DEFINITION of 'Rescission'

Rescission is the right of an individual involved in a contract to return to a state identical to that before he entered into the agreement, due to courts not recognizing the contract as legally binding. In many cases, rescission may be an option if there is a material error in the contract. If a contract is not legally binding, courts will most often try to return the non-liable parties affected to the state they were in before the contract was signed.

BREAKING DOWN 'Rescission'

Rescission is an important element of reversing contracts. It has multiple uses in a number of ways by different industries. How a rescission period is guaranteed by state legislation for certain consumer contracts is not usually available for contracts between businesses. Rescission, however, is federally mandated in respect to certain financial contracts between lenders and consumers.

Usage for Business Contracts

Rescission refers to returning both parties' status to a point before the contract was made, as if the business contract was never made in the first place. This remedy for business contract disputes is rarely used. Businesses tend to mediate these disputes or look for compensation or remuneration through the court system. However, a business may have an option to rescind a contract that would be harmful to its business in certain situations, such as if the contract was formed with a party who lacked the mental capacity to do so; if duress can be proven through violence or threat of violence; if fraudulent claims, misrepresentation of facts or both parties made contractual mistakes; or if one party does not fulfill its obligation, which is referred to as a breach of contract. However, rescission laws vary by state, requiring prior knowledge of the law before seeking rescission.

Insurers for life, fire, auto and health policies have a right to rescind policies based on the same criteria listed above, and often do so without court approval. Consumers can fight an insurance rescission in court.

Financial Rescission Laws

Many consumers feel they have a right to rescind a mortgage when buying a home; however, the federal rescission provision is not available for new-home purchases. The federal right of rescission is only available until midnight on the third business day after you signed the contract, received a truth in lending disclosure and received two copies of the notice explaining your right to rescind.

Consumer-Based Rescission

Many states offer rescission for various business-to-consumer contracts to protect consumer rights. States may offer periods from 24 hours to three days, 10 days or an indefinite period of time for rescission. For example, the state of California offers rescission rights to consumers on over 30 different types of contracts such as automobile sales, funeral contracts and home solicitation sales. Well-known examples of rescission availability across multiple states include timeshare sales, as they are typically a high-pressure sale that most states protect against.