Remedies - Rescission and reformation

Learning Outcomes

After reading this article, you will be able to identify when rescission or reformation is available as a remedy for contract defects, distinguish between legal and equitable grounds for rescission, explain the requirements for reformation, and apply these principles to MBE-style questions. You will also recognize common exam pitfalls and know how to approach questions on these remedies.

MBE Syllabus

For MBE, you are required to understand the circumstances under which a contract may be rescinded or reformed, and the legal and equitable principles governing these remedies. You should be able to:

  • Recognize the grounds for rescission, including misrepresentation, mistake, duress, undue influence, and illegality.
  • Distinguish between rescission at law and rescission in equity.
  • Identify when reformation is available to correct a written contract that does not reflect the parties’ true agreement.
  • Understand the limitations and defenses to rescission and reformation.
  • Apply these principles to fact patterns and select the correct remedy.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which of the following is NOT a typical ground for rescission of a contract?
    1. Mutual mistake of material fact
    2. Innocent misrepresentation
    3. Failure of consideration
    4. Substantial performance
  2. Reformation of a contract is generally available when:
    1. The contract is void for illegality
    2. The written contract fails to reflect the parties’ prior agreement due to mistake or fraud
    3. The contract is unconscionable
    4. The contract is unenforceable under the Statute of Frauds
  3. Which of the following is a defense to a suit for rescission?
    1. Laches (unreasonable delay)
    2. The contract was induced by fraud
    3. The contract is executory
    4. The contract is for the sale of goods
  4. If a party seeks to reform a contract, what standard of proof is generally required?
    1. Preponderance of the evidence
    2. Clear and convincing evidence
    3. Beyond a reasonable doubt
    4. Probable cause

Introduction

Rescission and reformation are equitable remedies that address problems with contracts. Rescission cancels a contract and returns the parties to their pre-contract positions, while reformation corrects a written contract to reflect the parties’ true agreement. Both remedies are tested on the MBE and require careful attention to the grounds, procedures, and limitations involved.

Key Term: Rescission The cancellation of a contract, restoring the parties to their positions before the contract was made.

Key Term: Reformation An equitable remedy that modifies a written contract so it accurately reflects the parties’ prior agreement, usually due to mistake or fraud.

Grounds for Rescission

Rescission is available when a contract is voidable due to a defect in formation or performance. Common grounds include:

  • Misrepresentation: Any material misstatement of fact, whether fraudulent or innocent, that induces a party to contract.
  • Mistake: A mutual mistake of material fact, or a unilateral mistake if the other party knew or should have known of the mistake.
  • Duress or Undue Influence: Where a party’s assent was obtained by threat or improper pressure.
  • Illegality: If the subject matter or consideration is illegal.
  • Lack or Failure of Consideration: Where the promised consideration fails or is not given.

Key Term: Mutual Mistake Both parties share a mistaken belief about a material fact central to the contract.

Key Term: Misrepresentation A false statement of material fact that induces another to enter into a contract.

Legal vs. Equitable Rescission

  • Legal rescission is available by right in certain cases, such as fraud or mutual mistake.
  • Equitable rescission is granted by the court where legal remedies are inadequate, and the court may impose conditions to do justice.

Procedure and Effect of Rescission

A party seeking rescission must act promptly and unequivocally. Upon rescission:

  • The contract is set aside.
  • Each party must return any benefits received (restitution).
  • If the contract has been partially performed, the court may require restoration of the status quo.

Defenses to Rescission

Rescission may be denied if:

  • The party seeking rescission has affirmed the contract after learning of the defect.
  • There has been unreasonable delay (laches).
  • Third-party rights have intervened (e.g., a bona fide purchaser).
  • The parties cannot be restored to their original positions.

Worked Example 1.1

A seller and buyer enter into a contract for the sale of land. Both believe the parcel is 10 acres, but it is actually 5 acres. The buyer seeks rescission. Is rescission available?

Answer: Yes. This is a mutual mistake of material fact about the subject matter, making rescission appropriate.

Reformation

Reformation is not about cancelling a contract, but correcting a written instrument to reflect the parties’ true agreement. It is available when:

  • The parties reached an agreement, but the writing does not reflect it due to mutual mistake or a unilateral mistake coupled with fraud or inequitable conduct.
  • The party seeking reformation must prove the true agreement and the mistake or fraud by clear and convincing evidence.

Key Term: Clear and Convincing Evidence A standard of proof requiring a high probability that the asserted facts are true, higher than preponderance but less than beyond a reasonable doubt.

Limitations on Reformation

Reformation is not available when:

  • The contract is void for illegality or lack of agreement.
  • The rights of a bona fide purchaser would be prejudiced.
  • The party seeking reformation was grossly negligent.

Worked Example 1.2

Two parties agree orally that a lease will last for five years. The written lease, due to a scrivener’s error, states a term of three years. Can the court reform the lease?

Answer: Yes. If clear and convincing evidence shows the true agreement was for five years and the error was mutual, reformation is proper.

Defenses to Reformation

  • Laches: Unreasonable delay in seeking reformation.
  • Estoppel: The party seeking reformation acted inconsistently with the claimed agreement.
  • Third-party rights: Reformation will not be granted if it would unfairly harm a bona fide purchaser.

Exam Warning

Be careful: Reformation is not available to correct a contract that is void from the outset, nor to supply a term where no agreement was reached. The MBE often tests whether the parties had an actual agreement before a writing was executed.

Revision Tip

On the MBE, always check whether the error is in the contract’s formation (rescission) or in the written memorialization of an agreement (reformation). Choose the remedy that fits the facts.

Key Point Checklist

This article has covered the following key knowledge points:

  • Rescission cancels a contract and restores the parties to their pre-contract positions.
  • Grounds for rescission include misrepresentation, mutual mistake, duress, undue influence, illegality, and failure of consideration.
  • Defenses to rescission include affirmation, laches, and third-party rights.
  • Reformation corrects a written contract to match the parties’ true agreement, usually due to mutual mistake or fraud.
  • Reformation requires clear and convincing evidence of the true agreement and the mistake or fraud.
  • Both remedies are equitable and may be denied if granting them would harm innocent third parties or if the claimant delayed unreasonably.

Key Terms and Concepts

  • Rescission
  • Reformation
  • Mutual Mistake
  • Misrepresentation
  • Clear and Convincing Evidence
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