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Recession of a Contract Based on Fraud or Misrepresentation

Rescission of a contract is a remedy available, which attempts to restore the parties who entered into a contract, to the same state they were in prior to the contract being executed. Essentially, rescission seeks to make it as though the contract never existed. Although in some cases it can be impossible to completely restore the parties, rescission may provide for additional monetary damages in an attempt to compensate for these scenarios.

Rescission is different than a claim for breach of contract. Generally, a cause of action from breach of contract occurs when there is a valid contract, and one or more parties fail to perform. Rescission, on the other hand, occurs when there is no valid contract due to the actions of one or more parties. Consequently, just because there is a subsequent breach of a contract, does not necessarily mean there was fraud to justify rescission. These actions that do justify rescission however include a mutual mistake, negligent misrepresentation, fraud, or a material failure of consideration. For purposes of this article we are going to discuss the remedy of rescission based on fraud and misrepresentation.

The first means of rescission of a contract this article will discuss, is rescission based on fraud. In a case of rescission based on fraud, there are nine established elements that must be proved to establish fraud took place. Those elements are: (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.  These elements were set forth in the case of Hall v. Romero, 141 Ariz. 120, 124, 685 P.2d 757 (App. 1984).

Misrepresentation is the second means of rescission discussed in this article. A person who makes a misrepresentation in this sense, can generally be defined as someone who supplies false information, during a transaction they have an interest in, for the guidance of others in their transactions. Under these circumstances, someone who supplies false information is subject to liability if the person who received the false information justifiably relies upon it, or if the person communicating the information fails to exercise reasonable care or competence in obtaining or communicating the information.

In Arizona, if a party elects to rescind a contract based on fraud or misrepresentation, they may receive restitution of money they paid plus interest. They may also be entitled to consequential damages as mentioned above. This is the amount necessary to take them back to the economic position they would have been in, had the contract never been made. Because the damages may only be available to an innocent party, it is important to act quickly so as not to be deemed as having ratified the contract through conduct.

As is probably evident from the above article, rescission can be a very complex legal remedy to recover under. There are not only different options for choosing the means of rescission, there are also different remedies available. While this article discusses some basic issues regarding rescission, it is not intended to be exhaustive. Because these issues can be complex, subtle and often times difficult to spot, it is best to speak with a knowledgeable attorney to see if rescission is an available remedy. Platt & Westby has offices in Phoenix, Arrowhead, Litchfield Park, Scottsdale and Gilbert Arizona.  If you are interested in discussing a potential claim, contact our office by calling 602-277-4441 or for a free consultation with one of our experienced attorneys.