All you need to know about the effects of rescinding a contract - iPleaders (2024)

This article has been written by Amitha Suresh of Government Law College, Kozhikode, Kerala, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho. It has been edited by Prashant (Associate, LawSikho) and Baviskar Ruchika Mohapatra (Associate, LawSikho).

Can you change your mind after entering into a contract? The answer would generally be – no, as a contract becomes binding, once it is signed by the parties to the contract. A legally binding contract is required to be performed in accordance with its terms. So, you can’t avoid a contract arbitrarily. That means, if you fail to perform the contract, you will be liable for its breach and you have to make good on the loss suffered by the injured party (specific reliefs are available when monetary compensation would not suffice).

However, there are certain situations where the contract is no longer binding. One such situation is when a contract is Rescinded i.e., when the Contracting Parties have got all the freedom/right to revoke/cancel a contract without causing its breach thus maintaining their previous position/status prior to entering the contract (status quo ante). Hence it is clear that the rescission is not a remedy for breach of contract, instead a remedy to avoid a non-beneficial contract for adequate reasons backed by law. Now let’s see what are the effects of rescinding a contract in detail.

Rescission can be legally defined as “the abrogation of a contract, effective from its inception, thereby restoring the parties to the positions they would have occupied if no contract had ever been formed. The word “rescission” is derived from the Latin term rescindere, which means to cut or tear open. It is an unwinding of a transaction or undoing of a contract.

Rescission can either be mutual or unilateral. Unilateral rescission is generally exercised when it is found that the underlying basis of the contract is basically wrong or on faulty grounds. In other words, some intentional act or omission of a contracting party destroys the very reason that the other party made the contract in the first place. The contract can be rescinded, at the instance or option of the innocent party. It is like a self-help remedy. On the other hand, in mutual rescission, parties rescind the contract on certain already agreed terms of the contract.

Basically, there are two kinds of rescissions based on nature and origin. The first is “common-law rescission” where the contract has a voidable clause at one party’s option or there is a legal ground to avoid the contract such as:

• Misrepresentation
• Mistake
• Duress and undue influence etc.

The second one is “equitable rescission” which requires a party to seek relief from a contract where it would be inequitable to bind a party by a contract where the foundation is wrong and tainted. It is a discretionary remedy based on equitable grounds and the court merely decides the validity of the rescission which is exercised by the innocent party, rather than initiate it themselves. Hence, we can say that it’s an enforcement of a previously exercised legal right.

In India, there is no mandatory form or mode to exercise the right of rescission. It is enough under Section 66 of Indian Contract Act, 1872 that communication of rescission is done as in the case of a proposal or an offer. However, in certain cases even notifying the concerned authorities, would be sufficient. It is to be noted that the notice of avoidance should be given within a reasonable time after the innocent party knows the relevant facts. Or else, the contract would remain valid, later the innocent can sue such party for breach of contract.

In India, rescission is awarded at the discretion of the court under Sections 27-30 of the Specific Relief Act, 1963. It is essential that the process of rescission is the act of the party rescinding, and not of the court. However, the court may annul a rescission previously influenced by self-help.

Grounds to rescind a contract

Sections 27 and 28 of the Specific Relief Act, 1963 provides the grounds for filing a suit for rescission and we are limiting our discussion only to Section 27. As per Section 27 of the Act any person interested in a contract may sue to have it rescinded. Such rescission may be granted by the courts in the following cases:

(I) where the contract is voidable or terminable

(II) where the contract is unlawful for causes not apparent on its face and the non-affected party is more to blame than the innocent/affected party.

A voidable contract is an agreement which is enforceable at the option of one or more of the parties thereto, but not at the option of another or others. A contract is declared voidable under various provisions of the Indian Contract Act, 1872 (“ICA”).

According to Section 19 of the ICA, a contract is voidable at the option of the party whose consent was obtained to such agreement by coercion, fraud or misrepresentation. Similar is the situation when the consent was obtained by undue influence under Section 19-A of the ICA.

Similarly, in case of anticipatory breach of contract by one party, the other party to the contract may put an end to the contract, unless there is anything to the contrary as under Section 39 of the ICA.

In the same way, in case the time of performance of a contract is of the essence of the contract, non-performance of it by one party in such prescribed time entitles the other to cancel the same as per Section 55 of ICA.

In legal parlance, a rescinded contract is void ab initio. After the rescission the parties will no longer be bound by the contract and thus none of the parties have the right to ask any of the parties to perform the contract i.e., the original contract need not be performed

The aftermath of rescission is that:

• the parties are put back in their previous position prior to entering the contract i.e., the rights and duties of the parties are retrospectively extinguished
• It’s considered as non-existing

The transaction established by the contract is brought to an end with retrospective effect. The purpose of rescission is to restore the status quo ante, i.e., the state of affairs existing before the contract was entered into.

Restitution: As a principle of equity, the party rescinding the contract is required to restore or return the benefit received in the nature of money, property and other interests under the contract to the other party. Any party receiving anything under the contract is liable to restore it or make compensation for it to the other from whom it has been received.

When a contract transferring the title to property is rescinded, it usually has the effect of revesting any property so transferred in the transferor.

Section 30 of Specific Relief Act also provides a similar provision to require parties rescinding to do equity by restoring the respective benefits they received out of the contract, and also the compensation which justice may require. If you get the contract rescinded, you cannot be allowed to be unjust to retain any benefit received under the contract.

These sections are in conformity with English equitable rules, i.e., 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.

Damages: Damages may be awarded to restore the position of the innocent party to the pre-contractual position when he had incurred any expenses under the contract.

The victim of a fraud is entitled to sue for damages, fraud being a tort. But this cannot be extended to or equated with innocent misrepresentation.

There are certain grounds on which the court may refuse to rescind, namely:

• The party seeking the remedy have affirmed/ratified the contract

Court may refuse to grant the contract where the affected/innocent party has expressly or impliedly ratified the contract.

• Restitutio in integrum is not possible

When a party wants to avoid the contract, he must do so, so long as the parties to the contract can be placed in the same position. If parties can’t be substantially restored to their original position due to change in circ*mstances the rescission can be refused.

In Wallis v. Pratt The buyer could not make out the defect in a seed variety because those he purchased and those supplied by the seller were indistinguishable. The defect could be known only after the seed had been sown and the crop was ready. Here, the Buyer could claim compensation only. There was no chance of avoiding the contract and rejecting the goods.

• Intervening third party rights are present

The right of rescission may not be available if before the contract has been rescinded, some third party has acquired a right in good faith without notice and for value in the subject matter of the contract.

• Severance not possible

Rescission is not allowed where the plaintiff is seeking rescission of only a part of the contract and that part is not severable from the rest of the contract.

This remedy is also not available when the requesting party has committed some mistake in relation to the contract and not exercised the same within reasonable time after discovering the misrepresentation.

Shiv Construction v. PWD {AIR 2015 MP 42}

A contract for construction of a bridge was a time-bound work. The contractor failed to complete the work within the stipulated time. The State rescinded the contract. The contractor did not challenge it. The contract was allotted to another party. The State was held entitled to recover the loss of money thereby caused.

HD Hanumanthappa v. Mohd Sab {(2011) 1 Kant LJ 49}

The court observed that the party affected by the factors that make the contract voidable, has to avoid it because otherwise it remains valid and it is not like that of a void agreement that does not require to be avoided.

Harmesh Kumar v. Maya bai {AIR 2006 P&H 1}

In this case, an illiterate widow authorised a special power of attorney to attend to litigation against her, transferred her property to his son in fraud, held the suit and execution proceedings are all a nullity.

Krishna Wanti v. LIC {AIR 2000 Del 63}

The court observed that the onus is on the plaintiff to prove fraud and this is quite as high as the burden to prove in criminal law that the accused is guilty beyond a reasonable doubt. In this case, LIC could not prove that the insured had concealed or suppressed knowledge about his heart condition at the time of taking out the policy.

Ganga Retreat and Towers Ltd v. State of Rajasthan {(2003) 12 SCC 91}

In this case, in spite of having acquired knowledge of the true facts assuming that there was any mistake or misrepresentation to begin with and having learnt that the title which was sought to be conferred on them by the respondents was not such a ‘full title’ as they had contemplated it to be, appellants proceeded to have the sale deed executed and registered in their favour, seeking extensions of time and paying interest for the period of delay in payment. The Hon’ble Supreme Court held that the appellants are not entitled to any relief in the realm of the law of contracts. It was observed that there is no question of affirmation to a concluded contract when the party challenging it had voluntarily chosen to implement it knowing all the relevant facts and circ*mstances.

The rescission is a powerful right as well as an effective remedy in discharging contractual obligations by undoing the injustice done to parties, but it is one of the most difficult to analyse. The present law in India causes confusion and seems to be complex as no separation is maintained between rescission as a right of the innocent party for vitiating factors such as misrepresentation, coercion etc and that of actionable in equity like for anticipatory breach of contract. In my opinion, rescission should be restricted to the former.

The relief should not be extended to other cases like anticipatory breach, non-performance of contract in time because they are valid contracts in the eyes of law from the inception itself and not vitiated by factors like misrepresentation, undue influence which affect the very reason for the existence of the contract. In fact, there are many other effective remedies like termination, cancellation, and specific performance available in such cases. A narrow approach should be taken in construing rescission. Otherwise, it would lead to misuse of law by bringing everything under the ambit of rescission like economic fallouts in the commercial sphere thereby increasing such and such litigations for unconscionable gains.

The contracts pertaining to sale of goods, and other commercial agreements should keep out of the purview of this as in most cases the main purpose of rescission is to restore the parties into their original position is not served.

Rescission is the unmaking of contracts between parties. It not only extinguishes future rights and obligations arising out of the contract but also the very contract itself and treats it as ‘non-existing’. It is not the same as termination or cancellation of a contract. Under Indian Contract law the grounds for rescission not only includes the common-law grounds but also the equitable ones as mentioned above. Therefore, right to rescission which is a self-help one, exercised by parties on terms and conditions of contract or on other legal basis can also seek a discretionary remedy to validate their election to rescind under the Indian Specific Relief Act.

• Avtar Singh, Contract and Specific Relief, Eastern Book Company, 12^th edn.,2017
• https://www.scribd.com/document/314845973/Right-of-Rescission
• https://www.jbsolicitors.com.au/what-is-a-rescission-of-a-contract/
• https://hallellis.co.uk/rescission-contract-law-meaning/
• https://www.forbes.com/advisor/mortgages/right-of-rescission/
• https://www.forbes.com/advisor/mortgages/right-of-rescission/

Students ofLawsikho coursesregularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us onInstagramand subscribe to ourYouTubechannel for more amazing legal content.