Repudiation vs. Rescission of Contracts (2020 Update)
Not sure whether a contract can be terminated? Learn about two common ways of termination, repudiation and rescission - and how they differ.
A contract is usually complete when both parties have performed the terms of the contract, however occasionally contracts can finish in other ways. It’s wise to know the difference between repudiation and rescission as they are two common ways of contract termination without the contract being fulfilled. While both of them will conclude the contract, they differ in why the contract can be terminated and the termination’s effects.
Repudiation is where one party to a contract decides to terminate it. The party in this case usually informs the other party that they cannot fulfil the terms of the contract. This usually occurs before a contract is actually breached. From here, the other party can choose whether to end the contract or continue (where the other party will likely breach the terms of the contract).
By contrast, rescission is a remedy the Courts award to a contracted party. This has the effect of ‘un-doing’ the contract. This usually occurs where the circumstances for the party entering the contract were unfair. This can be due to misrepresentation, duress or error.
A key difference between repudiation and rescission, are why the contract can be ceased. Grounds for repudiation are when one of the parties indicate that they will not perform the contract. A party’s breach of an ‘essential’ term or a large breach of a non-essential term shows they will not do their part of the contract. The other party can cancel the contract and stop its duties for both actual or anticipated breaches. This contrasts to rescission, which needs an actual defect.
On the other hand, rescission of a contract is when there is a error in the making of the contract. Undue influence or being against public policy are some ways contracts can be void or voidable. To learn more about void contracts, read ‘What Can Make a Contract Void?’ here.
You can rescind contracts for unconscionable conduct, which are words or actions that are not in good practice. Thus it is vital to ensure both parties comply with section 21 of the Australian Consumer Law (ACL)when making contracts.
Effects of Termination
Contracts that are brought to an end by repudiation are finished when the contract has been repudiated. The rights already given to the parties because of the contract remain valid. Instead, repudiation stops future performance of the contract. Be careful if you think that a contract has been repudiated because you must still do your duties until it is actually repudiated.
In contrast, a rescission will cancel a contract before it was formed. Rescission attempts to return the parties to their position before the contract. It is like the contract was never made in the first place!
It is therefore important to know the grounds and effects of termination to see whether a contract can be repudiated or rescinded. Get in contact with a contract lawyer if are unsure about this.
Lachlan is an intern at Lawpath as part of the content team. He is currently studying a Juris Doctor at the University of Sydney. Lachlan has a keen interest in corporate law and commercial litigation.