Chicago Business Litigation Attorney Blog

In a recent First District Illinois Appellate Court decision, the court addressed the issue of whether a party who proves it was fraudulently induced to enter into a contract can rescind the contract as an equitable remedy. 23-25 Bldg. Partnership v. Testa Produce, Inc., 381 Ill.App.3d 751 (1st Dist. 2008). In the 23-25 Bldg. Partnership v. Testa Produce, Inc., both parties owned property in a Chicago subdivision. Id. An outside buyer allegedly agreed to purchase the entire Chicago subdivision if all the unit-owners agreed to sell. Id. The defendants allegedly agreed to pay the plaintiffs $50,000.00, as an inducement to agree to the sale. Id. After the sale was complete, the defendants allegedly refused to pay the $50,000.00, contending the plaintiff fraudulently misrepresented that it needed the money because it was “upside down” in its mortgage. Id. As a result, the plaintiffs brought a breach of contract action against the defendants. Id. At trial, the Cook County trial court entered judgment for the plaintiff, holding that even though the defendants had been allegedly fraudulently induced into entering into the agreement, they could not rescind the contract because they benefited from the plaintiffs’ performance of its obligations under the contract and because the parties could not be returned to their pre-contract position. Id.

On appeal, the First District Illinois Appellate Court reversed the Cook County trial court, held that rescission was an available remedy because sufficient evidence allegedly established that the plaintiffs fraudulently induced the agreement, and that the defendants would not be required to comply with the terms of the contract based on the fact that it benefited from it. Id.

To establish an equitable claim for rescission of a contract on the basis of fraud and/or misrepresentation, a party must prove: (1) a false statement of material fact; (2) known or believed to be false by the party making it; (3) intended to induce the injured party to act; (4) acted on by the injured party in reliance on the truth of the representation; and (5) resulting in damage. Id. To warrant rescission of a contract induced by the misrepresentation, the misrepresentation must be “material,” meaning that the injured party would have acted differently had he been aware of the falsity of the statement, or the person making it knew the statement was likely to induce the injured party to engage in the conduct in question. Id. The court found that the plaintiffs allegedly induced defendants to enter into the agreement through a fraudulent, material misrepresentation that the sale price would not satisfy its outstanding mortgage. Id.

A contract induced by fraud or misrepresentation is not void but is voidable at the election of the injured party. Id. Although the perpetrator of the fraud or misrepresentation cannot enforce a contract that is voidable due to fraudulent inducement, the injured party may: (1) rescind the contract, or (2) waive the defect, ratify the contract, and enforce it. Id. Rescission, an equitable remedy, is the canceling of a contract so as to restore the parties to their initial status. Id. Usually, a party seeking rescission must restore the other party to the status quo prior to entering into the contract. Id. As a prerequisite, restoration of the status quo requires the rescinding party to return any consideration it received from the other party under the contract. Id.

However, where restoration of the status quo is impossible, it does not necessarily preclude rescission of a contract. Id. Restoration of the status quo, as a prerequisite to rescission of a contract, will not be required when restoration has been rendered impossible by circumstances not the fault of the party seeking rescission, and the party opposing the rescission has obtained a benefit from the contract. Id. Where restoration of the other party to the status quo is impossible, the party seeking rescission of a contract generally must reimburse the other party for the value of the benefit it received under the contract. Id.

In conclusion, the First District Illinois Appellate Court held that because the plaintiffs allegedly fraudulently induced the defendants to enter into an agreement, the agreement can be rescinded, despite the impossibility of returning the plaintiffs to the status quo prior to entering into the contract. Id.

Informational Purposes Only: The content of this writing was prepared by Tamari & Blumenthal, LLC for informational purposes only. The content of this writing is not intended to constitute and does not constitute legal advice. Reading the content of this writing or communicating with our office staff or attorneys by telephone, fax or e-mail does not make you a client of Tamari & Blumenthal, LLC. To become a client, you must sign and return our governing engagement agreement. Persons reading the content of this writing should not act upon this information without contacting and speaking with an attorney. Do not issue or provide us with confidential information until an attorney-client relationship has been formally established with our firm.

An issue in Illinois courts is whether a mistake, mutual or unilateral, between the parties of a contract can be grounds for rescission of an agreement. A mutual mistake occurs when an actual good-faith agreement is reached, but, due to error, the written reduction of the agreement violates the understanding of both parties. Cameron v. Bogusz, 305 Ill.App.3d 267, 272 (1st Dist. 1999). The reason for relief is that the misunderstanding precluded mutual assent to the terms of the contract. Illinois Jurisprudence, Commercial Law § 1:97.

The party asserting mutual mistake as grounds to rescind a contract must show that both parties were mistaken as to a material matter at the time the contract was entered into. Cameron, 305 Ill.App.3d at 272. Illinois courts require the plaintiff to prove the following elements for the court to grant rescission based on mutual mistake: (1) the mistake must have existed at the time the contract was entered into; (2) the mistake must have been mutual and common to all the parties; (3) the mistake must have involved a material matter; and (4) the mistake must have been such that the parties intended to say one thing but by the written instrument expressed another. Illinois Jurisprudence, Commercial Law § 1:97. To invalidate an agreement, a mistake must relate to a past or present fact material to the contract. United City of Yorkville v. Village of Sugar Grove, 376 Ill.App.3d 9, 24-25 (2d Dist. 2007). Illinois courts usually hold that predictions do not qualify as such present facts, and thus, mistaken predictions will not invalidate a contract. Id.

On the other hand, unilateral mistake, as a general rule, Illinois courts will not grant relief if only one party to a contract has made a mistake, especially where that party’s own negligence and lack of prudence caused the mistake. Illinois Jurisprudence, Commercial Law § 1:98. However, Illinois courts will allow a contract to be rescinded for unilateral mistake if: (1) the mistake relates to a material feature of the contract; (2) it occurred despite the exercise of reasonable care; (3) it is of such grave consequence that enforcement of that contract would be unconscionable; and (4) the other party can be returned to the same position it was in before the contract was entered into. Cameron, 305 Ill.App.3d at 274. The standard of care applied to the mistaken party where that party seeks to rescind the contract on the ground of unilateral mistake is whether a person of reasonable prudence would have acted in the same manner under the same circumstances. Illinois Jurisprudence, Commercial Law § 1:98.

Illinois courts will generally grant relief for unilateral errors that are clerical or mathematical. Illinois Jurisprudence, Commercial Law § 1:98. A contract fairly entered into cannot be rescinded on the ground of unilateral mistake merely because it is less profitable to one party than anticipated when he or she entered into it. Id. Nor can a party rescind a contract simply because of a mistaken opinion as to its legal effect. Id.

Unilateral mistakes in a party's assumptions as to cost to be incurred for performance of contract will not be cause for rescinding the contract. Bond Drug Co. of Illinois v. Amoco Oil Co., 274 Ill.App.3d 630, 635 (1st Dist. 1995). Illinois courts have held that each party assumes risk that its assumption as to cost of performance was wrong, and thus, the contract fairly entered into cannot be avoided or disregarded by one party upon discovery that the contract is less profitable than anticipated at the time of execution of the contract. Id.

Informational Purposes Only: The content of this writing was prepared by Tamari & Blumenthal, LLC for informational purposes only. The content of this writing is not intended to constitute and does not constitute legal advice. Reading the content of this writing or communicating with our office staff or attorneys by telephone, fax or e-mail does not make you a client of Tamari & Blumenthal, LLC. To become a client, you must sign and return our governing engagement agreement. Persons reading the content of this writing should not act upon this information without contacting and speaking with an attorney. Do not issue or provide us with confidential information until an attorney-client relationship has been formally established with our firm.