The Difference Between Rescission and Damages in Commercial Contracts
A Legal Article by CounselO
When one party to a commercial contract breaches its obligations, two separate questions commonly arise: Is it preferable to seek rescission of the contract, or to claim damages? In some cases, can both be sought?
Confusing these options may weaken a claim because each serves a different legal function.
Rescission: Ending the Contractual Relationship
Rescission seeks to end the contract because one party has breached a material obligation arising from it.
Where a contract is binding on both parties and one contracting party breaches its obligation, the other party may—depending on the nature of the contract, the facts, and its terms—seek to terminate it and obtain the resulting legal effects.
However, the mere existence of a dispute or a limited delay does not mean that rescission is automatically warranted. It is necessary to consider the nature of the breach and its impact on the contract’s fundamental purpose.
Accordingly, the key question is not simply whether a breach occurred,
but rather:
Is the breach sufficiently serious to justify ending the contract?
The Saudi Civil Transactions Law confirms the binding force of a contract and the obligation to perform it in accordance with its terms and in good faith. This makes ending the contract an exception requiring a clear legal basis.
Damages: Addressing the Loss
Damages serve a different purpose.
They do not necessarily seek to end the contract, but rather to compensate for the loss resulting from the breach.
The injured party may wish to continue the commercial relationship while claiming damages for a delay, loss, or additional cost resulting from the other party’s breach.
Thus, the contract may remain in force while a claim for damages arises at the same time.
To succeed with such a claim, proving the breach alone is not enough. It is also necessary to establish:
The loss, its connection to the breach, and the extent to which it can be proven and quantified.
Can Rescission and Damages Be Combined?
In principle, there may be circumstances in which rescission alone is insufficient to remedy the loss.
Ending the contract may address the future of the relationship, but it does not necessarily erase losses incurred before rescission.
Accordingly, certain facts may warrant considering a claim to end the contract together with damages for losses caused by the breach, provided that each claim has its own legal basis and that its elements are proven.
However, combining the two claims should not be automatic. The relationship between them and the loss for which compensation is sought must be analyzed so that the action does not become a collection of unrelated or unsupported claims.
How Should You Choose Between Rescission and Damages?
Before determining the relief sought, three questions should be answered:
Does continuing the contract still serve the client’s interests?
If continuing the relationship remains possible and beneficial, damages may be more suitable than ending it.
Is the breach material, or can it be remedied?
Not every breach necessarily justifies rescission.
Is there a loss that can be proven?
A claim for damages requires a separate evidentiary file establishing the loss, its amount, and its connection to the breach.
The Common Mistake
A recurring mistake is to begin a dispute by seeking:
“Rescission of the contract and damages”
before analyzing whether the facts satisfy the requirements of each claim.
The proper approach is to begin with the contract, the documents, and the parties’ conduct, then identify the appropriate legal outcome—not to decide the outcome first and look for justifications afterward.
Conclusion
Rescission and damages are not interchangeable.
Rescission addresses the continuation of the contractual relationship and seeks to end it where there is a justification for doing so.
Damages, by contrast, address the loss resulting from the breach and may be sought while the contract remains in force or, in some cases, alongside its termination.
Therefore, the right question when a commercial contract is breached is not:
Should we seek rescission or damages?
It is:
What happened to the contract? What loss occurred? What legal outcome serves the client’s interests and can be proven?
CounselO
We analyze the breach before determining the claim.
Under the supervision of the lawyer and legal consultant
Musaif Riyadh Baghdadi