Rescissible Contract: Everything You Need to Know
A rescissible contract is one that was entered into legally by the contracting parties but has resulted in economic damage to one of the parties or an outside party. The court can therefore rescind, or set aside, the contract for equitable reasons.3 min read
2. What Must Occur Before a Contract Entered Into in Fraud of Creditors Can Be Rescinded?
3. How Defective Contracts Are Classified
4. Distinctions in Defective Contracts
5. Obligations Created by Contract Rescission
A rescissible contract is one that was entered into legally by the contracting parties but has resulted in economic damage to one of the parties or an outside party. The court can therefore rescind, or set aside, the contract for equitable reasons.
What Types of Contracts Are Rescissible?
Valid contracts can be legally rescinded under certain circumstances. Types of contracts that are rescissible under Article 1381 include:
- Any contracts entered into by guardians when their wards suffer lesion by more than one-fourth of the items that are the object thereof.
- A contract agreed to in representation of an absentee, if the absentee suffered the lesion mentioned above.
- Any contracts relating to fraud of creditors when the creditors cannot collect what is owed to him or her in any other manner.
- Anything in litigation if it was entered into by the defendant without the knowledge or approval of the litigants themselves or a competent judicial authority.
- Any other type of contract the law declares subject to rescission.
Under Article 1382, if one party is unable to pay debts owed, the injured party can rescind the contract. Rescission is only necessary to the extent that it is required to cover damages. The offending party must return the items that were the subject of the contract, along with interest. Therefore, rescission can only occur if the person can return what he or she is required to return.
If those things that are the subject of the contract are in the legal possession of a third party who wasn't acting in bad faith, rescission won't take place. In this situation, the injured party can demand reimbursement of damages from the person or persons who caused the loss.
What Must Occur Before a Contract Entered Into in Fraud of Creditors Can Be Rescinded?
To rescind a contract for fraud of creditors:
- Credit must exist prior to the contract's creation.
- There must be an element of fraud, or at least the intent to commit fraud, to the creditor seeking rescission.
- Creditors cannot legally collect their credit.
- The object in dispute cannot be in the hands of a third party who hasn't acted in bad faith.
How Defective Contracts Are Classified
Defective contracts can be classified in several ways:
- Voidable and Annullable Contracts: These can be defective if one party was incapable of giving consent or if consent was granted by mistake, threat, violence, fraud, or undue influence.
- Unenforceable contracts: These are contracts that can't be enforced for a variety of reasons.
- Void or Inexistent Contracts: These have no legal effect because they don't legally exist.
Other defective contracts include those that are partially ineffective and partially valid. They don't fall under any of the above classifications, are only ineffective with respect to certain persons, but can be effective to other parties. These are known as Relatively Ineffective Contracts.
Distinctions in Defective Contracts
Contracts become defective typically by:
- Defect itself
- Damage or prejudice
Contracts that are void due to defect itself include:
- Void contracts that are caused by illegality or lack of essential elements.
- Voidable contracts that are defective because of their methods of consent.
- Rescissible contracts that are caused by damages or lesion to one of the contract parties or another third party.
- Unenforceable contracts that lack authority, capacity, or both parties' consent.
- Contracts that are not compliant with the Statute of Frauds or entered into on behalf of another party without their authority.
Void contracts cannot be ratified, but voidable contracts can be ratified in some circumstances. Rescissible contracts might be subject to convalidation, but not official ratification. Unenforceable contracts are also subject to ratification in some cases.
Obligations Created by Contract Rescission
Rescinding a contract creates something called mutual restitution. Mutual restitution is not applicable if a creditor received nothing from the contract and the thing owed is already in possession of a party in good faith. It is subject to indemnification only if two more alienations of liability exist from the first party in violation.
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