Rescission (Contract) – Definition

Cite this article as:"Rescission (Contract) – Definition," in The Business Professor, updated September 10, 2019, last accessed October 20, 2020,


Rescission Definition

Rescission simply refers to the cancellation or termination or a contract by an individual. In contract law, rescission is the right held by individuals which allows them to cancel or repeal the terms of a contract, hence, returning it to the state maintained before the agreement was made. Parties in a contract can resort to rescission if some error occured in the terms of the contract. Rescission can also occur if there is an alteration of terms or misrepresentation influenced by the other party. When a contract is rescinded, it has been terminated from the time it was initially made, hence, the contract ceases to exist.

A Little More on What is Rescission

Rescission can also be regarded as an act of unwinding a contract, parties in a contract who feel they can no longer continue with the contract due to errors or misrepresentation can rescind. It is an act that is legally recognized and used by many individuals, companies or agents to reverse a contract. When a contract is rescinded, its terms are cancelled or repealed by a party, this act is the termination of contract right from its initiation.

Rescission can occur between businesses, in consumer contracts and financial contracts between a creditor and a borrower. There are certain legislations, both at the state and federal levels that guide rescission.

Rescission of Business Contracts

A business that perceives that some terms in a business contract can harm the business can opt for rescission. Although, in many occasions businesses do not rescind contracts, rather they seek legal approach to settle disputes and compensation for losses that might result from a business contract. Before rescission can occur in business contracts, there must be some evidence showing that a party has the capacity to fulfil their obligations in the contract, there is a threat or violence, misrepresentation of facts, contrucatal errors, breach of contract, among others.

Rescission cannot occur in insurance policies, an insurer who has offered life, auto, health, fire and some other insurance policies have no right to rescind the contract. There are rescission laws which vary from state to state and region to region. In insurance policies for instance, policyholders have the right to file a lawsuit against a policy provider that rescinds.

Financial Rescission Laws

Financial contract is another type of contract that is heavily regulated by the state and issues like rescission are closely monitored. In a financial contract, oftentimes, consumers are of the opinion that they can terminate a contract as they please. In mortgage contracts for instance, contracts bordering on new-home purchases cannot be rescinded. Any consumer who attempts this will be unsuccessful.

In the United States, there is a federal right of decision that guides financial rescission. There are laws that stipulate when a rescission can be admissible in a financial contract. In mortgage, the federal right of rescission is available only in the midnight of the third business day after the contract has been signed.

Consumer-Based Rescission

As part of consumer protection right, a consumer is allowed to rescind a contract in many states. This is called a consumer-based rescission and can occur in business-to-consumer contracts. Some states have an indefinite period of rescission which means that a consumer can rescind a contract regardless of how long the contract has been in existence. Some states however have a rescission period ranging from 1-3 days or 10 days in certain situations. Also, many states have various provisions for consumer rescission rights which covers many types of contracts. It is important to add that the availability of consumer rescission right differ from state to state.

References for “Rescission” › Insights › Laws & Regulations

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