Rescission of a Contract

Introduction:

Rescission is a solution which is made accessible when the basic reason for making an agreement is essentially corrupted. It comes into action when due to the conduct or action of any party to the contract the entire reason for which the other party entered into the agreement is undermined. The contract can be canceled at the will of the affected party.

Rescission is different from termination of the contract as in the latter, the contract is terminated from the date of termination while in rescission the entire contract is treated as if it never existed.

It is an equitable remedy provided to people where the person entered the contract either because of force or undue influence or where there was a mistake of fact as to the entire subject matter of the contract by either party which would undermine the entire reason for entering into the contract.

What Does Rescission of a contract mean?

In contract law, rescission is an even-handed cure which permits a legally binding party to cancel the agreement. When a contract is rescinded, it is treated as if it never existed. It is also often referred to as the cancelation or unwinding of the contract.

The purpose of rescission is to bring the parties back to the positions where they were before the contract was made. It is frequently used as a cure in situations where there are issues with how the agreement was made. In this, both the parties must agree to the rescission of the contract and it is generally ended on mutual terms and any benefits received by any parties must be returned.^[1]

 Various Grounds for Rescission

1. Mutual agreement– when both parties to the contract express their intention to rescind the contract before completion of the said contract.  The rescission of the contract can be either express or implied.
2. Fraud- When the facts relating to the subject of the contract have been misrepresented intentionally by either party which led to the formation of the contract, then the agreement can be rescinded on the grounds of fraud.
3. Mistake of Fact– When one or both the parties made a mistake while understanding the terms and conditions or subject matter of the contract.
4. Undue influence – Any contract signed by a person under hostile conditions or due to a threat to harm his or any other person’s life or property.
5. Lack of capacity– Where it is proved that a person does not have the legal or mental capacity to enter into a contract.
6. Breach of contract– Where a party to the contract does not fulfill his obligation or it is indicated that the party won’t be fulfilling his obligation.

Bars to Rescission

Rescission is often called as an equitable remedy which means that its use is at the discretion of the parties of the contract or the judge’s decision. It is available only under certain circumstances. The following are the conditions under which a judge can deny the request for rescission: –

• When either party to the contract has affirmed the agreement through his action by performing his obligation under the contract. For example- Delivering of certain goods.
• Restitutio in integrum which means restoration to the original or pre-contractual position must be possible. If the parties cannot go back to their pre-contractual positions then the agreement cannot be rescinded.
• Any third party must not have received any benefit from the exercise of such a contract.
• The injured party should take action to rescind the contract within a reasonable period of time, otherwise he/she will lose the right to rescind.^[2]

Examples of Rescission

The most well-known case of rescission is the right of rescission within three days, in which a borrower refinancing a loan has additional opportunity to rethink the choice. The “clock” on the rescission cycle starts “ticking” the second the agreement is marked by the borrower. The borrower must attest the choice to practice the privilege of rescission by 12 PM on the third day in the wake of marking the agreement.

On the off chance that the borrower chooses to rescind, she or he should inform the lender. When the agreement is canceled, the lender must discount any charges related to the agreement that were paid by the borrower, for example, shutting costs, assessment expenses, or beginning charges. When this is finished, the agreement is then invalid and void.

Another common example of rescission can be found in an insurance company where companies that provide cover for life, car, fire, etc have the right to rescind policies without prior approval from the court in case the information provided by customers is false.

Provisions related to Rescission

The Specific Relief Act, 1963

• Sections 27 to 30 of this act deal with the rescission of the contract.
• Section 27 of this act deals with the situation where one of the parties has refused or adjudicated the rescission.
• Section 28 deals with the rescission of contracts of sale or lease of immovable property under specific circumstances.
• Section 29 of this act deals with the alternative prayer for rescission for specific performance in a suit.
• Section 30 under this section the court may require the rescinding party to do equity for the benefit which he/she acquired for the duration of the agreement.^[3]

Indian Contract Act, 1872

A person is entitled to rescind the contract under the following sections of this act:

• Section 39 – Applies to contracts where the execution period of such contracts has not yet begun.
• Section 53 – It refers to the liability of the party hindering an event, thereby affecting the fulfillment or execution of the contract.
• Section 55 – It is applicable when a party to the contract has failed to perform his obligations on or before the specified period of time.
• Section 64 – It deals with contracts that are voidable.
• Section 65 – It deals with the principle of restitution in integrum which means restoration to the original state.
• Section 75 – It entitles the person who has rightfully rescinded a contract for compensation of any damages sustained by him/her.^[4]

Conclusion

In a legal contract between two or more parties, any person who has entered into any such contract because of any unlawful reasons such as misrepresentation of facts, force, undue influence, or mistake of facts of the contract then any such affected person is entitled to rescind such contract either by agreement or by taking the matter to court.

Under the Specific Relief Act,1963 various provisions are given to provide judicial redressal to the aggrieved party.

It is fundamentally a way for the parties of a contract to go back to the positions where they were before they entered into an agreement.

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References:

^[1] Liberto, Daniel. “Rescission Definition.” Investopedia, www.investopedia.com/terms/r/rescission.asp.

^[2] Hall Ellis Solicitors. “Rescission in Contract Law: Remedy for Misrepresentation & Mistake of Law.” Hall Ellis Solicitors, 20 Sept. 2019, hallellis.co.uk/rescission-contract-law-meaning/.

^[3] Specific Relief Act,1963

^[4] Indian Contract Act,1872