Contract Rescission – When Can You Back Out Of A Deal?

Overview

Contracts are a fundamental part of life.  We all enter into various contracts on many occasions.  But, sometimes a deal doesn’t live up to expectations.  It’s those times that we might attempt to back out of the deal.  But, is that possible?  When can a deal be negated if the other party or parties to the agreement don’t want to cancel the deal?

Rescinding a contract – that’s the topic of today’s post.

Contract Rescission

Rescission refers generally to the cancellation of a contract.  Rescission can occur as a result of innocent or fraudulent representation, mutual mistake, lack of legal capacity, an impossibility to perform a contract not contemplated by the parties, or duress and undue influence.  Rescission may be mutual – all of the parties to the agreement agree (in writing) to terminate their respective duties and obligations under the contract.  Rescission may also be unilateral – where one party to the agreement seeks to have the contract cancelled and the parties restored to the position they were in economically at the time the agreement was entered into. 

An innocent as well as intentional misrepresentation may serve as the basis for a unilateral rescission of contract.  To be successful on such a claim, the plaintiff must have justifiably relied on a false statement, which was material to the transaction.  The rule prevents parties who later become disappointed at the outcome of their bargain from capitalizing on any insignificant discrepancy to void the contract. 

Duty to investigate?  There is a split of authority regarding a buyer’s duty to investigate a seller’s fraudulent statements, but the prevailing trend is toward placing a minimal duty on the buyer.  With respect to land sale transactions, the general rule is that a seller’s defense that the buyer failed to exercise due care is disallowed if the seller has made a reckless or knowing misrepresentation.  See, e.g., Cousineau v. Walker, 613 P.2d 608 (Alaska 1980); Fox v. Wilson, 211 Kan. 563 (1973).  However, the defense is typically allowed if the buyer’s fault was so negligent that it amounted to a failure to act in good faith and in accordance with reasonable standards of fair dealing.  So, in general, a purchaser of land may rely on material representations of the seller and is not obligated to ascertain whether such representations are truthful. 

Illustrative case.  In a 2006 New York case, Boyle, et al. v. McGlynn, et al., 814 N.Y.S.2d 312 (2006), the plaintiff bought the defendant’s farm (including the residence) and later sought to have the sale contract rescinded based on the seller’s alleged fraud and misrepresentations for not disclosing that plans were in the works for the construction of large aerogenerators on an adjacent parcel.  The plaintiffs submitted the affidavit of a neighbor of the defendant who detailed two conversations with the defendant that occurred months before the defendant put his farm on the market during which the wind energy development project was discussed.  The defendant, at that time, stated that the presence of commercial aerogenerators on the adjacent tract would “force” him to sell his farm.  When the plaintiff sought to rescind the contract, the defendant claimed he had no duty to the plaintiff and that the doctrine of caveat emptor (“buyer beware”) was a complete defense to the action.

The appellate court affirmed the trial court’s denial of the defendant’s summary judgment motion.  The appellate court noted the plaintiff’s claim that the defendants were well aware of their desire to buy a property with a scenic view that was free of environmental controversy and land use battles, and that the status of the land where the aerogenerators were planned was specifically discussed with the defendant before the contract closed.  The appellate court also noted that during this same conversation, the defendant told the plaintiff that the property was “protected.”  In addition, the sale brochure for the property stated that the property as “backing up to one of the largest areas of undeveloped land in the County.”   The defendant also apparently told the plaintiff that “what you see if what you get” and that the area was “secluded and protected.” 

The appellate court further noted that while there was an article in a local paper about the development project before the purchase offer for the property was made, the appellate court also noted that the plaintiff did not live in the area.  Likewise, no public documents concerning the project were filed with the local planning board until a month after the parties’ closing.     

Conclusion

It is important to note that the purchaser's claims in Boyle were based on the purchaser's allegations of unclear oral conversations between the purchaser and the seller, and a statement in a real estate brochure used to market the property.  The principle in Boyle could be applied in similar agricultural land sale transactions where plans are being made for the development of any activity that could be considered a nuisance.  In addition to the wind energy development project at issue in Boyle, known future development of a large-scale animal confinement operation, ethanol plant or similar activity that produces odors, obscures view or could create unreasonably objectionable noise, light or traffic, may need to be disclosed to a buyer to avoid a rescission action.