Rescission

In contract law, the term “rescission” refers to the undoing, or “unmaking” of a contract between parties. Rescission of a contract may be ordered by a court as an equitable remedy in a civil lawsuit, and is intended to bring the parties as close to the same position they were in before they entered into the contract as possible. While there are a number of reasons for which a contract may be cancelled, not all contracts may be rescinded. To explore this concept, consider the following rescission definition.

Definition of Rescission

Noun

  1. The undoing or termination of a contract that may have been entered into as a result of misrepresentation, fraud, or undue influence.

Origin                     

1605-1615    Late Latin rescissiōn

Use and Effect of Contract Rescission

Contract rescission requires that all parties give back any benefits they have received while the contract was in force, and be returned to their original states, as though the contract had never been formed in the first place. While some jurisdictions use the words rescission and cancellation interchangeably, others use the term rescission to refer to making something void, or for reversing a contract or a judicial decision. For example, a higher court can rescind a judgment based on errors made by the court during a criminal trial.

Typically, contract rescission can only be effected through equitable or legal means. When effected through equitable means, a judicial decree voids the contract and returns the parties immediately to the state in which they were before they entered into the contract. The court does not award either party damages. In this case, rescission prevents either party from taking any future action regarding the contract. As a legal remedy, the rescinding party provides the other party with notice of rescission or cancellation, and returns any monies or other benefits received from the contract.

3-Day Right of Rescission

The Truth in Lending Act of 1968 gives homeowners an opportunity to think about their mortgage, or the refinancing of their mortgage, even after signing the documents. When refinancing a mortgage, the borrower has three days, commonly referred to as a “3-day right of rescission,” to change their mind. The 3-day rescission period ends at midnight three business days after the loan documents were signed. If the borrower decides to cancel the loan within the rescission period, any fees paid in relation to the loan are to be refunded by the lender. The 3-day right of rescission provision of the Truth in Lending Act is intended to protect consumers, who often are overwhelmed by the amount of legal jargon, and loan terms they are unfamiliar with.

Grounds for Rescission

Rescission can only take place if the contract was fully formed to begin with, which means that, if one party lacked understanding or intent, there was no legal contract formed, so a rescission is not necessary or possible. Rescission is a complete undoing of the contract, meaning all provisions are cancelled. There is no thing as a “partial rescission.” Contracts are cancelled for a variety of reasons. Common grounds for rescission include:

Mutual Consent

If both parties agree to have the contract rescinded, they should indicate their intent and consent through a separate written document. In the event only one party wants the contract to be rescinded, he must give proper written notice stating on what statutory grounds the rescission is requested, and it may be necessary to have a court of law determine whether a cancellation may be made.

Problems in the Contract Formation

Every contract must be made under legal conditions, and through legal means. Consent to enter into a contractual agreement cannot be obtained through force or intimidation, and all parties must clearly understand what they are getting into. Problems in formation of a contract may include such issues as:

Mistake

A contract may be rescinded if a party entered into the agreement due to reliance upon, or belief in, a mistaken fact, or a mistake of law. Rescission based on mistake of fact may be allowed if the effect of the mistake causes such a change in the contract’s intent, or makes enforcement of the contract unconscionable.

Rescission on a mistake of law may be granted when a party is aware of the true facts of the contract, but is mistaken as to the legal ramifications of those facts. A mistake of law exists only when (1) all parties believe they know the law as it pertains to the contract, but are mistaken, or (2) one party misunderstands the law at the time he entered into the contract, and the other party fails to remedy the other party’s misunderstanding.

Fraud

Certain types of fraud support a recession and the fraud can be “actual” or “constructive.” Actual fraud exists when one party misrepresents something with the intent to deceive the other party. Constructive fraud occurs when one party engages in misleading conduct without intending to defraud the other party. When fraud of either type occurs, the innocent party may rescind the contract, as he entered into the contract based on facts that were not true.

Duress, Coercion, or Undue Influence

An individual cannot be forced to enter into a contract under threat of being harmed, coercion, or other hostile influence. When considering whether to grant a rescission based on duress, coercion, or undue influence, the court takes into account such issues as:

  • Whether or not the rescinding party acted with free will
  • Whether or not the parties involved were in a confidential relationship
  • Whether the contract was negotiated at arm’s length
  • The adequacy of the consideration afforded to the rescinding party

Lack of Capacity

Rescission can take place if one of the parties to the contract lacks the capacity to legally enter into a contract. For example, a party does not have the capacity to enter into a contract if he is under 18, intoxicated, mentally incompetent, or incapacitated due to illness.

Anticipatory Repudiation or Failure of Consideration

When it becomes clear that one party will not be performing his part of the bargain, whether intentionally or not, the contract may be rescinded for “anticipatory repudiation.” In addition, if the contract consideration, which is the thing of value given in return for goods or services, fails to become available, is inadequate, or is illegal, the contract may be rescinded.

Notice of Rescission Requirements for Unilateral Rescission

When one party decides to rescind a contract without the agreement of the other party, he must inform the other party promptly, specifically stating the grounds for the rescission. How much time a party has to make a rescission after the formation of the contract varies by jurisdiction, but in all cases, notice should be given as soon as the rescinding party discovers he has grounds to request the contract be cancelled.

In most jurisdictions, the notice of rescission brings about the unilateral rescission, giving the rescinding party the right to file a civil lawsuit to enforce the rescission or obtain a judgment in relief.

For example, under the Truth in Lending Act, rescission is a right afforded to people by federal law. The Act provides people with a three business-day rescission period to rescind a loan if they wish to do so. Within this time period, the borrower can cancel their home or equity loan without penalties. This right is given in order to protect borrowers from being talked into the transaction by an unscrupulous lender, and to give them a chance to change their minds.

Process for Rescinding a Contract

It must first be determined whether the contract can be rescinded. This can be done by reviewing the contract and the clauses within it to see if it contains instructions for rescission. If the contract does not contain such a clause, the person seeking the recession should contact an attorney or check the statutes in their state.

If the contract cannot be rescinded according to state or federal law, the person may attempt to negotiate a rescission with the other party. Any contract may be rescinded by mutual agreement, even if the contract itself does not allow it.

The rescinding party must determine whether there are legal grounds for rescission, such as mistake, fraud, or duress. Finally, written notice of rescission must be given to the other party, after which the parties may negotiate a mutual rescission, or either party may file a civil lawsuit.

Rescission of Insurance Policy

Insurance companies offer policies based on information provided by the consumer, whether regarding age and physical condition for health insurance, or speeding tickets and accidents for auto insurance. Insurance companies have the right to rescind a policy issued based on false or missing information. The legal grounds for such rescission include concealment, material misrepresentation, and breach of warranty.

When an insurance company wishes to rescind a policy, it sends a notice to the insured person and returns the person’s premium payment. Prior to the Affordable Care Act, also referred to as “Obamacare,” health insurance policies were often denied or cancelled when the consumer had a preexisting medical condition, or received a diagnosis of an illness known to be very expensive to treat. The insurer would often claim that the consumer withheld pertinent information about their health in obtaining the policy to justify cancellation. The Affordable Care Act took away insurance companies’ rights to deny coverage to consumers with preexisting conditions, and severely limited the grounds for insurance rescission.

This had a great deal to do with the results of a Congressional investigation into WellPoint Inc., UnitedHealth Group, and Assurant insurance companies, which were accused of targeting women with breast cancer, and individuals testing positive for the AIDS virus for policy rescission. Within a 5-year period, the companies rescinded the policies of more than 20,000 people.

As of September 2010, an insurance company wishing to drop a policyholder was required to prove the consumer intentionally deceived the insurance company as to preexisting conditions. Now the Affordable Care Act forbids underwriting, denial, or cancellation based on preexisting conditions.

Governmental Rescission

Rescission also exists within the U.S. Government, where the President has the ultimate authority to rescind a contract according to the Congressional Budget and Impoundment Control Act of 1974. The President may also compel Congress to vote on rescinding or withholding funds that have already been appropriated. Recession requests by the government occur quite often, and mainly take place when there is a serious budgetary problem.

When Rescission is Not Available

There are situations where rescission is not available as a remedy, and as an equitable remedy, the decision is at the discretion of the court. A judge may deny rescission based on certain facts, including:

  • One party has substantially fulfilled their part of the contract
  • A third party has already received some benefit from the contract
  • The requesting party has committed some wrong relating to the contract (referred to as “unclean hands”)
  • The requesting party has unnecessarily delayed the request for rescission, resulting in some prejudice to the other party
  • The requesting party has already asked for money damages. A contract rescission cannot be obtained after requesting a monetary award.

Related Legal Terms and Issues

  • Anticipatory Repudiation – A declaration by a party to a contract, whether verbal or through actions, that he does not intend to uphold his obligations under the contract. Also known as “anticipatory breach.”
  • Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
  • Clause – A section of a legal document that relates to a particular point or issue.
  • Consent – To approve, permit, or agree.
  • Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
  • Damages – A monetary award in compensation for a financial loss, loss of or damage to personal or real property, or an injury.
  • Equitable Remedy – An action ordered by the court for a party to complete his duties under a contract. This is most often used when an award of money damages cannot sufficiently rectify the damages.
  • Intent – A resolve to perform an act for a specific purpose; a resolution to use a particular means to a specific end.
  • Judicial Decision – A decision made by a judge regarding the matter or case at hand.
  • JurisdictionThe legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.
  • Rescind – To revoke or cancel.
  • Unilaterally – Doing something without the agreement or permission of the other party involved.

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