Chapter 3-2 Suit for Rescission
| Jurisdiction | United States |
3-2 Suit for Rescission
3-2:1 Overview
A suit for rescission can be either a defense to a breach of contract claim or a standalone lawsuit. In both instances, the party seeking rescission looks to the equity powers of the court to set aside a contract. A party seeking rescission will be successful if he can prove that grounds for rescission exist, that he has offered to reestablish the status quo, and that he has no adequate remedy at law.
3-2:1.1 Related Causes of Action
Breach of Contract, Quantum Meruit, Assumpsit, Unjust Enrichment, Common Law Fraud, Statutory Fraud, Fraud by Non-disclosure, DTPA Action
3-2:2 Elements
3-2:2.1 Equitable Rescission
(1) Grounds for rescission exist:
(1)(a) Fraud
• Fraud is a ground for rescission.105
• For the elements of a fraud cause of action, See Chapter 1: Fraud: Common Law Fraud; Chapter 1: Fraud: Statutory Fraud; Chapter 1: Fraud: Fraud by Non-disclosure.
(1)(b) Constructive Fraud
• "[C]onstructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interest."106
• A duty to deal fairly often arises because of some type of special relationship.107
• Constructive fraud exists when there is an entire failure of consideration.108
(1)(c) Mistake
• Mistake may qualify as a ground for rescission, depending on the type of mistake and other circumstances.
• Mutual mistake is a ground for rescission when the mistake:
• is a mistake of fact;109• Unilateral mistake is a ground for rescission when:
• is held mutually by the parties;110
• materially affects the agreed-upon exchange;111 and
• is not the result of the party seeking rescission's negligence.112
• Either, there is a unilateral mistake of fact by the party seeking rescission and inequitable conduct by the opposing party;113 or
• The mistake is of such magnitude that enforcement of the contract would be unconscionable;
• The mistake relates to a material element of the contract;
• The mistake occurred regardless of the exercise of ordinary care; and
• The relief does not result in prejudice to the other party beyond the loss of its bargain.114• Absent misrepresentation about the contents of a contract, a party's mistaken belief about a contract based upon that party's failure to read the contract is not an actionable mistake.115
(1)(d) Duress
• Duress exists when:
• The opposing party threatens to do something he has no legal right to do;
• The threat was of such a character as to destroy the free will of the party against whom it was issued and thereby overcome his will and cause his to do what he would not otherwise have done;
• The threatened injury was imminent; and
• The party against whom the threat was issued had no immediate means of protection.116
(1) (e) Incapacity
• A party has the capacity to contract when he can appreciate "the effect of what he [is] doing and [understands] the nature and consequences of his acts and the business he [is] transacting."117
• Common forms of incapacity are: minority,118 intoxication,119 and insanity/lack of mental capacity.120
(2) The party seeking rescission offers to reestablish the status quo.
• The party seeking rescission usually must offer to reestablish the status quo.121
• The party seeking rescission may not be required to reestablish the status quo if such reestablishment would result in an inequitable result.122
• The inability of the party seeking rescission to restore the status quo is a factor to consider in whether the court will grant rescission.123
(3) The party seeking rescission has no adequate remedy at law.
• The party seeking rescission must establish that it has no adequate remedy at law.124
3-2:2.2 Rescission by Consent125
(1) The parties mutually agree to the rescission
• Such an agreement may be express or implied by the circumstances.126
• Contracts that are required to be written may only be rescinded by written agreement to rescind.127
• Contracts that are not required to be written may be rescinded orally.128
• Only contracts for the sale of goods may expressly prohibit oral rescission.129
• There are several ways in which the parties may agree to rescind:
• The parties may mutually and expressly agree to rescind the contract;130
• One party may acquiesce to the other's repudiation of the contract;131 or
• The parties may form a second contract which is complete in itself while being substantially inconsistent with the first contract.132
(2) An agreement to rescind a contract must be supported by consideration.
• The mutual promise between the parties to release the other party/parties from the contract is sufficient consideration to create an enforceable agreement to rescind a contract.133
3-2:2.3 Rescission by Option134
Generally:
• The parties to a contract may prospectively grant one or more parties the option to rescind.135
An effective rescission accomplishes:
• The setting aside of the contract;
• The return of all consideration; and
• The return of the parties to the status quo.136
Special Damages:
• In addition to the return of consideration, the party seeking rescission is entitled to special damages.137
Interest:
• The party seeking rescission may be entitled to prejudgment interest.138
• The party seeking rescission is entitled to interest as a matter of right if he can show that the measure of damages is fixed by conditions existing at the time the claim arose.139
• Although the measure of damages must be fixed, the amount of damages does not need to be fixed.140
Exemplary Damages:
• A party seeking rescission may recover exemplary damages.141 Such damages are available if the defendant acts:
• Maliciously;
• Fraudulently; or
• With gross negligence.142
3-2:3 Damages and Remedies
3-2:3.1 Rescission
Rescission sets aside the contract, returns any consideration, and returns the parties to the status quo.
3-2:3.2 Special Damages
In addition to the return of consideration, the party seeking rescission is entitled...
To continue reading
Request your trial