Cancellation of an Instrument

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Cancellation of an Instrument

An equitable remedy by which a court relieves both parties to a legal document of their obligations under it due to Fraud, duress, or other grounds.

Cancellation is a term often used interchangeably with Rescission, but whereas only a document can be canceled, any agreement—whether oral or written—can be rescinded. Cancellation is distinguishable from reformation, which is an action by a court to enforce a document after its terms have been reframed in accordance with the intent of the parties, in that cancellation abrogates the duties of the parties under the instrument.

Any instrument by which two or more parties agree to exchange designated performances, such as a contract, deed, lease, insurance policy, Commercial Paper, or a mortgage, may be canceled if the circumstances of the case warrant it.

The judicial remedy of the cancellation of an instrument is granted by a court in its sound discretion exercising its Equity powers to do justice. If it is apparent that no injustice will result from restoring both parties to the positions they had prior to the execution of the instrument, an instrument may be set aside.

If the party seeking the cancellation has an adequate remedy at law, for example, and can recover damages that will give complete relief, cancellation will be denied. It is available, however, if the defendant is judgment-proof or financially unable to pay damages awarded against him or her. Statutes, too, may provide this equitable remedy as concurrent relief, in addition to damages, in particular cases. The Uniform Commercial Code permits merchants in sales transactions to seek the cancellation of a contract, in addition to an award of damages in a breach of contract suit.

A plaintiff is entitled to have an instrument canceled only if he or she has acted equitably in dealings with the defendant. The principles of equity apply to any case in which this equitable remedy is sought.

Grounds

The cancellation of an instrument must be based upon appropriate grounds, the gist of which makes the enforcement of the instrument inequitable. Such grounds must be proven by a preponderance of the evidence presented in the civil action. A term of a document may provide for its cancellation, and courts will usually act accordingly when the facts warrant it. The setting aside of an instrument that appears to record the agreement of the parties to it is considered a significant intervention by a court, which will not be done for a trivial reason or merely because of a change of mind by one party. The primary grounds for cancellation involve the validity of the instrument itself and the agreement that it embodies.

Duress An instrument that was obtained by duress, the use of threats or physical harm to compel one party to enter an agreement that he or she would not have made otherwise, can be canceled at the request of the victimized party. If duress was present at the time the contract was entered, the agreement of the parties is a sham, as the victim was forced to act against his or her will. It would be inequitable for a court to enforce such an agreement.

Fraud An instrument may be set aside if it was induced by fraud—an intentional deception of another—to gain an advantage over him or her. To justify cancellation, it must be clearly established that the representations made to the victim were untrue and of such a material nature that without them the victim would not have agreed to the transaction. In addition, it must be shown that such statements were made intentionally to defraud the victim and that the statements were relied upon by him or her in the decision to enter the agreement. Fraud vitiates an agreement, which makes it unjust to enforce a document embodying its terms.

If, however, a material Misrepresentation is made innocently by one party, the victim is still entitled to have the instrument set aside, as it does not reflect the mutual assent of the parties.

Mental Incapacity If an agreement has been made by one party who, at the time of its execution, was mentally incapable of understanding the nature of the transaction, it may be canceled at the request of the victim or the victim's legal representative. This is particularly true when the other party has taken advantage of the victim's incompetence in drawing the terms of the agreement.

Courts frequently cancel an instrument entered by a person so intoxicated at the time of executing the document that he or she does not comprehend its legal ramifications. Cancellation is justified particularly when the intoxication is brought about by the other party in order to deceive the victim about the nature of their agreement.

Mistake When the parties have both made a mutual Mistake of Fact concerning the agreement entered, an instrument may be canceled, since there is no real agreement between them. If a unilateral mistake exists, that is, a mistake by one party, a court may set aside the document and restore the parties to their position prior to its execution. In order to justify cancellation, a mistake must be material and involve a significant part of the agreement without which the contract would not have been entered into. If the mistake is the result of the carelessness of one or both parties, a court may deny a request for cancellation.

Undue Influence Undue Influence, which is the unfair use of pressure on the will of another to gain an advantage over him or her, is a ground for the cancellation of an instrument because one party's will is so overcome by pressure that the person is effectively deprived of freedom of choice. Undue influence is usually established when there is a confidential relationship between the parties and one of them has a greater bargaining power or influence on the other.

Forgery or Alteration The cancellation of an instrument is justified when it has been forged. Moreover, if an instrument has been materially altered without the consent or knowledge of the party against whom the change is effective, the instrument may be set aside.

Preclusion of Relief

A person seeking the equitable relief of the cancellation of an instrument might be precluded from it by waiver or Estoppel. The right to such relief may be waived or relinquished by a plaintiff's conduct, such as by failing to pursue a remedy within a reasonable time from the execution of the document, a form of Laches. The doctrine of equitable estoppel—by which a person is precluded by conduct from asserting his or her rights because another has relied on that conduct and will be injured if the relief is not precluded—may also operate in a case in which cancellation of an instrument is sought.

The ratification of a document by a party prevents its subsequent abrogation. If a party knowingly affirms or ratifies an instrument—whether by stating so, or by using the property received under it—he or she is precluded from having it set aside.

Further readings

Ruff, Anne. 1999. Contract Law. London: Sweet and Maxwell.

Cross-references

Duress; Fraud; Sham.

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