agree to do so, and it did not prevent any one or more of the parties from filing a partition action with respect to the property in the event the parties were unable to unanimously agree on whether or not the property should be sold, the Court of Appeal held the partition action did not fall with the agreement's attorney fee provision, and no attorney fees were allowed under the contract.

Code of Civil Procedure § 874.010(a) allows a court in a partition action to order payment of attorney fees prior to final judgment if the fees were incurred for the common benefit, and the court is required to apportion attorney fees among the parties under § 874.040.

The Court of Appeal's goal in interpreting a contract is to give effect to the mutual intention of the contracting parties at the time the contract was formed. (Civil Code § 1636.) It ascertains that intention solely from the written contract if possible, but also considers the circumstances under which the contract was made and the matter to which it relates.  The Court considers the contract as a whole and interprets its language in context so as to give effect to each provision, rather than interpret contractual language in isolation. (Civil Code § 1641.) It interprets words in accordance with their ordinary and popular sense, unless the words are used in a technical sense or a special meaning is given to them by usage. (Civil Code § 1644.) If contractual language is clear and explicit and does not involve an absurdity, the plain meaning governs.

Civil Code § 1717 states that in any action on a contract, where the contract specifically provides that attorney fees and costs that are incurred to enforce the contract shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney fees in addition to other costs.

In Orien, the defendants disputed that the right to partition is contractual. They argued that the parties had the right to partition independent of the agreement, and the agreement “neither enlarged nor restricted” that right.

As a matter of California law, the parties had the right to seek partition regardless of the agreement and a co-owner of property has an absolute right to partition unless barred by a valid waiver. Given the plain meaning of the language in the agreement, and considering the matter to which it relates, namely the waivable right to partition, the Court of Appeal concluded that the intent of the language concerning partition was to prevent an implied waiver of the parties' existing right to partition, not to bring that right within the terms of the agreement and its attorney fee clause. The right to partition therefore was not a “provision” within the contract that plaintiff enforced, as required to invoke the attorney fee clause.

Attorney fee provisions, if drafted broadly, can encompass noncontractual claims. Courts have found provisions sufficiently broad to reach noncontractual claims when they apply to actions “arising out of” or “relating to” a contract or its subject matter, or to “any dispute under” an agreement.

In contrast, when an attorney fee provision is limited to actions “to enforce the terms of the agreement or declare rights hereunder,” courts have found this language too narrow to encompass noncontractual claims. A tort claim is not an “action to enforce” an agreement such to bring it within attorney fee provision.

Attorney fees may be allowed for services rendered for the common benefit even in contested partition suits. The more just and equitable rule to be applied would require a proper division of the expenditures entailed in the maintenance of such actions for the common benefit among those who shall have been found to be entitled to their respective shares and interests in said property by the ultimate judgment of the court, regardless of whether or not controversies had arisen and been litigated.

Attorney fees incurred by a defendant to a partition action could be for the common benefit, and therefore allocable in part to the plaintiff, despite the fact that the defendant had resisted partition, with the claim that plaintiff had no interest in the subject property, that it belonged to defendant alone, and that plaintiff was a mere volunteer in paying the delinquent taxes. Again, the fact that the partition action is contested is no bar to the proportional allocation of attorney fees, as even fees incurred resolving contested issues can be for the common benefit.

As illustrated in Orien, prudent co-owners of real property should execute a written agreement regarding their respective rights and duties concerning the property, and should include a broad attorney fee provision that includes the right to recover attorney fees in any partition action to the prevailing party.  This will enable the prevailing party to recover all of its reasonable attorney fees under the contract, and will not limit the attorney fees to apportion the fees between the parties based on a finding of "common benefit".