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RESCINDING A
CONTRACT IN CALIFORNIA: WHAT IS IT AND WHAT EFFECT DOES IT HAVE?
Introduction:
As stated in our web article on
Contracts, most obligations
which are legally enforceable in the United States are predicated on
agreements between two or more parties which obligate the parties to
perform in certain ways. Damages may be awarded to the injured party
against a party who breaches such an agreement. This is discussed in
detail in the above article.
But the law grants a party the ability to revoke (“rescind”) an
agreement subject to strict criteria even after the agreement has been
signed. This right is summarized in this article.
The Basic Law of the Right to Rescind
All types of contracts, may be rescinded under specific circumstances.
[See California Civil Code §1689] Rescission extinguishes the contract,
terminates further liability on the agreement, and restores the parties
to their former positions. This generally requires each party to return
any consideration received prior to the rescission.
When a contract has been rescinded in whole or in part, any party to the
contract may seek relief based on that rescission by: (1) bringing an
action to recover any money or thing owing to him or her by any other
party to the contract as a consequence of the rescission or for any
other relief to which he or she may be entitled under the circumstances;
or (2) asserting rescission as a defense or cross-complaint.
Recall that in the contractual sense, “consideration” means the benefit
given to the other party based on the contract.
A
contract may be rescinded under the following circumstances:
(1)
where the parties mutually consent to rescission [Civ. Code §1689(a)];
(2)
where the consent of the rescinding party or of a jointly contracting
party was obtained by mistake, fraud, undue influence, duress, or menace
perpetrated by another party [Civ. Code §1689(b)(1)]
(3) the
consideration for the obligation of the rescinding party fails, in whole
or in part, due to the fault of the other party. [Civ. Code §1689(b)(2)]
(4) the
consideration becomes entirely void from any cause. [Civ. Code
§1689(b)(3)]
(5) the
consideration entirely fails in a material respect from any cause before
it is rendered. [Civ. Code §1689(b)(4)]
(6) the
contract is unlawful for causes that do not appear in its terms or
conditions and the parties are not equally at fault. [Civ. Code
§1689(b)(5)]
(7) the
contract would be prejudicial to the public interest. [Civ. Code
§1689(b)(6)]
(8)
rescission is authorized under any special statutory ground. [Civ. Code
§1689(b)(7)]
Methods to Rescind:
Generally, to effect a rescission a party to a contract must,
promptly on discovering the facts justifying rescission, do the
following:
(1) give notice of rescission to the other party; and
(2) restore to the other party everything of value received under the
contract or offer to restore on the condition that the other party do
likewise.
The service of a pleading in an action or proceeding that seeks relief
based on rescission fulfills both of these requirements. [Civ. Code
§1691]
Conclusion:
The decision as to whether to seek damages for breach of contract,
specific performance or rescission, or some combination of the three, is
a strategic one requiring good legal and, at times, tax advice.
Rescission is often utilized in real estate transactions in which a
party does not want the various obligations and costs of retaining
property allegedly purchased under false pretenses. It can also be a
more appropriate remedy if changes in the market make the usual damages
in appropriate.
The key is that rescission, unlike action for damages, requires
relatively quick action by the injured party. Recall that the statute of
limitations on a suit for pure breach of contract is four years from
date of breach. As seen above, rescission requires much quicker action.
Thus any person considering such a remedy should obtain legal advice as
quickly as possible.
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