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How to Rescind a Business Contract

By Jayne Thompson - Updated February 14, 2019
Rescinding a Business Contract

Can you get out of a business contact once you've signed it? Is the other party able to wriggle out of their commitment? These questions are asked surprisingly often, especially when the business relationship is just not going according to plan. Generally, you can't simply escape a contract unless the contract says you can. Sometimes, you may be able to walk away on the ground that the other person is not doing what he promised to do or if something said before the contract was signed turns out not to be true.

What Does Rescinding a Contract Mean?

The word rescind and associated words like r_escission_ are technical terms, so it's worth clarifying what they mean. Rescission occurs when someone cancels the contract entirely for a valid legal reason. Once a contract is rescinded, it ceases to exist. Neither party can force the other to perform their side of the bargain, and you must return any goods or payments you've already received under the contract. When rescission is successful, it's as if the contract had never been established in the first place.

In What Circumstances Can a Contract Be Rescinded?

A contract is a legally binding commitment. You cannot rescind it simply because you have changed your mind. Generally, there are five valid reasons for which you can rescind a contract:

  • Mutual consent.
  • Issues with the way the contract was made.
  • Unilateral mistake.
  • One person refuses to perform his obligations, also known as failed consideration.
  • The contract goes against the public interest.

Let's look at each in turn.

Rescission by Mutual Consent

If all parties feel that rescinding the contract is in their best interests, they can cancel it by mutual consent. All parties must sign a Mutual Rescission of Contract agreement; you can have your attorney prepare this for you or find a suitable rescission of contract template online.

There are two key elements to a rescission agreement: First, you must have a clear statement that the parties intend to rescind the original contract by mutual consent as of the date of signing. Second, you should indicate that none of the parties have any additional rights or duties under the contract and are relieved of any rights or liabilities that might have accrued. In other words, neither party can sue the other for matters relating to the contract from this point on.

Sign and date the rescission of contract form, and the original contract should be void as of the date of signing. The signatures should not need witnesses and notarizing, but check the laws in your state.

Rescission Due to Contract Formation Issues

One way to get out of a business contract unilaterally is if there are issues with the way the contract was formed. People are assumed to sign contracts of their own free will. If that turns out not to be the case, and a party was pressured into signing the contract, then she can usually walk away.

Common formation defects include:

Fraud: If one party falsely represented an aspect of the contract, that could amount to fraud. For example, if you hired a web developer who turned out to have no relevant experience and was fraudulently using someone else's portfolio, you have grounds for rescinding the contract.

Coercion: You cannot force someone to sign a contract under threat of harm or blackmail. For instance, if the web developer was threatening to release a virus onto your network unless you hired his firm, that would be an example of coercion or undue influence.

Lack of capacity: Certain people lack capacity to negotiate business contracts. This includes minors under the age of 18, intoxicated persons and those who are incapable of making their own decisions, for example, persons with dementia.

Rescission Due to Mistake

A party may rescind a contract if he was mistaken about a material term of the contract. For example, in an order for 10,000 units of screws, you assumed you were getting Phillips-type screws when the supplier thought you wanted standard screws. This type of mistake is quite common in contracts that involve quantities, prices, dates and the description of goods or services.

Rescinding the contract in this scenario means the contract is completely cancelled, and you can start again with a fresh order for the correct product. However, you can only rescind if the other party knows or should have known about the mistake. In other words, he must be taking advantage of the error in some way.

If you made a mistake because you did not communicate effectively or you failed to do your own due diligence, then you're probably out of luck.

Rescission Due to Failure of Consideration

Special rules exist when one party to the contract says or does something to indicate that he will not be performing his end of the bargain. This is known as anticipatory repudiation or anticipatory breach. Anticipatory breach relieves you, the innocent party, from all of your obligations under the contract. This makes sense if you think about it: Why should you have to spend time and money on your commitments when the other person is giving nothing in return?

Take care when rescinding a contract on the basis of anticipatory breach. The anticipatory breach must be material for you to be able to rescind the entire contract. A judge would look very hard to see if you make an attempt to negotiate to fulfill the major terms of the contract. For example, a business owner might commit anticipatory breach by refusing to make payment to a freelancer who performed all the conditions of his contract. The freelancer probably could rescind the contract in this scenario, since payment is a material term of the contract.

Compare this with the situation where the freelancer did not finish some marketing activities in a timely manner, such that a soft launch date is in jeopardy. In this scenario, the business owner may not be entitled to rescind the contract immediately since incomplete or late marketing activities may not be material enough to the entire contract to allow rescission. This is definitely an area where you would need some legal advice.

Rescission in the Public Interest

Finally, a contract can be rescinded if it's against the law or not in the public interest. For example, a court might rule that a contract that silences a whistle blower goes against the public interest and can therefore be rescinded. Generally, you will need a judge to rule on this type of case.

When Can You Not Rescind a Contract?

Rescission is not an easy remedy and there are some traps to watch out for. If the other party doesn't like the idea of you walking away from the contract, then you could be violating the contract unless you get a judge to rule that you have the right to rescind the contract. The judge may refuse your request to rescind the contract if:

  • The other side is willing to perform his contractual obligations in full.
  • A third party may be harmed by you rescinding the contract.
  • You were just as much at fault as the other person; you did not come to the court with "clean hands."

Ultimately, the only sure-fire way to rescind a contract is if the other party agrees to it. A better option may be to renegotiate the contract. This allows you to get the contract terms that work better for you, while still retaining your right to sue the other side if anything goes wrong.

About the Author

Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous legal blogs including Quittance, Upcounsel and Medical Negligence Experts. Find her at www.whiterosecopywriting.com.

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