John T. Blanchard, P.C.
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General Principles of Legal Remedies




[The following article was excerpted from John T. Blanchard's law school textbook, California Remedies: Commentary, Materials and Problems (3d ed. ©1997)]

Yes, in California this is a legal remedy, not an equitable remedy. See below.

Rescission "extinguishes" a contract ab initio; that is, the contract becomes a nullity, dissolved as if it had never existed. Rescission is commonly said to "unwind" a contract; it is obvious, but important, to note that rescission disaffirms the contract (while most actions in contract, at least implicitly, affirm the existence and enforceability of the contract).
"...the most interesting characteristic of the equitable remedy of 'rescission' is that it does not exist."

Rescission may be used either offensively or defensively. That is, it may form the foundation of an action for "restitution" of the consideration transferred to the other party or it may be pleaded as an Affirmative Defense to the other party's action to enforce the contract.

In general, rescission may be based on "failure of consideration", "fraud" or "mistake". The scope of these terms of art are explored in the following statutory and appellate materials. One caution is necessary. "Failure of consideration" (in broad terms, "breach") does not properly apply when a party simply discovers that the bargain made was not as advantageous as originally expected; in such a case the more astute of the contracting parties is entitled to the "benefit of the bargain" and the less astute bargainer has no basis for rescission.

One generally-respected text states, "[r]escission is available as a remedy for failure to form a contract because of lack of mutual assent and for breach of a validly formed and existing contract." This comment is, however, misleading for a number of reasons.

First, the most interesting characteristic of the equitable remedy of "rescission" is that it does not exist. While "rescinded" may accurately describe a contract's status (that is, extinguished and, thus, unenforceable) most authorities agree that no equitable cause of action to obtain a judicial declaration of a contract's status has existed in California since 1961 (instead, only a legal action for "restitution" remained after the statutory amendments). However, rescission is still conventionally thought to be one of the "classic" equitable remedies (along with Specific Performance and Injunction); further, nothing appears to preclude an action for Declaratory Relief (seeking a judicial declaration that a party has no "rights or obligations" under a contract because it was timely rescinded). If this seems confusing, that is because it is.

Second, such famous cases as the "Ship Peerless" demonstrate that, while litigants and their lawyers may intuitively think that a contract exists, they are sometimes wrong. However, Rescission has never been a proper remedy for "failure to form a contract because of lack of mutual assent". In gist, since a contract was never formed there is nothing to "rescind".

Third, the second clause of the quoted comment misleadingly limits its scope. The condition or status "rescinded", coupled with the remedy of Restitution, is appropriate for not only "breach[es] of . . . validly formed and existing contract[s]" but, also, where the contract arose because of fraud or mistake.

While the sort of distinctions drawn above may initially seem over-rigorous, great attention must be devoted to precise characteristics of every questioned situation because this area of the law of remedies is subtle and careless analysis can easily lead to dramatic consequences regarding such crucial matters as the right to jury trial, the availability of the provisional remedy of attachment and the selection between alternative Statutes of Limitation.

In California prior to 1961 there were two procedures by which a party entitled to rescind could obtain such relief. The first was accomplished by the rescinding party by giving notice of the rescission to the other parties to the contract and offering to restore everything of value which he had received. This method, rescission by the individual act of one of the parties to the contract, was conventionally termed "unilateral rescission". After the contract had been rescinded by a party's own, unilateral act that rescinding party could then bring an action to enforce the out-of-court rescission. Such an enforcement action was considered to be at law - brought in assumpsit on the implied by law, quasi-contractual, promise by the nonrescinding party to repay or return the consideration received. Such an action - based on a promise raised by implication of law - was, by its nature, limited by the nature of the implied promise. Since the implied promise was only to return the consideration, damages were never available as ancillary relief; there was no implied "promise" to pay damages.

The second method was the action for judicial rescission. Rescission could be adjudged on any of a number of grounds (generally the same as those now outlined in section 1689 of the Civil Code). However, unlike unilateral rescission this procedure was viewed as an action for specific judicial relief for the wrong giving rise to the right of rescission and was, therefore, deemed equitable. Such actions in equity to obtain judicial rescission could include monetary awards of consequential damages, given in conjunction with restitution.

In 1961 the procedural differences between these competing methods of effecting rescission were eliminated. However, in 1970 the Supreme Court, while acknowledging that "the purpose of the statutory changes was to eliminate the confusing and complex duality of rescission procedures", held, "[w]e perceive in this fusing of the two former rescission procedures no intention on the part of the Legislature to disturb, much less eradicate, substantive differences . . . underlying such procedures". All actions after the 1961 amendment to the Civil Code are to enforce a unilateral rescission (and to obtain restitution of benefits conferred on the other parties to the rescinded contract).
"Since rescission effectively 'unwinds' the parties' contract and restores them to their status quo ante, it is apparent that a recomputation of the parties financial interests is required following rescission."

Since rescission effectively "unwinds" the parties' contract and restores them to their status quo ante, it is apparent that a recomputation of the parties financial interests is required following rescission. If such calculations are more like an Accounting - a form of equitable relief - it is for the Court and not a jury. However, when the return of a "bare money judgment" is sought, a jury is available. The Supreme Court has held that the right to jury trial should be "determined by the nature of the substantive relief requested and not by the form of the complaint." Because many, indeed most, cases fall somewhere between an equitable evaluation of complex accounts and a "bare money judgment", that is easier said than done.

An additional problem arises when the rescinding party has suffered other consequential damages as a result of the same conduct or condition that supported the rescission. Rescission of a contract is premised on its disaffirmance; thus, it would be inconsistent for a party to rescind (disaffirm) and, at the same time, to recover damages (based on affirmance of the contract). Regardless of whether such damages are fixed by the Court or by a jury, prior law provided supplemental relief only where the rescission was based on a ground involving fault on the part of the nonrescinding party (e.g., fraud or failure of consideration); it denied relief where such fault was not the basis for the rescission (e.g., mistake) or where the parties were at least equally at fault (e.g., illegality).

The modern statute does not draw this distinction. Civil Code section 1692 provides that, so long as there are no duplicate or inconsistent items of recovery, a "claim for damages is not inconsistent with a claim for relief based upon rescission"; but it also says that the "aggrieved party shall be awarded complete relief, including restitution of benefits . . . and any consequential damages". Use of the term "aggrieved" might be thought to assume misconduct by the nonrescinding party. The central point is that the rescinding party is entitled to "complete relief", so as to place that party, as best the Court can fashion remedies (including both restitution of benefits conferred as a result of the transaction and any consequential damages), in the same position as before the contract arose, the status quo ante.

"Complete" relief has another application in the context of rescission. The rescinding party must rescind the entire contract, not merely the adverse portions while retaining the remainder). Only when the rescinding party cannot restore all benefits and advantages received under the contract because of the other party's misconduct (e.g., fraud) is a partial rescission proper. Under such circumstances the Court is requires to fashion relief that requires the rescinding party to restore, to the extent possible, all consideration to the other party and not to retain any benefits (while, as noted above, granting "full relief" to the rescinding party).

It is conventional wisdom that a party cannot unilaterally rescind when in material default of performance of a covenant or obligation of that same contract. However, the general rule only applies when the other party's failure of performance was dependent or concurrent to the rescinding party's performance or the rescinding party's default affected the other party's ability or duty to perform. In something more closely approximating English: the would-be plaintiff cannot rescind based on the defendant's breach (failure of consideration) when the plaintiff's own default caused or affected the defendant's breach. The general rule does not prevent rescission if the default of the rescinding party is unrelated to the other party's breach of obligation (on which the asserted right of rescission is based). The general rule has no application to a claim of entitlement to rescission based on grounds other than the other party's breach (for example, it has no application to the plaintiffs' claim to rescission based on the parties' mutual mistake).

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