RESCISSION OF CONTRACTS BASED ON FRAUD AND MISREPRESENTATION

July 19, 2012

When you have been fraudulently induced into signing a contract, you may be able entitled to have the contract rescinded. Rescission means that the contract is set aside or annulled, as if it had not existed. When a contract is rescinded, the agreement is extinguished, neither side has any more obligations under the contract and both sides are, as much as possible, restored to their condition prior to entering the contract. 

A contract can be rescinded if the contract was signed based on fraud. The plaintiff has the burden of proving the nine elements of common law fraud: 1) A representation; 2) its falsity; 3) its materiality; 4) the speaker's knowledge of its falsity or ignorance of its truth; 5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; 6) the hearer's ignorance of its falsity; 7) his reliance on its truth; 8) his right to rely thereon; 9) his consequent and proximate injury. Hall v. Romero, 141 Ariz. 120, 124, 685 P.2d 757 (App. 1984).

If you prevail in your claim for rescission, you may recover monetary damages in the amount that you paid under the contract. In addition, you also may be entitled to consequential damages in an amount necessary to make you whole, i.e., to place you back in the economic position you had prior to the rescinded transaction.

Rescission may also be an available remedy when negligent misrepresentation exists. When a person makes a negligent misrepresentation, they are not saying something that they know to be false. Rather, they are making a representation about something while having no reasonable basis for believing it to be true.

"Negligent misrepresentation requires proof that a person, in the course of a transaction in which he or she has a financial interest, supplies false information for the guidance of others in their business transactions, they suffer pecuniary loss caused to them by their justifiable reliance upon the information, and the supplier of the information fails to exercise reasonable care or competence in obtaining or communicating the information." St. Joseph's Hosp. & Med. Ctr. v. Reserve Life Ins. Co., 154 Ariz. 307, 312, 742 P.2d 808, 813 (1987), quoting Restatement (Second) of Torts § 552 (1977).

Finally, rescission may be available based on innocent misrepresentation. Innocent misrepresentation involves a false statement. However, the person making the false statement had reasonable grounds for believing that the false statement was true. In instances of innocent misrepresentation, a party is entitled to restitution only, and not consequential damages.

It is essential to act promptly to rescind the contract once you learn of the factual basis to make a claim for rescission. If you wait to bring a claim for rescission, then you may ultimately waive your right to rescission.  Contact a reputable attorney to discuss this and other remedies you might have.