Legal Definition of Contract Rescission

Written by joseph nicholson
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Legal Definition of Contract Rescission
Recission of a contract generally returns the parties to the status quo ante. (contract 20309 image by pablo from Fotolia.com)

Recission is the legal term for renouncing a contract. Normally, a contract is a legally binding agreement that is enforceable in court. A contract can be rescinded by operation of law or by mutual assent of the parties. It has the legal effect of erasing the contract as if it never happened.

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Effect

When a contract is rescinded, the normal effect is to return the parties to the status quo ante -- their condition before entering into the contract. This includes returning any money or other consideration that had been exchanged, compensating parties for partial performance and returning the relative rights to the parties against each other to their state prior to the contract. This means that a suit for breach cannot later be brought for failure to perform under a contract that has been effectively been rescinded.

Rescission by Law

A contract can be rescinded by a court as an equitable remedy if the contract is void or voidable due to a defect in its formation. This can occur if one of the parties to the contract was a minor at the time the contract was formed, was mentally incapacitated, or was intoxicated. A court may also elect to rescind a contract if there was fraud, duress, undue influence at the making of the contract, or if its terms are unconscionable.

Mutual Rescission

Contracts can be rescinded by mutual assent of all the parties. Rescission is an all or nothing deal -- partial rescission is not rescission, but modification of a contract. Rescission can be written or oral, but must be evidenced by definite mutual assent. Contract rescission must be accompanied by an exchange of valuable consideration, though generally the mutual release of obligations under the contract is sufficient consideration to effectuate the process.

Repudiation

Breach of a contract is not the same as rescission. It is not an offer to rescind, but can be treated as such by another party to the contract. Repudiation occurs when, prior to some performance under the contract becoming due, the obligated party states a definite and unequivocal intent not to perform. Ordinarily, repudiation constitutes a breach of the contract, but the other party can treat it as an offer to mutually rescind the entire contract.

Health Care

For many Americans, the term "rescission" is inextricably linked to health care insurance. When a person is diagnosed with an expensive or difficult to treat condition, some insurance companies have been shown to rescind, or cancel, their health insurance contract unilaterally. Because the contract terms allow for such rescission, the insured person is deemed to have given assent to the rescission. The ability of health care insurers to unilaterally rescind an insurance contract was substantially modified by the 2010 health care reform law signed by President Obama.

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