When Can A Contract Be Undone (or Rescinded)?
What is Rescission?
When a contract dispute arises, parties often look for ways to rescind the contract. A rescission is not merely a cancellation of a contract. Rather, a rescission will put the parties back to the day the contract was signed and the contract itself will be treated as if it never existed. This determination by a court requires the parties to the contract to return all consideration under the contract that had been received up to the point of the dispute. There are several different grounds for rescission of a contract in California.
Grounds for Rescission
In California, Civil Code§1689 governs when a contract may be subject to rescission:
Parties to a contract can agree to rescind an original contract between them without intervention by the Court. This can occur regardless of the express terms of the agreement. However, parties must complete the rescission by returning all consideration already given under the original contract.
A party may rescind the contract on the basis of a “unilateral mistake”. This means that one party was mistaken about a material fact under the contract that the other party knew or suspected of and the party used that mistake to their advantage. However, if the mistaken party did not do their reasonable diligence in the contract, a unilateral mistake is insufficient for rescission.
If both parties are mutually mistaken about a material fact, then a contract can also be rescinded by either party.
Fraud or undue influence
When a party is “induced” into a contract by a misrepresentation of the other party and relies on that misrepresentation, the defrauded party can rescind the contract.
Failure of consideration
A party to a contract may also rescind a contract based on a failure of the other party to provide “consideration” for their agreement. A refusal or failure of a party to perform his part of the contract, or a clear intention to violate it, gives the other party the right to rescind. For example, a car buyer that fails to deliver the purchase price of a car to a seller after driving off with the car has failed to provide the “consideration” for their agreement. Thus, buyer may rescind the contract and take back the car.
Unlawful contract and public interest
Finally, a contract may be rescinded if it is against the law or if the public interest will be prejudiced by permitting the contract to stand.
Contract disputes can be complex, and each situation is different. It is important for any consumer or small business owner to have a basic knowledge of their rights and remedies under contract law. For more complex disputes, you should find an experienced contract litigator in your area.