This article is written by  Randeep Rana pursuing Crack California Bar Examination – Test Prep Course. This article discusses the various nuances of rescinding contracts in an analytical manner.

This article has been published by Sneha Mahawar.​​ 

Introduction

The word “rescission” is derived from the Latin term ‘rescindere’, which means to cut or tear open. So, when a contract is torn open in a manner that the parties to the contract are restored back to the position that existed prior to the formation of the contract, it is called rescission of the contract. In effect, it may be compared to going back in time as if no contract was formed between the parties. Now there are certain circumstances like misrepresentation, fraud, etc. that may lead to the rescission of the contract between the parties. On the contrary, there are also situations where courts do not permit the contract to be rescinded. In this article, we will discuss analytically what is meant by the rescission of contracts, the usual circumstances when rescission of contracts are granted and situations where they are not granted by the courts and some relevant case laws on the rescission of contracts.

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What is rescinding of contracts

Rescinding a contract implies that it is no longer recognized as legally binding on parties to the contract. So, basically, one party makes an effort to void the contract so that they do not need to fulfill the duties under the same. Rescinding of a contract can also be termed as unwinding of an agreement. However, a rescinding contract can be described broadly in two ways, as described below:-

  1. Firstly rescinding a contract by a party manifesting its intention to void a contract. After rescinding a contract, the party which rescinds the contract is no longer bound to perform the contract, but the party may be liable/bound to indemnify the party facing prejudice subject to the relevant clauses of the contract. After the recession, both parties will be at the pre-contract stage as similar to the void contract, where the contract was never signed or entered into. Rescission can be done by law, by mutual consent, or by reasonable cause.
  2. A court of law may also do rescinding of a contract in the interest of fairness and justice if the performance of a contract may be adverse to the interest of society or the public at large. Court of law rescinding a contract must ensure that the parties must be rehabilitated to position as the contract had never been signed or entered into and side by side protecting the rights of any third party to the contract which the rescinded contract may prejudice.

Grounds for rescinding a contract

To have a contract rescinded, the court first determines if there is a valid reason to undo the contract. Just because the parties changed their minds, a contract is never rescinded as the same legally binds the parties. You can rescind a contract for:

  • Mutual consent – Both parties can mutually agree and apply for rescission of the contract if the performance of the contract will cause irreparable and unwanted loss to the parties to the contract.
  • Indian Contract Act, 1872 – As per Sections 19 and 19A of the Indian Contract Act, 1872 if the facts presented by the other party were false or misrepresented or unduly influenced or there was non-disclosure with respect to insurance contracts or where the contract is unlawful for one party, then the party at lose can demand rescission and in addition to the above, a party to a contract is can rescind the contract provided the circumstances envisaged in Sections 39, 53, 55 and 64 of the Indian Contract Act, 1872 are fulfilled.
  • Against the interest of the society or public at large – If the contract goes against the general interests of the society or public at large, then rescission can happen.
  • Specific Relief Act, 1963 – Sections 27 to 30 of the 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, the specific performance of which has been decreed.
  • Section 29 deals with an alternative prayer for rescission in a suit for a specific performance and
  • Section 30 envisages that the court may order the rescinding party to act in a manner that would restore equity.

When is the rescission of contracts not granted

It is pertinent to note that it is not always equitable to rescind a contract. Also, the right to rescind a contract is not an immediate right but the same is a discretionary power vested to the court. A court of law may deny a request to rescind a contract based on the below-mentioned circumstances:

  • Substantial performance – one of the parties has confirmed their willingness to fulfill their obligations by performing the actions.
  • Protection of Third party’s right – if a third party has received some benefit or acquired some rights from the contract, undoing the contract could cause them harm.
  • Other defences – some of the other defences that can be used to rescind a contract include unclean hands, which refer to one party filing a breach of contract due to the other party committing a wrong. Another defence is laches, which means one party unnecessarily delayed a filing that caused prejudice to a party.

Case laws on rescission of contracts

Various High Courts of India and the Supreme Court of India have opined various times on the topic through various cases. Some of them are mentioned below:-

Sri Pawan Kumar Dalmia v. Sri Biligowda (2021)

In this case, the plaintiffs claimed that the defendants did not have sufficient title to the property and wanted to rescind the contract while claiming back the earnest money from them. The plaintiffs lost the case at the trial stage but later on at the appellate stage, the Karnataka High Court decided in favour of the plaintiff’s right to rescission of the contract as the defendants had misrepresentation themselves in having proper title to the property and ordered the payment of the earnest money back to the plaintiffs/ appellants.  

Bhupinder Kumar v. Angrej Singh (2009)

In this case, the appellant had entered into an agreement to purchase land, but the respondent failed to execute and register the sale deed. The appellant filed a suit for specific performance, and the court decreed the suit in favour of the appellant. However, the appellant failed to deposit the balance sale price within the specified time, and the respondent filed an application for rescission of the contract. The executing court rescinded the contract, and the High Court upheld this decision.

The court referred to Section 28 of the Specific Relief Act, which allows for the rescission of a contract for the sale of immovable property if the purchaser fails to pay the purchase money within the specified time. The court held that the trial court retains its power and jurisdiction even after the decree for specific performance, and it can extend the time for compliance with the decree.

In analyzing the facts of the case, the court found that the appellant had not provided sufficient material to justify an extension of time, and there was no evidence of the appellant’s inability to tender or deposit the balance sale consideration. Therefore, the executing court’s decision to decline an extension of time and rescind the contract was deemed just and equitable by the High Court. The Supreme Court upheld the High Court’s decision.

Conclusion

Thus it can be said that rescission leads to the cancellation of the contract in a manner that erases all the effects of the contract. Anything that was exchanged between the parties like money or goods must be restored in an equitable manner. It acts as a legal remedy when one or both parties wish to undo the contract’s effects and return to their pre-contractual position.

References

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