What Is Rescission? Requirements, How It Works, and Example

What Is Rescission?

Rescission is when a contract is rendered null and void, and so is no longer 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 by a court that does not recognize it as legally binding.
Courts can free non-liable parties from their obligations in a contract.
Rescission can occur when there is a material error in the contract, evidence of fraud, a lack of legal or mental capacity, or other applicable circumstances.
Many states offer rescission on various business-to-consumer (B2C) contracts.

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.

Rescinding a contract 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, for certain contracts, such as those exchanged between lenders and consumers, rescission may occasionally be federally mandated.

A contract may be deemed void should the terms require one or both parties to participate in an illegal act, or if a party becomes incapable of meeting the terms.

Example of Rescission

Rescission is a common practice in the insurance industry. Insurers that provide life, fire, auto, and health coverage 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.

The right of rescission also applies to mortgage refinancing or home equity loans (but not to the first mortgage of a new home). If a borrower wants to cancel the loan, they must do so at the latest at midnight of the third day following the completion of the refinancing, including having received a mandatory Truth in Lending (TIL) disclosure from the lender and two copies of a notice advising them of their right to rescind. If the borrower rescinds, they must do so in writing before this deadline.

A right to rescission is typically provided on a no-questions-asked basis, as long as it takes place within the appropriate period of time.

Rescission Requirements

Consumer Contracts

Many states have made rescission a component of 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, including those covering 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 minds. 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 by a party who lacked the mental capacity to do so.
Duress can be proven through violence or threat of violence.
The party who formed it engaged in fraudulent claims and the misrepresentation of facts.
Both parties made contractual mistakes.
One party does not fulfill its obligation, also known as a breach of contract.

What Are the Steps to Rescind a Contract?

Different types of contracts will differ in the process and timeline to rescind, and some contracts may not have any provision for rescission at all. In many cases, to have a contract rescinded, a court must determine that there is a legally valid reason to void the contract. Since a contract is a binding agreement, it cannot simply be rescinded because parties have had a change of heart.

How Do You Rescind a Timeshare Contract?

Depending on the language in your contract, there are usually three routes to go to get rid of your timeshare. The first is to try to sell your timeshare to somebody else, although if you bought your timeshare new this is almost guaranteed to be a financial loss. The second is to try and negotiate with the timeshare company to break the contract. but this may come with costs and fees. Finally, if your contract has a "cooling-off" or rescission period and you are still in it, you can often return your contract without penalty. You may need to hire a lawyer specialized in timeshares to go over your contract terms. If all else fails, you can try to gift your timeshare to a friend or family member who is willing to pick up the ongoing maintenance costs.

How Long Does It Take to Rescind a Contract?

Certain contractual agreements have rescission periods written into them, sometimes by law. This gives consumers a certain amount of time, often a period of days or weeks, to change their mind without penalty (for instance, with new insurance policies or home equity loans). If one goes to court to try to cancel a contract, the legal process can take several months or longer depending on the circumstances and jurisdiction.

When Can You Not Rescind a Contract?

In the majority of cases, a contract is binding and cannot simply be rescinded. Courts will only nullify a contract if there is a clear and valid reason to do so. Contracts with built-in rescission periods are also unable to be canceled once that initial period has passed.

What Are Rescission Damages?

A judge may rule that a contract was unfair or misrepresented certain facts but choose not to nullify it. Instead, the judge may award monetary damages that must be paid by the offending party to the injured party.