Reformation, Rescission, and Cancellation

Definitions

1. Reformation—modification of document with legal effect (e.g., contract, deed) by court; based on document’s failure to reflect parties’ intent

2. Rescission—unmaking of contract

3. Cancellation—negation of instrument (e.g., deed, sales contract); similar to rescission

Equitable grounds

—include mistake, fraud, undue influence, duress, and lack of capacity

Failure of consideration

—grounds for rescission only when there is total failure of consideration

Statutory grounds - Fraudulent transfer

Fraudulent transfer—conveyance with intent to defraud creditor is voidable by creditor; however, fraudulent transfer to good-faith purchaser without notice can be protected from transferor’s creditor

Statutory grounds - Sale of goods

Sale of goods—generally, buyer or seller may cancel contract upon breach by other party

Limitations

1. Reformation, rescission, cancellation not available if bona fide purchaser takes property unaware of conduct justifying reformation, rescission, or cancellation

2. Generally, Court of Chancery is reluctant to order rescission unless both parties can be returned to same position they were in before contract; this can be accomplished by returning whatever consideration the parties exchanged