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Contract Rescission

Contract Rescission

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Contracts that are procured through fraud often allow the innocent party to rescind the contract if the parties can be placed in the position that they would have been in prior to the contracting. Also, if a party breaches a contract and is found to have substantially defeated the purpose of the contract, rescission may be available with a remedy based in restitution. In Strand Bldg. Corp. v. Russell & Saxe, Inc. (1963), a rescission action was commenced wherein the defendants moved to dismiss the complaint for insufficiency. The court held that the right to rescind a contract usually depends on the circumstances of the particular case. Rescission will be permitted for fraud in the making of the contract, and for a breach substantially defeating the contract’s purpose. In cases of breaches that are found at the root of a contract and unless damages can be ascertained with reasonable certainty, rescission will be a matter of right with restitution instead of compensation.

In the event of a substantial breach of the contract, the innocent party has the option to seek a rescission of the contract and sue for the consideration paid, to affirm the contract and sue for damages, or to seek rescission in equity and return to the status quo. In the event that restoration of the parties to the status quo is not possible, an equitable action for rescission of the contract will not be available. In Tarleton Bldg. Corp. v. Spider Staging Sales Co. (1966), the owners brought an action on a scaffolding equipment construction contract. The court held that the owners were not entitled to rescission of the scaffolding equipment construction contract where the installation of the facilities were integrated into and designed for a particular building and did not lend itself to substantial restoration of the status quo of the breaching contractor. It is common in most construction cases that rescission is a difficult remedy once performance of the contract has begun.

Rescission as a remedy may only be granted in particular instances, such as if: 1) the party seeking rescission acts promptly to cancel the agreement after the discovery of the reasons for rescission; 2) it is possible to restore the parties to their original position; and 3) the injured party cannot be reasonably compensated through a monetary damages award. In Fink v. Friedman (1974), an action was brought for the rescission of a building contract against a builder. The court held that a rescission of a contract is permitted where a breach is so substantial as to defeat the purpose of the entire transaction, and a party seeking rescission of a contract must act reasonably to cancel the agreement after discovery of the defect. It must be reasonably feasible to place both parties back in positions they occupied before the transaction took place, and the injury resulting from a deficiency must not be compensable by money damages. If the parties voluntarily enter into a termination agreement that rescinds the contract, the agreement will operate as an accord and satisfaction of any claims the parties may have, unless the claim is expressly or impliedly found in the agreement.

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