The rescission of a contract may take place only where there is non-performance by one of the parties to the contract.

It is important to distinguish between rescission and termination of a contract. Termination may occur for various reasons unconnected with non-performance. Examples of termination include:

  • mutual consent of the parties;
  • the death of the natural person, or the winding-up of the legal person, that is a party to the contract;
  • the giving of unilateral notice, where the contract so provides.

Unlike termination, the rescission of a contract is a specific type of termination that arises in the event of complete non-performance, defective performance or delayed performance of the obligations under the contract.

The right of rescission and time limits

The right to rescind a contract may be exercised within five years. Nevertheless, specific time limits apply to certain contracts – for example, in the case of a contract of sale on account of defects in the goods, or a contract for work where there are material defects.

It is not possible to rescind a contract where the non-performance affects only a very small part of the contract in comparison with what has already been performed.

Rescission of contracts relating to real estate

For contracts governing rights over real estate – such as the transfer, creation or extinguishment of rights in rem – rescission is effected only by judicial process. For other contracts, extra-judicial rescission is permissible, whereby the performing party addresses a declaration of rescission to the defaulting party. To be regarded as the "performing" party, that party must either have performed its own obligations or be ready to do so.

Rescission with the grant of an additional period for performance

In the case of contracts concluded in simple written form, if one party fails to perform its obligations for reasons attributable solely to it, the other party may rescind the contract by granting an appropriate period for performance. This must be accompanied by a warning that the contract will be regarded as rescinded if the period is not observed.

A warning of rescission of a contract concluded in written form must likewise be made in writing. The period for performance must be sufficiently long to enable the defaulting party to perform its obligations. In the event of a judicial dispute, it will be necessary to prove that:

  • a warning was given;
  • the other party received the warning;
  • the period granted was sufficient;
  • the other party failed to perform its obligations within the period granted.

The precise drafting of the clauses and the careful conduct of the rescission procedure are of decisive importance in any potential judicial dispute.

Rescission without an additional period for performance

In some cases, the performing party is entitled to rescind the contract without granting an additional period for performance, for example:

  • where performance of the contract has become wholly or partly impossible through the fault of the debtor;
  • where the delayed performance renders the contract useless to the performing party;
  • where the obligation was intended to be performed within a fixed period and that period has expired.

Where one of these situations exists, the performing party may notify the other party of the rescission of the contract; it is advisable for the notice to be made in writing and to be received by the other party. It is important to choose a method of sending the notice that will provide evidence of its receipt.

Legal consequences of rescission

The rescission of a contract has retroactive effect, which means that the parties must restore the position in which they were before its conclusion. Each party must return to the other what it has received. For example, if a price or advance instalments have been paid, the defaulting party must refund those sums. If it refuses, the performing party is entitled to bring a claim in court for the return of the sums, as well as to claim compensation for the damage caused.

In the case of contracts with continuous or periodic performance, rescission takes effect prospectively, which means that the parties are not required to return what was received up to the moment of rescission.

If the contract contains a liquidated-damages clause for delay but is rescinded on account of non-performance, the performing party is not entitled to claim the liquidated damages for the delay. In that case it may claim only liquidated damages to compensate for the loss caused by the non-performance, if this has been agreed in the contract.

Should you require legal advice or assistance in connection with the rescission of contracts, contact us on telephone 0887550706 or by e-mail: [email protected]