What is Rescission of Contract?

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 What Does Contract Rescission Mean?

In general, a contract is a written or oral agreement that creates certain legal responsibilities. Contract rescission is the legal term used when a contract is terminated or cancelled. It may also be called “overturning” or “cancellation” of a contract. Contract rescission ends the contract. Often, this also cancels any of the legal responsibilities that were in the contract. Contract rescission makes the contract void and unenforceable. 

The word and meaning of rescission comes from the term “rescind.” The definition of rescind is to cancel, revoke, repeal or annul. Contract rescission is used to put the parties back to their original position before the agreement was made. In legal terms, this is called “status quo ante.” Status quo ante is a latin that means the previously existing state of affairs. The purpose of contract rescission is to rewind time and put the parties in the position they were in before the contract.

Contract rescission must be done entirely. To rescind a contract you must cancel the whole contract. You cannot rescind just one part or section of a contract. The whole contract must be ended or cancelled.

In some cases, there are ways to cancel or change only part of a contract. This is done through contract reformation. Contract reformation is a way for the parties to cancel or rewrite certain sections of the contract. This is sometimes allowed by a judge. It is used so that the parties can fix a mistake or misunderstanding in a contract. Contract reformation is different from contract rescission.

Contract rescission can be used when there has been a breach of contract. Breach of contract means that one party did not complete or follow their responsibilities in the contract. 

Rescission for breach of contract is an equitable remedy sometimes used by the court. An equitable remedy means that the court uses its discretion to come up with the penalty. The court can also use other remedies for breach of contract. Legal remedies can include a variety of different types of damages. Money damages are often used in breach of contract cases. 

Rescission for breach of contract is available when money alone will not be enough to make the situation right. Contract rescission is also a remedy in cases where there was an issue with forming a contract. This means that there was some type of problem with how the contract was created.

Under What Circumstances Can a Contract Be Rescinded?

There must be certain circumstances for a court to find grounds for rescinding a contract.This means that a judge must make a decision that there is a very good reason to cancel the contract. Since a contract creates legal responsibilities, a court will not rescind a contract without a valid basis. You cannot just change your mind about the agreement and have a contract rescinded.

Contract rescission is most often available in certain specific circumstances. There are grounds for rescinding a contract in the following situations:

    • Mutual consent: Mutual consent means that both parties must show that they agree to have the contract cancelled. The best way to show consent is by using another written document. The written document should say clearly that both parties agree that the contract should be terminated. 
    • Problems with contract formation: A contract must be created legally. Both parties must have consented to the contract. The consent must be legal under contract law. If there were illegal conditions when the contract was created, a court can rescind the contract. The most common issues with formation include:
    • Incapacity: This happens when one or both of the parties have a lack of capacity. Lack of capacity means that the party does not have the ability to enter or negotiate a contract under the law. Examples of lack of capacity include mental incompetency, certain illnesses, intoxication, or being a minor. Usually, a minor is someone who is underage. In many states, a minor is a person under 18 years of age.
    • Fraud: Fraud is a false representation about the subject of the contract or things related to the contract. Contract fraud can be many things. It usually happens when a party lies or uses deceit to get you to form the agreement. 
    • Duress/Coercion/Undue Influence: You cannot force a party to sign a contract by threatening them. You also cannot use hostile or scary conditions to get them to agree to a contract. Duress, coercion and undue influence are all examples of when a party does not sign a contract of their own free will. 
    • Mistake: A mistake is when the parties do not understand the terms in a contract. Often this is a mistake of fact about one of the terms. For example, the parties might be mistaken about whether a contract about the sale of cups means paper cups or plastic cups. 
    • Anticipatory Repudiation: Anticipatory repudiation means that one party acts in a way that shows that they will not perform their legal obligations under the contract. 
    • Consideration: Consideration is a requirement for forming a contract. In certain cases, consideration can fail, be inadequate, or is not legal. 
    • Against the Public Interest: Sometimes a contract can be rescinded if it is against the public interest. This means that it would be bad for the general public. For example, a contract that requires a person be an indentured servant.

When Is Rescission Not Available?

No person has an automatic right to rescind a contract. As discussed above, rescission is an equitable remedy. A judge can use their discretion or opinion to make a decision about whether a contract should be rescinded. The right to rescind a contract is only allowed by a judge in certain situations. A court will deny the request to rescind a contract in the following circumstances:

  • Substantial Performance: Substantial performance is when one party has completed most of their legal obligation under the contract. For example, if a seller has delivered items to a buyer, there is likely substantial performance. 
  • Third Party Benefit: A third party is a party that is not part of the contract. If that other party got some benefit or right from the contract, a court might not rescind the contract. 
  • Available Defenses: If other available defenses apply, a court might not rescind the contract. Defenses include:
  • Unclean hands: Unclean hands means that the party filing for breach of contract has done something wrong themselves.
  • Laches: Laches means that there has been a filing delay that was not necessary, and it hurt the other party in some way.

Lastly, if a party has already asked for money damages, a judge can deny a contract rescission. If you are asking that a contract be rescinded, you must ask for that first before money damages.

A party cannot ask the court for money damages then decide later that they want the contract rescinded instead. You can ask for contract rescission first then ask for money damages later. Requesting that a contract be rescinded does not mean you cannot ask for money damages in the future.

How Long Do I Have to Rescind a Contract?

In general, once a contract is signed it is effective. In most situations, you do not have a time period where you have a right to rescind a contract. There are a few exceptions to this general rule. 

  • The Federal Trade Commission (“FTC”) has a 3 day, or 72 hour, cooling off period rule. This rule usually applies to high pressure sale situations. Most often, these situations happen in your home (for example, door to door sales), at a dealership, or convention. If this law applies to your case, you may have three days to back out of a contract. 
  • State and federal law also has a cooling off period for very specific industries. Again, these laws usually apply to high pressure sale situations. Some examples include: campground memberships, gym or fitness agreements, and contracts for home repair.

Remember that if there is any specific time period to rescind a contract, it will change depending on your situation and location. This is why it is a good idea to immediately contact a contract lawyer in your area. You do not want to miss any deadlines that might apply to your case. 

It is important to note that contract rescission is a remedy that can be used in a breach of contract lawsuit. In general, the time limit to sue for breach of contract is six years. This deadline does not apply to all contract cases. As an example, if there is a breach of an employment contract, a case must be filed within three months. There also may be many benefits to filing a lawsuit immediately or before the deadline. 

Do I Need a Lawyer for Contract Rescission?

It is highly recommended that you hire a specialized contract lawyer in your area. If you or another party want to have a contract rescinded, you will likely need to file a request with the court. A skilled lawyer can help you with this process and represent you in court. Contract rescission is often complicated. It can also be a big decision in your life. 

A lawyer who specializes in contract law can explain your options and the process. They can also tell you whether it is likely that you will succeed in getting the contract cancelled. A knowledgeable contract lawyer can also help you figure out if you can receive money damages.


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