Real Estate Disputes & Damages: Court Analyzes Difference Between Suing for Breach of Contract Versus Making a Claim for Rescission

When a real estate deal fails and litigation ensues, the parties face an important choice: whether to sue for breach of contract or pursue a claim for rescission. The difference between the two types of claims is crucial, both as to the type of proof that must be presented to the court as well as the measure of damages that will be applied. In a breach of contract case, the claimant is affirming the contract and asking the court to award the benefit of the bargain. In essence, the claimant is asking the court to award him everything he would have received had the deal gone through. On the other hand, in a rescission case, the claimant asks that the contract be cancelled and the parties returned to their respective positions as they existed immediately prior to entering into the deal (this is sometimes referred to as “restoring the status quo ante” – restoring the status of the parties immediately prior to the contract). If a claimant prevails on a rescission claim, he surrenders all of the consideration he received during the deal (including surrendering possession of the property), but in turn is allowed to recover from the other side all of the consideration he parted with. The distinction between breach of contract and rescission was the subject of an appellate decision in Sharbabianlou v. Karp, a case where the court reversed an award of compensation to the plaintiff, noting that the trial court had awarded too much money because of confusion between breach of contract damages and the permissible amount of recovery in a rescission context. The court relied on Civil Code section 1692 which governs rescission cases. That statute provides in relevant part: “A claim for damages is not inconsistent with a claim for relief based upon rescission. The aggrieved party shall be awarded complete relief, including restitution of benefits, if any, conferred by him as a result of the transaction and any consequential damages to which he is entitled; but such relief shall not include duplicate or inconsistent items of recovery. If in an action or proceeding a party seeks relief based upon rescission , the court may require the party to whom such relief is granted to make any compensation to the other which justice may require and may otherwise in its judgment adjust the equities between the parties.” The court went on to note that rescission is intended to restore the parties as nearly as possible to their former positions and bring about substantial justice by adjusting the equities between the parties despite the fact that the status quo cannot be exactly reproduced. What many litigants forget is that a rescission claim is based upon a disaffirmance of the contract. “The distinction between disaffirmance and affirmance of the contract,” said the court, “has important consequences when it comes to damages. A party who sues for breach of contract thereby affirms the contract’s existence, and the damages awarded compensate the party not in default for the loss of his ‘expectational interest’ – the benefit of his bargain which full performance would have brought. . . . In contrast, rescission is a remedy that disaffirms the contract. . . . Rescission extinguishes the contact . . . terminates further liability, and restores the parties to their former positions by requiring them to return whatever consideration they have received. . .. Thus, the ‘relief given in rescission cases – restitution and in some cases consequential damages – puts the rescinding party in the status quo ante, returning him to his economic position before he entered the contract.” Another important point is that the damages available in rescission cases depend in part upon the reason for which the contact was rescinded. If the contract is rescinded due to fraud or the fault of the other side, the claimant can recover consequential damages; if the contract is rescinded due to a mutual mistake, where neither party is at fault but the mutual mistake robs the contact of its meaning, the claimant cannot recover consequential damages. In the real estate context, the seller must refund all payments received in connection with the sale. The buyer must restore possession to the seller. If consequential damages are recoverable, they may include closing costs, real estate commissions paid, and interest on sums of money paid to the other side, as well as attorney’s fees in certain cases. A complete copy of the opinion in Sharabianlou v. Karp is attached for your convenience.

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