Monday, February 12, 2007

Buyer's Remorse: "Contract Rescission"

San Diego Unified School District (PERB Dec. No. 1883-E) (Issued January 27, 2007)

Ever agree to something you wish you hadn't? In this case PERB addressed the concept of "contract rescission" in collective bargaining. Here, the employer agreed to a contract provision that resulted in far higher cost than the employer anticipated. The employer argued that it would be unconscionable to enforce the contract provision due to its cost. PERB held that a party seeking to rescind a contract must establish the following elements:
1) The party made a material mistake regarding a basic assumption of the contract;
2) The party seeking the rescission did not neglect a legal duty or otherwise fail to exercise ordinary diligence; and
3) The mistake was so significant that enforcement of the contract would be unconscionable.

Applying this test to the facts, PERB found that the employer established the first element, but failed in establishing the second. Namely, the employer failed to research the actual cost of the provision and relied solely on its own assumptions. In reaching its holding, PERB held:
"Clearly, the lack of preparation leads to needless mistakes. If we permitted rescission based on alleged lack of preparation, we would both open the door to contract challenges based on careless bargaining and undermine the need for adequate preparation."

Unaddressed in this decision is the issue of severability. Specifically, if a party meets the above requirements on a particular contract provision, is the entire contract rescinded or just that provision?

This leads to another interesting question. Unlike the construction industry where much of the contract rescission doctrine originates, collective bargaining by its nature involves various quid pro quos. As often happens, one party gives ground on a subject in exchange for gains elsewhere in the contact. What happens when one party tries to rescind a provision but has already gained the benefit of another? Would there be some estoppel or other equitable-type remedy for the party against whom rescission is being sought? Interesting questions, but in reality, the elements required for contract rescission are fairly strict so most employers probably will never face these questions.