Key Takeaways

  • Rescission of contract is a legal remedy that voids a contract, returning all parties to their pre-contract state.
  • It can be voluntary (mutual rescission) or court-ordered based on factors like fraud, mistake, or undue influence.
  • Some contracts are not eligible for rescission due to timing, performance, or waiver by continued enforcement.
  • The rescission process typically involves giving notice, ceasing performance, and possibly pursuing a court order.
  • Monetary damages and rescission are usually mutually exclusive remedies.
  • Time limits and procedural requirements may apply depending on the jurisdiction.
  • Certain real-world examples, such as real estate and consumer protection contracts, illustrate practical rescission cases.
  • Legal assistance is highly recommended when seeking rescission of a contract.

Rescind contract law refers to the legal boundaries for terminating or rescinding, a contract between two parties. 

What Does it Mean to Rescind a Contract?

The right to revoke a contract, known as rescission or overturning, is a legal principle that dates back to early British common laws. The founding fathers of the United States adopted British common law as the law of the new land. Some modifications were made in 1789 with the U.S. Constitution, but much of the principles of the old country stayed put. 

Under rescind contract law, the offering party in an agreement has the right to rescind or terminate their contract with the accepting party. When exercised properly, this right gives both parties involved in the agreement full freedom from their obligations under the contract. This action is, however, irreversible. 

Once rescission has taken place, assuming the agreement was legal and formed correctly, the terms and conditions of the contract are unenforceable and, it's as if the two parties never entered into a contract at all. 

Mutual vs. Unilateral Rescission

There are two main ways rescission of contract occurs: mutual rescission and unilateral rescission.

Mutual Rescission happens when both parties agree to cancel the contract. This typically occurs when circumstances change or the contract is no longer beneficial or necessary for either party. In these cases, both parties may sign a mutual rescission agreement to formally terminate the contract.

Unilateral Rescission occurs when one party seeks to terminate the contract due to legal defects or issues such as fraud, misrepresentation, undue influence, or mistake. This type of rescission usually requires court involvement unless the contract includes a rescission clause or one party has committed a clear breach that justifies rescission.

Contract Basics

If there was never a meeting of the minds or offer and acceptance, then a contract was never formed. There are a few basic elements that need to be in place in order to create an enforceable contract:

  • Offer extended
  • Offer accepted
  • Two parties with the legal capacity to enter into a contractual agreement
  • Legality (cannot form a contract for illegal activity)
  • Contractual equity
  • Consideration (exchange of value)

Rescind contract law is in place to allow two parties to return to "business as usual" or the status quo once a contract has been canceled or annulled. Both parties can agree together to terminate their contract, one of the two parties can decide to end it with good reason, or it can be canceled on legal grounds. 

If a court rescinds a contract, they rule that the agreement must be ended for justice, fairness, and equity. In the case of rescission, the whole contract has to be voided, you can't rescind only a portion of an agreement. Contract law allows for agreements to be changed or amended with contract reformation laws, not under rescind contract law. 

When Rescission Is Not an Option

While rescission is a powerful remedy, it is not always available. Several situations can bar the rescission of a contract:

  • Lapse of Time: If too much time has passed since the contract was signed or the issue arose, rescission may no longer be available.
  • Substantial Performance: If the contract has already been largely fulfilled, courts are less likely to rescind it.
  • Third-Party Rights: If third parties have acquired rights based on the contract, rescission could unfairly affect them.
  • Affirmation of Contract: If the aggrieved party continues to perform or accept benefits under the contract after discovering the issue, they may be seen as having waived the right to rescind.
  • Availability of Other Remedies: If damages or specific performance are more appropriate, courts may deny rescission.

Understanding these limitations is crucial when evaluating whether rescission is a viable option.

How to Rescind

Rescind contract law can be enacted as a remedy when one or both parties in an agreement have a problem with how the contract was created. Before filing an official claim for rescission with the court, it's a good idea to get in contact with an experienced business lawyer for guidance through the very complex process. An attorney can help you weigh out your options and decide whether rescission is the proper remedy for your situation. 

Rescission must be filed with the court before you request any monetary damages. 

Steps to Legally Rescind a Contract

The rescission process involves several steps and varies based on whether the rescission is mutual or unilateral. Below is a general outline for unilateral rescission:

  1. Identify Legal Grounds: Ensure that one or more valid legal reasons for rescission exist.
  2. Notify the Other Party: Deliver a written notice explaining the intention to rescind the contract and the legal grounds.
  3. Cease Performance: Stop fulfilling any obligations under the contract to avoid further complications.
  4. Offer Restitution: Be prepared to return any benefits received under the contract.
  5. File a Lawsuit (if necessary): If the other party disputes the rescission or refuses restitution, you may need to seek a court order to enforce the rescission.
  6. Await Judicial Decision: A judge will evaluate whether rescission is the appropriate remedy and may order it if justified.

Because improper rescission can expose you to breach of contract claims, working with a qualified attorney is strongly recommended.

What Are Legal Grounds for Rescinding a Contract?

In order for rescission to take place, there must be valid reasoning for voiding the contract in the eyes of a judge. Because contracts are legally-binding agreements with duties required from both parties, changing your mind is not a good enough reason to rescind. 

Rescission can take place according to a mutual decision made by both parties or by one of the two parties with proper reasoning. The act of rescission comes about in the form of a lawsuit meant to enforce the right to rescind and return both parties to the way things were before the contract and relieve them of their contractual duties. 

If two parties find legal grounds for rescission, it is unlikely that they will also have grounds for legal damages or a breach of contract suit. The following remedies affirm an agreement and are therefore incompatible with the act of rescission:

In the event that both parties agreed for the need to rescind, they must show mutual consent. If a contract is still in process, also called an incomplete or executory contract, both parties can decide to rescind the agreement at any point in the negotiations. Even contracts with provisions contrary to rescission can be rescinded when they are not yet fully enacted. 

If only one of the two parties involved in the agreement wants to pursue rescission, they must give notice on legal grounds and file with the court for enforcement of the rescission. 

Legal Consequences of Rescission

When a contract is rescinded, the following legal consequences apply:

  • Termination of Obligations: All duties and rights under the contract are nullified.
  • Restitution: Each party must return any benefits received under the contract to restore the status quo.
  • No Right to Damages: Rescission generally precludes claims for damages unless a court allows both remedies due to exceptional circumstances.
  • Effect on Related Agreements: If the rescinded contract was part of a broader agreement, related provisions may also be affected.
  • Judicial Discretion: Even with valid grounds, courts have discretion to deny rescission if equitable concerns favor another remedy.

These consequences aim to undo the contractual relationship entirely, making it as though the contract never existed.

Common Real-World Examples of Rescission

Rescission of contract frequently arises in a range of real-life legal scenarios. Some common examples include:

  • Real Estate Transactions: If a homebuyer discovers that the seller withheld material defects, they may rescind the purchase contract.
  • Consumer Contracts: Buyers may rescind contracts if products or services were sold under false pretenses or through high-pressure tactics.
  • Employment Agreements: An employee may seek rescission of an employment contract if coerced into signing or misled about job conditions.
  • Insurance Policies: Insurers may rescind policies if the policyholder misrepresented key facts on their application.
  • Business Agreements: If a partnership is formed under false representations or mutual mistake, the agreement may be rescinded.

These examples highlight the practical importance of understanding rescission as a remedy in contract disputes.

Frequently Asked Questions

  1. What is the difference between rescission and termination?
    Rescission voids the contract as if it never existed, while termination ends a valid contract moving forward but keeps past obligations intact.
  2. Can you rescind a contract without going to court?
    Yes, if both parties agree to rescind or if the contract includes a rescission clause. Otherwise, court involvement may be required.
  3. Is rescission the same as a refund?
    Not exactly. A refund is typically part of restitution in a rescission but rescission also includes voiding the contract and restoring all parties to their pre-contract positions.
  4. How long do I have to rescind a contract?
    Time limits vary by jurisdiction and contract type. Acting promptly after discovering the issue is critical to preserving your right to rescind.
  5. Can I sue for damages after rescission?
    Generally, no. Rescission and damages are usually exclusive remedies, though some courts may allow both under specific conditions.

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