By Mary J. Drury

Rescission is an equitable remedy which abrogates a contract and places the parties in the position they occupied prior to executing the contract.[1]  There can be no partial rescission.  The contract is either valid or void in toto.[2]  Generally, a contract may be rescinded due to mutual mistake, unilateral mistake, fraud, lack of capacity to contract, duress, or undue influence.  However, generally an amicable agreement is only reached in the case of mutual mistake and the other bases often require court intervention.

Mutual Mistake

A mutual mistake occurs when both parties at the time of contracting share a misconception about a vital fact upon which they based their bargain.[3] In such instances, the parties can mutually agree to rescind the contract.

A recent example of mutual mistake leading to a rescission springs to mind:  a financier advertised that he purchases property with “subject to” financing.  A homeowner gave the financier a grant, bargain, sale deed and a power of attorney to sell his property.  No agreement concerning the financier’s obligation to pay the current mortgages was made.  The financier held the deed and power of attorney; they were not recorded.  The belief of the parties was that the financier would “flip” the house and profit from the spread.  The financier leased the house to a tenant.  The mortgages went unpaid.  An appraisal showed the value of the property as equal to the mortgages.  The homeowner consulted an attorney concerning the situation and whether he could sell the house to the tenant himself.

In the example described above, the parties agreed to rescind the transaction:  a rescission and mutual release agreement was drafted and the financier returned the deed and power of attorney, unrecorded.

Unilateral Mistake

In order to demonstrate unilateral mistake as a ground for rescission, a party must show that the unilateral mistake was known to the other contracting party and was encouraged or fostered by that party.[4]  Aside from the foregoing, “a mistake justifying rescission must be a misapprehension as to a fact which is material and basic to the agreement.”[5]

The existence of unilateral mistakes on the part of buyers may be more prevalent in the context of a real estate purchase agreements because sellers have more knowledge regarding the property.  An example of a unilateral mistake occurs when the seller leads the buyer to believe that the property has no environmental hazards, but is aware that such hazards existed and/or were not properly remedied.

Fraud

A contract may be rescinded and the purchase price recovered where it is alleged and proven that there was fraud.[6]  To establish that a contract should be rescinded due to fraud, a party must generally demonstrate “Silence or concealment as to a material fact, known to one party and unknown to the other . . . if there is a duty, arising from the circumstances, imposed on the former, to speak and disclose the truth; in the absence of any duty of disclosure, however, it does not.  Whether there is any such duty depends on the circumstances of the particular case.”[7]

A buyer may be more likely to allege a mistake due to fraud where a seller has made misrepresentations regarding the condition of the property, especially when the buyer cannot verify the veracity of the representations through independent sources.

Duress

An injured party may rescind a contract where the contract is entered into under duress.[8]  “Duress, which includes whatever destroys one’s free agency and constrains him to do what is against his will, may be exercised by threats, importunity or any species of mental coercion.”[9]  An example of duress may be a threat by a party to report the other to a federal agency for tax evasion unless the party transfers the desired property to the accuser.

Undue Influence

Undue influence is a ground for rescission where the non-defaulting party is compelled to agree to the contract by means of wrongful threat that precludes the exercise of free will.[10]  Undue Influence is generally found to exist where there is a confidential relationship between the parties.[11]  Unfortunately, undue influence is most commonly seen in the case of a child’s influence on an ailing parent; for example, to convince the parent to transfer property to just that child’s name, disregarding other siblings.

Waiver

A party may be deemed to have waived his/her right to rescind a contract by failing to take prompt action to rescind after becoming aware of the facts creating a right to rescind.[12]  Therefore, a buyer or seller should promptly notify, in writing, the defaulting party of his/her intent to rescind the purchase agreement.



[1] Bergstrom v. DeVoe, 109 Nev. 575, 854 P.2d 860 (1993).

[2] Id. at 861 citing Holden v. Dubois, 665 P.2d 1175 (Okla. 1983).

[3] Gramanz v. Gramanz, 113 Nev. 1, 8, 930 P.2d 753, 758 (1997).

[4] Kucharczyk v. Regents of University of California, 946 F.Supp. 1419, 1433 (1996).

[5] Gardner v. Meiling, 572 P.2d 1012, 1017 (1977).

[6] Ramsey v. Mading, 217 P.2d 1041, 1047 (Wash. 1950); See also Huens v. Tatum, 60 Cal. Rptr.2d 438, 442 (1997) (contractual grounds for rescission include fraud, mutual mistake, coercion etc. . .).

[7] 66 C.J. supra, 574 sec. 123.

[8] IMO Development Corp. v. Dow Corning Corporation, 185 Cal. Rptr. 341, 345 (1982).

[9] Gonzalez v. Gonzalez, 129 Cal. Rptr. 566, 570 (1976) quoting Gross v. Needham, 7 Cal. Rptr. 664, 672 (Cal. Ct. App. 1960 ) citing 9 Cal. Jur. 2d, Cancellation of Instruments, s 16.

[10] Baratta v. Kozlowski, 464 N.Y.S. 2d 803, 806 (1983).

[11] See Sizemore v. Miller, 247 P.2d 224 (Or. 1952) (“where a confidential relationship exits between the parties, when taken in connection with other suspicious circumstances, an inference of undue influence may be justified . . .”).  Id. at 227.

[12] Powell v. Goff, 868 P.2d 26 (Or. Ct. App. 1994); see also Ristau v. Wescold, Inc., 852 P.2d 271 (Or. Ct. App. 1993); Schuler et ux v. Humphrey et ux, 257 P.2d 865 (Or. 1953) (a defrauded party seeking to rescind must act promptly and “cannot retain the fruits of the contract awaiting future developments to determine whether it will be more profitable to affirm or disaffirm it”); Ferguson v. Jeanes, 619 P.2d 369 (Wash. Ct. App. 1980) (a person desiring to rescind a contract must act with reasonable promptness, and where delay reveals intent to waive the right to rescind, the contract is valid and binding); Channell v. Anthony, 129 Cal. Rptr. 704 (Cal. Ct. App. 1976) (a party who has been fraudulently induced into a conveyance can waive his right to rescind if, after full discovery of the fraud, the party takes steps to affirm the transaction); First Interstate Bank of Idaho v. Small Business Administration, 868 F.2d 340, 345 (9th Cir. 1988) (“A party rescinding a contract must do so within a reasonable time after discovery of a breach justifying rescission.”).


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One Response to Bases for Rescission in Failed Real Estate Transactions

  1. glass spigot says:

    glass spigot…

    So I sincerely say you make several great points and I will submit a variety of suggestions to add to shortly….