Key Takeaways:

  • Rescission of contract is a legal remedy that voids a contract, restoring both parties to their pre-contract positions.
  • Rescission can occur through mutual agreement, by law, or due to defects in contract formation such as fraud or duress.
  • A contract cannot be rescinded simply because a party changes their mind; a valid legal basis is required.
  • Rescission is different from contract reformation, which only alters certain terms rather than voiding the entire agreement.
  • If rescission is granted, all exchanged benefits or considerations must be returned.
  • Some contracts cannot be rescinded due to substantial performance, third-party interests, or specific legal defenses.
  • The process for rescission may involve written notice, legal proceedings, and compliance with statutory requirements.
  • Certain industries, such as consumer transactions and real estate, have specific statutory rescission rights.

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 Once rescinded, it is as if the contract never existed and both parties can go back to how they were before the contract was signed. We highly recommend you to hire a lawyer to look over your contract.

When a contract is rescinded, it is canceled entirely, not just one part or obligation.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.

The Process of Rescinding a Contract

Rescinding a contract involves several legal steps that depend on the circumstances and the governing law. The general process includes:

  1. Identifying Grounds for Rescission – The party seeking rescission must have a valid reason, such as fraud, duress, or mutual mistake.
  2. Providing Notice – The party must notify the other party of their intention to rescind the contract. This is usually done in writing.
  3. Restitution – Each party must return any benefits received under the contract to restore both parties to their original positions.
  4. Legal Action (if needed) – If the other party disputes the rescission, a lawsuit may be necessary to seek a court order confirming the contract’s cancellation.
  5. Compliance with Statutory Requirements – Some contracts, such as real estate and consumer agreements, have specific statutory rescission rights that must be followed.

Failure to adhere to these steps may result in the contract remaining enforceable.

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.

Rescission Rights in Specific Contracts

Certain types of contracts include built-in rescission rights, governed by federal or state laws. These include:

  • Consumer Protection Laws – Some consumer transactions, such as door-to-door sales, provide buyers a right to rescind within a cooling-off period.
  • Real Estate Transactions – Depending on jurisdiction, real estate buyers may have a limited time to rescind a purchase contract without penalty.
  • Insurance Policies – Many insurance agreements allow for rescission under specific conditions, particularly if material misrepresentation is discovered.
  • Securities Transactions – Investors may have rescission rights under federal securities laws if a seller misrepresents or omits crucial information.

Before seeking rescission, it is essential to check relevant laws and contract provisions to determine if specific rights apply.

Frequently Asked Questions 

  1. What happens if a rescission claim is denied?
    If a rescission request is denied, the contract remains in effect, and the disputing party may need to pursue legal action for breach of contract or another remedy.
  2. Can a contract be rescinded after performance has started?
    In some cases, yes. However, if substantial performance has been completed, rescission may be difficult or impossible unless fraud or misrepresentation is involved.
  3. How long do I have to rescind a contract?
    The time limit for rescission varies depending on contract type and governing law. Some contracts include specific rescission periods, while others rely on general contract law principles.
  4. Does rescission require mutual agreement?
    Not always. While mutual agreement can lead to rescission, a contract can also be rescinded by court order if legal grounds exist.
  5. What is the difference between rescission and termination?
    Rescission voids a contract as if it never existed, whereas termination ends a contract moving forward but does not erase past obligations.

If you need help with rescinding a contract you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.