In over 37 years as an attorney, I have been surprised by the myths and misunderstandings about contracts that circulate among the general population in California.
One of the most common myths that many Californians believe about contracts is that a contracting party has an unconditional right to cancel any contract into which he or she enters within 3 days after the contract is signed. That is not the case.
There are some contracts where contracting parties have an unqualified right to rescind within a specified period of time after the contract is signed, but those contracts are exceptions to the general rules that a contract is binding as soon as all contracting parties have signed it and that it cannot thereafter be rescinded without cause unless the contract falls within one of the limited exceptions set out in California statutes.
Contracts that are statutorily required to be unconditionally rescindable include contracts involving credit transactions by which an owner of residential property would place a security interest on that property and contracts with dating or weight loss facilities (3 business days after signing within which to rescind), contracts with immigration consultants (72 hours after signing), and contracts to develop inventions (7 days after signing).
Contracts that have such an unconditional right to rescind are controlled by statutes that require the contractor to put mandatory written rescission provisions into their contracts. One can generally assume that if a contract does not contain such a written rescission provision, there is no unconditional right to rescind that contract.
Of course, there are also statutory grounds upon which a contract may be rescinded, but such rescissions are not unconditional or mandatory upon the party receiving a notice of rescission. In such cases, the contractor is not legally obligated to agree to rescind his contract. Legal action may be required to obtain a judicial decree confirming the rescission and the party trying to rescind may not prevail in such an action.
The statutory grounds to rescind a contract include, among others, situations where a party’s consent to a contract was obtained through fraud, duress, menace or undue influence or was given by mistake, where the contract was illegal, or where the rescinding party did not receive the consideration for which he or she had bargained.
Written notice of rescission on such statutory grounds must be given promptly after the rescinding party becomes aware of the facts justifying rescission because California courts have held that an injured party may lose his or her right to rescind by failure to give timely notice.
Also, in connection with a rescission, the injured party may be required to return any consideration which he or she received from the other contracting parties. This is to assure that no party receives an unjust benefit and that the contracting parties are returned to their pre-contract positions to the extent that it is possible to do so.
While contracting parties do not have an unconditional right to rescind most contracts under California law, nothing in the law prevents a party who is negotiating a contract from demanding that such a provision be placed into that contract.
Such a provision should be in writing and should specify the amount of time within which the contracting party has to rescind and the exact manner in which the notice of rescission must be delivered to the other party. It should also specify that the contract can be cancelled within the rescission period at the sole discretion of the contracting party without any penalty to that party other than the return of any consideration received by the rescinding party.
Only in this way can a contracting party make the myth of an unconditional right to rescind a reality.