Banque Arabe Et Internationale D’Investissement v. Maryland National Bank

Issue Discussed: Rescission and Reformation

Submitted by Michele Jacobson, Julie Goldman

Date Promulgated: May 4, 1994


Banque Arabe Et Internationale D’Investissement v. Maryland National Bank, 850 F. Supp. 1199 (S.D.N.Y. 1995), aff’d, 57 F.3d 146 (2d Cir. 1995)

Court:  United States District Court for the Southern District of New York

Issue Decided:  What constitutes “prompt” in the context of raising a rescission claim?

Is the knowledge level used in determining promptness the same for
deciding whether there has been ratification?

Did the plaintiff evince an intent to continue performing under the
agreement after it had “notice of circumstances giving rise to a fraud
claim” and, therefore, ratify the agreement?

Key Holdings
“Rescission claims must be instituted ‘promptly after discovery of the fraud,’” and the plaintiff bears the burden of proving that its rescission claim is prompt (internal citations omitted). Adequate knowledge of the fraud may be imputed even if a party lacks full knowledge of the fraud; “‘[i]t is enough that he has such notice of the facts that would impel a reasonable man in his position to make inquiry’” (internal citations omitted). The requirement that rescission be promptly claimed is postponed when settlement negotiations are underway; “rescission need not be asserted until the negotiations fail” (internal citations omitted). If a party had sufficient knowledge of the fraud to claim rescission, but was engaged in settlement negotiations, it has not failed to promptly assert its claim.

Since rescission is premised upon a party’s rejection of a contract, where a party accepts benefits under a contract, the party loses the right to rescind. Full knowledge is not necessary for ratification; “[r]atification can occur even after a party has had notice of facts that would invite reasonably inquiry.” By ratifying the contract, a party waives its right to rescind.

The court determined that the plaintiff could not have known about the defendant’s fraud and therefore could not have waived its right to seek rescission on that basis. The court also held that “[a]n attempt to preserve the status quo in the face of a suspected fraud does not amount to reaffirmation of a contract” (internal citations omitted). The defendant’s claim that the plaintiff ratified this agreement through actions it took after it filed its claim for rescission was also rejected; As Judge Sweet held in Prudential Ins. v. BMC Industries, 630 F.Supp. 1298 (S.D.N.Y. 1986), “once a party has filed suit for rescission, he has made an unambiguous request to have the contract voided, and the acceptance of payments do not negative his intent to disaffirm the contract.” Further, the plaintiff’s assertion of a claim in the defendant’s bankruptcy case was simply an attempt “to mitigate its loss.”

Key Takeaways
A party need not have full knowledge of the fraud to raise a rescission claim; as long as the party has an adequate basis upon which he or she can determine if a fraud was perpetrated, the party must raise its rescission claim or it will be barred from doing so later. A party need not raise a rescission claim while settlement negotiations are underway, however. It is not until settlement negotiations break down that a party must make a rescission claim.

A party has not ratified an agreement by trying to preserve its standing once it suspects fraudulent conduct. Once a party files a claim for rescission, it cannot be said to have ratified the contract it seeks to rescind.