Rescission

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Rescission is the act of canceling the contract from the beginning and restoring the parties to the positions they were in as if the contract was never made. It is thus distinguished from discharge or termination of a contract where the rights and obligations accrued up to the moment of termination remain in place.[1]

Rescission is an act of the party (not the court), and is valid only when it is possible for the parties to be successfully restored to their original position (restitutio in integrum). Rescission is exercised within the following rules:

  • Rescission is usually done in equity, and only if court can substantially restore the parties.[2]
  • The court can order partial rescission or rescission on terms.[3]
  • Unconscionablility on behalf of the other party is fairly vital to the entitlement to rescind.[4]
  • Rescission will be barred if:
  1. Innocent misrepresentation - the common law does not allow rescission, and it is arguable whether equity has jurisdiction over this issue.[5]
  2. Executed contracts - cannot of be rescinded in the absence of fraud.[6]
  3. Affrimation - an affirmed contract cannot be rescinded.[7]
  4. Lapse of time - If lapse of time amount to affirmation, there can be no rescission. Delay itself will not be a bar to relief in quity but is relevant to the court’s exercise of discretion.[8]
  5. Misrepresentation becomes a term of the contract - there is authority to suggest that a party may still elect to rescind the contract on a basis of a misrepresentation even if the misrepresentation becomes a term (i.e., he does not have to sue under breach of contract).[9]
  6. Third Parties - rescission may be barred in cases where a third party became involved and acquired rights under the contract. However, monetary remedies are available.[10]
  7. Exclusion/entire agreement clauses - non-fraudulent misrepresentations will be protected by disclaimers or entire agreement clauses.[11]
  8. Notification - rescission will only be effective if it is communicated to the Representor. An exception to this bar is when it is impossible to communicate the rescission.[12]

If a contract is rescinded, the parties are restored to their original position as if the contract was never in existence.

This article is a topic within the subject Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 985-991 [39.05-39.30].

Introduction

[13] Rescission is an available relief to the following causes of action:

It often occurs that events have transpired to make rescission impractical or impossible (for example, cases involving third parties).

Rescission under the common law

[14] Rescission is an act of the party, not the court. Under the common law, a person may rescind the contract in cases where he was a victim of fraud, duress or a total failure of consideration. However, he may only do so if precise restitution is possible, which is often not the case.

Recission in equity

[15] Equity allowed rescission also in cases of an innocent misrepresentation and undue influence. In addition, it allowed rescission even when only substantial restitution was possible, since equity has the ability to issue orders and decrees which would in effect ensure appropriate restitution.

The way in which equity has the ability to affect appropriate restitution in cases of rescission is illustrated in Alati v Kruger:

  • "equity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo."[16]
  • "The difference between the legal and the equitable rules on the subject simply was that equity, having means which the common law lacked to ascertain and provide for the adjustments necessary to be made between the parties in cases where a simple handing back of property or repayment of money would not put them in as good a position as before they entered into their transaction, was able to see the possibility of restitutio in integrum, and therefore to concede the right of a defrauded party to rescind, in a much wider variety of cases than those which the common law could recognize as admitting of rescission."[17]

In Brown v Smitt[18], it was held that the court may adjust the compensations of the parties (after there have been changes to the subject matter) in order to ensure proper restitution:

  • "Where it has been wholly or substantially destroyed by the default of the party seeking rescission, there can be no rescission because there can be no restitution. But where the property has been improved or deteriorated by the act of the purchaser, and yet remains in substance what it was before the contract, equity adjusts the rights of the parties by awarding money compensation to one or the other, and so substantially putting each party in the position which he occupied before the contract was made."[19]

The courts have also enforced partial rescission, as demonstarted in Vadasz v Pioneer Concrete (SA):

  • "Thus unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other."[20]
  • The court may rescind only certain parts of the contract if the party entitled to rescission has also acted unconscionably.

Bars to rescission

[21] There are other reasons (besides the issue of restitutio in integrum) to why rescission would be impossible:

  1. Innocent misrepresentation - the common law does not allow rescission, and it is arguable whether equity has jurisdiction over this issue. Watt v Westhoven[22] holds it does not, Graham v Freer[23] holds it does.
  2. Executed contracts - cannot of be rescinded in the absence of fraud.[24]
  3. Affrimation - an affirmed contract cannot be rescinded.[25]
  4. Lapse of time - If lapse of time amount to affirmation, there can be no rescission. Delay itself will not be a bar to relief in quity but is relevant to the court’s exercise of discretion.[26]
  5. Misrepresentation becomes a term of the contract - there is authority to suggest that a party may still elect to rescind the contract on a basis of a misrepresentation even if the misrepresentation becomes a term (i.e., he does not have to sue under breach of contract).[27]
  6. Third Parties - rescission may be barred in cases where a third party became involved and acquired rights under the contract. However, monetary remedies are available.[28]
  7. Exclusion/entire agreement clauses - non-fraudulent misrepresentations will be protected by disclaimers or entire agreement clauses.[29]
  8. Notification - rescission will only be effective if it is communicated to the Representor. An exception to this bar is when it is impossible to communicate the rescission.[30]


References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. Casebook, p. 985 [39.05]
  2. Alati v Kruger(1955) 94 CLR 216, 223
  3. Vadasz v Pioneer Concrete (SA) 184 CLR 102, 114
  4. Vadasz v Pioneer Concrete (SA) 184 CLR 102
  5. Watt v Westhoven[1933] VLR 458 holds it does not, Graham v Freer (1980) 35 SASR 424 holds it does.
  6. Vimig Pty LLtd v Contract Tooling Pty Ltd (1987) 9 NSWLR 731, 737
  7. Coastal Estates Pty Ltd v Melevende [1965] VR 433
  8. JAD international Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378, 387-8
  9. Academy of Health and Fitness Pty Ltd v Power [1973] VR 254
  10. McKenzie v McDonald [1927] VLR 134
  11. Byers v Dorotea Pty Ltd (1986) 69 ALR 715
  12. Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525
  13. Casebook, p. 985 [39.05]
  14. Casebook, p. 985 [32.10]
  15. Casebook, p. 985 [32.10]
  16. (1955) 94 CLR 216, 223
  17. (1955) 94 CLR 216, 224
  18. (1924) 34 CLR 160
  19. (1924) 34 CLR 160, 164
  20. 184 CLR 102, 114
  21. Casebook, p. 995-6 [39.40]
  22. [1933] VLR 458
  23. (1980) 35 SASR 424
  24. Vimig Pty LLtd v Contract Tooling Pty Ltd (1987) 9 NSWLR 731, 737
  25. Coastal Estates Pty Ltd v Melevende [1965] VR 433
  26. JAD international Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378, 387-8
  27. Academy of Health and Fitness Pty Ltd v Power [1973] VR 254
  28. McKenzie v McDonald [1927] VLR 134
  29. Byers v Dorotea Pty Ltd (1986) 69 ALR 715
  30. Car & Universal Finance Co Ltd v Caldwell [1965] 1 QB 525
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