Key Takeaways

  • A rescissible contract is initially valid but voidable by the court if it causes economic damage or unfair consequences for a party or an external party.
  • Rescission is based on equitable fairness—it aims to restore parties to their original positions.
  • Parties must return benefits received under the contract upon rescission.
  • Mutual restitution requires parties to restore their original positions by returning property or payments and compensating for damages.
  • Post a job on UpCounsel for a contract lawyer in your state to get expert assistance with rescissible contracts and ensure your rights are protected.

Rescissible Contract

A rescissible contract is a legally valid contract that can be undone or set aside by a court if it causes economic harm to one of the parties or a third party. This remedy, known as rescission, is used when continuing the contract would result in unfair or unjust outcomes.

What Types of Contracts Are Rescissible?

Under certain circumstances, valid contracts can be legally rescinded. Examples of rescissible contracts include:

  1. Contracts entered into by guardians, where the wards (those under guardianship) suffer economic harm greater than one-fourth of the value of the items involved.
  2. Contracts entered into by representatives of absent parties, if the absent party suffers significant economic harm.
  3. Contracts that defraud creditors, especially when creditors cannot collect what is owed to them by other means.
  4. Contracts related to litigation, if they were entered into without the knowledge or approval of the defendant or other relevant parties.
  5. Any other contracts the law specifically declares subject to rescission.

In cases where one party is unable to pay debts or fulfill obligations under a contract, rescission may be used to cover the extent of the damages. The party seeking rescission must return what was received under the contract, along with any applicable interest.

Limitations to Rescission

Rescission can only occur if the party seeking it is able to return what they received. If the items involved are now in the legal possession of a third party acting in good faith, rescission will not be possible. In such cases, the injured party may instead seek compensation from the responsible party.

Requirements for Rescinding a Contract for Fraud Against Creditors

To rescind a contract due to fraud against creditors, the following conditions must be met:

  1. The creditor’s claim must have existed before the contract was created.
  2. There must be evidence of fraud or an intent to commit fraud against the creditor.
  3. The creditor must be unable to collect their debt by other means.
  4. The property or object in question must not be in the hands of a third party acting in good faith.

Types of Defective Contracts

Contracts may be considered defective in several ways:

  1. Voidable Contracts: These contracts can be defective if one party lacked the capacity to give consent or if consent was obtained through mistake, fraud, undue influence, or coercion.
  2. Unenforceable Contracts: These contracts are legally valid but cannot be enforced due to specific legal barriers, such as lack of authority or failure to meet formal requirements.
  3. Void Contracts: These contracts have no legal effect because they lack essential elements required by law, such as a lawful object or proper consent.

Relatively Ineffective Contracts

Some contracts are only ineffective with respect to certain parties but remain valid between others. These are referred to as relatively ineffective contracts.

Key Distinctions in Defective Contracts

Defective contracts can be categorized based on:

  1. The defect itself: Some contracts are void due to illegality or lack of essential elements, while others may be voidable due to flaws in consent.
  2. The damage caused: Contracts may be rescissible if they cause harm to one of the parties or a third party.
  3. The effect of the defect: Void contracts are completely invalid, while voidable contracts remain valid unless annulled.
  4. Available remedies: Void contracts cannot be ratified, but voidable contracts can. Rescissible contracts may sometimes be "cured" through a process known as convalidation.

Ratification and Prescription

  • Void contracts cannot be ratified or made valid through any legal process and are not subject to the statute of limitations (prescription).
  • Voidable contracts can be ratified, meaning they can be made legally binding if the defect is resolved, and are subject to prescription.
  • Rescissible contracts can also be subject to prescription, meaning they must be rescinded within a certain time frame.
  • Unenforceable contracts may be ratified under certain conditions, but they cannot be cured by prescription.

Obligations Created by Contract Rescission

When a contract is rescinded, both parties are typically required to return whatever they received under the contract, a process known as mutual restitution. However, if the creditor did not receive anything under the contract, or if the item in question is already in the hands of a third party acting in good faith, mutual restitution may not apply. In such cases, the creditor may be entitled to seek damages instead.

Conclusion: Get Legal Help with Rescissible Contracts

Defective contracts, including rescissible contracts, can be confusing. Consult a contract lawyer to ensure your right to mutual restitution is protected and to guide you through the process. 

If you need help with rescissible contracts, you can post your legal need on UpCounsel's marketplace.  

UpCounsel accepts only the top 5% of contract lawyers on its site. Lawyers on UpCounsel come from law schools like Harvard Law and Yale Law. They have an average of 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.