Many business deals involve multiple steps after the contractual language has been worked out by the lawyers and the contracts have been signed. For example, there may be several steps involving due diligence, government approvals, construction, and granting of licenses or permits which are part of the deal. During these steps, disputes can arise. When a dispute arises, clients often ask if one of the parties can back out of the deal. And, is trying to back out of the deal the best course of action?
Contractual recission, or cancellation of a contract, is one of the main ways that a party may back out of a deal.[1] Recission is a purely equitable remedy. However, not all purported breaches of contract give rise to an ability for a party to rescind a contract. Indeed, while a party’s breach of a contract may give rise to a suit for money damages, a party may only seek recission under limited circumstances. For example, recission is only available for substantial breaches that tend to defeat the object of the contract.[2]
When a party seeks recission, it must act consistent with the intent to rescind the contract. In other words, it must immediately by words and action advise the other party to the contract that it intends to restore the parties to their relative positions had the contract never been made.[3] The party seeking to rescind the contract must tender back the consideration and any benefits received under the contract. The party also cannot act in a manner that recognizes the validity of the contract.
Maryland’s appellate courts have not published many decisions on recission. Lazorcak, supra, is probably the seminal case given the depth of the Court’s discussion. The case arose out of a contract for the sale of a dry-cleaning business. Mr. Lazorcak, the purchaser, operated the business for several months and learned that the dry-cleaning machine in use violated the fire code. He continued to operate the business but then later decided to try to rescind the contract despite keeping the profits from the business. Mr. Lazorcak was not permitted to rescind the purchase agreement because he never unequivocally offered to restore the parties back to their original position; instead, he continued to operate the dry-cleaning business for 9 months after he discovered that the dry-cleaning machine violated the fire code.
While restoration to the status quo is generally required by the party seeking to rescind a contract, there are some exceptions to this general rule.[4] These exceptions focus on the impossibility of returning to the status quo, how a party has prevented the return of consideration, or performance by the person against whom recission is sought has become worthless.
The takeaway for business owners is that there are times when you can get out of a deal, but you need to act promptly in the event you want to rescind a contract. Should you have a concern about a deal that you believe you might want to rescind, we recommend contacting counsel early in the process so you can avail yourself of all potential remedies, including contractual recission.
[1] Lazorcak v. Feurstein, 273 Md. 69, 327 A.2d 477 (1974)
[2] See discussion in Maslow v. Vanguri, 168 Md. App. 298, 316-317, 896 A.2d 408 (2006)
[3] Kemp v. Weber, 180 Md. 362, 24 A.2d 779 (1942)
[4] Lazorcak v. Feurstein, 273 Md. At 78.
If you have questions about business contracts, need assistance drafting agreements, or have concerns about how to respond to another party’s breach of contract, please contact the author, Craig Brodsky at csb@gdldlaw.com, or any member of our Business and Corporate Law or Commercial and Business Tort Litigation Practice Group.
