Rescission is a legal remedy that cancels a contract and restores the parties to their positions before the contract was made, effectively nullifying the agreement as if it never existed.
Updated: Jun 12, 2024

3 key takeaways

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  • Rescission is a legal action that cancels a contract and returns the parties to their pre-contractual positions.
  • It can be initiated due to factors such as misrepresentation, mistake, duress, or undue influence.
  • Rescission aims to ensure fairness by undoing agreements that were entered into under unfair or invalid conditions.

What is rescission?

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Rescission is a legal remedy that voids a contract and treats it as though it never existed. When a contract is rescinded, both parties are released from their obligations under the agreement, and any benefits or goods exchanged are typically returned.

The goal of rescission is to restore the parties to their original positions before the contract was formed, ensuring that neither party unfairly benefits from the contract.

Reasons for rescission

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Rescission can be pursued for several reasons, often involving some form of misconduct or error at the time the contract was formed:

  1. Misrepresentation: If one party makes a false statement that induces the other party to enter into the contract, rescission can be sought. This can include both fraudulent and innocent misrepresentations.
  2. Mistake: A mutual or unilateral mistake regarding a fundamental aspect of the contract can be grounds for rescission. This occurs when both parties, or one party, operate under a significant misunderstanding about the contract’s terms or subject matter.
  3. Duress: If a party was forced or threatened into signing the contract, rescission can be an appropriate remedy.
  4. Undue influence: Rescission can be sought if one party used their position of power to unfairly influence the other party into agreeing to the contract.
  5. Lack of capacity: If one party lacks the legal capacity to enter into the contract, such as being a minor or mentally incapacitated, rescission may be granted.
  6. Illegality: Contracts formed for illegal purposes can be rescinded, as they are not legally enforceable.

Process of rescission

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The process of rescission typically involves several steps:

  1. Notice: The party seeking rescission must notify the other party of their intention to rescind the contract. This is usually done in writing and should clearly state the reasons for rescission.
  2. Return of benefits: Both parties must return any benefits or goods received under the contract. This is to ensure that neither party retains an unfair advantage from the now-voided agreement.
  3. Court intervention: If the parties cannot agree on rescission terms, the aggrieved party may seek a court order to enforce rescission. The court will evaluate the grounds for rescission and ensure that the process is conducted fairly.

Examples of rescission in practice

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Rescission can apply in various contractual contexts:

  • Real estate: A buyer may seek rescission of a property purchase contract if they discover that the seller misrepresented crucial information about the property.
  • Consumer contracts: A consumer may rescind a contract for a defective product if the seller fails to disclose significant defects.
  • Employment agreements: An employee may seek rescission of an employment contract if they were coerced into signing under duress.

Impact of rescission

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Rescission has several important implications:

  • Restoration of status quo: It aims to restore both parties to their original positions, ensuring fairness and preventing unjust enrichment.
  • Legal clarity: Rescission provides a clear legal remedy for contracts formed under problematic circumstances, upholding the integrity of contractual agreements.
  • Financial considerations: Both parties must be prepared to return any exchanged benefits or goods, which can have financial implications.

Challenges and limitations

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While rescission is a powerful remedy, it also comes with challenges and limitations:

  1. Mutual restitution: Rescission requires both parties to return all received benefits, which can be complex if the goods or services have been consumed or altered.
  2. Time sensitivity: There are often time limits within which rescission must be sought, known as statutes of limitations.
  3. Proof of grounds: The party seeking rescission must provide adequate proof of the grounds for rescission, which can be legally and factually demanding.

Understanding rescission is essential for recognizing how the law addresses and remedies invalid or unfair contracts. It ensures that agreements are fair and entered into voluntarily, maintaining trust and fairness in contractual relationships.

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AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the knowledge base, understands over 100,000... read more.