Rescind

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The term “rescind” is used to describe the act of canceling a contract that had been previously agreed to. In contract law, this is referred to more fully as “rescission.” The purpose of a rescission is to start over with a clean slate, to allow the parties to return to the status quo that existed before the agreement was made. To explore this concept, consider the following rescind definition.

Definition of Rescind

Verb

  1. The act of revoking, or voiding an order, agreement, or contract.

Origin

Mid-16th century          Latin (rescindere)

What is Rescind?

To rescind something in law means to invalidate it. Examples of rescission often come up in contract law, as parties may decide to void, or rescind, a contract they had previously entered into. The parties can either agree between themselves to rescind the contract, or they can bring the matter before the court and have a judge sign off on it.

Once a contract has been rescinded, things must go back to the way they were before the contract was entered into. Any benefits earned from the contract must be returned to their respective parties. No damages can be awarded to the parties for terms left unfulfilled, and no further activity should be carried out.

Once the parties, or a judge, rescinds a contract, that’s it. There is no such thing as a partial rescission. A rescinded contract is considered to be voided in its entirety. If the parties wish to agree to similar terms as those that were contained within the rescinded contract, then they must draft up a new contract.

A contract can be rescinded for a number of reasons. For example, rescind can occur:

  • If both parties consent to the rescission of the contract
  • If one of the parties is behaving in such a way as to communicate that he has no intention of upholding his end of the contract
  • If the contract was formed by illegal means, like:
    • Fraud: A false representation was made that encouraged the parties to sign off on a contract that is actually damaging in nature.
    • Lack of Capacity: One of the parties was incapable of agreeing to the contract due to being ill, below the age of consent, intoxicated, or otherwise mentally incompetent to make a sound judgment.
    • Mistake: If the parties do not have a thorough understanding of the terms of the contract, they may enter into it in error, thinking they were signing up for something different.
    • Coercion or Duress: If someone is pressured to enter into a contract against his will, then he is being forced to sign as a product of coercion or duress and not of his own free will.

Who Can Rescind a Contract

In order to rescind a contract, its terms must first be reviewed to determine whether there is a process in the contract to be followed when seeking rescission.

If there are no terms listed, then the parties should speak with an attorney before they proceed. This is because there may be certain state of federal laws that prohibit them from rescinding the contract. If that’s the case, then they may attempt to negotiate their way out of the contract.

Where it is permitted to rescind a contract, contracts can be mutually rescinded by all of the parties to it. In a civil lawsuit, a court can intervene and order the rescission. Some more specific examples of parties who have the power to rescind include:

  • Insurance Companies – An insurance company can rescind a customer’s policy if the correct information was not given to the company when the customer applied for the policy.
  • Homeowners – Homeowners are given three days to reconsider taking out a mortgage on a property. If they choose not to take the loan after three days, all fees paid up to that point are to be refunded to them by the bank.
  • The President – The President of the U.S. has the power to rescind a contract, and he can also direct Congress to vote to rescind monies that had already been allocated for the project.

Rescission Ab Initio, Rescission de Futuro, and Restitutio in Integrum

There are three terms in law that more clearly define the processes involved with rescission. These terms are outlined below:

Rescission ab Initio

The term rescission ab initio refers to the parties returning back to the way things were before the contract was made. (Incidentally, “ab initio” translates to “in the beginning.”) This is the same as simply using the term “rescission” to describe the situation.

Once a contract has been rescinded, to the parties it’s as if the contract never even existed in the first place. A rescission ab initio would be permitted in the event the parties entered into the contract either by mistake, or because of a misrepresentation (fraud).

Rescission de Futuro

The term rescission de future describes the position that a party to the contract is in when he has permission to cancel the contract if another of its parties breaches the contract’s terms. The “de futuro” of the term refers to the idea that a party may cancel the contract “in the future,” if another party to the contract does not act accordingly.

However, the irony here is that, if the party actually does cancel the contract, it is only a rescission if the parties can be restored to their original status quo. This makes the term a bit of a misnomer.

Restitutio in Integrum

If a party to a contract has been so severely damaged by the contract that he cannot be returned to the status quo that existed before he entered into it, the parties may lose their right to rescind. Instead, the matter would need to proceed to litigation, and the court presiding over the matter would award damages to the appropriate party.

If a contract is discovered to be the product of a fraud, a rescission can still be granted. However, the court may, and understandably so, deny a rescission if any of the following elements apply:

  • The party requesting the rescission has done something wrong (“unclean hands”).
  • A third party has benefited from the contract in some way.
  • The party requesting the rescission has delayed the request so as to damage, or prejudice, the other parties.
  • A party to the contract has already fulfilled the terms as they apply to him.

Rescind Example Involving the Rescission Act of 1946

An example of rescind can be found in a significant event that happened in U.S. history: the Rescission Act of 1946. During World War II, over 200,000 Filipinos fought to defend the U.S. against the Japanese.

The Philippines was a commonwealth of the U.S. before the war started and during the war, which meant that Filipinos were considered American citizens who were fighting alongside their fellow Americans. As such, these Filipinos were promised all of the benefits that American soldiers received for serving their country.

However, in 1946, Congress passed the Rescission Act, which effectively took all of those benefits away from the Filipinos. The bill gets its name from its infamous rider which stated, in part, that:

“…service in the Commonwealth Army of the Philippines should not be deemed to have been service in the military or naval forces of the United States.”

The rider served to rescind the executive order signed by President Roosevelt five years prior, which promises the Philippine Commonwealth Army the same benefits as those enjoyed by U.S. veterans. During the war, 66 countries served as allies to the U.S., and the Filipinos were the only ones to be denied the military benefits they had been promised – a $3 billion loss.

President Truman immediately vetoed the bill, however Congress passed an identical bill in February of that same year. This time, Truman signed the bill into law. After Sen. Daniel K. Inouye criticized the bill 62 years later, the Philippines was awarded $200 million in benefits – a far cry from the estimated $3 billion expected by Philippine Commonwealth President Sergio Osmena and Philippine General Omar Bradley.

In 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009. This bill included a rider that provided a tax-free payout of $15,000 to each of the surviving Filipino veterans who were U.S. citizens, and $9,000 to each of those veterans who were not.

Related Legal Terms and Issues

  • Coercion – The act of using force or intimidation to ensure compliance.
  • Congress – The legislative branch of the United States federal government, composed of the House of Representatives and the Senate.
  • 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.
  • Duress – Threats, intimidation, or bullying intended to force someone to do something.
  • Fraud – A false representation of fact, whether by words, conduct, or concealment, intended to deceive another.
  • Litigation – The process of taking legal action; the process of suing someone, or trying them for a criminal act.