A rescission definition law is the undoing of a contract between two parties. There are several ways rescission can occur, depending on the contract's nature.

Rescission Legal Definition

When discussing contract law, rescission is one of the most important terms to understand. Rescission is the process of unmaking a contract. The goal of contract rescission is to put the two parties into the original positions they were in before making the contract. Rescission requires that the whole contract be unmade. It is not possible to pick and choose which parts of a contract to cancel. If you want to only cancel one portion of a contract, you would need to use contract reformation laws instead of rescission.

If there are problems with the way a contract was written, rescission is the most common remedy. Courts will often order rescission when a contract dispute results in a civil lawsuit. The idea is that rescinding the contract will place the two parties as close as possible to the position they would have been in had they not formed a contract.

Mutual rescission occurs when two parties enter into a new agreement that rescinds the first contract. This is also known as rescission by agreement. Mutual rescission can only occur before the performance of the original contract. Rescission by mutual agreement differs from each party's ability to rescind a contract for cause. A promise of restitution can be included in a rescission by mutual assent.

Only the contracted parties, or someone allowed to act on their behalf, have the right to rescind a contract. Legal authorities, such as the courts, can also order a contract rescission. Just like forming contracts, rescinding a contract can take place verbally or in written form. Implied agreements to rescind can be effective if both parties can show they have agreed to the rescission and are acting accordingly.

Wrong of Adverse Party

If a contract is voidable, it can also be rescinded on a variety of grounds:

  • Fraud.
  • One party's mistake.
  • Incapacity.

Generally, there must be a reason to rescind a contract, as there is no arbitrary right to rescission. For instance, if one party commits fraud, the contract could be rescinded because the party failed to perform their contractual duties. In most cases, making a false statement of value does not constitute grounds for rescission. Another case in which a contract can be rescinded is if it was entered into under duress.

When both parties make a mistake about a material fact of the contract, they might be able to rescind the contract as long as the agreement has not yet been completed. Also, they would need to demonstrate that rescinding the contract wouldn't be unfair to one of the parties. Rescission can also occur if only one party has made a mistake and if rescinding the contract would prevent one of the parties from becoming unjustly enriched.

If one party is found to be of unsound mind, the contract can be rescinded if it would restore both parties to their original position. Rescission can occur in these circumstances even if one party did not know the other was of unsound mind. A party's intoxication at the formation of the contract is usually not enough to allow rescission. The exception to this rule is if the other party took advantage of the intoxicated person.

Breach of Contract

One of the most common reasons for one party to rescind a contract is a breach of contract. For rescission due to breach of contract, one party must have failed to perform their duties, and rescinding the contract cannot damage the breaching party. Not every breach of contract gives the right to rescission. Only when the contract breach is fundamental and substantial does the right to rescission exist.

When a contract is time-sensitive, failure to perform in a timely manner can be grounds for rescission. In other contracts, however, delayed performance does not provide grounds for rescission. Also, when a contract requires performance in a reasonable time, and one party is making a good faith effort to perform, the other party cannot suddenly cancel the contract.

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