984 Jul 25, 2024 at 08:28

Rescission of Contracts

Introduction

  • Rescission is a remedy in contract law which is made available to the parties when the underlying basis for making a contract is fundamentally befouled.  Some misconduct on behalf of a one party undermines the very reason that the other party made the contract in the first place. The contract, after such a misconduct, can be rescinded at the option of the affected party. The remedy of rescission literally means that the entire contract is set aside.
  • For the convenience of legal purposes, it’s treated like the contract was never made. Rescission is a remedy in which a contract is rendered null, void, and is no longer legally binding on the concerned parties. The court can, at its discretion, free the non-liable parties from their agreed obligations and will effectively seek to restore them in the state that they were in before the contract was signed.
  • Rescission is available to a party when there has been a misrepresentation of a material fact that was intended to be relied upon and has indeed been relied upon. Typical reasons for rescission include fraud, duress, unilateral or mutual mistake, and inadequacy of consideration. However, a party must rescind the contract in a timely manner.
  • A mutual mistake in rescission includes errors in writing the contract and any misunderstandings between the parties during the formation of the contract that result in no mutuality of assent. A mutual mistake of fact must concern either a present or prior fact or facts that are material to the contract.

Modes of Rescission

  • Fraud: Fraud occurs when one party intentionally deceives another about a material fact, leading the deceived party to enter into the contract. For example, if a seller knowingly lies about the condition of a car, claiming it is new when it is actually used, the buyer can seek rescission.
  • Coercion: Coercion involves one party being forced into a contract under threats or coercion. For instance, if someone is threatened with physical harm unless they sign a contract, that contract can be rescinded. The section 19 of Indian Contract act, 1872 deals with the voidability of agreements without free consent. If consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is voidable at the option of the party whose consent was so caused. In the case of Ranganayakamma v. Alwar Setti. It was held that an agreement procured by coercion is voidable. The plaintiff was forced to adopt a son under threat, and the court allowed rescission of the adoption. Coercion, as defined in Section 15 of the Indian Contract Act, 1872, refers to the act of committing or threatening to commit any action prohibited by the Indian Penal Code (45 of 1860), or unlawfully detaining or threatening to detain any property, with the intention of forcing someone to enter into an agreement, to the detriment of any individual.
  • Mistake: A unilateral mistake occurs when only one party to a contract is mistaken about a fundamental aspect of the agreement. Rescission may be possible if the mistake is significant, and the other party knew or should have known about the mistake. For example, if a contractor bids on a project based on incorrect plans provided by the client, the contract might be rescinded if the mistake is discovered promptly after entering into the agreement. Fraud is defined in the Indian Contract Act, 1872 under Section 20 and 21.
  • Consideration: Consideration refers to the value exchanged between parties in a contract. If the consideration is grossly inadequate, indicating unfairness or a lack of mutual assent, rescission may be appropriate. For example, selling a valuable painting for a fraction of its worth due to a significant misunderstanding or mistake may justify seeking rescission of the contract.
  • Impossibility of performance: If the performance of an agreement is impossible then such an agreement is void. Agreements, the meaning of which is not certain, or capable of being made certain, are void.[1]

Types of Rescissions

1. Rescission by Mutual Consent

Rescission by mutual consent occurs when all parties to a contract agree to terminate the contract voluntarily. This type of rescission is based on the principle that contracts can be undone by the same parties who initially entered into them. As long as all parties freely and willingly agree, they have the right to change or cancel the contract.

For mutual consent rescission to be valid, all parties must clearly and unambiguously agree to terminate the contract. Upon rescission, the parties aim to restore themselves to their positions as they were before entering into the contract. This typically involves reversing any actions taken under the contract to the extent possible.

2. Rescission for Breach

Rescission for breach occurs when one party fails to fulfill their obligations under the contract, giving the other party the right to rescind the contract due to the breach. This type of rescission is typically available when the breach is substantial or fundamental, meaning it goes to the root of the contract and deprives the innocent party of what they expected from the agreement.

In most cases, the breach must be material or fundamental to the contract. The innocent party must notify the breaching party of their intention to rescind due to the breach. Rescission for breach aims to restore the innocent party to their pre-contractual position by undoing the contract, so that they are not left worse off due to the breaching party’s actions.

3. Rescission by Court Order

Rescission by court order is a type of rescission granted by a court, usually in cases where there’s a legal defect in the contract. This occurs when one party was subjected to undue pressure, or if there’s a clear reason to believe the contract is unfair or defective.

To obtain rescission by court order, there must be a valid legal basis, such as misrepresentation, mistake, duress, undue influence, incapacity, or illegality. The court exercises judicial discretion and applies equitable principles to determine whether rescission is appropriate. Alongside rescission, the court may also award other remedies like restitution for damages, depending on the circumstances of the case.  The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.[2]

Rescission, Cancellation and Termination

  • Rescission of a contract refers to the act of canceling a contract as if it never existed. Rescission is typically used when there has been a material breach of the contract, fraud, or mistake. It is an equitable remedy that can be sought by either party, aiming to restore the parties to their original positions before the contract was formed.
  • Cancellation of a contract is the act of terminating a contract by mutual agreement of the parties. Cancellation can occur when both parties agree that the contract is no longer necessary or relevant, or if there has been a breach of the contract that both parties agree to cancel. It usually happens when both parties want to end the contract amicably.
  • Termination of a contract refers to the act of ending a contract due to a breach of its terms. Termination can occur when one party fails to perform their obligations under the contract or commits a material breach. It can also happen if the contract includes a specific termination clause outlining conditions under which either party can end the agreement.

Rescission in Specific Relief Act

The Specific Relief Act, 1963 comprehensively deals with the rescission of contracts in its Sections 27 to 30, providing a detailed framework for this type of legal remedy.

  • Section 27 addresses scenarios where the rescission of a contract can either be granted or denied by the court. This section sets out the conditions under which a party may seek to rescind a contract, as well as the circumstances that might lead a court to refuse such a request.
  • Section 28 specifically pertains to contracts involving the sale or lease of immovable property. In cases where the court has already decreed specific performance of such contracts, this section provides the guidelines for rescinding the agreement, ensuring that the rights and obligations of the parties are clearly defined and upheld.
  • Section 29 offers an alternative remedy by allowing a party to seek rescission in a suit for specific performance. This means that if a party initially seeks the specific performance of a contract, but circumstances change, they can alternatively request the rescission of the contract instead.
  • Section 30 empowers the court to mandate the rescinding party to take actions necessary to restore equity between the parties. This section ensures that the rescission process is fair and just, compelling the rescinding party to rectify any imbalances that may have arisen due to the rescission of the contract.

Conclusion

Rescission of contracts serves as a vital legal remedy, allowing parties to undo a contractual agreement as if it never existed. This remedy is typically invoked due to factors like misrepresentation, fraud, or other circumstances that undermine the validity or fairness of the contract. Through rescission, parties can restore themselves to their pre-contractual positions, thereby nullifying obligations and restoring any benefits exchanged. However, the process can be complex and may involve legal proceedings to determine the validity and consequences of rescinding the contract. Overall, rescission stands as a crucial mechanism in contract law, aiming to uphold fairness and equity in contractual relationships.

[1] Indian Contract Act, 1872, s. 29.

[2] Id. at s. 64.

Sahil Kumar