Rescission of Contract (Legal Definition: All You Need To Know)

What is Rescission of Contract?

How do you rescind a contract?

What are the essential elements you should know!

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Rescission of Contract Overview

In contract law, to rescind a contract or rescinding contract refers to an equitable remedy where a contracting party seeks to cancel the contract that was entered into.

In other words, to rescind a contract is to put an end to the contract.

The term “rescind” means to cancel, revoke, annul, or repeal something.

As a result, to “rescind” a contract is to terminate the contract.

A contract may be canceled or rescinded unilaterally or mutually.

When you have a unilateral rescission of a contract, the cancellation initiative comes from one contracting party typically due to the other party’s material breach of the contract terms.

With a mutual rescission of contract, both parties to the contract “mutually agree” to cancel the contract and provide one another with a discharge of their legal duties.

Definition

What is the definition of rescind contract?

What does rescinded mean in contract?

The Cornell Law School’s Legal Information Institute defines contract rescission as follows:

Short and sweet!

To “rescind” a contract is to “cancel” the contract.

How It Works

How does the rescission of a contract work?

If you are looking to cancel a contract, you need to cancel the entire contract.

A contracting party that exercises the right to rescind a contract will need to exercise that right on the whole contract (partial rescission is not possible).

A party looking to maintain the contract but modify certain elements of it should consider contract reformation rather than rescission.

Generally, rescinding a contract is an option exercised by a contracting party when the other party has materially failed in performing its duties under the contract.

As such, the law provides for this equitable remedy to cancel a contract when the other party is failing to perform what was promised.

When To Rescind The Contract

Just like any other legal remedy, a party seeking to rescind a contract must have a valid cause.

In other words, the courts will not accept a party’s contract rescission if it is unable to demonstrate a good reason for canceling the contract.

It’s important to remember that when a contract is rescinded, it’s because the other party has failed at something as opposed to the rescinding party changing his or her mind about the contract.

Let’s look at some instances when the court may rescind a contract.

Lack of Capacity

A party who may not have had the legal capacity to enter into a contract due to illness, mental incompetency, a minor, or other capacity issues.

Lack of capacity is a ground for rescission.

Fraud

A party committed fraud and made false representations to induce the other party to sign a contract.

Duress 

A party was put under pressure to enter into a contract against their will (duress, coercion, undue influence).

Mistake of fact 

A mistake of fact is when a party misunderstood the terms of contract and would not have signed otherwise.

Anticipatory Repudiation

A party can rescind a contract if the other party is failing to perform its obligations on the basis of anticipatory repudiation.

This means that the other party considers that the rescinding party has failed in its obligations and is no longer performing its own obligations.

Lack of Consideration

When the contract consideration is considered legally inadequate or fails, the contract can be terminated as it does not observe the contract formation rules.

Public Policy

A contract violating public policy can be terminated as it goes directly against public interests. 

No Right To Rescind Contract

The law does not grant anyone the “right” or “entitle” anyone to rescind a contract.

Based on the rescission contract law, you must have a valid reason to cancel the contract.

Otherwise, the law’s main objective is to legally enforce contracts allowing the parties to mutually define their legal obligations.

There are cases where the courts will reject or deny a contracting party’s claim to rescind an agreement.

Substantial Performance

In the case where one party nearly completed its obligations in a contract, the law will prohibit the other from rescinding the contract.

Third-Party Benefit

There are cases when the court may not move for a contract rescission when a third party has benefited from the obligations performed by a party under the contract.

Legal Defenses

How can you legally defend yourself if the other contracting party intends to rescind your contract?

There are different legal defenses possible, particularly:

• Unclean hands
• Laches

The “unclean hands” defense means that the plaintiff (or rescinding party) was at fault and did not perform certain contractual obligations.

As a result, the court must not rescind the contract based on the plaintiff’s failure to perform.

The argument of laches relates to the filing delays being unreasonable, resulting in prejudice to the defendant.

Rescission Delays

How long do you have to rescind a contract?

Typically, when you execute a contract in most jurisdictions, you are legally bound to its terms immediately.

However, there are some exceptions.

In certain situations, the law may provide a “cooling period” where the parties (or one party) has a short period of time after contract signature to rescind the contract.

For example, the Federal Trade Commission (FTC) provides for a 3-day cooling off period.

Also, under consumer protection laws, certain “consumer contracts” have cooling off periods where a consumer will be given the right to rescind a contract.

Consequences

What are the consequences of contract rescission?

When a contract is rescinded, it’s as if it never existed in the first place.

In essence, rescission has a retrospective effect on the contract.

As a result, the legal obligations and duties of the parties are “extinguished” as if they never existed.

When the court rescinds a contract, the parties must restitute what they have received from one another.

Restitution means that the parties have to restore, pay back, or return the benefits they received under the contract.

Examples

Let’s look at an example of rescission of contract to illustrate the concept better.

A typical example of contract rescission can be illustrated in insurance contracts.

In the context of insurance, an insurer will cover risk or liability based on the proper evaluation of risk.

However, if the insured does not provide truthful information to the insurer (misrepresentation), then the contract may be rescinded.

Life, fire, auto, or health insurance policies provide the insurer the right to rescind without having to obtain court approval.

Another example is when a contract is signed with a minor.

Since a minor does not have the legal capacity to enter into a legally binding contract, the contract can be rescinded.

Rescission Contract Takeaways 

So what is the legal definition of Rescission of Contract?

How to rescind a contract?

What is rescission of a contract?

Let’s look at a summary of our findings.

Rescission of Contract:

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