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.
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