What is Contract Rescission?
Contract rescission is the legal term used to cancel a contract and terminate the rights and obligations between the contracting parties. Contract rescission makes an agreement void ab initio meaning it totally negates any legal effect (as opposed to voidable, which means that the contract may still have some legal force). Both parties must consent to rescission. That means there must be a quid pro quo, or something of value exchanged by both parties in order for the cancellation of the contract to have the same force as a void agreement . Any number of events can lead you to rescind a contract including: A disharmonious contract is so in violation of the terms of the agreement, it causes an imbalance of the contractual rights and obligations. An example would be an exchange of cash for services to perform in the future, yet no payment was ever made. The other party has engaged in duress, coercion, fraud, etc. If the injured party has no adequate remedy at law, they are entitled to an equitable remedy. Contract rescission is one type of equitable remedy. When both parties voluntarily enter into an agreement, they are bound by the consideration of the contract unless they’ve entered into a rescission.
Top Reasons to Rescind a Contract
A party may rescind a contract when it appears that, for some reason, the contract cannot be fulfilled according to its provisions. In such an instance, each contracting party may have a remedy against another, and thus both or all parties may be held liable for any damages suffered. Potential contractual duties include the submission of documents, but also filing of zoning or other regulations. In order to judge whether a contract is binding, one must look beyond the four corners of the document to the actions of the parties. As such, parties should remain ever aware of the actions of their counterparts, and provide adequate evidence of due diligence. Contracts entered into by parties can be rescinded upon mutual mistake of fact, fraud, duress or mutual mistake of value. Contracts may be rescinded when there is a misrepresentation of fact to the party to be charged, but not in cases where both parties were mistaken with respect to the same fact. Common law contracts may also be voided on the grounds of fraud, which is when a false statement of material fact is alleged to have been made knowingly by one party to induce the other to enter into the agreement. A contract may also be voided on the grounds of duress or undue influence, which exists when a party entering into the contract is induced by coercion to sign. Mutual mistake of fact occurs where two parties are mistaken as to the facts of an agreement, which if known would have resulted in neither party entering into the agreement. However, a mutual mistake is not grounds for voiding a contract if the contract has a complete merger clause stating that the complete agreement is contained within the contract, if the contract is clear and unambiguous, if only one party is mistaken as to the facts, or the mistake is due to the negligent representations of a third party who is not a party to the contract.
Contract Rescission: The Legal Process
Rescinding a contract requires compliance with certain requirements, such as filing a lawsuit against the other party or parties. As mentioned previously under "the legal remedy of recission to cure the statute of frauds," in California the statute of frauds requires a rescission of contract action to be filed in writing, verified by affidavit, and must be filed within six months after the date on which the contract was rescinded. Rescission is essentially a challenge to the validity of the contract and consists of demanding a return of everything the party to be rescinded received under the contract.
A rescission can also be used as a defense to a breach of contract lawsuit, which is an equitable defense to a show that although the contract may have appeared valid and enforceable at its inception, it was later rendered invalid due to the mutual mistake of the parties.
The rescission process starts with a demand letter to the opposing party or parties notifying them of a material misrepresentation or mistake and/or fraudulent activity that occurred in the entering of the contract. A request for restitution may be included in the demand letter, however, restitution is automatic with a rescission remedy. Restitution requires a partial rescission of contract in order to restore a party to the position it would have been if the contract had not been entered into. The request for restitution may, however, be denied equitable considerations, such as if the party seeking restitution would be unjustly enriched or if another is innocent third party would be harmed.
Once the contract is rescinded a suit can commence, the notice should contain "the language required by [CA Civil Code section] 1691, including a statement (1) that the party believes he/she/it has a defense to a breach of contract action; (2) that the party intends to rescind the contract at a later time; (3) that the party intends to arrive at mutually agreeable terms for the contract; (4) that any action to enforce the contract shall be filed with the court within 45 days of the date the Notice is served; and (5) that the party will file a rescission action if the contract is not canceled by mutual agreement."
In response to a rescission, the opposing party can either deny the demand for rescission and/or ask that the rescission be compel, either of which will lead to the filing of a rescission of contract action.
Why You Need a Rescission of Contract Template
Having a template for a rescission of contract is useful simply because it saves time. Having an existing template will allow someone to draft the necessary document in minutes. For those not used to drafting legal documents, creating something as simple as a rescission of contract can be extremely difficult. Having to ensure that nothing is left out in terms of legal requirements, and that its formatted properly can take a very long time if you don’t have a clear guide to follow.
A rescission of contract will enable you to cancel agreements under a variety of circumstances, including a unilateral right to terminate, the consent of both parties, or even simply an agreement between both parties to cancel the contract after significant problems have arisen. A template will usually cater to all three situations, allowing you to quickly draft a cancellation letter regardless of the circumstances.
The importance of a template for a cancellation really comes into play if the dispute ends up going to court. When a legal proceeding is initiated, a proof of service is almost always required. A proper template will enable you to easily prove that the person who has been served actually received the documents. The proof of service is an extremely important part of any lawsuit, and having a template makes sure that you have everything in place in the extremely likely event that you do end up in court.
A proper legal template will also contain a signature line for witnesses and a notary public. In the situation where a judge might challenge whether the other person was actually a witness, having a specific line on the document will help your case. When it is dated, signed by a witness, and notarized, it will virtually ensure that a judge sees its validity in court.
A legal template will also include a section to provide specific information. Elements that you will need to include in your rescission of contract will be the name of the contract holder, the date that the cancellation is made, which party is revoking the contract, and what they are agreeing to. More details will ensure that a judge sees the nature of the document, and recognizes that the cancellation is valid.
Because every legal document needs specific details to be considered legally binding, having a form that contains all of these elements will ensure that your rescission of contract template is ideal. The best templates will even allow you to customize the document itself, providing you with all of the advantages mentioned above and a uniquely tailored document that is ideal for your situation.
What Makes a Good Rescission of Contract Template?
A rescission of contract template should include a number of elements that clearly and meaningfully describe the parties to the agreement, the contract that is being rescinded and the reasons for the rescission.
Identifying the Parties
The parties to the rescinded contract are the first thing that should be addressed in a standard rescission of contract template. Parties should be identified by full name and any other relevant information that may be useful in the future. If the contract is between two individuals, their addresses should be included. If the contract is between an individual and a business or some other entity, the name of the company, its place of business and perhaps the contact information of the legal department should be included.
Identifying the Contract
Similar to the parties, the contract that the parties are seeking to rescind should be clearly stated in the template. This may include identifying the contract by name or date or another unique identifier . Regardless, if ever a question comes up as to which contract is being rescinded, the rescission of contract template should contain enough language to unambiguously identify the contract.
The Reason for Rescission
The reason for the rescission should be provided in full in the rescission of contract template. Too often it is tempting to simply document that the parties no longer wish to be bound by the terms of an agreement, but providing the specific grounds on which the agreement is being rescinded could save time and money later if there is ever a disagreement about it.
Restitution
Finally, the template should specify the restitution that may be required by one of the parties in order for the rescission of contract to be perfectly executed. This may include demanding the return of funds paid, goods delivered or services performed, but should as a general rule be provided in fairly broad terms to include a change in circumstances that may not come to mind at the time of signing.
Customizing a Rescission of Contract Template
Customising a template to reflect the specific circumstances of a given situation is a simple matter. Individuals or businesses should take care to ensure that the agreement is revised to address details that are specific to the transaction. As with any other Agreement, the Rescission of Contract must be specific, clear and accurate. The following tips are recommended for customising a Rescission Agreement: 1. Always consult with qualified legal counsel for the inclusion of additional terms or exemptions. 2. Review all details with the other party to verify that the amendment is agreed upon by all parties involved. 3. If a single party is responsible for the breach of contract, they may choose to indemnify the other party for losses resulting from the breach. 4. Incorporate a clause relevant to dispute resolution, either specifying a specific method or committee to oversee the situation. 5. Consider a time limit for the amendment and point out the effective date clearly. 6. Cite the primary Agreement by number or date to make it easily identifiable. 7. Finally, have both parties indicate their signatures and the date, but do not sign until all parties to the Agreement has signed.
Difficulties in Rescission of Contracts
Parties seeking to rescind a contract may face several challenges, including issues related to unjust enrichment or equitable estoppel. Unjust enrichment occurs when one party is unjustly enriched at the expense of another in circumstances where it would be contrary to justice to determine how that money should be allocated without the agreement of both parties. This may be invoked when one party has received something of value in exchange for payment from another party, but later decides that they no longer want to keep the item for a particular reason. This could come into play when the parties wish to terminate the contract without the return of consideration in certain circumstances.
Equitable estoppel may also be an issue in rescission cases, which may occur when one party, upon hearing or reading a representation, takes some action which increases their reliance upon that representation and the other party documented such an increase. Equitable estoppel can arise when a party relied on the representations of the other party to the contract and once those actions are made, the misrepresented party cannot thereafter be allowed to deny the validity of those assertions. In order for equitable estoppel to apply, it must be shown (i) that the party misrepresented another to the third party, (ii) the misrepresented party knew or should have known that the misrepresentation was made, (iii) the third party materially relied upon the misrepresentation by taking some action that altered their status, (iv) the representation must have been voluntary, and (v) the third party would suffer loss or injury if the misrepresenting party was allowed to deny the truth of the matter misrepresented .
A party might also seek judicial estoppel if the other party had obtained a favorable outcome in an earlier litigation with respect to the issue involved in the rescission. However, to invoke this doctrine, the party opposing the rescission would have had to gain an advantage by having knowingly changed his or her position with respect to the legal certainty that is asserted. This would imply that the party acted inequitably by having achieved the benefit in their previous situation.
Other potential challenges to rescission might include waiver or abandonment, which are aspects related to contract law instead of tort law. Abandonment, in this case, would be concerning the unilateral abandonment of the contract by the rescinding party. Waiver would be the affirmative choice to abandon or give up the right to rescind. In other words, although a contract may appear valid upon its execution, the parties have the right to rescind at any time before performance. However, a party may lose his or her right to rescind due to acts that would be inferred as an intent to waive the rescission right.
These issues should be addressed during the process of drafting and executing the Rescission of Contract template to ensure that the agreement meets the needs of the parties while also protecting their rights. Some parties may prefer to avoid rescission for various reasons and would be better served by carefully navigating the rescission process or addressing the potential risks of a contract.