RESCISSION OF CONTRACTS
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 Where rescission may be adjudged or refused.-(1) Any person interested in a contract may sue to have it rescinded, and such rescission may be adjudged by the court in any of the following cases, namely,-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(d) where only a part of the contract is sought to be rescinded and such part is not severable from the rest of the contract.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, does not extend, means a contract in writing.
Essentials of relief of rescission
Under Section 27 a person having some interest in the contract can request the court to rescind the contract i.e., to declare that the contract is not binding on him. That means recession is getting rid of a contract. Significantly, this section confers right of rescission on a party to the contract where consent of that party is caused by coercion, Undue influence, fraud, misrepresentation or mistake and hence contract is either voidable or void.
Important essentials of relief of rescission are;
(1) Who can claim relief of rescission – the Privity of Contract provides that the party to the contract can enforce the contract. It means as per this principle only the party to contract can claim relief of rescission. However, section 27 of the SRA 1963 provides an-exception that a person who has some interest in the contract can enforce the Contract and claim rescission. The Bombay High Court in a case Ravji Janardan Sarangpani v Gangadharbhatt (1880 Bom), has held that 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.
2) Grounds of relief of rescission- Such party to the contract However under Section 27(1) the Court may allow this relief on following two grounds;
(i) Where the contract is voidable or terminable by the plaintiff; or- First ground of rescission is that contract is voidable or terminable by the plaintiff.
Let’s understand these two expressions, voidable and terminable by the plaintiff.
Contract is voidable-
Significantly, the contract is voidable under Section 19 and 19A, 39, 53 and 55 of the Indian Contract Act, 1872. Section 19, 19A covers the cases where consent is not free but caused by vitiating factors such as coercion, fraud, misrepresentation or by undue influence. However, where consent is caused due to mistake, the contract is either void or voidable depending upon the nature of the mistake, Section 39 of the Indian Contract Act, 1872 talks about anticipatory breach made by the promisor.
Further, section 55 Para l covers the contract where promisor has agreed to perform his promise on or before the due date and he fails to do so and time is the essence of the contract. in all these cases the contract is voidable which means valid so long not avoided by the party having right of recession. It is important to mention that right of rescission must
be exercised as early as possible because it has its own limit and due to change of circumstances that party may not be able to exercise this right.
Terminable by the plaintiff-
Another case where relief of rescission can be claimed is where a contract is terminable by the plaintiff. It is important to mention that a contract is terminable by the plaintiff, where he has reserved a right to rescind. He may be entitled to terminate the contract because:
(1) He has the option to determine the contract; or (e.g. Partnership at will)
(2) He is entitled to terminate it on the happening of a particular event; or
(3) On non-performance or breach of a term of the contract.
(ii)Where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff.
It is important to note that Section 27 (1) (a) permits innocent plaintiff to claim relief of rescission, whereas Section 27(1) (b) allows a plaintiff who is not wholly innocent to get the relief from an unlawful transaction. Under this Section, he can sue for rescission where:
(1) The causes of unlawfulness of the contract are not apparent on its face; and
(2) The defendant is more blame than the plaintiff.
Significantly, rescission will be adjudged when the plaintiff is either wholly innocent, or
only partially guilty. It means where the plaintiff only partially guilty the defendant is to be blamed more. Therefore, the provisions of this Clause do not apply if the parties are in Pari Delicto (1924 Cal) (both the parties are equally guilty). Even the Bombay High Court accepted that this Section is a statutory recognition of the equitable doctrine of
Pari Delicto (1977 Bom).
Example A, an attorney, induces his client, B a Hindu widow to transfer property to him for the purpose of defrauding B\’s creditors and the parties are not equally in fault. B is entitled to have the instrument of transfer rescinded as she was partially guilty and the parties were not in pari delicto. ((Illustration b) to Section 35 of the repealed Specific Relief Act 877).
Discretion of the Court to grant relief of rescission: Word \”May\” under Section 27(1) show that it is discretion of the Court to grant relief of rescission. It means the Court must be satisfied that contract is either voidable or terminable by the plaintiff or the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff. However, burden of proof lies on the plaintiff that his contract is covered either under Section 27(1) (b). It means where he fails to prove this no relief of rescission shall be granted.
Refusal to grant relief of rescission (Section 27(2):
The court may refuse rescission of the contract or any of the ground mentioned in the Section 27(2). Accordingly, Section 27(2) mentions these circumstances where this right cannot be exercised which are:
(1) When the contract is affirmed by that party who has option to avoid the contract-
Where the contract is affirmed by that party who has option to avoid the contract then he cannot exercise his right of rescission. In Long vs Lloyd (1958 WLR), the defendant made an advertisement that his lorry was in excellent condition. Accordingly the plaintiff bought that lorry, but in its first journey, it did only 5 miles and broke down. When contacted by plaintiff, Mr. Lloyd, the defendant proposes to get it repaired and agreed to bear half repair price. The plaintiff, Mr. long, accepted the defendant’s proposal. However, in another journey, lorry was used by his brother on business trip and it broke down completely, Mr. long sued to rescind the contract.
His plea was that the advertisement that lorry was in excellent condition was false statement in amounted to misrepresentation. The court refused to grant rescission because it said the plaintiff should have rejected the lorry when it first broke down but instead of revoking the contract at that time, he accepted the proposal of defendant to be here 50% repair cost. By accepting that proposal he had indicated his willingness to continue with the contract. Hence he has performed the contract, and he cannot revoke it after the second breakdown, which was too late.
Therefore, in such contract where consent of a party is caused by coercion, undue influence, fraud or misrepresentation and, such person get chance either to affirm or to rescind the contract, then if he affirms the contract that then he cannot exercise his right of rescission. So, right of recession must be exercised first when he has such choice.
(2) Where restitution is not possible–
Significantly, for exercising right of rescission, the party exercising this right must restore any benefit which it takes from the other party That means restitution must be possible However, where restitution is not possible then this right cannot be exercised.
Example- A purchased a suit length on the basis of false statement that it is pure silk by the sale agent of Kohinoor, sector 17, Chandigarh. After getting it stitched, she realised that false statement was made by the agent and suit length was not off pure silk at this stage right of rescission cannot be exercised as restitution is not possible.
(3) Where third party acquires right in the subject matter of contract in good faith– Where a third person acquires rights in property, in good faith and for value, the party having right to rescind will lose his right. In this regard Section 178A of the Indian Contract Act, 1872 and Section 29 of the Sale of Goods Act 1930 are worth mentioning here.
Pledge by person in possession under voidable contract [See. 178A] – When the pawnor has obtained possession of the goods pledged by him under a contract voidable under Section 19 or Section 19A, but the contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawnor\’s defect of title.
Example- A obtains goods from B by misrepresentation/fraud, He pledges them to C. who acted in good faith and for consideration. Now B cannot rescind the contract when he discovers the misrepresentation/fraud so as to recover the goods from C.
In Philips v Brooks (1919 KB), a rogue purchased some items from the claimant\’s jewelers shop claiming to be Sir George Bullogh., He paid by cheque and persuaded the jewelers to, allow him to take a ring immediately as he claimed it was his wife\’s birthday the following day. He gave the address of Sir George Bullogh and the jewelers checked the name matched the address in a directory. The rogue then immediately pawned the ring at the defendant pawn brokers in the name of Mr. Firth and received Rs. 350. He then disappeared without a trace. The claimant brought an action against the pawnee to recover the ring. It was held by the Court that as pawnee had acquired the interest in the ring in good faith and for value, hence, the jewelers had lost his right to rescind the contract.
Sale by person in possession under voidable contract [Sec. 29 of the Sales of Goods Act, 1930]-
When the seller of goods has obtained possession thereof under a contract voidable under Sec. 19 or Sec. 19A of the Indian Contract Act, 1872, but the contract has not rescinded at the time of the sale by the other party, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the seller\’s defect of title.
Example- If A obtains goods from B by misrepresentation/fraud. He sells them to C, who purchases them in good faith and for consideration. Now B cannot rescind the contract when he discovers the misrepresentation/fraud so as to recover the goods from C.
(4) Severance– It is important to mention that where contract is partly valid and party voidable or void and the valid part is not separable from void or voidable part and the plaintiff is seeking rescission of a part of the contract then no rescission shall be granted by the court.
(5) By lapse of time– It is important that right of rescission must be exercised within the reasonable time period. However, where the injured party does not take action to rescind within a reasonable time, the right of rescission will come to an end. In Leafv International Galleries, the claimant purchased a painting from the defendant who innocently stated that painting is of renowned artist. Both parties believed that the painting was by the artist Constable. In fact 5 years later the claimant discovered the painting was not of the renowned artist. The claimant brought an action based both on misrepresentation and mistake and decided to revoke the contract.
The Court held that claim based on misrepresentation was successful as it was an innocent misrepresentation, but the claimant had lost the right to rescind the contract due to lapse of time. Significantly, it was held that for exercising the right of rescission the time starts from the date of the contract not from the date of discovery. Significantly, lapse of time without rescinding, may also be evidence of the plaintiff’s decision to affirm the contract.
Limitation period– A suit for rescission of a contract must be brought within three years from the date when the facts entitling the plaintiff to have the contract rescinded first became known to him (Limitation Act, 1963, Schedule, Section 59). 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 (2002 SC).