Rescission by Mutual Consent in Contracts
Throughout their lives, individuals engage in transactions with one another in order to satisfy their needs and interests. These transactions are evidenced by contracts and give rise to legal effects and obligations. In contractual relations, it is always possible that, for various reasons, the parties may no longer wish to maintain the contract and may regret their prior agreement, thereby seeking to terminate or undo the contract through mutual consent, known as rescission by agreement.
When a concluded contract is dissolved by mutual consent of the parties, rescission or mutual termination has occurred. Under the Civil Code of the Islamic Republic of Iran, rescission by mutual consent is recognized as one of the causes for the extinguishment of obligations. Pursuant to Article 283 of the Civil Code, the parties to a contract may, by mutual agreement, rescind or mutually terminate the contract.
Conditions for the Validity of Rescission in Contracts
Types of Rescission
Rescission may occur in two forms, explicit or implicit. Therefore, it is not necessary for the term rescission to be expressly stated, as implied or conduct-based rescission is also sufficient. Rescission may apply to the entire contract or only to a portion of it.
Essential Elements of Rescission
Among the key elements of rescission are the existence of a binding and enforceable contract and the mutual agreement of the parties, whether expressed orally or in writing. The nature of rescission is to dissolve a previously concluded binding contract, and it is regarded as a binding agreement itself. This is because, in non-binding contracts, either party could terminate the agreement unilaterally, whereas rescission requires the consent of both parties.
Accordingly, for rescission to be valid, a contract must first exist so that an action may be taken to dissolve it. Since rescission constitutes a contract, it must, like other contracts, satisfy the general conditions for contractual validity.
The conditions for the validity of a rescission agreement include the following:
- Mutual consent of the parties: Both parties must express their consent to rescind the contract, either orally or in writing.
- Legal capacity of the parties: At the time of rescission, the parties must have full legal capacity, meaning they must be of legal age, mentally competent, and acting without mistake, coercion, or duress. If a party lacks capacity, their legal guardian or custodian may effect the rescission.
- Specification of the subject matter: The parties must clearly identify which contract is being rescinded or, if only part of the contract is to be rescinded, specify the relevant portion.
Scope and Effects of Rescission of Contracts
The effects of rescission vary depending on whether the contractual obligations have been performed. In cases where the contract has not been performed at all, rescission results in the complete dissolution of the contract. Where ownership has already been transferred under the contract, all remaining effects of the transaction must be reversed in order for rescission to be fully effective.
Like other contracts, rescission produces legal effects. These effects apply prospectively, meaning that rescission terminates obligations that are to be performed in the future, while the prior contractual relationship remains recognized for past actions. Upon rescission, the subject matter of the contract is returned to its original owner, and any consideration received must be refunded to the paying party. If the subject matter has been destroyed, its equivalent or monetary value must be returned to the owner.
Another issue frequently addressed in the context of rescission concerns the benefits derived from the subject matter up to the time of rescission. If the benefits are inseparable, they belong to the party who owned the property prior to rescission, typically the seller. If the benefits are separable, they belong to the buyer.
Contracts Not Subject to Rescission
Rescission generally applies to all contracts, except in cases where the law expressly prohibits it. Such contracts are referred to as non-rescindable contracts. The basis for excluding certain contracts from rescission is their connection to public order. Examples of contracts that cannot be rescinded include marriage, endowment, and guarantee.
Difference Between Termination and Rescission
Rescission involves a bilateral and consensual agreement between the parties and applies specifically to binding contracts. Termination, on the other hand, is a unilateral act that dissolves a contract and falls within the category of unilateral legal acts.
Rescission is not subject to the statutory grounds required for termination, such as legal options or rights of cancellation. The source of rescission is not necessarily statutory or contractual, whereas termination of a contract must be based on a legal or contractual right.
In termination, the consent of the other party is irrelevant, while rescission is based entirely on the mutual agreement of both parties.
Frequently Asked Questions About Rescission in Contracts
Rescission refers to the mutual agreement of both parties to dissolve a binding contract. This action requires the consent of both parties and results in the extinguishment of their obligations.
In rescission, the dissolution of the contract is mutual and consensual, and the consent of both parties is required. In contrast, termination is a unilateral act that may be subject to legal conditions or statutory rights, and the other party's consent has no effect.
The validity of rescission requires three main conditions: mutual consent of the parties, whether oral or written; legal capacity of the parties, meaning mental competence and legal age; and clear identification of the contract or portion thereof to be rescinded.
Rescission may be explicit, where the agreement is clearly expressed, or implicit, where the conduct of the parties indicates mutual consent.
Following rescission, the contract is dissolved, and any transferred property or consideration is returned to the original owner. Inseparable benefits belong to the party who owned the property prior to rescission, while separable benefits belong to the buyer.
No. Certain contracts are excluded from rescission on the grounds of their connection to public order or specific legal provisions. Examples include marriage, endowment, and guarantee.
Rescission serves as a mechanism for dissolving binding contracts that cannot otherwise be terminated unilaterally. By rescission, mutual obligations are extinguished, and the parties' rights are restored. What is rescission in a contract?
What is the difference between rescission and termination of a contract?
What conditions are required for a valid rescission?
How is rescission carried out?
What are the legal effects of rescission?
Are all contracts subject to rescission?
What role does rescission play in binding contracts?
