What Is Rescission?

Rescission is the voiding of a contract not recognized as legally binding. The courts can free non-liable parties from their agreed obligations and, when possible, will effectively seek to restore them to the position they were in before the contract was signed.

Key Takeaways

  • Rescission is the voiding of a contract that is not recognized as legally binding.
  • The courts can free non-liable parties from their agreed obligations and, when possible, effectively restore them to the position they were in before the contract was signed.
  • Rescission may be an option if there is proof that there was a material error in the contract, or evidence of fraud, mutual errors, lack of legal or mental capacity, duress and undue influence, or one party not fulfilling its obligation.
  • Many states offer rescission for various business-to-consumer (B2C) contracts to protect consumer rights.

How Rescission Works

Rescission involves canceling a contract and treating it as though it never existed by ensuring that all its effects are eliminated. To return all parties to their original state, things that were exchanged, such as money, must be returned.

Rescission may be an option if there is proof that there was a material error in the contract. Evidence of fraud, mutual errors, lack of legal or mental capacity, duress and undue influence, or one party not fulfilling its obligation can also lead contracts to be voided.

Laws addressing rescission vary from state to state. However, certain contracts, such as those exchanged between lenders and consumers, are occasionally federally mandated.

Example of Rescission

Rescission is a common practice in the insurance industry. Companies that provide life, fire, auto and health cover have a right to rescind policies without court approval, if, for example, they can prove that an application was submitted with false information. Consumers who want to fight this can then take the decision to a court.

Rescission Requirements

Consumer Contracts

Many states offer rescission for various business-to-consumer (B2C) 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. The state of California, for example, 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. Transactions for a property that has several owners offer extra protection because decisions to sign-up are typically made under lots of pressure.

Other contracts can be harder to break. Under the Truth in Lending Act (TILA), banks are required to give customers applying to refinance an existing loan with a new lender a three-day period to change their mind. The clock starts ticking once the contract is signed and the Truth in Lending disclosure and two copies of a notice explaining rights to rescind are received.

In contrast, those buying a new home with a mortgage have no right to cancel the loan once all the relevant documents are signed.

Business Contracts

Rescission of business contracts is much rarer. Companies tend to mediate disputes or look for compensation or remuneration through the court system because most of their contracts do not include clauses stating they can be rescinded.

That said, businesses may have an option to rescind a contract in certain situations, including if it 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.
  • If one party does not fulfill its obligation, also known as a breach of contract.