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Rescission of Contract

Updated on March 10, 2015

Rescission Of Contract

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(a) RESCISSION OF CONTRACTS

In contract law, rescission also called overturning has been defined as the unmaking of a contract between parties. The word rescission means cancellation. Instead of enforcing performance, the party is discharged from the obligation. Rescission is the unwinding of a transaction. Rescission is a form of specific relief by which the plaintiff claims for the avoidance of a contract as distinguished from specific enforcement. The contract should be voidable or terminable at his option. The object of the action is is to annul the contract and restore the paries to their original positions in which they were before they entered into a contract. (the status quo ante)

Rescission is an abrogation or revocation, particularly of a contract. In a sale of land there is usually an express condition of a sale under which, in case the purchaser makes and persists in any objection or requisition which the vendor is unable or unwilling to comply with, the vendor may by notice in writing rescind the sale, and return the deposit to the purchaser and so escape liability to pay damages for breach of contract. If a party is entitled to rescind a contract owing to a misrepresentation having been made, he must notify the other party of his intention by pleading invalidity as a defence to proceedings to enforce the contract, or by bringing a suit for having the contract judicially set aside.

Rescission is only allowed where the restitution is possible. A contract may be rescinded on the ground of innocent misrepresentation. When the vendor of immovable property desires to enforce a contract for sale with a condition that the title adduced should be to the satisfaction of the purchaser's solicitors, he must prove either that the solicitors did approve of the title or that there was such a title tendered as made it unreasonable not to approve it. Where the plaintiff succeeds in proving above facts to the satisfaction of the Court, he is entitled to a decree for specific performance of the contract, and the defendant cannot rescind it. The remedy by way of rescission is open not only to the parties to the contract but also to any other person, who though not a party to the contract is interested in it. Thus, a joint Hindu family of proprietors defrauded by a contract between the manager and third party has a right to have the contract rescinded. A person seeking to set aside a contract on the ground of fraud must set it aside as a whole and not a part thereof. For rescission, it is not sufficient that the contract is unlawful, but the other condition that the plaintiff should be shown to have been less to blame in the transaction than the defendant must exist; and if the plaintiff and the defendant are in pari delicto the contract should not be set aside.

Where a person has entered into a contract after a misrepresentation has been made to him, and the misrepresentation has become a term of the contract, he may be entitled to the equitable remedy of rescission as an alternative to his remedy for breach of contract.1 Mere non-payment for goods delivered or delay in fulfilling the obligation to pay would not generally go to the root or essence of the contract entitling the other party to rescind, because such non-payment or delay in payment might be with or without good cause.

Where a decree for specific performance of a contract of sale or lease has been made in favor of the purchaser or the lessee, on condition of his paying the purchase-money or other sums within a certain period and he makes default in making payment of what he was directed to pay the Court, instead of driving the parties to a separate suit may in the same suit direct the rescission of the original contract for non compliance with the order and may also direct the purchaser or lessee, if he is found to be in wrongful possession of the property, to pay to the vendor or lessor the mesne profits for the period during which he was in wrongful possession of the property.2

After a decree for specific performance, a party may by motion in the action get a rescission on the ground that the other party has refused to complete the contract within the time fixed by Court. A party is entitled to rescind a contract when the other party refuses to perform part of the contract and is disabled from performing that part.

Where a contract stipulates for a right of rescission in respect of separate breaches, the waiver of one will not waive another; so that where there was a contract for the payment of money by installments, and that time should be of the essence, and further a power to rescind on breach of the contract, each default of payment of an installment at the stipulated time was a fresh breach of the contract, on which the right to rescind arose. According to the terms of a contract if from any cause whatever the purchase was not completed by the time specified, the vendor was at liberty to annul the contract. On the day appointed the parties met and the vendor offered and the purchaser accepted the vendor's undertaking to satisfy certain unsatisfied requisitions. Nevertheless the purchaser refused to pay the purchase money, whereupon the vendor said that he would annul the contract if the money was not paid; the purchaser refused to pay till the requisitions were satisfied; the vendor on the same day annulled the contract by notice and successfully maintained an action for injunction to restrain any proceedings at law on the contract. Mere delay in making his election after knowledge of his right does not, however, itself amount to confirmation of the contract There is no rule of law that he must rescind immediately or within a reasonable time. He is entitled to suspend his judgment and election, and to consult his own interest in the matter by reference to the event. But if he does so, delay entails certain risks and may in the result lose his right of rescission.

As the power under section 35 of the Specific Relief Act, 1877 being the power to rescind the contract, the contract must be in existence for that power to operate upon. Power to rescind, therefore, presupposes the existence of what is to be rescinded. Where the Court while passing the decree, made a formal order that the suit would stand dismissed in case the condition of the payment of the purchase money by the appointed date was not performed, such order in the decree was also a formal rescission of the contract effective from the date specified in the decree.

Section 35 of Specific Relief Act, 1877 would be applicable only if no time in the decree has been fixed and decree-holder within reasonable time fails to make the payment. In such case, judgment-debtor would have a right under S.35 of the aforementioned Act, to seek rescission of contract on equitable principles that the vendee is not ready and willing to perform his part of the contract. But aforementioned S.35 would not apply when decree itself has stated that suit for specific performance would stand dismissed if the payment is not made within stipulated period. In such case, the agreement to sell per se would stand rescinded by the Court, without requiring the judgment-debtor to seek rescission independently.

Normally in a civil suit after passing of a decree, the proceedings come to an end. In a suit for specific performance, the situation is different and if the case falls under clause (c) of section 35 of Specific Relief Act, 1877, still the order of rescission can be passed. This brings it within the scope of preliminary decree, as further proceedings, as a rule, are to be taken before a suit could be completely disposed of. Besides such decree itself assumes the characteristic of a contract, whereby certain acts are yet to be performed, including depositing of the purchase price, costs of purchase price of necessary stamps for execution of conveyance deed, the seller has also to put his appearance for signing conveyance deed, to receive the purchase price. So rescission can be made.

In a suit for specific performance of a contract, the plaintiff can ask in the alternative that if the contract cannot be specifically enforced, it may be rescinded and delivered up to be cancelled. Thus where a vendor or less seeks for a specific performance of a contract of sale or lease, he may in the alternative pray that if the contract cannot be specifically enforced on the ground of his defect of title or any other cause, then it may be rescinded and delivered up to be cancelled; and the Court if it refuses specific performance, may direct it to be cancelled and delivered up accordingly; and at the same time it may direct the purchaser or lessee who has been in possession to render an account of rents and profits received by him.3

It is a maxim of law that he who seeks equity must do equity in the transaction in respect of which relief is sought. So where a contract is rescinded, the Court may, in its discretion, require the party to whom such relief is granted to make any compensation to the other party which justice may require; that is, in cases where rescission is adjudged against a party who is perfectly innocent and the Court considers that in order to restore the parties to their original position, compensation should be given to the defendant, the Court should award him such compensation as the justice of the case may require.4


(b) DISCRETIONARY RELIEF

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 or a third party has acquired some rights or there has been substantial performance in implementing the contract.Where the plaintiff has expressly or impliedly ratified the contract, rescission is not permissible. Rescission will not be granted where owing to the change of circumstances which has taken place since the making of 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. Rescission will be refused when only a part of the contract is sought to be rescinded and such part is not severable from the rest of the contract rescission will be refused. The general rule is that as the condition of rescission there must be restitutio integrum but at the same time the court has full power to make all just allowances. The use of the word may in the section 35 of Specific Relief Act, 1877 shows that the Court is not bound to grant the relief of rescission even if the grounds set out in the section have been proved. This relief of rescission is discretionary and may be refused if not conducive to justice.

When a purchaser of immovable property has entered into a contract of sale and paid a deposit and, when the time for completion comes, the vendor fails to complete, the purchaser has two alternatives open to him, He can treat the contract as rescinded and sue either in equity to be placed in the position he would have been, had it never been made, or at law for any money that he has parted with as money received by the other side for a consideration that he has wholly failed. Or in the alternative he can treat the contract as on foot and (a) either ask for damages for its breach or (b) seek the remedy of specific performance.

The statutory power under section 35 of Specific relief Act, 1877 is expressed to be exercised within the discretion of the Court and as the justice of the case may require and in the case of transfer of property consideration of profit or loss resulting there from cannot govern the delicate question whether in equity, which forms an essential element in the dispensation of justice, the transfer should be enforced. The element of discretion in equity is to be applied judicially, that is, in accordance with settled principles, and in relation to relevant factors. The Specific Relief Act, 1877 represents a codification of a number of principles derived from a long series of precedents, and the established practice of the English Courts of equity for several centuries. These principles are to be treated as of the essence of the Act, in its application to cases arising thereunder. As the relief of rescission is discretionary, so where third parties have acquired rights under a contract for value, the contract cannot be rescinded.

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1 W T Major, Christine Taylor, LAW OF CONTRACT, Ninth ed., p..268.

2 Specific Relief Act, 1877, S. 35.

3 Specific Relief Act, 1877, s. 37.

4 Specific Relief Act, 1877, s.38.

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