Key Takeaways

  • Rescission is a legal remedy that cancels a contract and restores parties to their pre-contractual positions.
  • Common grounds for rescission include misrepresentation, fraud, undue influence, and mutual mistake.
  • Rescission can be achieved through mutual agreement or judicial intervention.
  • There are two main types: rescission in equity (void from the beginning) and rescission de futuro (terminated for the future).
  • The right to rescind may be lost if the contract is affirmed or if there's an unreasonable delay.
  • A 3-day right of rescission is federally mandated for certain consumer loans, such as HELOCs.
  • Courts may deny rescission if full restitution (restitutio in integrum) is impossible or inequitable.
  • State laws and limitations periods may affect rescission rights and deadlines.
  • Rescission is different from termination or reformation and should not be confused with these remedies.

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Although there are a plethora of reasons that warrant the cancellation of a contract, not all of them can be rescinded.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

Types of Misrepresentation in Rescission

Rescission is often granted based on misrepresentation, which can take several forms:

  • Innocent Misrepresentation: A false statement made without intent to deceive. Rescission is generally available, but damages may not be.
  • Negligent Misrepresentation: A careless false statement that induces another to enter into a contract. Courts may grant rescission and sometimes damages.
  • Fraudulent Misrepresentation: A deliberate lie or omission. This provides the strongest basis for rescission and may also result in punitive damages.

For rescission to be granted, the misrepresentation must have been material and relied upon by the injured party when entering into the contract.

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. 

Judicial vs. Voluntary Rescission

Rescission can occur in two primary ways:

  • Voluntary Rescission: Both parties agree to undo the contract without court involvement. This is common when neither party has performed or both want to avoid litigation.
  • Judicial Rescission: When one party seeks rescission through a lawsuit, the court may grant it based on equitable principles and legal grounds like fraud or mistake.

In judicial rescission, the court aims to restore both parties to their original positions, to the extent possible. However, this can be denied if the court finds it inequitable or impractical to reverse all obligations.

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. 

Rescission in Other Consumer Contracts

Beyond mortgage-related transactions, certain state laws provide consumers with additional rescission rights. These include:

  • Door-to-Door Sales: Under the FTC's Cooling-Off Rule, consumers typically have 3 days to cancel purchases made at home or at temporary locations.
  • Timeshare Purchases: Many states require a rescission period (often 5 to 15 days) to allow buyers to reconsider.
  • Gym and Health Club Contracts: Often include statutory rescission periods due to frequent consumer disputes.

These consumer protection laws are jurisdiction-specific and aim to prevent high-pressure sales tactics and buyer's remorse.

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. 

Limitations and Defenses to Rescission

Even when grounds for rescission exist, certain defenses or limitations may block this remedy:

  • Affirmation: If the injured party continues to act under the contract after discovering the issue (e.g., accepting benefits), the right to rescind may be waived.
  • Laches (Delay): An unreasonable delay in asserting the right to rescind may lead the court to deny relief.
  • Impossibility of Restitution: If it's impossible to restore both parties to their original positions, rescission may be denied.
  • Third-Party Rights: Rescission is generally not granted if it would unfairly affect an innocent third party who has relied on the contract.

Timeliness and the ability to make full restitution are key factors courts weigh when considering rescission.

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.

Rescission vs. Reformation and Termination

Rescission is often confused with other legal remedies, but it serves a distinct function:

  • Rescission: Voids the contract entirely as if it never existed.
  • Reformation: Modifies the contract to reflect what the parties actually intended, typically used to correct drafting or clerical errors.
  • Termination: Ends the contract going forward, usually due to breach, but does not void past obligations unless stated.

Each remedy has unique legal standards. Reformation is based on mutual mistake or fraud; termination generally follows a material breach; rescission focuses on vitiating elements present at contract formation.

Frequently Asked Questions

1. What is the difference between rescission and cancellation? While often used interchangeably, "rescission" typically refers to a legal remedy voiding a contract, while "cancellation" may simply end a contract under its own terms or via statute.

2. Can a contract be rescinded after performance has begun? Yes, but it depends on the extent of performance and whether restitution is possible. Courts may deny rescission if full reversal of benefits can't be achieved.

3. Is rescission available for a unilateral mistake? Generally, no, unless the non-mistaken party knew or should have known of the mistake. Courts prefer mutual mistake as grounds for rescission.

4. Does rescission erase all legal obligations? Yes, rescission voids the contract retroactively, restoring parties to their pre-contract positions. However, courts may impose conditions such as restitution.

5. How long do I have to seek rescission? The time limit varies by jurisdiction and the basis for rescission (e.g., fraud vs. misrepresentation). Prompt action is essential to preserve this right.

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