Rescissory damages are a form of monetary relief specifically designed to restore parties to the financial position they held before a particular transaction occurred. This differs significantly from ordinary compensatory damages, which aim to put the injured party in the position they would have been in had the transaction or contract been properly performed.
Understanding the Purpose of Rescission
The fundamental goal behind awarding rescissory damages aligns with the broader principle of rescission, which is to undo a transaction and return both parties to their status quo ante – the state they were in before the agreement was made. When directly unwinding a transaction (e.g., returning goods and money) is not feasible or appropriate, rescissory damages provide a financial equivalent to achieve this pre-transaction state.
Key Distinction: Measurement Timing
A crucial characteristic that sets rescissory damages apart from other types of damages is how and when they are measured:
- Ordinary Compensatory Damages: These are typically measured at the time the transaction or breach of contract occurred. They focus on the direct losses suffered by the injured party at that specific point in time.
- Rescissory Damages: In contrast, these are measured at a point in time after the relevant transaction. This allows the calculation to account for any subsequent changes in the value of the assets or benefits derived from the transaction, ensuring a more complete restoration to the original pre-transaction financial position. This can include the recovery of profits unjustly gained by the breaching party.
To illustrate the difference, consider the table below:
| Feature | Rescissory Damages | Ordinary Compensatory Damages |
|---|---|---|
| Primary Goal | To restore parties to their pre-transaction position | To compensate for actual losses due to a breach or wrong |
| Measurement Time | Measured at a point after the relevant transaction | Measured at the time of the transaction or breach occurred |
| Focus | Unwinding the deal; recovering unjust enrichment/profits | Making the injured party whole for direct, provable losses |
| Underlying Principle | Restitution, prevention of unjust enrichment | Expectation, reliance, direct causation |
When Are Rescissory Damages Awarded?
Rescissory damages are typically sought in situations where a contract or transaction is deemed voidable due to fundamental flaws or misconduct, such as:
- Fraud or Misrepresentation: When one party was induced to enter a transaction based on false statements or deceit.
- Mutual Mistake: When both parties entered into an agreement based on a significant misunderstanding of a material fact.
- Breach of Fiduciary Duty: When a party in a position of trust (e.g., an agent, trustee, or corporate officer) acts against the best interests of the other party, leading to an unfair transaction.
- Undue Influence or Duress: When one party unfairly coerced or dominated another into an agreement.
Practical Implications and Examples
Consider a scenario where an individual (Party A) sells a piece of land to another individual (Party B), but Party A failed to disclose a significant environmental contamination issue that drastically affects the land's value.
- Ordinary Compensatory Damages: Party B might sue for the difference between the land's value with and without the contamination at the time of sale. This would cover their direct financial loss from the reduced value.
- Rescissory Damages: Party B would seek to recover the full purchase price paid for the land, plus any associated costs (like closing fees or property taxes incurred), essentially reversing the entire sale. If Party A had also made a profit from the land's subsequent (but ill-gotten) development due to their misrepresentation, rescissory damages could also seek to recover those profits, as the measurement occurs after the transaction, encompassing any benefits gained by the breaching party.
Benefits of Rescissory Damages
- Comprehensive Restoration: They aim for a complete return to the original financial standing, often including expenses incurred and potentially even the return of unjust profits.
- Disincentive for Wrongdoing: By potentially requiring the disgorgement of any profits gained from a wrongful transaction, rescissory damages serve as a strong disincentive against fraudulent or unethical behavior.
- Adaptability: The "after the transaction" measurement allows courts to account for the full financial impact of the wrongful act over time, providing a more flexible and equitable remedy in complex cases.
