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HOW DOES THE RESCISSION OF CONTRACTS WORK?

INTRODUCTION

This blog will deal with the Rescission of Contract under The Specific Relief Act of 1963. First, it is essential to have a glimpse of what the act is. The Specific Relief Act offers specific reliefs. Specific relief, also known as an exact or designated, fixed, or decided relief, refers to the relief of a certain species. In contrast to generic relief of damages or compensation, the term generally refers to providing relief of a particular kind. For instance, the general relief may require the defendant to compensate me in an amount equal to the loss I incurred as a result of the unauthorised possession of my property. A specific remedy may allow me to reclaim custody of the same asset by requiring the defendant to return possession of it[1].

When there is no accepted method for determining actual damage, such as when the sale is of a painting by a deceased artist or when monetary compensation will not be sufficient to satisfy the plaintiff, specific performance is typically awarded just like that, in the same way, Specific relief could also be in the form of rescission of a contract. Chapter IV of the Act offers rescission as a form of relief. The Court may order rescission when the contract is voidable or terminable by the plaintiff or unlawful. In general terms, rescission refers to the termination or annulment of the contract. Rescission of contract has been defined in Sections 27 to 30 of The Specific Relief Act 1963[2].

The Term Rescission derives from the Latin word ‘rescindere’, which means to revoke or to cancel. In simple terms, this is done to put the party who has lost something as a result of a contract back in the same situation as before the contract. This class of contracts can be voidable at the discretion of the party whose consent was not free, for one cause or another, such as, for example, lack of free consent. He is entitled to a rescission of the contract. The option to rescind a contract makes it appear as though the contract never existed because of the flaws it had. After the Court has granted the rescission, the parties will no longer be liable or responsible for upholding any of the terms of the contract[3].

THE PATHWAY–RESCISSION OF CONTRACT

Any party to a contract may file a lawsuit to have it rescinded. A contract’s rescission automatically prevents either of its parties from carrying it through. A person subjected to imposition due to a contract can benefit from the relief of rescission. He has been subjected to this obligation of a contract as a result of fraud, unlawful activity, or an equivalent, rendering the agreement unenforceable or voidable. He may ask the Court to declare the contract non-binding on him. This is called rescission. Which means getting rid of a contract[4]. Accordingly, Section 27 stipulates that the Court may grant the relief of rescission in the following situations or circumstances:

  • When the contract is voidable or terminable by the plaintiff,
  • When the contract is illegal for reasons that are not immediately obvious, or
  • When the defendant is more at fault than the plaintiff[5].

These are the few situations where the relief of rescission may be granted under Section 27[6] of The SRA Act 1963. It is also seen that contracts can be rescinded through Section 19[7] of The Indian Contract Act. Next, it is essential to understand the procedure through which one can get rescission done.

WAY FORWARD – NOTICE FOR RESCISSION

As discussed above, there are a few situations where the Court may grant relief of rescission. A party to the contract may choose to break it in specific circumstances, as was mentioned above. If a contract is voidable, the party with the right to avoid it or repudiate it may do so by giving notice to the other party or performing other actions required in the specific situation. A voidable contract can only be avoided if the party with the right to do so does so. The agreement will be enforceable against both parties if, on the other hand, he affirms it. In most cases, giving the other party notice of your plan to cancel the contract is sufficient. Taking all necessary efforts that may be feasible under the circumstances when the other party is absent would be sufficient[8].

In Car and Universal Finance Co. Ltd. v Caldwell[9], an automobile buyer committed fraud against the vendor by paying a dishonoured cheque. The buyer was untraceable, which prevented the seller from breaking the agreement and regaining possession. The vendor immediately reported the incident to the police and the Automobile Association. A, acting in good faith, was sold the car by the buyer in the interim. The issue was whether A bought it after the seller rescinded the contract; if so, A would not have a good title to the vehicle. It was decided that even if the seller was unable to do so, the rescission to A, information to the police, and information to the Automobile Association had caused the retraction of the contract and that A did not receive a good title to the car as a result.

LIMITATIONS – RESCISSION OF CONTRACT

The following restrictions apply to the right to rescission of a Contract. The law might not allow the exercise of the right to rescind a contract under these circumstances.

  • Affirmation or Ratification by the plaintiff, which comes under Section 27(2)(a), deals with the situation where the plaintiff has explicitly or implicitly ratified the contract, and then the Court may not declare it unenforceable. A party with the option to avoid a contract can cancel or affirm it[10]. Revocation of the contract renders it void and unenforceable. On the other hand, if it is affirmed, the contract is legal and enforceable against both parties. The affirmation may be made expressly or implicitly, or it could be inferred through conduct.
  • When the parties cannot be substantially restored to their original position. Section 27(2)(b) comes into the picture[11]. If a party wishes to break the contract, he must do so as long it is possible to put the other parties back in the same situation as before the contract was established. There can be no rescission if ‘restitution in integral cannot be accomplished. For example, Anu purchases a suit piece from Ajay under a contract voidable at Anu’s option. Anu gets the piece converted into a suit. Anu’s right to avoid the contract cannot be exercised because he cannot return the suit piece.
  • Rights acquired by third parties come under Section 27(2)(c) of the Specific Relief Act[12]. The Court has the right to refuse the rescission of the contract where third parties have, during the subsistence of the contract, acquired rights in good faith without notice and for value. If a third party has gained a right to the contract’s subject matter before the right to rescind the contract has been exercised, the right to do so may be lost. A voidable contract remains in effect until it is avoided, at which point it is declared void. As long the contract has not been avoided, an interest in favour of a third party may be created.
  • Severance or Severability comes under Section 27(1)(d) of the Specific Relief Act[13]. The Court has the right to refuse the rescission wherein only a portion of the contract is being sought to be cancelled, and that portion cannot be severed from the remainder of the contract. When a party files a lawsuit to retract a contract, he must get the rescission of the entire agreement if the contract’s components form one cohesive whole. The law does not allow for the rescission of just a portion of a contract where one component cannot be separated from the other parts[14].

CONCLUSION

To sum up, we discussed that various reliefs are offered by the Specific Relief Act, and one of them is rescission. When a party makes a false representation in a legitimate contract between two or more parties, the other party has the legal right to have it dissolved. Through Section 27, we saw that the court might grant relief of rescission in the abovementioned situations. Limitations form an important part of any legislation. The same goes with rescission, where severance and affirmation/ratification are some limitations.

Author(s) Name: Jolly (Himachal Pradesh National Law University, Shimla)

Reference(s):

 [1] Dr R.K. Bangia, Contract I (7th edn, Allahabad Law Agency 2017)

[2] Avtar Singh, Contract and Specific Relief (11th edn, Eastern Book Company 2018)

[3] Dr R.K. Bangia, Contract I (7th edn, Allahabad Law Agency 2017)

[4] Dr R.K. Bangia, Contract I (7th edn, Allahabad Law Agency, 2017)

[5] Avtar Singh, Contract and Specific Relief (11th edn, Eastern Book Company,2018)

[6] Specific Relief Act 1963, s 27

[7] Indian Contract Act 1872, s 19

[8] Dr R.K. Bangia, Contract I (7th edn, Allahabad Law Agency 2017)

[9] Car and Universal Finance Co. Ltd. v Caldwell [1965] 1 QB 525

[10] Specific Relief Act 1963, s 27(2)(a)

[11] Specific Relief Act 1963, s 27(2)(b)

[12] Specific Relief Act 1963, s 27(2)(c)

[13] Specific Relief Act 1963, s 27(1)(d).

[14] Avtar Singh, Contract and Specific Relief (11th edn, Eastern Book Company, 2018).