Setting Aside Contracts: Legal Implications for Business Owners 

In Short

• A contract can sometimes be set aside if there was a serious problem when it was formed, such as misrepresentation or duress.

• Setting aside a contract (rescission) cancels the agreement and aims to return both parties to their original position.

• This remedy is strict and can be lost if you delay, continue performing the contract, or circumstances have changed.

Tips for Businesses
If you think a contract was entered into on unfair or misleading grounds, act quickly. Stop accepting benefits under the contract, gather evidence of what went wrong, and clearly communicate your position in writing. Because rescission has limits and risks, get legal advice early to assess whether setting aside the contract is realistic or whether another remedy would better protect your business.

Summary
This article explains when business owners in England and Wales may be able to set aside a contract under English law and outlines the key risks and limitations of rescission. Prepared by LegalVision, a commercial law firm specialising in advising clients on contract disputes and remedies, it guides businesses through the legal principles and practical considerations involved.

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Table of Contents

• Understanding Contractual Remedies and Setting Aside a Contract
• What is Misrepresentation?
• What is Duress?
• Practical Benefits of Setting Aside a Contract
• Limitations and Risks for Business Owners
• Key Steps for Businesses 
• Key Takeaways
• Frequently Asked Questions

Commercial contracts are important documents that can help manage business relationships and protect your small business from risk. As a business owner, you are likely to enter many contracts over time. Sometimes, things do not go as planned with respect to your contractual arrangements. For example, you might find that a contract your business entered into is problematic, such as if it was based on misleading statements or signed under pressure. If a serious flaw arises in the contract, English law may allow your business to set it aside and return to your original position. 

This process is called ‘rescission’ (also known as setting aside a contract) and is a way to cancel a contract. Rescission is available where there has been a defect in the formation of a contract and requires the parties to be returned to the positions they were in before they entered into the contract. Setting aside a contract can be a useful remedy in some cases, but it can be complicated and must meet strict requirements. 

This article introduces when your business can set aside a contract and offers practical steps to help protect your interests.

Understanding Contractual Remedies and Setting Aside a Contract

When things with a contract go wrong, the appropriate remedy will depend on the relevant circumstances. For example, if the other party commits a serious or material breach of your business contract, you may have the option to end the contract and potentially claim damages. However, if there was a problem in how the contract itself was made in the first place, you could be entitled to different remedies, such as the right to set aside (or rescind) the contract.

Rescission allows your business to undo the agreement and restore both sides to their previous positions. It unravels the contract and frees your business from ongoing commitments, allowing you to recover money or goods it transferred. Once rescinded, the law treats the contract as though it never existed. 

Your business may be able to set aside (rescind) a contract if something went wrong at the point of agreement. Some of the main legal grounds to do so include: 

• misrepresentation; 
• duress; and 
• undue influence.

What is Misrepresentation?

This occurs when a party makes a false or misleading statement that persuades your business to enter into a contract. The false statement may be: 

• fraudulent; 
• negligent; or 
• innocent. 

Rescission is usually available as a remedy, but the court can award damages instead.

What is Duress?

Duress occurs when a party illegitimately exerts pressure to get your business to agree to a contract. This could involve threats to harm your business financially or damage its reputation. Tough negotiation is acceptable, but coercion that removes free choice is not and can give rise to remedies.

Practical Benefits of Setting Aside a Contract

When your business sets aside a contract, the law will treat it as if it never existed. This essentially cancels all obligations, returning both parties to their original positions. You should send a clear written notice stating that you set aside (rescind) the contract and explain why. If the other party does not accept this, you may need to go to court to resolve the matter. 

Limitations and Risks for Business Owners

Even when your business has a valid reason to set aside (rescind) a contract, some factors can block that right. These are known as bars to rescission.

Some examples include:

• if your business continues to perform the contract or accepts benefits after discovering the problem, it might lose the right to rescind;

• if your business waits too long to act, you could lose the right to rescind. Acting quickly is vital to help protect your position;

• if the position has changed so that the parties cannot be restored to their pre-contractual position; or

• if rescission would prejudice the rights of a third party who acquired rights under the contract.

Key Steps for Businesses 

Acting quickly and planning your approach can be the difference between setting aside a contract and losing that right. You should try to avoid costly, unpredictable litigation over this issue, which could be damaging and stressful for your business.

Act Promptly

Act promptly once you identify a problem that could justify setting aside the contract. Delay can signal acceptance of the contract and remove your right to rescind. Collate all available evidence as early as possible, including: 

• the contract itself; 
• any correspondence; 
• payment records; and 
• the materials you relied on before signing.

Seek Legal Advice

Seek legal advice as soon as possible to confirm whether setting aside the contract is the best and most practical approach. Depending on the circumstances, other options may be more: 

• appropriate; 
• practical; and 
• cost-effective. 

Whenever your business faces a contractual problem or potential dispute, seeking legal advice can make a difference to your ultimate outcome. A dispute resolution lawyer can assess your situation objectively, explain the remedies available, and guide you through the process of asserting or protecting your rights.

Plan Your Approach

As rescission (setting aside a contract) is complex and the other party can contest it, always plan your approach to contract entry carefully to avoid risk. This could include ensuring your contracts are entered into correctly from the outset to avoid risks and disputes later down the line.

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Key Takeaways

Setting aside a contract is a legal remedy that may allow your business to cancel a contract where there was a defect in its formation. It cancels the agreement and returns both parties to their original position. However, certain factors can prevent this remedy from being available. It is important to act promptly and seek legal advice to protect your business’s rights.

LegalVision provides ongoing legal support for businesses through its fixed-fee legal membership. Our lawyers help businesses in the recruitment industry manage contracts, employment law, disputes, intellectual property, and more. Members receive unlimited access to specialist lawyers for a fixed monthly fee. To learn more, call 0808 196 8584 or visit our membership page.

Frequently Asked Questions