What is rescission?

A rescission is the cancellation of a contract. A rescinded contract is terminated from the beginning – as though the contract never existed – so a rescission requires that all parties be brought back to the position they were in before entering into the contract. This means any benefit received as part of the contract, such as money, must be returned. Rescission can occur as a result of innocent or fraudulent representation, mutual mistake, lack of legal capacity, an impossibility to perform a contract not contemplated by the parties, or duress and undue influence. For example, assume you agreed to sell and the buyer agreed to buy two acres of land that you thought you owned. Later, it turns out that you did not have title to the property. Rescission would be the proper remedy.

Many people encounter rescissions when dealing with insurance companies, as insurers have the right to rescind customers’ insurance policies in certain circumstances. For example, an insurance company can cancel your policy if it discovers that you intentionally listed false information on your application for insurance. 

You may also have come across rescissions if you have ever applied for a Home Equity Line of Credit (HELOC). Banks are required by law under the Truth in Lending Act to provide customers applying for a HELOC or to refinance an existing loan with a new lender a three day “cooling-off” period after the loan is signed, which allows customers to read over the loan documents and change their minds. Customers can rescind the contract no questions asked during these three days, and the lender must give up any claim it has to their property and return all fees paid within 20 days of the rescission. However, not all mortgage related loans have the right of rescission. For instance, you cannot rescind a mortgage to purchase a home, a mortgage on a second home or investment property, or a loan to refinance an existing loan with the same lender.

There are several other situations in which a contract can be rescinded. You can rescind a contract by agreement. If all parties to a contract agree to cancel it, they can do so. You can also rescind a contract because of a breach by another party, but the breach must be so substantial that it defeats the purpose of the contract.