RESCISSION UNDER THE CONTRACT LAWS: INDIAN AND COMMON LAW JURISPRUDENCE

The word “rescission” derives from the Latin term rescissio rescindere, meaning to cut or tear
open. In English law today, rescission is the process by which a subsisting contract (or other
disposition of property) is avoided at the instigation of one of the parties, on account of some
defect vitiating or otherwise tainting that party’s entry into the contract, such as fraudulent or
innocent misrepresentation, undue influence, duress or certain shared mistakes.1

The word “rescind” implies an express and unequivocal cancellation of the contract by one
party.2 The rescission must be communicated in the same manner as a proposal.3 The right of
rescission is available under Section 19 of the Indian Contract Act, 1872(hereinafter “the Act”),
where the consent is caused by fraud, misrepresentation or coercion; the right to rescind the
contract in the case of undue influence is dealt with under Section 19A of the Act.

Rescission (except by mutual consent or by a competent court) is the right of one party , arising
upon conduct by the other, by which he intimates his intention to no longer abide by the contract.
It is a right to treat contract as at an end, if he chooses, and to claim damages for its total breach,
but it is a right in his opinion and does not depend in theory on any implied term providing for its
exercise, but is given by the law in vindication of a breach.

A party to a contract is entitled to rescind the contract in the circumstances given in ss. 39, 53,
55, 64 & 65 of the Act.

1. Section 39 applies to executory contracts where the time of performance has not yet
arrived, and not to executed contracts. It presupposes a contract which is subsisting and
something yet to be performed under it. The option to the promisee to keep the contract
alive clearly implies that.4 Nor is the section confined to anticipatory refusals; it covers

1
Janet O’Sullivan, Rescission as a Self-Help Remedy: A Critical Analysis, Cambridge Law Journal, 509 (2000).
2
POLLOCK & MULLA, INDIAN CONTRACT ACT & SPECIFIC RELIEF ACT, 575(13th ed. 2007).
3
Section 66, The Indian Contract Act, 1872.
4
Kedarnath Lal v. Sheonarain Ram AIR 1957 Pat 408; V K Kumuraswami Chettiar v. PASV Karuppuswami
Mooppanar, AIR 1953 Mad 380; Sheikh Sultan Ahmad v. Syed Maksad Hussain, AIR 1944 Pat 3.
 the refusal to perform any substantial part of the contract which remains to be
performed.5

“Section 39: Effect of refusal of Party to perform promise wholly-When a party to

a contract has refused to perform, or disabled himself from performing, his promise
in its entirety, the promisee may put an end to the contract, unless he has signified,
by words or conduct, his acquiescence in its continuance.”

2. Section 53 is identical to the English Law, that prevention by one party is constructively
tantamount to fulfilment by the other. Such other may seek specific performance or
compensation by rescinding, annulling or abandoning the entire contract.6
“53. Liability of party preventing event on which the contract is to take
effect.—When a contract contains reciprocal promises, and one party to the
contract prevents the other from performing his promise, the contract becomes
viodable at the option of the party so prevented: and he is entitled to
compensation from the other party for any loss which he may sustain in
consequence of the non-performance of the contract.”
3. According to S. 55, where a party, who has promised to do a certain things at a specified
time, fails to do it at or before time, the contract becomes voidable at the option of promise,
if the intention of the parties was that time should be of the essence of the contract. Once
time is essence, either originally or subsequently made so by notice, and a party fails to
perform at the stipulated time, the other party has a right to avoid the contract.7 But the
contract does not by itself come to an end after the expiry of the time period, a proper notice
under Section 66 of the Act is required.8

5
Phulchand Fateh Chand v. Jugal Kishore Gulab Singh, AIR 1927 Lah 693.
6
Makineni Nagayya v. Makineni Bapamma, AIR 1958 AP 504; Alghussein Establishment v Etan College [1991] 1
All ER 267.
7
Kalidas Ghosh v. Magneeram Bangur & Co., AIR 1955 Cal 298; State of Maharastra v. Digambar Balwant
Kulkarni, AIR 1979 SC 1339.
8
Hindustan Construction Co. v. State of Bihar, AIR 1963 Pat 254; Tandra Venkata Subrahmanayam v. Vegesena
Viswanadharaju, AIR 1968 AP 190.
4. Section 64 gives the effect of rescission of a voidable contract. First, the person rescinding
the contract is liable to restore the benefit to the person from whom it was received.
Secondly, the other party need not perform his part of the contract.
“64. Consequences of rescission of a voidable contract.—When a person at
whose option a contract is voidable rescinds it, the other party thereto need
not perform any promise therein contained in which he is the promisor. The
party rescinding a voidable contract shall, if he had received any benefit
thereunder from another party to such contract, restore such benefit, so far
as may be, to the person from whom it was received.”
Earlier there was a view that this section applies only to rescission for want of free
consent(ss. 19 and 19A), later on it was opined that this is applicable even for section 39.9
5. Section 65 is based on the principle of restitution in integrum. It contains the principle of
restitution, where, after a benefit has been received, and the agreement is later discovered to
be void. It is ‘compensatory in principle’ and prevents ‘unjust enrichment’.10

“65. Obligation of person who has received advantage under void agreement, or
contract that becomes void.—When an agreement is discovered to be void, or
when a contract becomes void, any person who has received any advantage under
such agreement or contract is bound to restore it, or to make compensation for it
to the person from whom he received it.”

COMPENSATION

Section 75 of the Act prescribes compensation in case of rightfully rescinded contract. The
section reads as follows:

“Section 75. Party rightfully rescinding contract, entitled to compensation-A

person who rightfully rescinds a contract is entitled to compensation for any
damage which he has sustained through the non-fulfilment of the
contract.”

9
Murlidhar Chatterjee v. International Film Co. Ltd., AIR 1943 PC 34.
10
Ram Nagina Singh v. Governor General in Council, AIR 1952 Cal 306.
This section entitles such a party to claim compensation for the damage sustained by him
because the contract has not been fulfilled. The claim for compensation under S. 75 is
maintainable when the right of repudiation of the contract has been exercised under either of the
ss. 39, 53, 54 or 55 of the Act. This section appears fairly to cover the right of a buyer who has
paid a deposit on sale to recover it back if the seller makes default, if any more specific authority
is wanted than his remedy for breach of contract under the general provisions of section 73.

Applicability to Contracts Voidable under Sections 19 and 19A

A party who rescinds on the ground of fraud or the like is in a different position: it rescinds the
contract not because fulfilment has been prevented or refused, but because the contract, by
reason of the fraud is altogether to his disadvantage. It is sometimes said that a party who
rescinds for fraud cannot also recover damages.11 This limitation on the available remedies must
be confined to wholly executory contracts. In the case of partially executed contract, the two
remedies should be cumulative.12 The need for both remedies may be illustrated with the facts of
the case of Red Grave v. Hurd.13 If P agrees to enter into partnership with D in the latter’s
business of solicitor, and also to buy his suburban house, and the contract is induced by the fraud
of D, P should be entitled not only to rescind the contract, but also to recover as damages his
removal expenses, and damages for the loss involved in giving up his own practice.

The words ‘through the non-fulfilment of the contract’ indicates that the Act reproduces the
distinction which the English law draws between contracts rescinded on the ground of fraud and
those rescinded for other reasons: when any contract is avoided for breach, it remains operative
as to the past and so claims for restitution in respect of acts of performance prior to the rescission
are precluded. However, when it is rescinded ab initio just as if it had never been in force, as also
in case of innocent misrepresentation. In the latter case, therefore, all that can be claimed is
restitution. The parties on both the sides are to be restored to the status quo as far as that is
possible bearing in mind the important qualification given in Hulton v. Hulton.14

11
Halsbury’s Laws of England, Fourth Edition, Vol.31 Para 1082, P. 657.
12
Newbigging v. Adam, (1886)34 Ch D 582
13
(1881) 20 Ch D 1.
14
[1917] 1 KB 813.
 DISTINCTION BETWEEN RESCISSION OF CONTRACT AND REPUDIATION

In Howard-Jones v. Tate15the Court of Appeal clarified the distinction between rescission of a

contract on the one hand and repudiation on the other. The terms are often used interchangeably
– even by judges. This leads to confusion since they are quite different concepts. They result in
different outcomes for the parties and, importantly, a very different basis for the recovery of
damages.

Principle: The current position is that in situations of rescission ab initio, “the contract is
treated in law as never having come into existence” (as per Lord Wilberforce in Johnson v
Agnew, 392-393). It is a discretionary remedy of the court which may arise, for instance, in cases
of mistake, fraud or misrepresentation. In situations of repudiatory breach on the other hand,
“the contract has come into existence but has been put an end to or discharged”. Here, the
innocent party may choose to affirm the contract or bring it to an end, whilst still claiming
damages in addition.

Facts:

Mr Howard Jones (HJ) agreed to purchase a property from Mr Tate (T) on the basis that T was to
arrange, at his own expense, for it to have electricity and water supplied installed within six
months from the date of completion. Unfortunately, T failed to provide those services in
accordance with his obligations. HJ then issued proceedings against T seeking to rescind the
contract ab initio together with damages.

The Court of Appeal reaffirmed the first instance decision that HJ was only entitled to damages
for T’s repudiatory breach of contract. HJ discharged the contract, which he was entitled to do,
after T had failed to install the electricity and water supply within the stipulated time period.
From then on, as the primary obligations of the parties came to an end, a secondary obligation
arose on T to compensate to HJ for the losses arising from his contract breaches. The damages
were not to be assessed so as to put HJ back into the position as if he had never entered into the
contract (i.e. for HJ to recover all the monies paid under the contract). Rather, those should be
assessed on the basis of the loss HJ suffered as a result of not being able to use his property due

15
[2011] EWCA Civ 1330.
to the electricity and water supplies not being installed in time and on the basis of the cost of
installation of those services.

RIGHT TO RESCIND

BDW Trading Ltd (t/a Barratt North London) v JM Rowe (Investments) Ltd16

Facts: contracts were exchanged in February 2008 for a purchase at £1,800,000. Completion
was due in July. If the conditions were not satisfied within six days of the contractual completion
date, either party had a right to rescind. Although the conditions were not satisfied at the due
date, both parties continued working together with a view to achieving the conditions. In
November 2008 (primarily because of changed market conditions) the buyer gave notice of
rescission, requiring the return of its deposit. The seller claimed that the right to rescind had been
waived by the continued work on the transaction. The Court of Appeal held the rescission was
effective. The continued working to achieve satisfaction of the conditions did not amount to a
waiver of the right to rescind.

Principle: When a contract confers a right to rescind if conditions are not met by a particular
date, and the parties continue working on the matter after the right to rescind has become
available, the continued working will not (generally) amount to an election which waives
the right of rescission. If the pre-conditions have not been satisfied at a later date, the right can
still be exercised.

16
[2011] EWCA Civ 548.