10/28/2017 CaliforniaRescissionOfContractsLaw&ProcedureAttorney(Lawyer)

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EugeneE.Kinsey,AttorneyatLaw
Phone:5625968177
Fax:5625960298
EMail:KinseyE@ix.netcom.com
Web:www.Kinseylaw.com

323MainSt.,2ndFloor,SealBeach,CA90740

RESCISSIONOFCONTRACTS
INCALIFORNIA
(NEW:ChooseFullServiceOrRepresentYourself)

RescissionOfContractsGeneralConcepts

Rescissionisaremedythatdisaffirmsthecontract(CaCivil1688etseq.).Theremedyassumesthe
WhenYouNeedAn
contractwasproperlyformed,buteffectivelyextinguishesthecontractabinitioasthoughitnever ExperiencedFamily
cameintoexistenceanditstermsceasetobeenforceable.[CaCivil1688] LawAttorney

Afindingthatthereneverwasameetingofthemindsontheessentialtermsi.e.,thattheparties
lackedcontractualintentmeansthatnocontractwasformed.Ifmoneyhaschangedhands,orone
partyhastakenpossession,theremaybeanequitableremedy.Butthereisnoremedyofrescission,"
[s]inceacontractcannotberescindedifithasneverbeenformed."[HedgingConcepts,Inc.v.First
AllianceMortgageCo.(1996)41Cal.App.4th1410,14171418,49Cal.Rptr.2d191,196]

Acontractcanberescindedbytheparties'mutualagreementorunilaterallybyapartyuponproper
grounds..Inturn,an"actionforrescission"isactuallyasuittoenforcetherescissionbyseeking
appropriaterelief(i.e.,areturntothestatusquo)baseduponrescission.

Groundsforrescissionmayalsosupportothercontractremediesbut,becauserescissionis
predicatedonadisaffirmanceofthecontract,itisinconsistentwithadamagessuitforbreachof
contractorfraud,areformationsuit,oraspecificperformancesuit,allofwhicheffectivelyaffirmthe
contract.Nonetheless,absentawaiver,plaintiffmaypleadandpursuealternativeremedies
(assumingtheyarebasedonconsistentfacts)andisnotfinallyputtoanelectionofremediesuntil KinseyLawOffices
thecasehasproceededthroughtrialandallevidencehasbeenpresented.[SeeCaCivil1692] EugeneE.Kinsey
SealBeach,CA
GroundsForRescission
(562)5968177
MutualConsentOfTheParties:Acontractmayalwaysberescindeduponthemutualconsentof
thepartiesthereto.Butrescissionatonlyoneparty'sbehestrequirespropernoticeonstatutory
groundsand,ifnecessarytoadjusttheequities,acourtactiontoenforcetherescission.[CaCivil Since1976
1689,1691,1692] Negotiation
Settlement
Theparties'consentneednotbeinwriting,evenifthecontracttoberescindedwasrequiredbythe
statuteoffraudstobeinwriting.Aconsensualrescissionmayoccurbytheparties'oralagreement Trial
oritcanbeimpliedfromtheirunequivocalconductthatisinconsistentwithcontinuedexistenceof
thecontract.[Martinv.Butter(1949)93Cal.App.2d562,565566,209P.2d636,638Bushv.
Vernon(1955)135Cal.App.2d33,3637,286P.2d903,906seeUngerv.Isaacs(1954)123 EMailUs
Cal.App.2d533,535,266P.2d869,870saleagreementimpliedlyrescindedbysubsequent
executionofinconsistentexchangeagreement]

UnilateralRescissionOnTheBasisOfMistake,Fraud,orDuress:Acontractissubjecttounilateralrescissionbyaparty
whoseconsenttothecontract(ortheconsentofanotherpartyjointlycontractingwiththerescindingparty)wasgivenby
mistakeorobtainedthroughduress,fraudorundueinfluenceexercisedbyorwiththeconnivanceofthepartyagainstwhom
rescissionissoughtoranyotherpartytothecontractjointlyinterestedwiththepartyagainstwhomrescissionissought.[Ca
Civil1689(b)(1)]

Thewrongfulactsofthirdpersonswhoarenotpartiestothecontractmaysupportanactionforrescissionifthepartyagainst
whomtherescissionissoughthadknowledgeofthewrongdoingbeforepartingwithconsiderationforthecontract.Underthe
court'sbroadequitablepower,rescissionmayalsolieagainstacontractingpartywhowasentirelyinnocentofanywrongdoing
butsimplya"conduit"throughwhomathirdparty'sfraudwasperpetrated.

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ConsentMistakenlyGiven:Rescissionmaybegrantedinfavorofapartywhoseconsenttothecontractwasgivenundera
material"mistakeoffact"or"mistakeoflaw."[CaCivil1576]

MistakeOfFact:Apartygivesconsentundera"mistakeoffact"when,notbecauseofhisorher"neglectofa
legalduty",heorshe(i)isignorantoforhasforgottenapastorpresentfactmaterialtothecontract,or(ii)
believesinthepresentexistenceofsomethingmaterialtothecontract,whichdoesnotexist,orinthepast
existenceofsomethingwhichneverexisted.[CaCivil1577]

Ineffect,thistypeofmistakerelatestoanerroneousbeliefaboutanobjectiveexistingornonexistingfactmaterial
tothecontract.

UnilateralMistakeOfFact:Rescissionforaunilateralmistakeoffactisauthorizedwhere"the
effectofthemistakeissuchthatenforcementofthecontractwouldbeunconscionable."Insuch
cases,itneednotbeshownthattheopposing(nonrescinding)partycausedorevenknewofthe
mistake.

Indeterminingwhetherrescissioniswarrantedforaunilateralmistakeoffact,substantiveratherthan
proceduralunconscionabilityisoftenthedeterminativefactor,becausetheoppressionandsurprise
ordinarilyresultsfromthemistakenotfrominequalityinbargainingpower.

LimitationNoRescissionForPartyBearingTheRiskOfTheMistake:Rescissionis
unavailabletoacontractingpartywhobearstheriskofthemistakeatissue.Apartybearstheriskofa
mistakewhen(i)theriskisallocatedtothepartybythecontractor(ii)thepartyisawarewhenthe
contractismadethatheorshehasonlylimitedknowledgeregardingfactstowhichthemistake
relates,buttreatsthatlimitedknowledgeassufficientor(iii)itisreasonableunderthecircumstances
toallocatetherisktotheparty.[Donovanv.RRLCorp.,supra,26Cal.4that283,109Cal.Rptr.2dat
825Rest.2dContracts154]

Rescissionwhereunilateralmistakeoffactunknowntononrescindingparty:Rescissiononthe
basisofaunilateralmistakeoffactisnotbarredbythefacttheotherpartywasunawareofthe
mistake.However,wherethenonrescindingpartyhadnoreasontoknowofanddidnotcausethe
otherparty'sunilateralmistakeoffact,thefollowingmustbeestablishedtoobtainrescission:

themistakeconcernsabasicassumptionuponwhichthecontractwasmade

themistakehasamaterialeffectontheagreedexchangeofperformancesunderthecontractthatis
adversetotherescindingparty

therescindingpartydoesnotbeartheriskofthemistakeand

theeffectofthemistakeissuchthatenforcementofthecontractwouldbeunconscionable.

MistakeOfLaw:Amistakeoflawoccurswhenapartytothecontractknowsthefactsastheyactuallyarebut
hasamistakenbeliefastothelegalconsequencesofthosefacts.

Amistakeoflawexistsonlywhen(i)allpartiesthinktheyknowandunderstandthelawbutallaremistakenin
thesameway,or(ii)onesidemisunderstandsthelawatthetimeofcontractingandtheothersideknowsthe
correctlawbutdoesnotrectifytheotherparty'smisunderstanding.[CaCivil1578]

Thefactthatoneofthepartiessubjectivelymisunderstoodhisorhercontractualdutiesorothercontractualterms,
orthatbothpartieshaddifferingsubjectiveunderstandingsofthecontractfromitsinception,doesnotwarrant
rescissionbasedonmistakeoflaw.

Unlikecaseswhereaparty's"neglectofalegalduty"precludesrescissionorreformationbasedonamistakeof
fact,"freedomfromnegligence"isnotaprerequisitetorescissionbasedonamistakeoflaw.ThisisbecauseCa
Civil1578makesnoreferenceto"negligence."[Harrisv.Rudin,Richman&Appel,supra,95Cal.App.4that
1341,116Cal.Rptr.2dat559]

DuressOrUndueInfluence:Courtsconsideravarietyoffactorsindeterminingwhethertherescindingparty'sconsentwas
procuredthroughduressorundueinfluence,including:

theadequacyoftheconsiderationinvolved
whethertherescindingpartyactedwithafreemind
whetherthecontractwasnegotiatedatarm'slengthand
whetherthepartiestothecontractwereinaconfidentialrelationship.

Fraud:Thetypeof"fraud"sufficienttosupportaunilateralrescissionmaybeeitheran"actualfraud"(misrepresentationwith
intenttodeceive)ora"constructivefraud"(misleadingconductwithoutfraudulentintenttotheprejudiceoftheotherparty).A

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presumptionofconstructivefraudmayarisewherethereisinadequateconsiderationfortherescindingparty'sperformanceand
especiallywherethepartiesareinaconfidentialrelationship.[CaCivil1572(defining"actualfraud")&1573(defining
"constructivefraud")]

Evenaninnocentmisrepresentation,madeingoodfaithandwithareasonablebeliefinitstruth,mayprovideabasisfor
rescissionifitrelatedtoamaterialfactuponwhichtherescindingpartyreliedinconsentingtothecontract.Althoughneithera
specificallyenumeratedgroundforrescissionnortheequivalentof"fraud,"innocentmisrepresentationsupportsrescissionasa
typeof"mistake".

Whereasproofofdamagesisanessentialprerequisitetoafraudcauseofactionseekingdamages,adefraudedpartyhasthe
righttorescindacontractevenwithoutashowingofpecuniarydamages.Therulederivesfromthebasicprinciplethata
contractingpartyhasarighttowhatitcontractedfor,andsohastherighttorescindwhereheobtain[ed]something
substantiallydifferentfromthatwhichhe[is]ledtoexpect.

Sincethegoalofrescissionistorestorethepartiestotheprecontractstatusquo,courtsordinarilywillnotgrantreliefbased
uponrescissionwheretherescindingpartyisunabletorestoresubstantiallyalloftheconsiderationheorshereceivedunder
thecontracti.e.,unlessthecontractisdivisiblebecausesupportedbyseverableconsideration,itcannotbe"partially
rescinded."However,thisrulemayberelaxedincasesoffraud.Here,eventhoughthecontractisnotseverableandthe
innocentpartycannotrestoretheidenticalconsideration,courtsmaygrantapartialrescissionthatnonethelessproducesan
equitableresult.

FailureOfConsideration:Aunilateralrescissioncanbebasedonafailureofconsiderationinthreesituations(CaCivil
1689(b)(2),(3)&(4)):

Wheretheconsiderationfortherescindingparty'sobligationfails,inwholeorinpart,throughthefaultoftheotherparty
tothecontract(CaCivil1689(b)(2))
Wheretheconsiderationfortherescindingparty'sobligationbecomesentirelyvoidfromanycause(CaCivil1689(b)
(3))or
Wheretheconsiderationfortherescindingparty'sobligationfailsinamaterialrespectfromanycausebeforeitis
rendered(CaCivil1689(b)(4)).

Illegality:Acontractissubjecttounilateralrescissionifitisunlawful"forcauseswhichdonotappearinitstermsand
conditions"and"thepartiesarenotequallyatfault."[CaCivil1689(b)(5)]

PublicInterest:Apartymayalsorescindacontractwhereitsenforcementwouldbeprejudicialtothepublicinterest.[Ca
Civil1689(b)(6)"(i)fthepublicinterestwillbeprejudicedbypermittingthecontracttostand"]

ParticularStatutoryGrounds:CaCivil1689incorporatesbyreferenceseveralotherstatutesprovidingabasisfor
rescissioninparticularcontractualrelationshipsandalsoincludesa"catchall"provisionrecognizingaparty'srighttorescind
under"anyotherstatuteprovidingforrescission"(seeCaCivil1689(b)(7)).

NoticeRequirementForUnilateralRescission

Apartyintendingtoeffectaunilateralrescissionmustgivenoticetotheotherpartypromptlyupondiscoveringthefacts
entitlinghimorhertorescind(providedtheaggrievedpartyis"freefromduress,menace,undueinfluenceordisability"andis
awareoftherighttorescindatthattime).[CaCivil1691(a)]Thenoticeitselfeffectstheunilateralrescission.Thereafter,the
rescindingpartyisentitledtobringanactiontoobtainreliefbasedupontherescission(or,viewedanotherway,anactionto
enforcetherescission).Thoughtechnicallyaprerequisitetofilingsuitbaseduponrescission,ifthenoticehasnototherwise
beengiven,plaintiff'sserviceofthecomplaintseekingrescission"shallbedeemedtobe"therequisitenotice.[CaCivil
1691]

Despitethestatutoryrequirementthatnoticeofrescissionbegiven"promptly"(above),delayinprovidingtimelynoticewill
amounttoawaiveroftherighttoreliefbaseduponrescissiononlyifthedelayhassubstantiallyprejudicedtheotherparty.[Ca
Civil1693]Ineffect,thisamountstoalachesdefense:"[R]easonablediligenceorpromptnessonthepartoftheparty
seekingrescissionis[not]...aprerequisitefortheremedy.The...requirementisessentiallyoneoffreedomfromlaches.Its
applicationdependsonwhether,undertheparticularfacts,thedelayhasinanywayprejudicedthedefendant.Nowaiverwill
befoundwherethedelayisjustifiedunderthefactse.g.,pursuitofsettlementnegotiationsafterdiscoveryofoneparty's
fraud,orrelianceontheotherparty'spromisetomaketheaggrievedparty"whole.

Apartymaywaivetherighttorescindbywordsoractionsindicatinganaffirmanceofthecontractafterlearningofthefacts
entitlinghimorhertorescind.Awaivercommonlyoccursbyacceptingthebenefitsofthecontractafterknowledgeofthe
factswarrantingrescission.Apartywishingtorescind"cannotplayfastandloose.Hecannotconducthimselfsoastoderive
allpossiblebenefitfromthetransactionandthenclaimtherighttorescind...Waiverofarighttorescindwillbepresumed
againstapartywho,havingfullknowledgeofthecircumstanceswhichwouldwarranthiminrescinding,neverthelessaccepts
andretainsbenefitsaccruingtohimunderthecontract."[Neetv.Holmes(1944)25Cal.2d447,457458,154P.2d854,859
seeSaretCookv.Gilbert,Kelly,Crowley&Jennett(1999)74Cal.App.4th1211,1226,88Cal.Rptr.2d732,743]

However,thereisnosuchwaiveriftheactsindicatingaffirmanceofthecontractwereinducedbytheotherparty'sfraud.
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Continuedacceptanceofthebenefitsofthecontractaftergivingnoticeofrescissiondoesnotwaivetherighttoreliefbased
uponrescissioniftheotherpartyhasrejectedthenoticeofrescission.Insuchevent,therescindingpartymaycontinueto
acceptthebenefitsuntiltheactionforrescissionaryreliefisconcluded.

Nordoesapartywaivetherighttorescindbybringinganactionbaseduponrescissionordamagesforbreachofcontractin
thealternative.Thoughtheremediesareinconsistent(rescissiondisaffirmsthecontract,whileadamagessuitaffirmsit),the
aggrievedpartyisnotputtoafinalelectionofremediesuntilafteratrialuponpresentationoftheevidence.[CaCivil1692]
Ontheotherhand,apartymaybedeemedtohavewaiveditsrightofrescissionbybringinganactionexclusivelyfordamages
orspecificperformance(i.e.,waiverbyconductunequivocallyaffirmingthecontract).[Pricev.McConnell(1960)184
Cal.App.2d660,665666,7Cal.Rptr.695,698]

Anoticeofrescissionremainsrevocableupuntilthetimethattherescinding(innocent)partyreceivesrestitutionofthe
benefits(consideration)partedwith.

RestorationOfConsideration

Inadditiontogivingpromptnoticeofrescission,thepartyseekingrescissionaryreliefmust"promptly,"upondiscoveringthe
factsentitlinghimorhertorescind,restoretotheotherparty"everythingofvalue"receivedunderthecontractorofferto
restorethebenefitsreceived"uponconditionthattheotherpartydolikewise"...unlesstheotherparty"isunableorpositively
refusestodoso."[CaCivil1691(b)]Thisrestorationofbenefitsaccomplishestheultimatepurposeofrescissioni.e.,to
returnthepartiestotheirprecontractstatusquopositions.Thus,inarealpropertypurchaseandsaletransaction,arescission
normallyrequiresthebuyertoreturntheproperty(title)tothesellerandthesellertoreturnthefundsreceivedfromthebuyer.

Aformaloffertorestorethecontractualbenefitsreceivedisnotrequired.Plaintiff'sserviceofthecomplaintseeking
rescissionaryrelief"shallbedeemed"tobetherequisiteoffer.[CaCivil1691]

Aswiththenoticeofrescission,adelayinrestoringthebenefitsreceivedunderthecontractorintenderingsuchrestoration
doesnotwaivetherighttoreliefbaseduponrescissionunlessthedelaysubstantiallyprejudicestheotherparty(again,the
issueisessentiallyoneoflachesHowever,thecourtmayconditionitsjudgmentawardingreliefonplaintiff'stenderof
restoration.[CaCivil1693]

ReliefBasedUponRescission

Inanactionbaseduponrescission,courtsmayorderwhateverreliefisnecessarytoadjusttheequitiesbetweenthepartiesand
ensurerestorationtotheprecontractstatusquo.[CaCivil1692]Thegoalistoreachanequitableresultbyreturningthe
partiestothepositiontheywereinbeforethecontractwasenteredintoandavoidingunjustenrichment.Therefore,such
additionalreliefmayoperateinfavorofeitherorbothparties.

Forexample,thecourtmayorderarestitutionofbenefitsconferredbytherescindingpartyandalsoawardhimorher
consequentialdamagesincurredasaresultofenteringintothecontract(solongastheawarddoesnotincludeadoubleor
inconsistentrecovery).Thecourtmayalsoawardcompensationorotherequitablerelieftothenonrescindingparty(e.g.,an
offsetforthevalueoftherescindingparty'suseoftheproperty).[CaCivil1692]

Theauthorityto"adjusttheequities"doesnotempowerthecourttoprovideeitherpartywithgreaterreliefthanheorshe
wouldhaverealizedhadthecontractbeenaffirmed.Acourtcannot,inthenameof"adjustingtheequities,"rewritetheterms
oftheparties'contract.Thus,e.g.,reliefbaseduponrescissionpursuanttoCaCivil1692cannotincludeanawardof
compensationthatwassubjecttoacontractualcontingencywhichneveroccurred.

Consequentialdamagesintherescindingparty'sfavormayincludealloutofpocketexpensesincurredinrelianceonthe
contractincluding,e.g.,escrowfees,titlecharges,thevalue(orcost)ofanyimprovementsmadetotheproperty,payments
madebyarescindingbuyeronamortgageimposedbytheseller,andattorneyfees(ifauthorizedbytherescindedcontract).

Arescindingbuyerisentitledtoprejudgmentinterestoncontractpaymentsmadetotheseller(netofliquidatedoffsets
awardedtotheseller),runningfromthedateofnoticeoftherescission.TheinterestisawardableunderCaCivil3287(a),
providingforprejudgmentinterestasamatterofrightondamagesthatarecertainorcapableofascertainment.

CaCivil1692expresslystatesthatinanactiontoenforcearescission,theaggrievedparty"shallbeawardedcomplete
relief"anditalsostatesthata"claimfordamagesisnotinconsistentwithaclaimforreliefbaseduponrescission."[CaCivil
1692]Thus,wheretherescissionisbaseduponfraud,andprovidedplaintiff(rescindingparty)satisfiestheapplicablestatutory
standards(CaCivil3294),thecourtapparentlyhasdiscretiontoawardtherescindingpartypunitivedamages.[SeeMahonv.
Berg(1968)267Cal.App.2d588,589590,73Cal.Rptr.356,357358]

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