The application of contracts to business takes no prisoners. Take a look across some of the professions, for example. Physicians have their patients sign informed consent forms prior to surgical procedures. Lawyers have their clients sign engagement letters or fee agreements. Engineers and architects have their clients sign professional services agreements. Accountants or CPAs use engagement letters for tax preparation services. The list goes on. If you want to do business in America, you can expect to sign a contract.
There is a great amount of variation among contracts. What one may consider a “standard form”, another may be looking at for the first time. Standardization of documents is very common, for example, when working in real estate in the Kansas City metropolitan area. Nearly all local Realtors will use KCRAR forms when transacting in residential real estate. Those real estate forms, though, don’t necessarily look like what one would see when purchasing an automobile. One familiar with contracting in real estate therefore would not necessarily have a grasp of the documents pertaining to the purchase and sale of cars. Enlarging the basket of documents further, companies small, medium, and large in the United States have their own forms or even have form libraries. Each given company has comfort and familiarity with its documents (not necessarily those of its vendors, suppliers, customers, etc.), so it has a predilection for their use. When two given companies try to do business together on this basis, a battle of the forms might result.
With over a million licensed attorneys in the United States, one should expect to see their influence on the contracting process. Transactional attorneys propose changes to contracts routinely. It’s part of their job. If each side to the transaction is represented by counsel, whether in-house or engaged, it’s nearly a given that the ultimate contract signed will be different from the first document presented by either side.
The emphasis placed on contract drafting and negotiation is merited, if not underemphasized. Ensuring that one has adequate remedies in the event of a breach, as well as that one can keep its own end of the bargain, is a worthwhile exercise. The aftermath of failed contractual performance can be ugly. Upon a given contract not being carried out as expected, a party might think, should I have negotiated harder? hired an attorney? sought a second opinion? done more due diligence on the other side?
When contracts go south, aggrieved parties look for potential remedies. They may seek reformation, as discussed in our last blog article, damages, specific performance, or rescission. It is the ultimate remedy in the aforementioned non-exclusive list that will now be explored in greater detail.
Ask an attorney for the definition of rescission. Then ask a second attorney. Finally, ask a third attorney. Did you hear different definitions, possibly three of them? You might have even heard one or more of the respondents say “I’m not sure.” This rhetorical exercise isn’t meant to generate criticism of the legal profession or any individual attorney. Rescission is a remedy that is ill understood, including among those studying and practicing law. In at least one Kansas case, an attorney was open about his misuse of the term “rescission”. See WIHO, L.L.C. v. Hubbauer, 45 F. Supp. 3d 1285, 1289 (D. Kan. 2014) (“Plaintiff’s attorney stated that he misused the term ‘rescission’ in Plaintiff’s brief and that Plaintiff is actually seeking to affirm the contract and recover the damages it incurred as a result of Defendant’s alleged fraud.”). This blog article will bring some clarity via a non-exhaustive review of what the law in Kansas says about rescission.
It might be easiest to start with what rescission is not. It is not the same thing as cancellation. Indeed, contract cancellation is far different in effect from rescission. Hoffman v. Haug, 242 Kan. 867, 871, 752 P.2d 124, 127 (Kan. 1988). Cancellation is the interruption and termination of a contract by agreement at a time after its formation. Id. “Rescission is the undoing of a contract from its beginning[.]” Id. Rescission is not something that is normal. In fact, it has been called “extreme”. See Johnson v. Johnson, 202 Kan. 684, 691, 452 P.2d 286, 292 (Kan. 1969) (“But the right to rescind a contract is extreme and does not necessarily arise from every breach.”). Rescission is not a remedy that is available to everyone, and especially not the slothful. See Nichols Co. v. Meredith, 192 Kan. 648, 653, 391 P.2d 136, 140 (Kan. 1964) (“rescission is open only to the diligent, and one who seeks to rescind a contract…must do so with reasonable promptness” (citing Brown v. Wolberg, 181 Kan. 919, 317 P. 2d 444 (Kan. 1957))). Rescission is not a claim that calls for money damages. Moore v. Moore, 56 Kan. App. 2d 301, 324, 429 P.3d 607, 624 (Kan. Ct. App. 2018). Finally, as most succinctly stated by a Connecticut court, rescission is not the same as the similarly-sounding contract remedy of reformation. E. Point Sys., Inc. v. Maxim, No. 3:13-cv-00215 (D. Conn. Feb. 7, 2014).
Having narrowed down the universe of what rescission could be by describing what it is not, let’s discuss what it actually is. Rescission is an equitable remedy that extinguishes the contract so that for all intents and purposes it never existed. Whiteley v. O’Dell, 219 Kan. 314, 318-19, 548 P.2d 798, 802 (Kan. 1976). “[U]pon rescission of a contract, the parties must be placed in substantially the same condition as when the contract was executed.” Id. at 319 (citing Dreiling v. Home State Life Ins. Co., 213 Kan. 137, 515 P.2d 757; 17 Am. Jur. 2d, Contracts § 512, p. 994). This is powerful. The Kansas courts are essentially saying that rescission is a remedy that allows the parties to go back in time, to the way things were before. Indeed, it has been called “a remedy that restores the status quo ante.” Quenzer v. Advanta Mortgage Corp. USA, 288 B.R. 884, 888 (D. Kan. 2003) (citing Ray v. Citifinancial, Inc., 228 F. Supp. 2d 664 (D. Md. Oct. 28, 2002)).
Going back in time might be a thrilling prospect to some but a scary proposition to others. Pairing backward time travel with litigation might dull the thrill of the historians and accentuate the panic of those who live for today. Fortunately for both camps, a litigant is not able to simultaneously rewrite history as well as maintain the status quo. “A party seeking rescission of a contract must return the benefits it has received as a precondition to an action for rescission.” Quinn v. City of Kansas City, Kan., 64 F. Supp. 2d 1084, 1096 (D. Kan. 1999) (citing Webster v. Toland, 148 Kan. 36, 79 P.2d 884, 888 (1938)). In other words, a litigant cannot expect the court to extinguish the contract so that for all intents and purposes it never existed yet to permit the keeping of any benefits obtained from making that contract. Such a position would be nonsensical: the litigant would be expecting the court to acknowledge and uphold the existence of the subject contract while also ordering its undoing.
Rescission may be mutually exclusive, in an election of remedies situation, from the pursuit of damages. See, e.g., Morris Plan Leasing Co. v. Karns, 197 Kan. 150, 154, 415 P.2d 291, 295 (Kan. 1966) (“Under general principles of contract law, affirmance and rescission are inconsistent remedies, and after electing to disaffirm, a party cannot later seek to affirm.”); Lindsay v. Keimig, 184 Kan. 89, 91, 334 P.2d 326, 328 (Kan. 1959) (“Because the remedy by way of damages rests on affirmance, and the remedy by way of rescission rests on disaffirmance, the two are inconsistent and incompatible. Resort to one excludes resort to the other[.]” (quoting Beneke v. Bankers Mortgage Co., 119 Kan. 105, 237 Pac. 932 (Kan. 1925))); Whiteley v. O’Dell, 219 Kan. 314, 319, 548 P.2d 798, 802 (Kan. 1976) (“It is generally held that a lawful rescission of a contract prevents recovery of damages for the breach.” (citing 17 Am.Jur.2d, Contracts, § 516, p. 1002)). This makes inherent sense. In addition to rescission and damages (or disaffirmance and affirmance, respectively) being a possible contradiction in terms, another reason to prohibit their simultaneous receipt would be to not compensate the plaintiff twice for the same loss, honoring the rule against double recovery.
The complicated and anecdotally misunderstood nature of rescission leads to the rhetorical question of whether it might be underutilized by practicing attorneys as a means to obtain legal relief for their clients. Contract-based disputes, conceivably because of the regularity with which they occur, are discussed frequently among attorneys. In those conversations, lawyers often hear or say words like “damages” (whether consequential, liquidated, punitive, etc.), “specific performance”, and “attorneys’ fees”. Rarely is a lawyer heard trumpeting the pursuit or defeat of the remedy of rescission. Perhaps greater knowledge of the concept might lead to its greater implementation. Reading the Kansas cases about rescission would be a good start towards knowledge building and the expansion of tools that could be used to help solve contract-related problems.
Whether beginning their lives as “standard forms” or corporate templates, contracts in Kansas are commonplace. Taking due time to prepare, review, and understand them is appropriate. When there is a contract dispute, remedies come to the forefront. One such remedy is rescission, a difficult concept, and not one about which a person should feel foolish if he doesn’t know all there is to know. Hiring an attorney to advise on contracts would be a wise course of action. This law firm has extensive experience advising on contracts and breaches of contract. If you, your business, or your family has a legal issue pertaining to contracts, please contact us at 913-735-7707 or schedule with us here if we could potentially be of service. You may also wish to read about fundamental contract principles (in Kansas) on our blog.
Matthew T. Kincaid