Consequences of Rescission, and Restoration of Benefit

Section 64 broken down

Two consequences of a valid rescission.

1. The other party need not perform any promise in the contract of which he is promisor. The contract is at an end as to the future.
2. The party rescinding must restore any benefit received, so far as may be, to the person from whom it was received.

Three points on the second.

• The duty is on the party rescinding, not on both.
• "So far as may be" softens the obligation where exact restoration is impossible. It does not excuse restoration altogether.
• Where restoration has become impossible, for example because the goods have been consumed, the right to rescind may itself be lost. See [Voidability of Agreements Without Free Consent].

Where section 64 applies. To contracts voidable under section 19 (coercion, fraud, misrepresentation), section 19A (undue influence), section 39 (refusal to perform wholly), section 53 (prevention) and section 55 (time of the essence). In every case one party has an option, and section 64 is what happens when he takes it.

Section 65 broken down

Two triggers, and both matter.

"An agreement is discovered to be void." The agreement was void all along and the parties find out. Illustration (a) is this: a promise to marry a woman already dead, so the agreement was void from the start and the thousand rupees must come back. This is also the route to restitution where an agreement is void under section 20 for bilateral mistake.

The word "discovered" carries weight. The courts have held that section 65 does not assist a party who knew from the outset that the agreement was void or unlawful. A person who knowingly enters an illegal bargain has not discovered anything, and the maxim in pari delicto potior est conditio defendentis leaves the parties where the court finds them.

"Or when a contract becomes void." A good contract that becomes void later. This is the limb that carries frustration under section 56, and illustration (d) is precisely a frustration case: the singer too ill to sing must refund the advance, and is not liable for the profits the manager would have made.

The obligation is to restore OR to make compensation. Where the advantage is money, it is repaid. Where it is goods consumed, services rendered or a benefit that cannot be handed back, its value is paid. Illustration (b) is the model: the buyer who keeps a hundred and thirty maunds of rice after the delivery date must pay for them.

"Any person who has received any advantage." Either party. Illustration (c) shows the innocent rescinding party paying: B rescinds because the singer absented herself, and B must still pay her for the five nights she sang.

The two sections compared

A worked example

Take three unwindings.

• Voidable and rescinded. Priya buys a car from Qadir for six lakh rupees, induced by his fraud, and rescinds on discovering it. Under section 64 Qadir need not perform any remaining promise, and Priya must restore the car, so far as may be, having received it under the contract. She recovers her six lakh.
• Becomes void by frustration. Rashmi engages Sameer to perform at a concert for two lakh rupees, paid in advance, and he falls seriously ill. The contract becomes void under section 56. Under section 65 Sameer must refund the two lakh, and, exactly as illustration (d) says, he is not liable for the profits Rashmi would have made.
• Discovered to be void. Tarun pays Uma three lakh rupees for a consignment that, unknown to both, had been destroyed before the contract. The agreement is void under section 20 as a bilateral mistake as to the existence of the subject matter, and under section 65 Uma must repay the three lakh.

Now a partial case on illustration (b). Vinod contracts to deliver two hundred and fifty quintals of wheat by 1 May, delivers a hundred and thirty by that date and no more, and the contract comes to an end. If the buyer retains the hundred and thirty after 1 May, he is bound to pay for them, because he has retained an advantage received under the contract.

And on illustration (c). A manager rescinds a singer's engagement after she wilfully misses the sixth night. He may rescind, but he must pay her for the five nights she sang. Rescission does not let a party keep the benefit he has already taken.

What it does NOT mean

"Rescission wipes the slate clean and nobody owes anybody anything." Both sections require benefits and advantages already received to be given back or paid for.

"Section 65 lets a party recover money paid under an illegal agreement." Not where he knew of the illegality. The section speaks of an agreement discovered to be void, and in pari delicto the court leaves the parties as it finds them.

"Section 64 applies to a void agreement." It applies to a voidable contract that has been rescinded. Void agreements are section 65's territory.

"Under section 65 the innocent party keeps everything." Illustration (c) says otherwise: the manager who rescinds must still pay for the nights already sung.

"A frustrated contract leaves the loss where it falls." Section 65 requires the advance to be refunded. What it does not give is damages for the lost bargain, and illustration (d) makes that explicit.

Quick revision

• s.64: on rescission of a voidable contract by the party entitled, the other party need not perform, and the party rescinding must restore any benefit received, so far as may be.
• s.65: where an agreement is discovered to be void, or a contract becomes void, any person who received any advantage must restore it or make compensation for it.
• s.65's two limbs: "discovered to be void" carries s.20 mistake; "becomes void" carries s.56 frustration.
• Illustration (a): promise to marry a dead woman, the thousand rupees repaid. (b): the buyer who retains a hundred and thirty maunds must pay for them. (c): the manager who rescinds must pay for the five nights already sung. (d): the ill singer refunds the advance but owes no damages for lost profits.
• "Discovered" excludes a party who knew: in pari delicto potior est conditio defendentis.
• s.65 gives restitution, never damages for the lost bargain.

Test yourself

1. Distinguish sections 64 and 65. Section 64 applies where a contract is voidable and the party entitled rescinds it: the other party need not perform, and the party rescinding must restore any benefit he received. Section 65 applies where an agreement is discovered to be void or a contract becomes void, and it obliges any person who has received an advantage under it to restore it or make compensation for it.

2. What does section 65 do for a frustrated contract? It supplies the restitution. Because the section covers a contract that becomes void, and a frustrated contract becomes void under section 56, any advantage received must be restored or paid for. Illustration (d) has the singer too ill to perform refunding the advance of a thousand rupees while owing nothing for the profits the manager would have made.

3. Can a party who knowingly entered an unlawful agreement recover under section 65? No. The section speaks of an agreement discovered to be void, and a party who knew of the illegality from the start has discovered nothing. Where both are equally at fault the maxim in pari delicto potior est conditio defendentis applies and the court leaves them where it finds them.

4. Explain illustration (c) to section 65. A singer contracts to sing two nights a week for two months at a hundred rupees a night, wilfully absents herself on the sixth night, and the manager rescinds. He is entitled to rescind, but he must pay her for the five nights on which she did sing, because he has received an advantage under the contract and section 65 requires it to be paid for.

5. What must a party who rescinds a voidable contract do with what he has received? Under section 64 he must restore the benefit received under the contract, so far as may be, to the person from whom it was received. The qualification allows for cases where exact restoration is impossible, but it does not excuse restoration altogether, and where restitution has become impossible the right to rescind may itself be lost.