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What is Rescission? When can a Contract be Rescinded? (with examples)

DocPro Legal
21 Feb 2022
What is Rescission? When can a Contract be Rescinded? (with examples)

What is Rescission of Contract?

 

Rescission of contract means the revocation or cancellation of the contract as if the contract has never existed in the first place. The contract is rendered null and void, which means that it is no longer legally binding. The parties to the contract are restored to the position before the signing of the contract.

 

 

 

Difference between Rescission and Termination

 

A contract between parties is usually concluded by (i) completion, (ii) termination and (iii) rescission. Completion means the parties fulfill their obligations to the contract. Whilst termination and rescission are both ways to end a contract without fulfilling it, there is a substantial difference between the two:

 

Termination – Termination usually stems from a breach of contract. The exercise of the right of termination of the contract is known as “repudiation”, with the result of the contract being “discharged”. This means that the contract continues to exist but the unperformed obligations owed by the parties fall away. The obligation of the party in breach is to pay monetary damages for the breach instead of performing the contract.

 

Rescission – On the other hand, a rescission is often the result of a mistake with all parties agreeing to rescind the contract. In cases of fraudulent misrepresentation, duress or undue influence, rescission is a remedy the court award to the innocent party. In effect, the contract is undone with the parties put back to their original positions as if the contract has never existed.

 

For examples of documents used to exit an agreement, please see the below:

Notice of Termination of Contract - https://docpro.com/document-form-select/Notice%20for%20Termination%20of%20Contract%20for%20Services

Mutual Agreement to Exit an Agreement - https://docpro.com/document-form-select/Exit%20from%20Multi-Parties%20Agreement

Notice of Frustration of Contract - https://docpro.com/doc1651/notice-of-frustration-of-contract-cancel-voiding-of-contract

 

 

Effects of Rescission vs. Termination

 

Where a contract is terminated, the contract continues to exist but it ceases to be enforceable from the date of termination. By contrast, if a contract is rescinded, it is as if the contract has never existed. All rights and obligations under the contract simple disappeared. This may have enormous effect on the types of remedies the parties can get.

Both termination and repudiation put an end to future performance of the contract. For a contract that has been terminated, the termination date is the date where future performance can be stopped. The end date for performance of a rescinded contract can be a bit more tricky. The contract is undone so there should be no obligations to perform in the first place. The contract in question may be found void ab initio (i.e. there was never any contract between the parties) or voidable. However, you must still perform until the contract is actually rescinded. 

In relation to remedies, if a contract is terminated as a result of a repudiatory breach, the main remedy is damaged. The party in breach shall compensate the innocent party for the breach and termination in monetary terms. Damages are usually calculated on the basis of the losses arising from the party not fulfilling the contract.

On the other hand, rescission puts the parties back to their original position as if the contract never existed. So any payments have been made by the parties should be refunded, and any goods and services have been provided should be sent back to the provider. This may have drastically effect and consequences when compared with monetary damages.

In general, a rescission is preferred by lawyers because when a contract is terminated, the obligations remain in place and the parties may continue to sue each other even after the termination. This is not the case for a rescission, the obligations under the contract simply vanished.

 

 

 

When can a Contract be Rescinded?

 

There are several grounds which allow for a contract to be rescinded. If there is (i) a material mistake or error in the contract, (ii) proof of fraudulent misrepresentation, (iii) undue influence, (iv) duress, (v) lack of legal or mental capacity can lead to contracts being rescinded.

 

Mistake

Mistake in contract is an erroneous belief of the facts by the parties at the time of contract. That is if the parties have agreed the terms of a contract on the basis of a shared (or mutual) and fundamental misapprehension as to the facts (e.g. where goods to be sold never existed). Mistake can also occur where there is a misunderstanding in the communications between the parties (e.g. the parties misunderstand each other or one party makes an offer on terms which the other party knows the first party did not intend) which prevents there being an effective agreement. The parties may misunderstand each other or one party may know that the other does not intend the terms offered (e.g.  sell goods at a price per pound instead of per kilo) or there may be a mistake about the identity of the parties.

However where, at common law, the court would decide that the mistake was not enough to make the contract void, it may then consider whether grounds exist for relief in equity. For example, it could refuse to grant specific performance or could grant rectification of a written agreement or agree to rescind the contract (i.e. bring the contract to an end).

 

Misrepresentation

The law on misrepresentation is a complex mixture of the rules of common law, equity and statute law. It is also complicated by the fact that it may be possible to bring an action in tort for a misrepresentation, as well as in contract which can lead to the amount of damages awarded being different. There are three categories of misrepresentation: innocent misrepresentation, negligent misrepresentation and fraudulent misrepresentation.

A person can always rescind for a fraudulent misrepresentation. If the misrepresentation is negligent or wholly innocent, the court has a discretion to refuse to allow the person to whom the misrepresentation was made to rescind the contract, but to award him damages instead. If someone was induced to enter a contract by a misrepresentation, he could rescind the contract subject to certain conditions but could only claim damages if the misrepresentation was fraudulent.

The misrepresentation can be a misstatement of a fact. In some cases, for example if a representation is made about an opinion or intention which is not honestly held, a statement of opinion or intention can also be actionable. The general rule is that mere non-disclosure is not a misrepresentation as there is generally no duty on a party to a contract to disclose material facts to the other party. There are exceptions to this, for example, where there is a fiduciary relationship between the parties or where failure to disclose a fact distorts a positive representation. If a statement which is true when made subsequently becomes untrue, a failure to notify the change can itself be a misrepresentation in some cases.

To obtain relief, a person must be able to show that the misrepresentation was made to the person or his / her agent, or that the person making it expected it to be passed on or made it to the public at large. The person must also show that he / she relied on it or was affected by it.

As explained above, the main remedies for misrepresentation are damages or rescission. The amount of damages for fraudulent misrepresentation differs from the normal damages for breach of contract. Damages for negligent misrepresentation can be reduced if the person claiming was contributorily negligent - i.e. the loss is partly his fault. Rescission may not be awarded (i) if it is not possible to put the parties back to their original positions, (ii) if the party has affirmed the contract, (iii) because of lapse of time or (iv) because a bona fide third party has acquired the rights.

 

Duress and undue influence

A contract which has been entered into as a result of duress can be rescinded by the party subject to the duress (i.e. that party can choose not to be bound by the contract provided he has not affirmed or ratified the contract). In addition, a contract may be rescinded if one party has abused his influence over the other or betrayed a position of confidence. Equitable relief may also be granted for unconscionable bargains (where the "bargain" or transaction is so oppressive that it shakes the conscience of the court: e.g. where the complainant has got nothing out of a transaction or has sold property for much less than it was worth) or where there was inequality of bargaining power. This is not normally relevant to commercial contracts between businessmen.

 

Lack of Capacity

A contract made with a person or entity without mental or legal capacity can be rescinded. The law presumes that a party to a contract has capacity to contract. Minors (children under 18) and mentally disordered people do not have full capacity to contract. It is for the person claiming the incapacity to prove it. There are special rules which apply to corporations (including companies), unincorporated associations (including clubs and trade unions), the government (including any government department or officer), public authorities (including local government bodies or statutory bodies), foreign states, sovereigns, international organisations and enemy aliens.

 

Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.    

 




 

 

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