Everything You Need to Know About Rescinding a Contract
Rescinding a contract is an effort by one of the parties to void the contract so they do not have to fulfill the obligations of it.3 min read
2. When Can You Not Rescind a Contract?
Updated June 26, 2020:
Rescinding a contract is an effort by one of the parties to void the contract so they do not have to fulfill the obligations of it. When defining the act of rescinding a contract, there are two definitions:
- Definition 1 - Rescinding a contract is a declaration of a party's intention to void a contract. This is an irrevocable step that frees the demanding party from their obligations set forth by the contract. When a rescinding of contract occurs, it is as if the contract had never been established in the first place. Rescission can be done by law, by mutual consent, or by reasonable cause.
- Definition 2 - The unmaking of a contract by a court in the interest of fairness and justice. For this to work, it has to be possible for both parties to be restored to their pre-contract positions and it must not upset the rights that a third-party may have acquired while under a contract.
When people talk about rescinding a contract, they are referring to the cancellation or the overturning of a contract, therefore canceling obligations set forth by it. Once rescinded, it is as if the contract never existed and both parties can go back to how they were before the contract was signed.
When a contract is rescinded, it is canceled entirely, not just one part or obligation. If you are looking to reverse one part of a contract, it would not be considered rescission but instead fall under contract reformation laws. Rescission is typically a remedy in situations where there were issues in the way that the contract was originally formed. If a rescission occurs, both parties must return anything they received as a part of the contract.
Under What Circumstances Can a Contract Be Rescinded?
To have a contract rescinded, a judge must determine that there is a valid reason to undo the contract. Since a contract is a legally binding agreement between two parties, it cannot be rescinded because the parties have simply had a change of mind. You can rescind a contract for:
- Mutual consent — If both parties feel that rescinding the contract is in their best interest, they can consent to rescission through a written document.
- Issues with the way the contract was formed — There are certain legal conditions that must be present for a contract to be legally formed. If there are any conditions that exist in the formation of the contract such as fraud or acquiring by force, then the contract can be rescinded. Fraud can be characterized as a false representation of part of the contract. It is also illegal to form a contract with someone who is under duress or does not have the capacity to enter into a contract agreement.
- One party will not perform their obligations — If one of the contracting parties performs actions that indicate their inability or unwillingness to perform their obligations, a contract can be rescinded.
- Failed consideration — If the consideration of a contract has failed, is inadequate, or is illegal, then there would be a case to have the contract rescinded.
- Against the interest of the public — If the contract is considered to be made in a way that would be against the general consent of the public, then rescission can occur.
When Can You Not Rescind a Contract?
There are instances in which a contract rescission would not be considered an equitable remedy. It is important to remember that rescission is not an immediate right but is at a judge's discretion to grant. A judge may deny a request to rescind a contract based on the following circumstances:
- Substantial performance — One of the parties has confirmed their willingness to fulfill their obligations by performing the actions.
- Third party benefit — If a third party has received some benefit or acquired some rights from the contract, undoing the contract could cause them harm.
- Other defenses — Some of the other defenses that can be used to rescind a contract include unclean hands, which refers to one party filing a breach of contract due to the other party committing a wrong. Another defense is laches, which means one party unnecessarily delayed a filing which caused prejudice to a party.
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