The abrogation of a contract, effective from its inception, thereby restoring the parties to the positions they would have occupied if no contract had ever been formed.
Mutual rescission, or rescission by agreement, is a discharge of both parties from the obligations of a contract by a new agreement made after the execution of the original contract but prior to its performance. Rescission by mutual assent is separate from the right of one of the parties to rescind or cancel the contract for cause, or pursuant to a provision in the contract.
The parties to an executory or incomplete contract can rescind it at any time by mutual agreement, even if the contract itself contains a contrary provision. A rescission by mutual assent can properly include a promise by either or both parties to make restitution as part of the contract of rescission.
The right to rescind is limited to the parties to the contract or those legally authorized to act for them. As with other contracts, the parties to the rescission agreement must be mentally competent.
Form The rescission agreement can be either written or oral. An implied agreement is also effective, provided the assent of the parties can be shown by their acts and the surrounding circumstances. An express rescission of a contract as a whole is adequate and effective, without specifically designating each and every clause to be rescinded.
Unless a statute provides otherwise, an oral rescission agreement is valid, even though the contract being rescinded contains a provision that it can be altered only in writing.
Assent All the parties to the contract must assent to its rescission because mutual rescission involves the formation of a new contract. A meeting of minds can be reached by an offer to rescind and an acceptance by the other party. One party to a contract cannot rescind it simply by giving notice to the other party that he or she intends to do so.
Although a breach of contract by one party is not an offer to rescind, the other party can treat the repudiation as an offer to rescind that he or she can accept, leading to rescission of the contract by mutual assent. Rescission must be clearly expressed, however, and the conduct of the parties must be inconsistent with the existence of the contract. The fact that some of the materials that form part of the subject matter of the contract have been returned is not conclusive as to whether rescission has occurred.
Consideration An agreement to rescind a prior contract must be based on a sufficient consideration, an inducement. When a contract remains executory on both sides, an agreement to rescind by one side is sufficient consideration for the agreement to cancel on the other, and vice versa. If the contract has been executed on one side, an agreement to rescind that is made without any new consideration is void, that is to say of no legal force or binding effect.
Operation and Effect The mutual rights of the parties are controlled by the terms of their rescission agreement. The parties are generally restored to their original rights in regard to the subject matter. They no longer have any rights or obligations under the rescinded contract, and no claim or action for subsequent breach can be maintained.
Whether rights or obligations already accrued are abandoned when the contract is rescinded in the course of performance depends on the intention of the parties, as deduced from all attending facts and circumstances, and on whether the parties have reserved such rights. Recovery can be allowed, however, for partial performance.
Wrong or Default of Adverse Party
No arbitrary right exists to rescind a contract. An executory contract that is voidable can be rescinded on the grounds of fraud, mistake, or incapacity.
A contract, whether oral or written, can be rescinded on the ground of fraud. The right to rescind for fraud is not barred because the defrauded party has failed to perform. Generally, false statements of value, or the failure to perform a promise to do something in the future without fraudulent intent, will not provide a basis for rescission for fraud or misrepresentation. A party proves sufficient grounds for rescission by showing that he or she was induced to part with some legal right or to assume some legal liability that he or she otherwise would not have done but for the fraudulent representations.
On discovering the fraud, the victimized party can affirm the contract and sue for damages. He or she might instead repudiate the contract, tender back what he or she has received, and recover what he or she has parted with, or its value; the adoption of one remedy, however, excludes the other.
A contract obtained by duress can be rescinded, and in such a case, the same rules apply as in the case of fraud. A contract cannot be avoided because of duress or coercion, however, unless the duress was sufficient to overcome completely the will of the party who is seeking to avoid the contract.
A mutual mistake concerning a material fact entitles the party affected by the mistake to rescind the contract, unless the contract has already been completed and rescission would be an injustice to the other party. Rescission can also be allowed even for a unilateral, or onesided, mistake in order to prevent an unjust enrichment of the other party. On rescission, the aggrieved party can recover the money he or she has paid or the property he or she has delivered under the contract.
A contract made by a person of unsound mind can be rescinded when the parties can be restored to the status quo. This rule applies even if the opposite party was unaware of the mental condition, and the contract was fair, reasonable, and made in good faith for adequate consideration. When one party knows of the other's incapacity, the contract can be rescinded on the ground of fraud. When both parties are sane and the contract is valid, subsequent insanity of one of the parties is not a ground for rescission, unless it affects the substance or purpose of the contract, as in the case of a personal services contract.
As a general rule, a contract cannot be rescinded because one of the parties was intoxicated at the time it was made. If, however, unfair advantage was taken of a person's intoxicated condition, or if the intoxication was induced by the party seeking to take advantage of the contract, the contract can be set aside on the ground of fraud. Similarly, habitual drunkenness that impairs a party's mental abilities can constitute a ground for rescission.
Mere inadequacy of consideration is not a sufficient reason to justify rescission. When the consideration is so inadequate that it shocks the conscience of the court or is so closely connected with suspicious circumstances or misrepresentations as to provide substantial evidence of fraud, it can furnish a basis for relief.
Nonperformance or Breach
One party to a contract can rescind it because of substantial nonperformance or breach by the other party. The party who knowingly and willfully fails to perform cannot complain that the other party to the contract has injured him or her by terminating the contract. The right to rescind does not arise from every breach but is permitted only when the breach is so substantial and fundamental that it defeats the objective of the parties in making the agreement. The breach must pertain to the essence of the contract. The act must be an unqualified refusal by the other party to perform and should amount to a decision not to be bound by the contract in the future. A party to a contract who is in default cannot, however, rescind because of a breach by the other party.
When time is of the essence in a contract, failure to perform within the time stipulated is a ground for rescission. Otherwise a delay in the time of performance is not considered a material breach justifying rescission. When performance is intended within a reasonable time, one party cannot suddenly and without reasonable notice terminate the contract while the other party is attempting in good faith to perform it.
An unconditional notice by one party that he does not intend to perform a contract is a ground for rescission by the other party. In order to justify rescission, the refusal must be absolute and unconditional.
When one party to a contract abandons it and refuses further performance or her conduct shows that she is repudiating the contract, the other party is entitled to rescission. A disagreement over the terms of the contract and a subsequent refusal to perform in a particular manner by one of the parties do not constitute an abandonment of the contract justifying rescission.
A right to rescind must be exercised promptly or within a reasonable time after the discovery of the facts that authorize the right. A reasonable time is defined by the circumstances of the particular case. The rule that rescission must be prompt does not operate where an excuse or justification for a delay is shown.
McGowan, Diane M., and A. Thomas Brisendine. 2001. "Option Medley Continued: Rescissions." Benefits Law Journal 14 (autumn).
Sherwin, Emily. 2003. "Nonmaterial Misrepresentation: Damages, Rescission, and the Possibility of Efficient Fraud." Loyola of Los Angeles Law Review 36 (winter).