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All types of contracts, may be rescinded under specific circumstances.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When a contract has been rescinded in whole or in part, any party to the contract may seek relief based on that rescission by: (1) bringing an action to recover any money or thing owing to him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A contract may be rescinded under the following circumstances: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]
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.