Termination of a contract is actually accomplished through a legal process known as rescission. When each party to a contract agrees that the other parties need not perform their duties under the contract, the process is known as mutual rescission. An effective rescission must meet a set of legal requirements; parties planning to rescind a contract should seek legal counsel.
Rescission does not terminate the contract; rather, rescission discharges the party's duties under contract. Legally, parties who have rescinded a contract have already performed their complete duties under the contract. When parties agree to rescind, that agreement to rescind establishes a new and equally binding contract. However, if a third party beneficiary (a third party who has gained some rights as a result of the contract) will find his contract rights impacted as the result of rescission, courts may not allow it.
A unilateral contract is a contract in which one party (the "offeror") offers some form of payment for a service, and the other party (the "offeree") is free to accept that offer by performing the service. The contract is only completed when the act is performed. Mutual rescission of a unilateral contract that has not yet been paid for by the offerer or performed by the offeree can be accomplished relatively easily, by mutual agreement. However, if the offeree has already performed his service under the contract and the parties then wish to rescind, the offeror must offer some new incentive to the offeree, or the offeree must show that he intends the performance as a gift.
A bilateral contract is one in which each party makes a promise to the other to perform some action. Courts will enforce a mutual rescission agreement to terminate a bilateral contract; however, the analysis becomes more complicated if one party has already rendered some portion of performance before the parties attempt to rescind. In such cases, the performing party will often wish some sort of compensation for the performance rendered. Courts will generally not find any right to compensation unless that right to compensation has been immortalised in the rescission agreement itself.
Many legal contracts deal with the possibility of rescission in the contract itself; the contract spells out the requirements and formalities needed for a valid rescission. A standard rescission contract will need to be in written form. However, the law does recognise oral rescission contracts, if the parties can prove the existence of such a contract. Certain rescission contracts, however, must be written down. All contracts (including rescission contracts) are subject to the statute of frauds, which requires written contracts for prenuptial agreements, agreements for sale of real property, suretyship contracts and others. In areas subject to the statute of frauds, only a few courts have been willing to enforce oral rescission.
Rescission of a contract should be distinguished from a novation agreement. Novation occurs when all parties to a contract agree to substitute a new party for one or more parties to the contract. Unlike rescission, novation does not terminate or discharge the original contract, only the substituted parties' duties under that contract. The original contract remains in effect and the new party takes on all contractual duties of the party for which he acts as the substitute.
- "Cases and Materials on Contracts, Sixth Edition"; Farnsworth, E. Allan and William F. Young, Jr. and Carol Sanger and Neil B. Cohen and Richard Brooks; Foundation Press; 2002.
- "Restatement of Contracts (Second), Section 283: Rescission"; American Law Institute; 1981.
- KinseyLaw: Rescission of Contracts (California)