Contracts/Remedies.  Rescission is a contractual remedy that involves the avoidance or setting aside of a contract and returning the parties to their precontract positions.

Rescission extinguishes the contract, terminates further liability, and restores the parties to their former positions by requiring them to return whatever consideration they have received.  The relief given in rescission cases—restitution and in some cases consequential damages—puts the rescinding party in the status quo ante, returning him to his economic position before he entered

There are several grounds based on which a party may seek unilateral rescission of the contract.  For instance, a contract is to unilateral rescission by a party whose consent to the contract was given by mistake.  The mistake could be one of fact or of law.

A party may also seek to rescind a contract where his consent was obtained through duress, fraud, or undue influence by the party against whom rescission is sought.

A contract may also be rescinded for illegality and public interest.

The damages available in cases of rescission depend in part on the reasons for which the contract was rescinded.  The damages available in actions for rescission based upon the fault of the nonrescinding party (such as cases of fraud or misrepresentation) and those not involving fault (such as cases of illegality or mistake), are different.  Generally, courts will not award consequential damages when rescission is sought based upon mistake.  Such damages may be awarded, however, where consent was obtained by fraud or duress.

Finally, since rescission is considered an equitable remedy, it does not carry with a right to trial by jury.

REFERENCE DESK

Dean v. Garland, 779 A.2d 911 (D.C. 2011):

Where a party to an executed contract discovers a material misrepresentation made in the execution of the contract, that party may elect one of two mutually exclusive remedies. He may either affirm the contract and sue for damages, or repudiate the contract and recover that with which he or she has parted.  One cannot rescind for breach of contract and at the same time recover damages for the breach.  The purpose of the doctrine of election of remedies is not to prevent recourse to any remedy, but to prevent double redress for a single wrong.  But if the defrauded party treats the property as his own and affirms the contract through continued performance, that party is precluded from seeking rescission.

In addition, inherent in the remedy of rescission is the return of the parties to their pre-contract positions. Rescission is an equitable remedy, and a party seeking rescission must restore the other party to that party’s position at the time the contract was made.  This rule applies even when the party against whom rescission is sought has committed fraud.

Marriott Financial Services, Inc. v. Capitol Funds, Inc., 217 S.E. 2d 511 (N.C. 1975):

It is a well-recognized principle that equity will grant relief from the consequences of mistake, some unintentional omission, or error, arising from ignorance, surprise, imposition or misplaced confidence.  It is not every mistake, however, which will justify the equitable remedy of rescission.  The rule is well stated as follows:

The formation of a binding contract may be affected by a mistake. Thus, a contract may be avoided on the ground of mutual mistake of fact where the mistake is common to both parties and by reason of it each has done what neither intended. Furthermore, a defense may be asserted where there is a mutual mistake of the parties as to the subject matter, the price, or the terms, going to show the want of a consensus ad idem. Generally speaking, however, in order *136 to affect the binding force of a contract, the mistake must be of an existing or past fact which is material; it must be as to a fact which enters into and forms the basis of the contract, or in other words, it must be of the essence of the agreement, the since qua non, or, as is sometimes said, the efficient cause of the agreement, and must be such that it animates and controls the conduct of the parties.

A mutual mistake of such a character as to affect the validity of an executory agreement ordinarily affects the validity of an executed agreement.

In order for the remedy of rescission to be operable because of mistake of fact, there must be mutual mistake of fact. A unilateral mistake, unaccompanied by fraud, imposition, undue influence, or like oppressive circumstances, is not sufficient to avoid a contract or conveyance. The following pertinent statement aptly summarizes the requirement of mutuality:

. . . It is said that ordinarily a mistake, in order to furnish ground for equitable relief, must be mutual; and as a general rule relief will be denied where the party against whom it is sought Was ignorant that the other party was acting under a mistake and the former’s conduct in no way contributed thereto, and a fortiori this is true where the mistake is due to the negligence of the complainant. . . .

Sharabianlou v. Karp, 181 Cal.App.4th 1133 (2010):

The damages available in cases of rescission depend in part on the reasons for which the contract was rescinded.  In this case, the trial court rescinded the Agreement based on mutual mistake of fact, because neither party knew the full extent of the environmental hazard at the property.  (See Civ.Code, § 1689, subd. (b)(1) [contract may be rescinded “[i]f the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake….”].) Rescission is an appropriate remedy where, as here, the contracting parties are mutually mistaken as to the condition of real property. (E.g., Williams v. Puccinelli (1965) 236 Cal.App.2d 512, 515–516, 46 Cal.Rptr. 285 [lease of premises for operation of restaurant and bar properly rescinded after discovery that structure lacked sufficient load-bearing capacity].) As our Supreme Court pointed out in Runyan, however, the damages available in actions for rescission based upon the fault of the nonrescinding party (such as cases of fraudor misrepresentation) and those not involving fault (such as cases of illegality or mistake) are different. (Runyan, supra, 2 Cal.3d at p. 317, 85 Cal.Rptr. 138, 466 P.2d 682.) Runyan observed that courts have not awarded consequential damages when rescission is sought based upon mistake. (Ibid.) “ ‘Rescission for mistake … is a remedy by means of which a party may be relieved of the burdens and may procure restitutionary redress respecting a contract which was defective at its inception because consent was not freely or knowingly given.’ ” (Id. at pp. 317–318, fn. 16, 85 Cal.Rptr. 138, 466 P.2d 682, quoting Recommendation and Study Relating to Rescission of Contracts (1960) 3 Cal. Law Revision Com. Rep. (1961) p. D–15, fn. 1.) Runyan therefore indicates that the damages available to parties in cases in which rescission is based upon mistake are more limited than those available in cases in which rescission is based upon fault.

In cases involving the rescission of agreements to purchase real property, California courts have held that the seller must refund all payments received in connection with the sale. (See Kent v. Clark (1942) 20 Cal.2d 779, 784, 128 P.2d 868.) If the buyer has taken possession of the property, the buyer must restore possession to the seller. (Ibid.) Such recovery of the consideration exchanged is part of restitution. (See 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 937, p. 1031; Millar v. James (1967) 254 Cal.App.2d 530, 531, 532, 62 Cal.Rptr. 335.) As consequential damages, rescinding buyers or sellers may recover such items as real estate commissions paid in connection with the sale (Tampico v. Wood (1963) 222 Cal.App.2d 211, 214–215, 34 Cal.Rptr. 885), escrow expenses (Curran v. Heslop (1953) 115 Cal.App.2d 476, 483, 252 P.2d 378), interest on specific sums of money paid to the other party (Smith v. Rickards (1957) 149 Cal.App.2d 648, 654, 308 P.2d 758), and attorney fees in appropriate cases. (Hastings v. Matlock (1985) 171 Cal.App.3d 826, 841, 217 Cal.Rptr. 856.)

California Civil Code § 1689

(a) A contract may be rescinded if all the parties thereto consent.

(b) A party to a contract may rescind the contract in the following cases:

(1) If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party.

(2) If the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds.

(3) If the consideration for the obligation of the rescinding party becomes entirely void from any cause.

(4) If the consideration for the obligation of the rescinding party, before it is rendered to him, fails in a material respect from any cause.

(5) If the contract is unlawful for causes which do not appear in its terms or conditions, and the parties are not equally at fault.

(6) If the public interest will be prejudiced by permitting the contract to stand.

(7) Under the circumstances provided for in Sections 39, 1533, 1566, 1785, 1789, 1930 and 2314 of this code, Section 2470 of the Corporations Code, Sections 331, 338, 359, 447, 1904 and 2030 of the Insurance Code or any other statute providing for rescission.

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