CHAPTER IV

RESCISSION OF CONTRACTS

The provisions relating to rescission of contracts are contained in Sections 27 to 30 of Chapter

IV of Part II of the said Act.
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 action1 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.

1
Long v Lloyd [1958] 1 WLR 753
2
Car & Universal Finance v Caldwell [1965] 1 QB 525
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A contract cannot, in general, be rescinded by one party unless both parties can be placed in the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, 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.

In Prem Raj v. D.L.F.M Co. Ltd., it was held that a person who sues for rescission of contract
cannot claim alternative relief of specific performance but a person who files the suit for specific
enforcement can alternatively claim for rescission of the contract.
In Hari v. Naro, it was held that where the parties are equally at fault, the provisions of clause
1(b) will not apply.
If a contract is not proving to be beneficial depending on the situation, one has the option to
rescind the contract. The word “rescission” is derived from the Latin term rescindere, which
means to cut or tear open. The right of rescission is available under Section 19 of the Indian
Contract Act.
The option of Rescission is available to a party as a remedy whose consent, whilst entering the
contract, has been invalidated due to following:

 Misrepresentation / false statement of fact made by the other party whilst execution of
the contract
 A party is mistaken in the terms of the contract and the other party was aware of the
mistake
 A party was unduly influenced by another to enter into the contract (which is
considered under Section 19A of the Act).
 Non-disclosure with respect to insurance contracts

The above could be the main grounds for rescission of the contract. A party to a contract is
entitled to rescind the contract in the circumstances given in Sections 39, 53, 55, 64 & 65 of the
Indian Contracts Act.

 Section 39: Applies for Contracts where the performance period or time has not yet
arrived
 Section 53: Applies to the liability of party preventing an event, thereby affecting the
performance or the fulfilment of the contract
 Section 55: Applies where the party, who has promised to do a certain thing at a
specified time, fails to do it on or before time
 Section 64: Applies for a voidable contract
 Section 65: Deals with the principle of restitution in integrum (a Latin term). Meaning
restoration to original condition i.e. in situations where the benefit is received and the
contract was later found to be void. It is ‘compensatory in principle’ and prevents
‘unjust enrichment’.3

A party would be unable to go for rescission if it does not restore the other party to the pre-
contractual position. If rescinding party has received a benefit, it will not be able to rescind
unless and until the benefit is returned to the other party. Also if the reason for rescission is to
negate a third party’s rights, rescission cannot be available.

3
Ram Nagina Singh v. Governor General in Council, AIR 1952 Cal 306
Rescission of a contract by agreement

Where the parties may agree to the total release of their obligations under the contract or may
enter a new contract having different obligations or parties. There could be a partial discharge by
way of variation/waiver in terms or obligations of the existing contract.

Rescission of agreement can either be express or implied. It is implied wherein there is an

alteration of prevailing terms and substituted by new terms. Or there can be novation i.e. the
substitution of a new contract in place of old one. There can be contractual termination, if the
contract expressly provides an option for either of the parties to terminate the contract. This can
happen if there is a breach of contract, or occurrence / nonoccurrence of a specified event other
than the breach. After facts come to notice, right to rescind must be exercised immediately or in
a reasonable time frame. Circumstances of a case will define the reasonable time frame. Norm
that rescission has to be immediate does not hold good if there is a tenable reason for the delay.
The rescission must be communicated in the same manner as a proposal.

Compensation

Section 75 of the Act applies to compensation in case of rescission in a contract. It prescribes

compensation in case of rightfully rescinded contract. The section reads as follows:

“Section 75. Party rightfully rescinding the contract, entitled to compensation- A person who
rightfully rescinds a contract is entitled to compensation for any damage which he has sustained
through the non-fulfillment of the contract.”

This section entitles such a party to claim compensation for the damage sustained by him or her
because the contract has not been fulfilled. The claim for compensation under Section 75 is
maintainable when the right of repudiation of the contract has been exercised under Sections 39,
53, 54 or 55 of the Act. This section fairly covers the right of a buyer who has paid a deposit on
sale to recover it back if the seller makes default if any more specific authority is wanted then the
remedy is available by way of breach of contract under the general provisions of Section 73.
Steps for Recession

Basically, a notice is presented by the aggrieved party, addressed to the opposite party stating the
reasons for recession. In that notice, the party declares its intention to rescind the contract and
also asks that money be refunded or compensation be paid. The notice results in unilateral
rescission.

Sections 27 to 30 of Specific Relief Act, 1963 deal with the rescission of a contract. It is a type
of legal redressal.

 Section 27 deals with a situation where the rescission may be adjudged or refused,
 Section 28 deals with rescission in cases of contracts for the sale or lease of
immovable property,
 Section 29 deals with an alternative prayer for rescission and
 Section 30 the court may require the rescinding party to do equity.

SEC 27. 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 person 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)4

SEC 28. 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

4
Wilde v. Gibson (1848) 1 HLC – 605 approved in Gramani v. Ramachandran 1953 A.M 769
(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 the lessee as earnest money or deposit in
connection with the contract.

(3) If the purchase 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.

SEC 29. 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. Ltd5

5
Prem Raj v. D L F H Co Ltd (1968) A.SC 1355
SEC 30. 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 6

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

If 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) 7 Note that in Peyman v
Lanjani8, 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.

6
Govindram v. Edward Radbone (1947) 74 IA 295
7
Long v Lloyd [1958] 1 WLR 753
8
Peyman v Lanjani [1985] Ch 457
(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 Galleries9

(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 Pike10

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 11

(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)12 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.

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.

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
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)13

13
Whittington v. Seale-Hayne (1900) 82 LT 49