Rescission

Meanings of Rescission

Rescission has a number of legal meanings.  Where one person has committed a fundamental breach of contract the innocent party has the option to treat the contract as terminated and to claim for damages. Alternatively, he may elect to enforce it (and in some cases also claim for damages.  In this sense rescission is the act of the person who was party to the contract. The contract itself may provide that one or other party can rescind in specified circumstances.

In the present sense rescission is a remedy or relief given by Court Order to set aside transactions.  It applies to contracts, deeds and other documents.  Rescission in this sense is an equitable remedy.  This means that as with Injunctions, specific performance and other equitable remedies considerations of justice and equity come into play.  In addition, the relief may be lost on other bases such as hardship, acquiescence, delay, the conduct of the party, etc.

The Court will generally only set aside a transaction where it is possible to restore the parties to the position they would have been in, had the transaction not been entered into.  For this purpose, an account may be taken so as to determine the rights of the parties.

An Order may be made for an account to be taken before Court officials in order to restore the original position. Where the position could not be reinstated, the court may be prepared to grant rescission as long as practical justice can be effected.

Equitable Rescission

Equity granted rescission is on a wider basis than the Courts of law. With equitable rescission, the transaction is voidable which means it remains in being until it is rescinded by the Court.  In the case of rescission by the parties, the innocent party  is only discharged from future performance.  In the case of equitable rescission by the Court, the contract is discharged from the beginning and retrospectively.

The cases in which rescission are granted are broadly as follows:

• where a person has been induced to enter into a transaction by a misrepresentation by the other side whether innocent, negligent or fraudulent;
• where a person has been silent in circumstances where a disclosure is required (limited category);
• where a person enters a transaction as a result of a mistake;
• where a person has entered into a transaction by reason of undue influence;
• where a transaction is unconscionable and should not be allowed to stand.

Grounds for Rescission

Rescission is an equitable remedy by which contracts and other instruments are set aside by the court. It is an equitable order. The effect of the order is that the instrument is deemed void as and from the outset. It is retrospectively invalidated.  The order may be made when the courts consider it just and equitable that the parties should be restored to their pre-existing position.

The principal grounds on which contracts and instruments are avoided are mistake (in the sense recognised at law or in equity) and misrepresentation.  Where a party enters a transaction as a result of another’s undue influence or where a transaction is unconscionable and the court decides that it should not be allowed to stand, it may be rescinded and set aside.

It may be a ground for rescission, that a party who has an obligation to disclose, fails to do so. This may occur in relation to contracts of utmost good faith, such as insurance contracts. Contracts of utmost good faith include insurance contracts but also some contracts in relation to allotment of shares and family arrangement.

Restitution of Status Quo I

It is a requirement of rescission, that the transaction can be unwound and for both parties. Rescission proceeds on the basis that the original transaction is avoided so that it must b possible to restore the parties to their original position.

This was formerly a strict requirement. The courts of equity now take a more flexible approach. However, it remains a ground for refusing an order of rescission, that is no longer possible to reinstate the prior positions. If as a result of the steps which the claimant has participated in or taken, it is impossible to restore the position substantially to the prior position, rescission may not be available.

In principle, assets and money transferred must be returned. However, equity does not require a strict restoration. A party in default may be required to give up his profits while receiving some payment for work carried out and expense incurred.

Restitution of Status Quo II

It is relevant that the impossibility of restoring the position is due to the nature of the agreement or the defendant’s default or misconduct. The court will be more willing to allow rescission, regardless of the difficulty of restoration, if the claimant is not responsible for the inability to restore the position.

A contract will not be rescinded if, or to the extent that it would prejudice the rights of innocent third parties. If a bona fide purchaser of an asset buys it without notice of the grounds, then it is generally too late to rescind. The impugned transfer is avoidable but not void.

Traditionally the view was that if the decision is not available where the contract was fulfilled.  However, it is likely that this older view may not hold in modern times.  It has been reversed by Statute in England and Northern Ireland.

Grounds for Rescission; Misrepresentation

In theory, rescission only applies when a contract is voidable. It was void and never was a contract.

The claimant must have been induced to enter the contract by reason of the representation. If a person is induced by another by fraudulent means to enter a contract or by statements known to be true recklessly or indifferently, the person is entitled to sue for damages, as well as the possibility of rescission.  This might arise from the civil wrong of receipt or negligent misrepresentation.  There is also a statutory right to sue for damages in the sale of goods.

However, if the representation is innocent but derives from the other party the only remedy is to grant rescission.

In the case of insurance contracts, family contracts and contracts involving fiduciary.  There is a duty to disclose relevant information.  In insurance cases, this is because it is critical that the insurer appreciates the full nature of the risks.  Failure to disclose material circumstances will entitle the insurer to rescission.

The duty goes beyond the information which the insured knew or should have known.  More commonly the policy proposal forms themselves purport to extend the duty further to all material facts whether known or unknown.

In the case of public companies, there are statutory obligations for extensive disclosure in prospectus law.

Grounds for Rescission; Mistake

A person will only be relieved from the consequences of his mistake in limited circumstances.  See our separate guides on mistake in relation to negating contracts.

Mistakes are difficult to categorise but the following broad categories have traditionally been identified.  In the case of a common mistake, both parties are mistaken as to something concerning the nature or quality of the thing being contracted.  For example, both could believe they are buying a valuable painting.  Generally, such a mistake will not negate the contract.

On the basis of common law mistake, a contract would only be void if the very matter being contracted for did not exist. For example, it was agreed to sell an item which unknown to both multiple parties had been completely destroyed. However, in some cases equity may allow relief where the mistake is fundamental.

The cases indicate that there is an equitable jurisdiction to have a transaction set aside for mistake if the mistake is fundamental and the claimant was not himself at fault.  In this case, the Court may set aside a contract on terms so as to do justice between the parties.  This is considerably wider than the basis on which a contract may be void at common law.

A so-called mutual mistake is where parties contract at cross purposes.  One party thinks he is contracting about one item whereas the other party is contracting about another.  In some situations, it may be found that there is no contract at all.  However if a reasonable man viewing circumstances would believe that there was an agreement, the subjective thoughts of a party are irrelevant.  Exceptionally a Court may decline specific performance in the case of a mutual mistake where this would cause hardship.

In the case of a unilateral mistake, one party makes an obvious mistake known to the other.  For example, he quotes a price greatly in excess of any reasonable price for an item by way of an obvious error.  Where one party is mistaken in a fundamental matter and the other party is aware, relief may be granted to the mistaken party by way of rescission for mistake.  However, where one party is not aware of the mistake however fundamental there is no relief.

Transactions may be set aside where there is a wholly inadequate consideration where there is a relationship of confidence between the parties.  See our separate guides on undue influence.  Similarly where there is an improvident transaction contract may be rescinded in equity.  This would generally involve an unequal relationship and a very one-sided bargain.

Defences / Grounds for Refusal

The usual delay, acquiescence or affirmation grounds are a bar to seeking rescission.  Delay will prevent the claimant from obtaining rescission if he gives rise to the interference that he has acquiesced in the void rendering event or the delay causes detriment to the defendant.  Where a person knows his rights have been violated and refrains for a significant period of time he may be held that he has acquiesced.

The operative degree of delay will depend on the circumstances.  Where the other party has acted to his detriment in reliance on the validity of the transaction, rescission may be barred.  Rescission is only available where a contract is voidable.  If the contract is void then it does not exist in the first place.

In common with other equitable remedies, the remedy of rescission may be lost by failure to take action within a reasonable time. Where the delay gives the defendant the inference and implication that the claimant has acquiesced in the violation of the rights, there may be a bar to grant the remedy.

Where delay has resulted in detriment to a third-party who has acted in good faith it will generally be too late to assert the remedy.

If a party with full knowledge of the facts which entitle him to rescind, affirms the contract and takes benefit under it, he may be taken to have waived his rights to rescind. As with other equitable remedies the person who seeks to rescind must do so within a reasonable time. He may be held to have affirmed the contract,  he may be denied the equitable remedy of rescission, by his delay in taking action.