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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.
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A contract cannot, in general, be rescinded by one party unless both parties can be placed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.
(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
(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:-
(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.
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
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:
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.
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.
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.
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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.