what does rescind a contract mean ?

A contract, be it of any kind, involves a lot of terms, conditions, and clauses. The contract is formed only after all the parties participating in the transaction agree to all the clauses. A contract serves as a set of guidelines to be taken care of while completing a transaction.

However, we often see that the contracts are terminated between the parties for several reasons. In some cases, the termination of a contract is based on mutual consent from all the parties. Today, in this article, we shall be talking about everything you should know about the rescission of a contract and the rights to rescind the contract. Read on to learn more about it.

Introduction

Before we talk about the rights to rescind the contract, let us first understand what it means. 'rescind' means 'revoke', 'cancel', or 'reverse'. Using the term regarding contracts would mean an 'unmaking of an agreement between the participating parties.

To explain in simple terms, it means the cancellation of a contract by one party. If any party wants to rescind a contract, he should communicate it to the other parties like he did when offering the warranty. If you revoke a contract, you will be back in your position before you agree. Every country provides a right to rescind a contract and has a different set of terms of conditions for the same.

Rescission is a provision of state contract law that protects the parties to contracts with the legal right to withdraw from a contract within an allowed timeframe. That means that when a contract is rescinded, the signed contract is effectively voided. The difference between termination and rescission of a contract is that a terminated contract becomes unenforceable starting on the date of the termination, whereas a rescinded contract is treated as if there had never been a contract at all. If the contract is rescinded, all the contractual obligations disappear. Further, in many cases, all parties to the contract mutually agree to the rescission. 

There are several scenarios in which recession can protect businesses such as misrepresentation or fraud, duress of undue influence, breach of contracts (material breach), etc. The article explores the legal framework that governs recession in India, recession types, common grounds to invoke this remedy, involved legal procedures, etc.

Legislative Framework Related To Rescission

In India, rescission is primarily governed by the Indian Contract Act, 1872, and Specific Relief Act, 1963. These laws outline the conditions, processes, and remedies available for rescinding a contract.

Recission Of Contracts Under The Indian Contract Act, 1872

The Indian Contract Act, 1872, addresses the concept of rescission under Sections 19 and 19A, which deal with voidable contracts arising from coercion, undue influence, fraud, and misrepresentation. Under Section 62 a party is allowed to rescind a contract but such rescission should only be in bilateral terms.

A party to a contract is permitted to rescind the contract in the situations given in Sections 39, 53, 55, 64 & 65 of the Contracts Act.

• Section 39: It applies to the Contracts where the performance period or time has not yet taken place.

• Section 53: It applies to the responsibility of the party stopping an event, thus influencing the performance or completion of the contract.

• Section 55: This section appertains where the promising party made sure to do a particular thing at a specified time, but fails to do it on or before time.

• Section 64: This section is applicable to a voidable contract.

• Section 65: This section deals with the principle of restitution in integrum. Its meaning is restoration to original condition i.e. in circumstances where the profit is received and the contract is found to be void later.

Recission Of Contracts Under The Specific Relief Act, 1963

The Specific Relief Act of 1963 focuses mainly on the specific performance of agreements, injunctions, and associated remedies. The Act specifies the precise conditions and legal bases under which a contract can be cancelled. Sections 27-30 of the Act establish the guidelines for the rescission of contracts in India.

• 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 specific performance.

• Section 30 envisages that the court may order the rescinding party to act in a manner that would restore equity.

Types Of Rescission

Recession can be divided into two types:

Recession By Agreement

Such kind of rescission occurs when all parties to the contract mutually agree to terminate it. This is a consensual act and doesn't necessarily involve a breach.

Rescission by Operation of Law

Such a situation happens if law allows one party to rescind the contract due to certain circumstances, such as breach by the other party, misrepresentation, fraud, mistake, duress, undue influence, or frustration of purpose.

Grounds For Rescission Of A Contract

A party may seek rescission of a contract under several legally recognized grounds, including:

Misrepresentation

When one party is intentionally deceived into entering a contract under false pretences, misrepresentation takes place. This can be fraud or negligence. The aggrieved party can rescind the contract if the misrepresentation is immaterial or it influenced the decision to contract.

Mistake

A mutual mistake or an error substantially affecting the agreement can lead to a mistake. It can be either unilateral (one party is mistaken, and the other party is aware of it or it should have been) or bilateral (both parties are mistaken about a crucial fact). If the mistake is so fundamental that it prevents the formation of a true agreement, recession may be granted.

Duress

The threats or coercion forcing a party to enter a contract against their will is duress. When a party enters into a contract under duress, it is voidable at the option of the coerced party.

Undue Influence

In a situation wherein some coercion or manipulation has forced a party to agree, undue influence occurs. if the influenced party can prove undue influence, they can rescind the contract.

Breach Of Contract

A material failure of one party to perform one or more of its contractual obligations leads to a breach of contract. The breach must go to the root of the contract, substantially impairing its value to the innocent party.

Illegality

When the contract entails illegal activities or contravenes public policy.

Lack Of Capacity

If a party was not legally competent to enter into the contract due to age, mental incapacity, or other factors.

When Rescission Can Be Denied

Although rescission is an effective remedy, courts take into account several limitations:

• Ratification of the Contract: The contract has been expressly or impliedly ratified by the plaintiff.

• Lapse of Time: An individual having right to avoid the contract must do so within an inexpensive time.

• Restoration to Original Position: The parties cannot be substantially restored to the position in which they stood when the contract was made where due to the change of circumstance which has taken place since the making of the contract (however not due to any act of the defendant himself).

• Third-Party Rights: The court may uphold third-party rights and deny rescission if those rights were obtained in good faith and the third party was unaware of the withdrawal.

• Severability of the Contract: Only a part of the contract is sought to be rescinded and such part is not severable for the rest of the contract.

Legal Procedure For Rescission

The legal procedure for rescission involves formally revoking or cancelling a contract, typically due to a breach of contract, misrepresentation, or other legal grounds, thereby restoring both parties to their pre-contractual positions.

Step-By-Step Process

Rescinding a contract requires following specific legal procedures, including:

• Application For Rescission- The injured party wishing to rescind the contract needs to apply for rescission, declaring the legal grounds.

• Court Involvement vs. Mutual agreement- Some rescissions go through a court of law, whereas some are settled amicably.

• Statutory Provisions- The Specific Relief Act, 1963, principally under Section 27, allows rescission particularly where contracts are voidable or breached.

• Limitation Period for Rescission Claims- According to the Limitation Act,1963, the timeframe for filing a rescission claim depends on the nature of the dispute.

Effects Of Rescission

Once a contract is rescinded, the following legal effects take place:

• Restoration of Parties to Pre-Contract Position – Both parties revert to their original state before the contract was formed.

• Restitution and Returning Exchanged Benefits – Any goods, services, or payments exchanged must be returned (Section 65 of the contract act deals with obligations of parties when an agreement is discovered to be void).

• Cancellation of all contractual obligations – The contract is effectively erased, and neither party has any further obligations under it.

Available Remedies For Rescission

The remedies available for rescission are as follows:

Restittuion

The remedy restores any benefit one party has received from the other under the contract. Section 64 of the Indian Contract Act addresses restitution in the context of rescission and deals with the obligation of a person who has received any advantage under a void or voidable contract to restore it or to compensate for it, to the person from whom he has received it.

Compensation For Damages

While rescission unwinds the contract, it doesn't always fully compensate the aggrieved party for all the losses they've suffered as a result of the contract (especially if the rescission is due to misrepresentation, fraud, or breach). Therefore, the aggrieved party shall also be entitled to claim damages.

Rescission vs. Cancellation of Contract

Important Case Laws On Rescission Of Contract

A few case laws on rescission of the contract are as follows:

Harmesh Kumar And Ors. vs Maya Bai And Ors.

In this case, the appellant challenged the findings of the lower courts, which had declared that the general power of attorney obtained from the respondent, was fraudulent. The Court found the second respondent had misrepresented the purpose of the document to the first respondent, leading her to believe it was solely for managing litigation on her behalf. Upon discovering the deceit, the first respondent filed a suit, seeking a declaration of her ownership and possession of the disputed land and challenging the validity of the power of attorney and subsequent property transfer. The Court emphasized that the appellants failed to provide credible evidence to support their claims, noting that key witnesses lacked personal knowledge of the parties involved or had conflicts of interest. Consequently, the appellants' appeal was dismissed, and the fraudulent transactions were nullified.

Krishna Wanti vs LIC

Here, the appellant sought to claim the proceeds from four life insurance policies following the death of her husband. The respondent contested the claim, alleging that the deceased had knowingly suppressed information about his heart condition at the time of obtaining the policies. The primary issue before the Delhi High Court was whether LIC was justified in repudiating the claim based on the assertion that appellant’s husband had fraudulently concealed his heart ailment. Upon reviewing the evidence, the court concluded that appellant’s husband had indeed been aware of his heart condition and had failed to disclose this material information to LIC. Consequently, the suit filed by appellant was dismissed, affirming LIC's repudiation of the policy amounts.

When Can A Contract Be Rescinded?

While executing a contract, the parties involved in the transactions are sure to have expectations from each other. However, there might be several occasions when you want to terminate the contract. If you also want to do the same, there are several cases when you can do the same. We list some of them for you.

In Case Of A Fraud

If you have entered a contract but have been subjected to fraud by one or more parties entering the agreement, you will be given an option to perform rescission of the contract. In this case, you will not need an understanding of other participating parties if you can prove the fraud.

Quality Of Service

Before entering into a contract, if you have specified the clause for a minimum quality of service or timelines and the other party does not meet them, you will have a right to terminate the contract. However, for this, you might have to provide advance notice to the other party, and in some cases, you might even need approval from a regulator.

Mutual Consent

If all the parties involved in a contract agree to rescind an agreement, a separate written document can indicate mutual consent or an intent to revoke the contract. However, in a deal, if only one party wants to rescind the agreement, he must give appropriate written notification of the legal reason because of which he is requesting the withdrawal. In such cases, a court might have to intervene and determine if the contract can be rescinded.

How To Rescind A Contract?

If you want to rescind a contract, several steps to it. Some contracts come with an option that allows parties to end the contract, while others don't have any facility. There are different ways to rescind contracts based on the conditions; some of which we mention below:

Clause In The Contract Document

You need to check the contract to see if there is a clause that facilitates terminating a contract. If yes, then there should not be any significant challenges. However, if there is no such clause in the agreement, then you might have to contact an attorney who might help you in doing so.

If the contract does not allow termination, or if the state or federal laws in a particular region do not allow doing so, you may attempt to negotiate with the other party to end the contract. You can complete the agreement when all the parties have a mutual understanding, even if such a clause is not mentioned in the contract itself.

Valid Reason For Termination

If you want to terminate a contract on valid grounds like fraud, coercion, or error, you will have to give written notification to other parties in advance. Once the notice is given, there should be no big challenge if all the parties mutually agree to terminate the contract.

On the other hand, if one or more parties are against terminating the contract, you might have to enter negotiations with them. If still, the parties are not able to reach a mutual agreement, you might have to file a civil suit, and the local court will decide if the contract can be terminated or not.

After-Effects Of Rescission Of A Contract

Based on the conditions on which a contract has been terminated, there might be several after-effects. When you complete the contract, you relieve yourself and the other involved parties from all the deal's obligations.

However, in some cases, there might be several obligations that might make you pay monetary compensation to the other parties if they face any loss due to the termination of the contract. However, that can also be negotiated with the parties.

Apart from that, once the contract is rescinded, all the parties are free from performing the outstanding obligations, as the deal is broken once for all. Also, all the benefits that you or the other parties might be receiving will be null and void once the contract is terminated.

Conclusion

Rescission of contract is a vital legal remedy that empowers parties to escape from problematic agreements. Whether due to a fundamental flaw in the contract's formation, a material breach by the other party, or other specific legal grounds, rescission offers a way to unwind the contractual relationship and seek appropriate remedies.

FAQs

A few FAQs based on rescission of contract are:

Q1. What is Rescission of Consumer Contracts?

Imagine you buy something that turns out to be faulty or the seller misled you – rescission of a consumer contract is your chance to back out of the deal. Consumer protection laws give you special rights to cancel in certain situations, beyond the usual contract rules.

Q2. What is Rescission of Business Contracts?

When businesses make deals with each other, rescission works similarly, but things can get a bit more complicated. If a contract goes wrong due to a breach, misleading info, or other serious issues, rescission can help a business get out of the agreement.

Q3. How Long Does It Take to Rescind a Contract?

Getting out of a contract can take a while, and it really depends on the situation. If everyone agrees, it can be quick, but if there's a disagreement, you might have to go to court, which can be a longer process.

Author Bio: Adv. Mudit Kaushik, a seasoned advocate with over a decade of experience, holds a degree from the renowned Campus Law Centre at Delhi University. Mudit has deep expertise across various areas of law, including intellectual property, contracts, corporate law, consumer protection, cybercrime, employment issues, commercial litigation, and arbitration. He skillfully handles complex legal matters in these fields.

What truly distinguishes Mudit is his focus on clear communication and well-designed strategies, ensuring that clients fully understand their situation and empowering them to make wise decisions. This client-centered approach, combined with consistently achieving favorable outcomes, demonstrates his commitment to upholding the highest professional standards.

Mudit consistently delivers exceptional results, whether he's protecting intellectual property, navigating complex contracts, or resolving legal disputes, showcasing a dedication to excellence that instils confidence and positively impacts every client.