Rescission is an equitable remedy that voids or annuls the terms of a contract. It is granted to a litigant in cases of innocent misrepresentation, fraud, or any other action on behalf of a defendant that calls into question the legality of the bargain or which constitute unconscionable and undue influence. There are two kinds of rescission, namely rescission in equity and rescission de futuro. 

Also referred to as rescission ab initio, i.e., from the beginning, rescission in equity works by rolling back the contract to the initial state of affairs, before the parties in question accepted the terms of the contract. The terminology, rescission de futuro, or "rescission for the future" is used unwisely to describe the situation of plaintiffs who are entitled to contract termination after a breach.

For rescission to function as an equitable remedy, it is subject to some discretionary barriers including affirmation and delay. Likewise, it is essential that plaintiffs are capable of effecting restitutio in integrium. This facilitates the restoration of the contracting parties to their hitherto pre-contractual positions. However, the degree of restoration usually varies and will depend on the underlying cause of action. In cases of fraud, a court of law may be reticent about granting complete restoration whereas complete restoration is virtually guaranteed in cases of innocent misrepresentation.

Grounds for Rescission

Although there are a plethora of reasons that warrant the cancellation of a contract, not all of them can be rescinded. Grounds for rescission include 

  • undue influence
  • fraud 
  • misrepresentation

The right to rescind must be executed immediately or within some reasonable length of time once the facts which authorize the right have been discovered. A reasonable length of time is determined by the circumstances surrounding a particular case.

Use and Effects of Contract Rescission 

Contract rescission mandates the contracting parties to return all benefits received while the contract was in force and reverse all actions and status to the states they were in before they entered into the contract. No damages are awarded to either party during a contract rescission, and once in effect, a rescission renders all parties incapable of taking future actions concerning the voided contract. A notice of cancellation or rescission is provided by the rescinding party and all benefits or monies received are returned by the party. 

3-Day Right of Rescission 

Individuals who have applied for a HELOC (i.e., a Home Equity Line of Credit) may have come across a right to rescission. Under the Truth in Lending Act of 1968, banks are required by law to provide customers who apply for HELOC loans or mortgage refinancing with a 3-day “cooling-off” period, once the loan contract has been signed. This is meant to protect consumers, many of whom are overwhelmed by the unfamiliar loan terms and legal jargon, and allow them a period of grace to think about and review the terms of their mortgage contract before it goes into effect. 

During this period, customers can rescind the signed contract without reprisal, and the lending institution must return any fees paid as well as give up all claims to the customer's property within 20 days. However, not all mortgage or mortgage-related loans have this rescission right. Mortgages for the outright purchase of a home, a loan to refinance existing loans from the same lender, or mortgages on an investment property or second home are non-rescindable. 

Conditions for Rescission

Rescissions can only be granted in cases of a fully formed contract. If either party lacked intent or understanding of the implications of the contract, the contract is not legally binding, and as such, a rescission is unnecessary and not possible. 

Mutual Consent

Contracting parties can mutually consent to have a contract rescinded. If this is the case, both parties must separately tender their intent and consent in written form. 

In cases where only one party wants to rescind, a written notice containing the grounds for the rescission request must be presented to the other party. It is then left for the court to decide if the grounds for cancellation are valid. Parties to an incomplete or executory contract can rescind at any time if they mutually agree to it, even if there is a contrary provision within the contract itself.

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