When a court rescinds a contract (known as rescission), that makes the contract no longer legally binding on those who signed it. It’s legally as if the contract was never signed.
If money was paid by one party to another, it typically must be returned. The idea is that the parties (or at least the party that is “innocent”) need to be made whole.
What kinds of problems can lead to rescission?
Rescission of a contract can typically be sought if it’s unfair or defective because of:
- Fraud (including misrepresentation of facts)
- Lack of capacity by one or both signing parties
- Undue influence or duress on a party to sign
- Material and/or mutual errors
A contract can also be rescinded if the contract isn’t legally valid or if it requires any party to be involved in an illegal act. Typically, if a party seeks to rescind a contract for one of these reasons, a court needs to order that rescission.
In cases where one party has committed a serious breach of the contract, the other may seek a rescission. This is typically when a key component of the contract can’t be fulfilled by the breaching party. If one party intends to rescind the contract due to a breach, they need to notify the other party.
Sometimes, both parties to a contract agree to rescind the contract. This is a fairly simple process.
Rescissions are less common in business-to-business (B2B) contracts than in those involving consumers. However, insurance companies typically have a right to rescind a contract, even without a court order, if they determine that a customer provided false information on their insurance application. That doesn’t mean the consumer can’t fight the rescission in court.
Rescission isn’t the same as termination
Note that rescission and termination are two different things. Rescission makes it as though the contract never existed, while termination ends the contractual relationship, typically under terms specified in the contract itself.
If you have serious issues with a contract, it’s important to find out what your best remedy is. This is only a brief look at when rescission may be the appropriate option to seek. With experienced legal guidance, you can determine the best course of action for your specific situation.