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What Is Rescission?

Rescission is the cancellation of a contract so that it becomes null and void. It could be a unilateral decision – a party cancels a contract because the other party misrepresented facts that made them enter the contract. It could be a mutual decision – parties involved in the contract realize they made a mistake and agree to free themselves of the contract obligations.

Deeper Definition 

Rescission is a remedy provided by law when the underlying basis for entering a contract is fundamentally questionable. It involves canceling a contract, making it not legally binding, and attempting to return contractual parties to the way things were before they entered into a contract.

The remedy of rescission means that the contract is made null and void. Several factors may prompt a party to want to cancel a contract. They include misrepresentation, mistake, fraud, and duress. For instance, if a party to a contract deliberately concealed a piece of information, which had you known before you signed, you would not have signed, that is enough reason to want out of the contract.

Just because a party has valid reasons to exercise the right of rescission does not mean they must do it. However, when rescission right is exercised it brings about the following:

  • Reversal of whatever the parties involved have done as a result of the contract
  • Contractual parties return to the position they would have been if the contract had not been entered.
  • The contract is being treated as though it never took place.

In the insurance industry, rescission is a common occurrence. An insurance company may decide to exercise the right of rescission, even without getting court approval, if they find that a customer provided false information when submitting their application.

For a contract to be nullified by a court, a party must prove there is an underlying material error. Else most contracts are legally binding and cannot be rescinded.

Some contracts have a specific time frame within which the right can be exercised. For instance, a borrower, after taking a loan, may decide to reconsider the decision. The law allows a borrower to exercise the right of rescission within three days of obtaining the loan. Afterward, the contract cannot be rescinded.

Rescission Example

John takes out an auto insurance policy with State Farm. He fails to declare that he has modified his vehicle by adding after-market alloys and an after-market exhaust. State Farm realize that this has occurred and therefore they cancel the insurance contract with John.

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