The 3 Must-Have Conditions to Rescind a Contract in New York
Image: David Singleton
Sometimes, 20/20 hindsight isn't such a bad thing; in the world of contracts, the law provides that there are some instances where you can essentially go back in time and get a do-over.
In legalese, this is called "rescission," which means that the court undoes the contract, and puts everybody back in the same (or substantially the same) position they were in before the agreement was made.
Why You May Want to Rescind a Contract
There are a number of reasons that a party who wants out of an agreement might want to pursue this remedy, such as where the other side deliberately concealed vital information that, had you known about it at the time of the contract, you would never have signed the agreement in the first instance.
Absent These 3 Conditions, a Rescission Claim is Doomed to Fail
There are 3 critical conditions that must be fulfilled before you can seek to rescind a contract - at least under New York law - however. Two of these conditions are part of the inherent fabric of the claim; the third, though important, is an external factor.
Permit me to explain.
New York's courts have summarized the first two requirements as follows:
"[T]he equitable remedy [of rescission] is to be invoked only when there is lacking complete and adequate remedy at law and where the status quo may be substantially restored" (Rudman v Cowles Communications, 30 NY2d 1, 13 ).
In other words, a rescission claim will be dead on arrival unless:
(1) money damages can't make you whole; and,
(2) rescinding the contract will actually be effective in putting each party back into roughly the same position they were in before the agreement.
Naturally, these two factors go to the heart of the claim.
There is a third factor that although less-known, remains a critical component needed to repudiate a contract under New York law:
Simply put, you can't dilly-dally, or hedge, once you learn about the fraud perpetrated by the other party to the agreement that induced you to sign on the dotted line; if you hesitate, you will waive your right to undo the agreement, and the door to rescission will close.
To that end, New York State's Court of Appeals (the highest court in New York), articulated this rule as follows:
"[A] plaintiff waive[s] its right to seek rescission of the ... agreement by failing to promptly seek rescission after accepting the benefits of that agreement (see New York Tel. Co. v Jamestown Tel. Corp., 282 NY 365, 372-373 ; R & A Food Servs. v Halmar Equities, 278 AD2d 398 ; Capstone Enters. of Port Chester v County of Westchester, 262 AD2d 343 )."
Why Plaintiffs Often Decline to Seek Rescission
In truth, it is hard to know with any degree of certainty why relatively few plaintiffs seek to retroactively rescind their contracts. Based upon anecdotal and experiential evidence, however, I suspect that one reason that many, if not most, parties involved in a breach of contract situation don't seek rescission is that many plaintiffs may find it very rough going to prove this third prong, namely, demonstrating that they moved promptly to repudiate the agreement after learning of the fraud.