Rescission of Contracts

The two grounds

(a) Voidable or terminable by the plaintiff. The ordinary case: the plaintiff's consent was vitiated, so the contract is voidable at his option under sections 19 or 19A of the Contract Act, or the contract is by its terms terminable by him.

(b) Unlawful for causes not apparent on its face, and the defendant more to blame. A narrow and interesting ground. Ordinarily a party to an unlawful agreement gets no help: in pari delicto potior est conditio defendentis. Clause (b) relaxes that where two conditions are met: the unlawfulness was not apparent on the face of the contract, so the plaintiff could not readily have seen it; and the defendant is more to blame. The parties are not equally at fault, so the maxim does not apply.

The four grounds of refusal

(a) Ratification, express or implied. A plaintiff who affirmed the contract with knowledge cannot then ask the court to undo it.

(b) Restitution is impossible. Where a change of circumstances since the contract, not due to any act of the defendant himself, means the parties cannot be substantially restored to their original position. The qualification matters: if it was the defendant's own act that made restoration impossible, he cannot rely on this.

(c) Third party rights. Where third parties have, during the subsistence of the contract, acquired rights in good faith, without notice and for value. The familiar protection, and all three elements are required.

(d) Part not severable. Where only part of the contract is sought to be rescinded and that part is not severable from the rest.

These are grounds on which the court may refuse. The word is permissive.

The Explanation provides that in territories to which the Transfer of Property Act 1882 does not extend, "contract" in this section means a contract in writing.

Section 28: rescission of a decreed sale where the buyer does not pay

This section is the machinery a vendor needs after he has lost a specific performance suit, and it is regularly examined because students expect the decree to be the end of the matter.

The situation. A decree for specific performance of a contract for the sale or lease of immovable property has been made, and the purchaser or lessee does not pay the purchase money or other sum the court ordered, within the period allowed by the decree or such further period as the court may allow.

Sub-section (1): the vendor's application. He may apply in the same suit in which the decree was made to have the contract rescinded, and the court may by order rescind it either so far as regards the party in default or altogether, as the justice of the case may require.

Note two things. No fresh suit is needed, and the court's power is flexible.

Sub-section (2): consequences of rescission. The court:

• shall direct the purchaser or lessee, if he obtained possession under the contract, to restore that possession to the vendor or lessor; and
• may direct payment of all the rents and profits accrued from the date possession was obtained until restoration, and, if the justice of the case so requires, the refund of any earnest money or deposit.

Sub-section (3): if he does pay. Where the purchaser or lessee pays within the period, the court may, on application in the same suit, award him further relief, including the execution of a proper conveyance or lease, and the delivery of possession, or partition and separate possession, of the property.

The scheme in a sentence: section 28 keeps the suit alive after the decree, so that whichever way the purchaser jumps, the consequences are worked out in the same proceeding.

Section 29: rescission as an alternative prayer

"A plaintiff instituting a suit for the specific performance of a contract in writing may pray in the alternative that, if the contract cannot be specifically enforced, it may be rescinded and delivered up to be cancelled; and the court, if it refuses to enforce the contract specifically, may direct it to be rescinded and delivered up accordingly."

Why it matters. A plaintiff who sues only for specific performance and fails is left with nothing, and section 24 then bars a later suit for compensation. Section 29 lets him plead the alternative: enforce it, or undo it and give me the document back.

Note the limits: the contract must be in writing, and the prayer must be made in the alternative in that suit.

Section 30: the party rescinding must do equity

"On adjudging the rescission of a contract, the court may require the party to whom such relief is granted to restore, so far as may be, any benefit which he may have received from the other party and to make any compensation to him which justice may require."

This is the maxim he who seeks equity must do equity in statutory form. It corresponds to section 64 of the Contract Act, which requires a party rescinding a voidable contract to restore benefits, and it goes further by allowing the court to require compensation as well.

The Chapter in a table

A worked example

Dinesh buys a warehouse from Esha for three crore rupees, induced by her fraudulent statement about its structural condition.

• He wants the contract undone by the court. Section 27(1)(a): the contract is voidable by him under section 19 of the Contract Act, so rescission may be adjudged.
• He had taken possession and used the warehouse for a year before suing. Section 30: the court may require him to restore the benefit received, so far as may be, and to make such compensation as justice requires, for example for the use he has had.
• He had, after learning the truth, spent six months negotiating a rent reduction and continued to occupy. Section 27(2)(a): he may have ratified the contract, expressly or impliedly, and the court may refuse.
• The warehouse burnt down after the sale, through nobody's fault. Section 27(2)(b): the parties cannot be substantially restored, and the change was not due to any act of the defendant, so the court may refuse.
• The warehouse burnt down because Esha's employees were negligent. The change was due to the defendant's own act, so clause (b) does not assist her.
• Esha had mortgaged the warehouse to a bank that lent in good faith, without notice and for value. Section 27(2)(c): the court may refuse to rescind so as to defeat the bank's rights.

Now change the setting. Dinesh obtains a decree for specific performance against Esha and then fails to pay the price within the period allowed.

• Esha applies in the same suit to rescind. Section 28(1): the court may rescind the contract so far as regards the party in default or altogether, as justice requires. No fresh suit is needed.
• Dinesh had taken possession under the contract. Section 28(2)(a): the court shall direct him to restore possession, and may direct payment of the rents and profits from the date he obtained it, and, if justice requires, the refund of his earnest money.
• He pays within the extended period instead. Section 28(3): he may apply in the same suit for execution of a proper conveyance and for delivery of possession.
• Suppose at the outset Dinesh had doubted whether performance was possible. Section 29: he could have prayed in the alternative that, if the written contract cannot be specifically enforced, it be rescinded and delivered up to be cancelled, which also avoids the trap in section 24.

What it does NOT mean

"Only a party may sue for rescission." Section 27(1) allows any person interested in the contract to sue.

"An unlawful contract can never be rescinded at the suit of a party to it." Section 27(1)(b) allows it where the unlawfulness was not apparent on the face of the contract and the defendant is more to blame.

"The grounds in section 27(2) bar rescission automatically." The court may refuse; the word is permissive.

"After a decree for specific performance the suit is over." Section 28 keeps it alive: the vendor may apply in the same suit to rescind on non payment, and the purchaser may apply for conveyance and possession if he pays.

"A plaintiff must choose between specific performance and rescission before suing." Section 29 lets him pray for rescission in the alternative, provided the contract is in writing.

"Rescission costs the plaintiff nothing." Section 30 lets the court require him to restore benefits and make compensation.

Quick revision

• s.27(1): any person interested may sue. Grounds: (a) voidable or terminable by the plaintiff; (b) unlawful for causes not apparent on its face AND the defendant more to blame (a relaxation of in pari delicto).
• s.27(2), refusal: (a) ratification, express or implied; (b) parties cannot be substantially restored, the change not being due to the defendant's act; (c) third parties acquired rights in good faith, without notice and for value; (d) the part sought to be rescinded is not severable.
• Explanation: where the Transfer of Property Act 1882 does not extend, "contract" means a contract in writing.
• s.28: after a decree for sale or lease of immovable property, on the buyer's non payment the vendor may apply in the same suit; the court may rescind as regards the defaulter or altogether; shall order restoration of possession; may order rents and profits and refund of earnest money; and if the buyer pays, may order conveyance and possession.
• s.29: in a suit for specific performance of a written contract, the plaintiff may pray in the alternative for rescission and delivery up for cancellation.
• s.30: the court may require the party rescinding to restore benefits and make compensation. He who seeks equity must do equity. Compare s.64 of the Contract Act.

Test yourself

1. On what grounds may a court adjudge rescission? Under section 27(1), where the contract is voidable or terminable by the plaintiff, and where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff. Any person interested in the contract may sue.

2. When may the court refuse to rescind? Where the plaintiff has expressly or impliedly ratified the contract; where a change of circumstances since the contract, not due to any act of the defendant himself, means the parties cannot be substantially restored to their original position; where third parties have during the subsistence of the contract acquired rights in good faith, without notice and for value; and where only part of the contract is sought to be rescinded and that part is not severable from the rest.

3. What happens under section 28 if a decree holder does not pay? The vendor or lessor may apply in the same suit in which the decree was made to have the contract rescinded, and the court may rescind it either as regards the party in default or altogether, as the justice of the case requires. On rescission the court shall direct the purchaser or lessee who obtained possession to restore it, and may direct payment of the rents and profits from the date possession was obtained and, if justice requires, refund of the earnest money or deposit.

4. What is the value of section 29? It allows a plaintiff suing for specific performance of a contract in writing to pray in the alternative that, if the contract cannot be specifically enforced, it be rescinded and delivered up to be cancelled, and empowers the court refusing specific performance to so direct. It saves a second suit and helps avoid the bar in section 24 on suing for compensation after a dismissal.

5. What does section 30 require? That on adjudging rescission the court may require the party to whom the relief is granted to restore, so far as may be, any benefit received from the other party, and to make any compensation to him which justice may require. It is the maxim that he who seeks equity must do equity, in statutory form, and it goes further than section 64 of the Contract Act by allowing compensation as well as restoration.