The Basics of Settlement Agreements
Settlement agreements are a vital part of the civil litigation process. Typically, they are used to resolve finally some or all of the issues in dispute in a civil action so as to avoid the expense and uncertainty of trial. Settlement agreements can resolve all claims between the parties or be limited to the claims in which mediation did not succeed. Where the parties are able to resolve all claims between them, the litigation usually culminates with the filing of a stipulated order of dismissal. Depending on the scope of the settlement, a stipulated judgment may be entered in court and then later filed with the court if a party subsequently breaches the terms of the agreement . To enforce the settlement agreement, it will be incorporated into a consent order filed with the court.
The settlement agreement is usually reached during the course of the litigation. In the family court, this typically occurs after the completion of the mediation process. Whether the case is settled during or after mediation, the parties will then reduce the agreement to writing. Absent some defect in the agreement, such as a lack of material terms, a mutual mistake or a defense of fraud, the settlement agreement is generally enforceable.
Conditions for Overturning a Settlement
A settlement agreement may be overturned in a California family law case under a number of scenarios. Fraud. If one party committed fraud to induce the other to sign a settlement agreement, the agreement may be set aside. However there are very strict requirements as to how fraud must be done and the ways in which the person who was defrauded must prove it. This situation is rare, however, a truly fraudulent situation in family court is when one spouse hides an asset from the other and makes her agree to property division or spousal support based upon a false set of facts. Duress. If a settlement agreement is signed by one spouse under duress, it may be set aside. We commonly see this problem with our clients; the other side threatens to drag the case into trial unless you sign the agreement. While the concern with trial is real, the judge can impose sanctions against the other party. Often that reality alone is enough to encourage a party to stop the threats and confer fairly on the issue. It is also possible for the judge to appoint a special master to handle the case. When a judge has been appointed we can no longer use the threat of trial to block settlement. Mutual Mistake. If you and your spouse agree to a settlement but later discover that one of you made a mistake regarding the value of an asset, it may be possible to undo the settlement. In that case you must prove 1) you did not know of the mistake, 2) the other party did not know of the mistake and 3) you would not have agreed to the settlement had you known of the mistake.
Basis for Overturning Settlements
As with a wide range and variety of legal instruments, the validity of a settlement agreement can be called into question under a number of circumstances. Yet more obscure are the specific legal grounds judges will look for in assessing the validity of a settlement agreement. One way, for example, in which a settlement agreement can be easily overturned by the courts is by citing the failure of one or both parties to meet the requirements of a contract. The requirements for a basic contract between two parties are that each must accept the contractual terms and conditions, generally by signing the contract or a legal document stating its acceptance of the terms, and that there is sufficient and legitimate consideration for the contract. When these two requirements are not met, a settlement agreement can be legally voided by the court, i.e., it will be considered in law to have never existed.
Another factor that can lead a judge to discard the validity of a settlement agreement is the appearance of undue influence. In practice, this can be a difficult element to prove. To qualify as undue influence, a party must demonstrate that the other party took active steps to manipulate the situation toward his or her own benefit at the expense of the other party. Undue influence could point toward coercion or fraud, either of which would be a valid legal reason for one party to contest the validity of a settlement agreement. The most common example of undue influence is that one party may be in a position of advantage over the other in terms of economic power, wealth, status or ascendance. In short, the settlement agreement needs to be voluntary and free of the taint of influence from the other party to be considered valid.
A settlement agreement can also be overturned if it is deemed unconscionable – a situation in which the terms are wholly unconscionable at the time the agreement was signed or carried out. This would mean, in essence, that the arrangement was so one-sided as to be unfair to one party and morally indefensible. There are two main legal grounds judges can cite to strike down a settlement agreement as unconscionable, whether or not the document is deemed to be unconscionable at the time of its execution as mentioned above. If the contract is upheld as conscionable at the time, the agreement can still be rendered unconscionable if a party suffers a material change in their financial circumstances that materially affects their ability to pay. A good example of this would be if a party derived its primary source of income from rental properties or investments in real estate and the affected real estate market collapsed, depriving them of their primary source of income. A settlement agreement can also be deemed unconscionable as the result of an unequal bargaining process.
The Process for a Judge to Undermine a Settlement
The judicial review process for overturning a settlement agreement involves several steps. First, a motion seeking to overturn the agreement must be filed with the appropriate court. This motion should outline the specific legal grounds upon which the party is seeking to set aside the agreement, as well as the relevant supporting evidence.
Both parties and their legal representatives play a critical role in this process. After the motion is filed, opportunity is given to the opposing party to respond. This response should address arguments made in the original motion, and provide its own counterarguments based on the law and relevant evidence. Following the responses and rebuttals, a hearing will typically be held before a judge, or in some cases a jury, who will evaluate the validity of the claims made in the motion.
During the hearing, the judge will consider all presented evidence, arguments, and relevant legal principles before making a final determination regarding whether to uphold or set aside the settlement agreement. This process is essential for ensuring that all relevant facts and evidence are fully considered before a final decision is made.
Once a decision is rendered, both parties will have the opportunity to appeal the judge’s ruling if they believe it was incorrect. The appellate court will then review the case again, and will issue a final ruling as to whether the settlement agreement should stand or be overturned.
Examples of Judges Overturning a Settlement
In Idaho v. Peitz, a husband and wife executed a settlement agreement stipulating that support payments would be made to the Idaho Department of Health and Welfare, for and on behalf of their disabled daughter, and dismissed a pending lawsuit with prejudice. The trial court modified the agreement at a later date to provide for support payments to the parents, rather than to the Department of Health and Welfare. The parents argued on appeal that the family could not alter the terms of a contract entered into in settlement of a lawsuit, except by mutual agreement, and that the order modifying provisions of the parties’ original settlement agreement should be vacated.
The Arkansas Court of Appeals has held that a trial court does not possess authority to set aside or alter a settlement agreement between parties to a lawsuit. In Adams v. Adams, the trial court in an ongoing child-support case granted the mother’s motion to set aside the court’s approval of a settlement agreement for failure to comply with mandatory child-support guidelines. The father contended on appeal that the trial court exceeded its authority and committed reversible error by setting aside or altering an approved child-support settlement agreement. The appellate court reversed the trial court’s modification of the agreement because the language in the settlement agreement was clear and unambiguous; the court had no authority under the relevant statutory provisions to alter the substantive terms of the settlement agreement.
In Chamberlain v. Chamberlain, the Maryland Court of Special Appeals considered whether a trial court has the authority to invalidate and void a marital settlement agreement after entry of an absolute divorce. The wife contended that the lower court’s revocation of the agreement and reallocation of marital property constituted arbitrariness , capriciousness, and abuse of discretion. The court acknowledged that an agreement entered into in the course of divorce proceedings is enforceable and must be given effect absent fraud, overreaching, or unconscionability. The court identified no evidence to suggest that the agreement resulted from fraud or overreaching. However, the court also held that simple fairness alone is not a viable ground for the invalidity of a separation agreement. Rather, the agreement must be no more than fair, just and equitable when considering the totality of the circumstances.
In McMillan v. McMillan, the Texas Court of Appeals considered whether a marital settlement agreement is an executory contract and is subject to modification before it becomes enforceable as a judgment. The court held that for a written agreement to be enforceable, the parties must have signed it, but execution is not synonymous with enforcement. Significantly, however, while a court is prohibited from enforcing an unenforceable agreement, the court retains the ability to invalidate an unenforceable agreement on equitable grounds. In the McMillan case, neither party attempted to place the agreement before the trial court; thus, there was no writing for the trial court to consider under the governing rule. That rule provides that only an agreement in writing signed by the parties’ similar to a property settlement agreement under the Family Code—is enforceable. The court did not address whether the trial court had the power to invalidate the agreement on equitable grounds.
Implications of a Judge Deciding Against a Settlement
The implications of a judge overturning a settlement agreement are significant for both parties to a divorce. It is common for a judge to overturn a settlement agreement, particularly at the final hearing in a divorce setting, for two reasons: 1) the judge believes the settlement is inequitable or unjust to one party; and 2) the judge believes the settlement is based upon fraud, misrepresentation or collusion.
The implications of the judge overturning the settlement agreement include considering the rights of both parties going forward. Let’s say a husband and wife sign a Property Settlement Agreement (PSA) as part of their divorce. The PSA indicates that the house that they have lived in is to be sold and they will split the profits from the sale. The PSA further states that, pending the sale of the house, the wife should remain in the home with the children and that the husband will pay child support and continue to pay the mortgage on the home. The PSA also acknowledges that the husband is buying a second home in the area and offers to buy the first home back from the wife at the time the house goes on the market. The PSA is signed, the divorce is finalized, the wife moves out and moves in with her parents with the children, and the husband moves into his new home.
The wife then decides that it is in her best interest to stay in her parents’ home with the children and refuses to move out of the house and sell it. She litigates this in court and the judge decides that, essentially, there can only be one primary residence for the children. The judge says that he will not let the wife remain in the home with the children when the husband is not also living there, and especially because the husband is buying a second home. One consequence of the judge’s ruling is that the wife and children must now live elsewhere, which it turns out is far from the other parent and a school that the children have always attended.
The fact that the judge does not permit the wife and children to remain in the home means that the husband must find other housing (which would not be so bad, except he has already bought the second home). There is litigation and the judge decides that the wife must buy the husband’s interest in the first home out of what the house sells for, and she will have three years to move out of the home, starting the day she qualifies for a mortgage. The implication for the wife is that she needs money.
The judge may also decide that the husband should get an offset for the time that the wife remains in the home, essentially giving him part of the profits of the house in the end. Of course, the judge could also decide that the wife should stay in the house, but that the husband should no longer be responsible for the mortgage, the taxes, and the utilities. These are all important implications of a judge overturning a settlement agreement.
One reason for drafting a clear settlement agreement with clear terms is to avoid these issues. One way to do this is by providing a timeline for performance (i.e. the house shall be listed for sale on or before X date), including requests that one or both parties secure a mortgage for purposes of buying the other’s interest in the property, specifying a dollar amount for the buyout (note, you will have to appear in front of the judge to get approval to go over the buyout amount in certain circumstances), and involving a neutral appraiser for the buyout so as to avoid valuation arguments.
How to Prevent a Judge from Overturning Your Settlement
Parties would be well advised to first carefully review their settlement documents with a cautious eye to assess whether they will hold up in light of the potential grounds for setting aside a judgment as summarized above. As noted, a court may set aside an agreement or judgment if it is obtained by fraud or overreaching, if there is misrepresentation, overreaching or other misconduct by an attorney or agent, or if the agreement is illegal. Parties should therefore satisfy themselves that they clearly understand what they are signing and what their obligations are under a settlement agreement and that the terms of the agreement are reasonable and lawful . To head off the potential for misconstruing or misapprehending the terms of a settlement agreement, parties should consider retaining a disinterested third-party counsel to review the settlement agreement once it is prepared. If the parties are both represented by counsel in private mediations and arbitration proceedings, and their attorneys are able to review and explain the terms of the agreement after the mediation and prior to signing, such a safeguard will likely be in place. Where the parties are not represented by counsel, however (as may be the case in non-binding mediations), such protections and safeguards likely will not be available. Thus, parties should be warned that they assume the risk that the terms of the settlement agreement may be misconstrued or misapplied if they are not represented by independent counsel.