Rescission is a judicial remedy in contract law that terminates a contract and returns the parties to their statuses prior to their entering into an agreement together. It may be effected legally through the actions of one of the parties or equitably through the decree of a judge. There are several grounds for rescission, though the two most common are mistake and misrepresentation.
It is said that the parties return to status quo ante, which is a Latin phrase for “the way things were before,” upon rescission of an agreement. The plaintiff will be returned any amount he paid in consideration of the agreement and the defendant will not be required to fulfill any duty imposed by the agreement. The facts of the case determine whether or not the contract may be rescinded as a fair remedy for the parties. The reason that made the contract voidable must also have occurred or been true prior to the parties entering into the contract.
Rescission can be effected through either legal or equitable means. Legal rescission is when the plaintiff effects the cancellation of the contract by giving the other party notice of the intent to rescind and tendering back any consideration given. Equitable rescission is the more common use of the term and refers to a judicial decree that voids the contract and returns the parties to status quo ante.
The two main grounds for rescinding a contract are mistake and misrepresentation. While there are both unilateral and mutual mistakes in contract law, mutual mistake — when both parties have the same material misconception as to the rights and responsibilities entailed in the contract — is generally the only type of mistake that will lead to rescission. If either party makes a material misrepresentation, however, and the other party assents to the terms of the agreement upon actual reliance of that misrepresentation, then the contract may be rescinded as well. This is true whether the misrepresentation was made innocently or with fraudulent intent.
The non-rescinding party has a few defenses available to him to prevent the rescinding of the contract. If the plaintiff purposefully delayed effecting rescission, causing harm or prejudice to the defendant, then the defendant may assert the defense of laches — kind of like a statute of limitations — to prevent the rescission. Likewise, the "doctrine of unclean hands" may be asserted as a defense if the plaintiff is guilty of any misconduct in regard to the transaction. The most common, however, is the election of remedies defense that the defendant may assert in the event the plaintiff already sued for damages; the rationale behind this defense is that by suing for damages, the plaintiff affirmed the contract and may not seek rescission after that point.