The Equitable Remedy of Rescission

Remedies (types of relief sought by injured parties) can be either legal or equitable in nature. The recovery of money damages (monetary damages) is a legal remedy. An equitable remedy is designed to provide more flexible relief to aggrieved parties. The goal of equitable remedies is fairness. Injunctive relief where a court orders a party to do or refrain from doing something is a common example of an equitable remedy. In contract law, a common equitable remedy is rescission. The word “rescission” is derived from the word “rescind” which means to cancel. It seeks to restore the parties to a contract to the positions they held before they first entered into the contract. Rescission nullifies or “undoes” the contract which relieves all parties of their duties and obligations under the contract. Its effect can be analogized to restoring your computer to its factory settings. In California, there can be no partial rescission. The entire contract must be rescinded. A contract can be rescinded for a variety of reasons, including fraud, mutual mistake of fact or law, undue influence and duress. If the parties do not agree that a contract should be rescinded, the party seeking rescission will need to file a legal action to seek resolution.

steps-1229559-300x96There are numerous grounds for rescission. The following are some of the most common grounds upon which a party may rescind a contract:

Mistake of Fact or Law: If both parties entered into the contract based on a mistake of fact, the contract may be rescinded. The fact must be material to the contract. A fact only collateral to the contract will not suffice. Sometimes, parties may be mutually mistaken about a material fact. For example, if the contract is for the sale of a book that contains the original signature of the author, it would be a mutual mistake of fact if the signature was forged and both the buyer and seller believed it to be real. A unilateral mistake of fact may serve as the basis for rescission where the effect of the mistake is such that enforcement of the contract would be unconscionable. Similarly, a mutual mistake of law is grounds for rescission. A mistake of law exists where all parties believe they know the law as it pertains to their contract but are wrong (i.e. both parties enter into a gambling contract believing gambling is legal in their state). A unilateral mistake of law is not a basis for rescission except where one party misunderstands the law and the other party knowing this fails to clarify the misunderstanding.

Fraud: This is the most common ground for rescission. Fraud encompasses any action or inaction that is intended to deceive which results in injury to another party who justifiably relies on it. Different types of fraud include: 1) Intentional misrepresentation; 2) Negligent misrepresentation; 3) Failure to disclose a material fact; and 4) Intentional concealment of a material fact.

Undue Influence or Duress: Undue influence and duress are grounds for rescission designed to protect parties who were coerced into entering into a contract that they otherwise would not have entered into. Courts look at several factors to determine whether the rescinding party’s consent was procured through duress or undue influence, including: 1) adequacy of the consideration (was there a fair exchange of value); 2) whether the rescinding party acted with free will when it entered into the contract; 3) whether the contract was negotiated at arm’s length; and 4) whether the parties to the contract were in a confidential relationship.

Of course, if the parties mutually consent to rescind a contract, there is no need for legal action and any grounds for the rescission become irrelevant.

A party seeking rescission of a contract should promptly inform the other party of its intention. If the parties agree, both sides must return any consideration received from the other party returning the parties to their pre-contract positions. This requirement of restoring/returning to each other what was received fulfills the purpose of rescission. If there is no agreement to rescind, the rescinding party’s notice and offer to restore consideration is sufficient to serve as a valid basis for a legal claim. In most cases, the other party will not agree forcing the matter to litigation.

Whether it is you or another party that seeks contract rescission, it is advisable to seek competent legal counsel. In the absence of mutual assent to rescind the contract, gathering sufficient evidence to bring a valid rescission claim requires careful and thorough investigation. Bringing a rescission claim without sufficient evidence can have potentially dangerous consequences including being forced to pay the other party’s costs and legal fees. Consult an experienced San Diego business attorney to better assess your case. For a free initial consultation, contact the Law Offices of Donald R Oder at (888) 900-9002.

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