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Published : August 21, 2014 | Author : elbepeter
Category : Contracts laws | Total Views : 10380 | Rating :

  
elbepeter
Dr Elbe Peter, MDS, LL.B, DCR. orthodontist kerala
 

Rescission of contract

In contract law, rescission has been defined as the unmaking of a contract between parties. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract (the status quo ante.

Rescission is an equitable remedy and is discretionary. A court may decline to rescind a contract if one party has affirmed the contract by his action 1 or a third party has acquired some rights or there has been substantial performance in implementing the contract. Furthermore, because rescission is supposed to be imposed mutually upon both sides to a contract, the party seeking rescission normally must offer to give back all benefits he or she has received under the contract (an "offer of tender")

The injured party may rescind the contract by giving notice to the representor. However, this is not always necessary as any act indicating repudiation, eg notifying the authorities, may suffice.(Car & Universal Finance v Caldwell) 2

Alternate terms
Virginia uses the term "cancellation" for equitable rescission. Furthermore, a minority of common law jurisdictions, like South Africa, use the term "rescission" for what other jurisdictions call "reversing", "overturning" or "overruling" a court judgment. In this sense, the term means to be set aside or made void, on application to the court that granted the judgment or a higher court. Applications to rescind a judgment are usually made on the basis of error or for good cause.

Most common law jurisdictions avoid all this confusion by holding that one rescinds a contract and cancels a deed (i.e. of real property), and treat rescission as a contractual remedy rather than a type of procedural remedy against a court judgment.

The right to rescind a contract seems to suppose not that the contract has existed only in appearance; but that it has never had a real existence on account of the defects which accompanied it; or which prevented its actual execution.

A contract cannot, in general, be rescinded by one party unless both parties can be placed in the same situation, and can stand upon the same terms as existed when the contract was made. The most obvious instance of this rule is, where one party by taking possession, etc., has received a partial benefit from the contract.

A contract cannot be rescinded in part. It would be unjust to destroy a contract in toto, 3 when one of the parties has derived a partial benefit, by a performance of the agreement. In such case it seems to have been the practice formerly to allow the vendor to recover the stipulated price, and the vendee to recover, by a cross-action, damages for the breach of the contract. But according to the later and more convenient practice, the vendee, in such case, is allowed in an action for the price, to give evidence of the inferiority of the goods in reduction of damages, and the plaintiff who has broken his contract is not entitled to recover more than the value of the benefit the defendant has actually derived from the goods or labor; and when the latter has derived no benefit, the plaintiff cannot recover at all. A sale of land, by making a deed for the same, and receiving security for the purchase money, may be rescinded before the deed has been recorded, by the purchaser surrendering the property and, the deed to the buyer, and receiving from him the securities he had given; in Pennsylvania, these acts revest the title in the original owner. But this appears contrary to the current of decisions in other states and in England

The Specific relief Act - 1963

Sections 27 to 30 of specific relief act4 deals with rescission of contract. Specific relief is a form of judicial redress belongs to the law of procedure and is a body of written law arranged according to the natural affinities of the subject matter. In India the Specific relief act of 1963 was enacted by the parliament in the 14th year of republic.

According to section 27 of Specific Relief Act - When rescission may be adjudged or refused.
When rescission may be adjudged or refused.-(1) Any person interested in a contract may sue to have it rescinded, and such rescission may be adjudged by the court in any of the following cases, namely:-
(a) where the contract is voidable or terminable by the plaintiff;

(b) where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff.

(2) Notwithstanding anything contained in sub-section (1), the court may refuse to rescind the contract-
(a) where the plaintiff has expressly or impliedly ratified the contract; or

(b) where, owing to the change of circumstances which has taken place since the making of the contract (not being due to any act of the defendant himself), the parties cannot be substantially restored to the position in which they stood when the contract was made; or

(c) where third parties have, during the subsistence of the contract, acquired rights in good faith without notice and for value; or
(d) where only a part of the contract is sought to be rescinded and such part is not severable from the rest of the contract.

Explanation.-In this section "contract", in relation to the territories to which the Transfer of Property Act, 1882 (4 of 1882), does not extend, means a contract in writing.
any per son interested in a contract – the remedy by way of rescission is not confined to persons named as parties to a contract, it is open to any person who though not named as a party to a contract, is interested in the contract. Thus any member of a joint Hindu family is entitled to rescind a contract entered into by the manager where by the former would be defrauded.

There is a rule of equity that where a conveyance has been excecuted it will be set aside only on the ground of actual fraud, and not for mere innocent misrepresentation. (wilde v. Gibson)5

Section 28 - Rescission in certain circumstances of contracts for the sale or lease of immovable property, the specific performance of which has been decreed.

Rescission in certain circumstances of contracts for the sale or lease of immovable property, the specific performance of which has been decreed.- (1) Where in any suit a decree for specific performance of a contract for the sale or lease of immovable property has been made and the purchaser or lessee does not, within the period allowed by the decree or such further period as the court may allow, pay the purchase money or other sum which the court has ordered him to pay, the vendor or lessor may apply in the same suit in which the decree is made, to have the contract rescinded and on such application the court may, by order, rescind the contract either so far as regards the party in default or altogether, as the justice of the case may require.

(2) Where a contract is rescinded under sub-section (1), the court-
(a) shall direct the purchaser or the lessee, if he has obtained possession of the property under the contract, to restore such possession to the vendor or lessor, and

(b) may direct payment to the vendor or lessor of all the rents and profits which have accrued in respect of the property from the date on which possession was so obtained by the purchaser or lessee until restoration of possession to the vendor or lessor, and, if the justice of the case so requires, the refund of any sum paid by the vendee or lessee as earnest money or deposit in connection with the contract.

(3) If the purchaser or lessee pays the purchase money or other sum which he is ordered to pay under the decree within the period referred to in sub-section (1), the court may, on application made in the same suit, award the purchaser or lessee such further relief as he may be entitled to, including in appropriate cases all or any of the following reliefs, namely:-

(a) the execution of a proper conveyance or lease by the vendor or lessor;

(b) the delivery of possession, or partition and separate possession, of the property on the execution of such conveyance or lease.

(4) No separate suit in respect of any relief which may be claimed under this section shall lie at the instance of a vendor, purchaser, lessor or lessee, as the case may be.

(5) The costs of any proceedings under this section shall be in the discretion of the court.

Section 29 -Alternative prayer for rescission in suit for specific performance

Alternative prayer for rescission in suit for specific performance.- A plaintiff instituting a suit for the specific performance of a contract in writing may pray in the alternative that, if the contract cannot be specifically enforced, it may be rescinded and delivered up to be cancelled; and the court, if it refuses to enforce the contract specifically, may direct it to be rescinded and delivered up accordingly.

A party suing for specific performance may in the alternative sue for rescission of the contract but the converse is not true and a person suing for rescission cannot in the alternative sue for specific performance. Prem Raj v. D L F H Co. Ltd 6

Section 30. Court may require parties rescinding to do equity

Court may require parties rescinding to do equity.- On adjudging the rescission of a contract, the court may require the party to whom such relief is granted to restore, so far as may be, any benefit which he may have received from the other party and to make any compensation to him which justice may require.

Benefit and compensation – This section is in accord with English equitable rules, whereby if rescission is to be granted both parties must be restored to the status quo ante. If a purchaser seeks rescission, a court of equity can take account of any profit he has made and make allowances for any deterioration in the property.

Onus – A party claiming restoration of benefit received must prove the value of that benefit. Govindram v. Edward Radbone 7

BARS TO RESCISSION
Rescission is an equitable remedy and is awarded at the discretion of the court. The injured party may lose the right to rescind in the following four circumstances:

(i) AFFIRMATION OF THE CONTRACT
The injured party will affirm the contract if, with full knowledge of the misrepresentation and of their right to rescind, they expressly state that they intend to continue with the contract, or if they do an act from which the intention may be implied. (Long v Lloyd)8

Note that in Peyman v Lanjani9, the Court of Appeal held that the plaintiff had not lost his right to rescind because, knowing of the facts which afforded this right, he proceeded with the contract, unless he also knew of the right to rescind. The plaintiff here did not know he had such right. As he did not know he had such right, he could not be said to have elected to affirm the contract.

(ii) LAPSE OF TIME
If the injured party does not take action to rescind within a reasonable time, the right will be lost.

Where the misrepresentation is fraudulent, time runs from the time when the fraud was, or with reasonable diligence could have been discovered. In the case of non-fraudulent misrepresentation, time runs from the date of the contract, not the date of discovery of the misrepresentation.

Leaf v International Galleries10

(iii) RESTITUTION IN INTEGRUM IMPOSSIBLE
The injured party will lose the right to rescind if substantial restoration is impossible, ie if the parties cannot be restored to their original position. Vigers v Pike11

Precise restoration is not required and the remedy is still available if substantial restoration is possible. Thus, deterioration in the value or condition of property is not a bar to rescission. Armstrong v Jackson 12

(iv) THIRD PARTY ACQUIRES RIGHTS
If a third party acquires rights in property, in good faith and for value, the misrepresentee will lose their right to rescind (Phillips v Brooks)13 under Mistake.

Thus, if A obtains goods from B by misrepresentation and sells them to C, who takes in good faith, B cannot later rescind when he discovers the misrepresentation in order to recover the goods from C.

Note:
The right to rescind the contract will also be lost if the court exercises its discretion to award damages in lieu of rescission under s2(2) of the Misrepresentation Act 1967.

For innocent misrepresentation two previous bars to rescission were removed by s1 of the Misrepresentation Act 1967: the misrepresentee can rescind despite the misrepresentation becoming a term of the contract (s1(a)), and the misrepresentee can rescind even if the contract has been executed (s1(b)). Generally, this will be relevant to contracts for the sale of land and to tenancies.

INDEMNITY
An order of rescission may be accompanied by the court ordering an indemnity. This is a money payment by the misrepresentor in respect of expenses necessarily created in complying with the terms of the contract and is different from damages. ( Whittington v Seale-Hayne)14

Conclusion
Rescission of a contract is remedy offered for a contract if entered in by mis- representation, mutual rescission is possible only if both the parties can be restored to the original position before the entry in to contract.
*************
Table of cases
1) Long v Lloyd [1958] 1 WLR 753
2) Car & Universal Finance v Caldwell [1965] 1 QB 525
3) Sheffield Nickel co V. Unwin 2 QBD 214 – 223
4) Wilde v. Gibson (1848) 1 HLC – 605 approved in Gramani v. Ramachandran 1953 A.M 769.
5) Prem Raj v. D L F H Co Ltd (1968) A.SC 1355
6) Govindram v. Edward Radbone (1947) 74 IA 295
7) Long v Lloyd [1958] 1 WLR 753.
8) Peyman v Lanjani [1985] Ch 457
9) Leaf v International Galleries [1950] 2 KB 86.
10) Vigers v Pike (1842) 8 CI&F 562.
11) Armstrong v Jackson [1917] 2 KB 822.
12) Phillips v Brooks [1919] 2 KB 243
13) Whittington v. Seale-Hayne (1900) 82 LT 49.

Bibliography
1) Pollock and Mulla on Indian contract and Specific Relief acts 10 th edn – 1044-48
2) Avtar Singh – Principles of Mercantile law

 

1) Long v Lloyd [1958] 1 WLR 753
2) Car & Universal Finance v Caldwell [1965] 1 QB 525
3) ibi
4) Pollock and Mulla on Indian contract and Specific Relief acts 10 th edn – 1044-48
5) Wilde v. Gibson (1848) 1 HLC – 605 approved in Gramani v. Ramachandran 1953 A.M 769
6) Prem Raj v. D L F H Co Ltd (1968) A.SC 1355
7) Govindram v. Edward Radbone (1947) 74 IA 295
8) Long v Lloyd [1958] 1 WLR 753
9) Peyman v Lanjani [1985] Ch 457
10) Leaf v International Galleries [1950] 2 KB 86.
11) Vigers v Pike (1842) 8 CI&F 562
12) Armstrong v Jackson [1917] 2 KB 822
13) Phillips v Brooks [1919] 2 KB 243
14) Whittington v. Seale-Hayne (1900) 82 LT 49

Authored by: Dr Elbe Peter, MDS, LL.B, Dip.Clin.Res / The author can be reached at: elbepeter@legalserviceindia.com




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