RESCISSION OF A CONTRACT

In a contract, a party has the right to rescind a contract if the given situation is not proving to
be beneficial. Section 19 of the Indian Contract Act provides for this right. This right is
extended to that party whose consent has been invalidated due to reasons such as
misrepresentation, undue influence, etc.

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.

HOW IS RESCISSION DIFFERENT FROM OTHER OPTIONS AVAILABLE TO

END A CONTRACT?
While there are many ways a contract can be ended, there are subtle differences between the
meanings of these terms. For instance:
 Termination typically refers to the ending of a contract, usually before the natural end of the
anticipated term of the contract, which may be by mutual agreement or by exercise of one
party of one of his remedies due to the default of the other party.
 Cancellation refers to the ending of a contract by destroying its force, validity, or
effectiveness. Generally, cancellation puts an end to a contract by discharging the other party
from obligations as yet unperformed, usually because the other party has breached or
defaulted.
 Rescission refers to the act, process of rescinding (i.e. undoing or unmaking) a contract.
More specifically, it refers to the right of parties involved within a contract to return to the
identical state as before they entered into the agreement.
 Repudiation refers to the refusal to perform a duty or obligation owed to the other party. It
consists of words or actions by the contracting party indicating that they are not going to
perform their part of the contract in the future.
 Revocation refers either to (a) mutual cancellation of a contract by the parties involved; (b)
withdrawing an offer before it is accepted (eg “We revoke our offer.”); (c) cancelling a
document before it has come into legal effect or been acted upon, as revoking a will or (d)
recalling a power or authority previously given, ie cancelling a power of attorney or
cancelling a driver’s licence.
 Accord and satisfaction refers to the situation in which one party, having complied with its
obligation under a contract, accepts compensation from the other party (usually money and of
a lesser value) in lieu of enforcing the contract and holding the other party to their obligation.
This discharges the previous contract. The accord is the agreement by which the obligation is
discharged. The satisfaction is the consideration which makes the agreement operative.
CHAPTER IV: RESCISSION OF CONTRACTS
Chapter IV of the Specific Relief Act, 1963 deals with Rescission of Contracts.
The Sections are as follows:
27. Where 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.
Section 27 talks about the right to rescind in the instances wherein the contract is voidable at
the instance of one party. However, this does not extend to illegal contracts. Subsection (2)
places a fetter on Subsection (1).
THE CONTRACT IS VOIDABLE AT THE OPTION OF THE PLAINTIFF
This clause has to be read with Sections 19, 19A, 39, 53 and 55 of the Indian Contract Act. It
also includes instance wherein power to rescind is reserved by the parties or party in the
contract itself. In other words, in order to rescind a contract, its invalidity has to be
established.
A contract becomes voidable at the option of one party if the contract has been caused by
coercion, undue influence, misrepresentation, or fraud. However, there is a distinction
between fraud in performance and fraud in contract, only the latter one is applicable in this
instance.
UNLAWFUL CONTRACTS

WHO CAN SEEK RESCISSION?

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, or whose interests are affected by it.
Thus, any member of a joint Hindu family is entitled to rescind a contract entered into by the
manager, whereby the former would be defrauded. The remedy is also available for legal
representatives, heirs and other assignees, provided that the original party has not, by his own
conduct, disentitled himself to relief, which does not affect the general rule. However, a legal
representative who was not a party to the suit of specific performance, cannot seek rescission
as to prevent the decree holder from securing fruits of the decree, if he was aware of the suit.”
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
The 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 Lloyd1)
Note that in Peyman v Lanjani2, 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.
(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 Galleries3)
(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 Pike4
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 5)

1
Long v Lloyd [1958] 1 WLR 753
2
Peyman v Lanjani [1985] Ch 457
3
Leaf v International Galleries [1950] 2 KB 86
4
Vigers v Pike (1842) 8 CI&F 562.
5
Armstrong v Jackson [1917] 2 KB 822.
(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 Brooks6) 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.
REFUSAL TO RESCIND
The court may refuse rescission of the contract or any of the grounds mentioned in sub-
section(2). This is a statutory recognition of the case law on the subject. Grant of rescission is
the discretion of the court. A suit for rescission of a contract must be brought within three
years7 from the date when the facts entitling the plaintiff to have the contract rescinded first
became known to him. Yet, rescission may be refused where the party entitled to rescission is
guilty of such delay or laches as amount to waiver or abandonment of right, or acquiescence,
or raise a presumption of such circumstances. Although a party entitled to rescind is not
bound to do so immediately, or within reasonable time, and he retains the right to make the
election to rescind or not to rescind, he may lose the right where, in the interval during which
he is deliberating, an innocent third party has acquired an interest in the property for value.
(Clough v. London and North Western Rly. Co.)8Lapse of time without rescinding, may also
be evidence of the plaintiff’s decision to affirm the contract.
RESTORATION NOT POSSIBLE
Since the object of the relief of rescission is to put the parties in the status quo, the court may
refuse to rescind the contract where the parties cannot be substantially restored to the position
in which they stood when the contract was made, where:
(i) a change of circumstances has occurred after the contract was made;
(ii) this change was not due to any act of the defendant himself; and
(iii) the circumstances are such that the parties cannot be substantially restored to the
position in which they stood when the contract was made.
In Halpern v. Halpern9, “a clause in a compromise involving an inheritance dispute provided
that all documents relating to the agreement shall be destroyed. This compromise was
challenged on the ground of duress. The destruction of documents had benefited the plaintiff,
and it could not be undone. On the preliminary question whether rescission should be ordered
when restoration was not possible, the court adopted a flexible approach that the courts may
do what is practically just, though it cannot restored back to their position. Thus in some
cases monetary compensation may substitute counter-restitution.
THIRD PARTY HAS ACQUIRED RIGHTS
There will be no rescission where the rights of third parties have intervened, and it would be
inequitable to grant rescission; i.e., where a third party has acquired a substantial right or

6
Phillips v Brooks [1919] 2 KB 243.
7
Limitation Act, 1963, schedule Art. 59.
8
[1871] 7 App 360
9
[2007] 3 All ER 478 (CA)
interest in the subject matter of the contract during the subsistence of the contract, in good
faith without notice of the contract, and has acquired such right or interest for value. The onus
of proving their bona fides lies on the third parties. (Nirmal Singh v. Geo Mihan Singh10)

10
AIR 1997 P&H 260