Contract rescission refers to the termination or cancellation of a contract. It is sometimes called “cancellation” or “overturning”. The word rescission comes from the word “rescind” which means to cancel or annul. The purpose of contract rescission is to restore the parties to their original status before the contract was made (the “status quo ante”).
Contracts must be rescinded entirely; that is, the entire contract must be cancelled, not just one part. If only a portion of the contract is to be cancelled, this is usually accomplished under contract reformation laws, not rescission laws. Rescission is often available as a remedy in cases where there are issues with the way that the contract was formed.
In order to rescind a contract, a judge must determine that there is a valid basis to cancel the contract. A contract creates a legal duty to act for both parties, and contracts cannot be rescinded simply because the parties have changed their mind.
Contract rescission is available under the following circumstances:
- Consent: Both parties must manifest their intent to have the contract rescinded. It is best if they indicate their consent through an additional written document
- Issues with contract formation: The contract must be made under legal conditions, and consent cannot be acquired by force or fraud. If the contract was formed under illegal conditions, it may be rescinded. Common formation defects include:
- Fraud: The false representation may related either to the contract’s subject matter or to matters related to the contract
- Lack of capacity: one of the parties lacks to the capacity to negotiate an agreement due to illness, mental incompetence, intoxication, or being underage (under 18 years old)
- Coercion/Duress/Undue Influence: A party cannot be forced to sign a contract under threats of harm or under hostile conditions
- Mistake: Both parties must clearly understand all the terms in the contract
- One party’s actions indicate that they will not be performing their part of the bargain (“anticipatory repudiation”)
- Consideration has failed, is inadequate, or is illegal
- Against public interest: A contract may be rescinded if performing it would be against the general consent of the public (for example, a contract requiring one of the parties to be subjected to indentured servitude)
Rescission is an equitable remedy, meaning that it is discretionary or up to the judge’s decision. It is not an immediate right and is only available under certain circumstances. A judge can deny a request for rescission based on the following:
- Substantial performance: One party has confirmed the contract by their actions (for example, delivering goods)
- A third party has already received some benefit or acquired rights from the contract
- Defenses are available such as:
- Unclean hands: the party filing for breach has committed the same type of wrong
- Laches: One party has unnecessarily delayed in filing, resulting in prejudice to the other party
Finally, a judge can deny a request for rescission if the party has already requested for money damages. If the person is requesting contract rescission, they must file for it first- they will not be entitled to contract rescission after seeking money damages.
In other words, a party cannot file for money damages and then change their mind and have the contract rescinded. On the other hand, if they have filed first for rescission, they are allowed to retract their request and then request for money damages instead.
Whether it is you or another party requesting for contract rescission, it is advisable to contact a lawyer before you file a claim with the court. Contract rescission is a major decision and can often be complex and multi-layered. The effect of rescission is that the entire contract is cancelled out. An experienced contract attorney will be able to tell you whether rescission is appropriate and what your chances are in succeeding with such a claim. Be sure to file for rescission first before requesting for money damages.