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CALIFORNIA CORPORATE & SECURITIES LAW

Rescission And The California Corporations Code

Yesterday, I wrote about an attempt, albeit unsuccessful, to avoid a forum selection clause by a claim of rescission.  The plaintiffs’ in that case, Hatteras Enterprises, Inc. v. Forsythe Cosmetic Group, Ltd., 2016 U.S. Dist. LEXIS 100352 (July 30, 2016), invoked California Civil Code Section 1691, which specifies how a party may rescind.  The grounds for rescission are found in Section 1688 which provides that a party to a contract may rescind in the following cases:

  • If the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake, or obtained through duress, menace, fraud, or undue influence, exercised by or with the connivance of the party as to whom he rescinds, or of any other party to the contract jointly interested with such party.
  • If the consideration for the obligation of the rescinding party fails, in whole or in part, through the fault of the party as to whom he rescinds.
  • If the consideration for the obligation of the rescinding party becomes entirely void from any cause.
  • If the consideration for the obligation of the rescinding party, before it is rendered to him, fails in a material respect from any cause.
  • If the contract is unlawful for causes which do not appear in its terms or conditions, and the parties are not equally at fault.
  • If the public interest will be prejudiced by permitting the contract to stand.
  • Under the circumstances provided for in Sections 39, 1533, 1566, 1785, 1789, 1930 and 2314 of this code, Section 2470 of the Corporations Code, Sections 331, 338, 359, 447, 1904 and 2030 of the Insurance Code or any other statute providing for rescission.

This statute has been on the books without amendment for more than a half century.  Consequently, several of the referenced statutes no longer exist or make sense.  In particular, Section 2470 of the Corporations Code has not been in effect for some 52 years!  The statute was repealed in 1963 (effective January 1, 1965), well before the enactment in 1975 of the present General Corporation Law.   Civil Code Section 1785, part of the former Uniform Sales Act, was also repealed long ago.

The reference to the circumstances in provided for in Section 1789 is now a puzzle.  That statute now reads in its entirety as follows: “The Legislature hereby finds and declares that it is in the public interest that consumers have comprehensive knowledge of services available through electronic commerce and to that end hereby enacts the Electronic Commerce Act of 1984.”

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