Rescission of Contract under the Specific Relief Act

Contracts are the foundation of legal relationships in various aspects of life, whether personal or business. However, there are situations where a contract may need to be invalidated due to unforeseen circumstances, misrepresentation, fraud, or other factors that render the agreement unenforceable. This is where the doctrine of rescission comes into play, offering a remedy for parties who wish to undo the legal obligations created by the contract.

In India, the provisions for the rescission of contracts are governed by the Specific Relief Act, 1963. This article provides a detailed analysis of the concept of rescission, the legal grounds for rescinding contracts, and the specific provisions under the Specific Relief Act, 1963 that deal with this remedy.

Meaning of Rescission of Contract

The term “rescission” is derived from the Latin word “rescinder,” which means to cut off or cancel. In the context of contracts, rescission refers to the process by which a contract is cancelled or terminated, returning the parties to the position they were in before the contract was made. It is a remedy that voids the contract, releasing the parties from their contractual obligations.

Rescission is typically sought when a contract has been formed based on misrepresentation, fraud, mistake, or undue influence. The effect of rescission is to restore the parties to their original position, as though the contract had never been made. It can be initiated either by the parties involved (mutual consent) or by a court of law, depending on the circumstances.

Provisions for Rescission under the Specific Relief Act, 1963

The Specific Relief Act, 1963, primarily deals with the specific performance of contracts, injunctions, and other related remedies. The Act outlines the specific conditions and legal grounds under which a contract may be rescinded. Sections 27 to 30 of the Act provide the framework for rescission of contracts in India.

Let’s examine these sections in detail:

Section 27: Where Rescission May Be Adjudged or Refused

Section 27 of the Specific Relief Act, 1963, lays down the circumstances under which a court may adjudicate rescission or refuse to grant it. This section offers both the grounds for rescission and the defences that can be raised against it.

Grounds for Rescission

Voidable Contracts: Rescission can be granted where the contract is voidable or terminable by the plaintiff. For example, if the contract was entered into based on fraudulent misrepresentation, the aggrieved party has the right to have the contract rescinded.

Unlawful Contracts: If the contract is unlawful for reasons not immediately apparent and the defendant is more at fault than the plaintiff, the court may order rescission.

When Rescission May Be Refused

• Ratification: If the plaintiff has ratified the contract, either explicitly or implicitly, the court may refuse rescission.
• Change of Circumstances: If circumstances have changed significantly since the formation of the contract and the parties cannot be restored to their original position, rescission may be refused.
• Third-Party Rights: If a third party has acquired rights in the contract in good faith and without knowledge of the rescission, the court may protect those rights and refuse rescission.
• Indivisibility of the Contract: If only a part of the contract is sought to be rescinded, and that part is inseparable from the rest, rescission may be refused.

Illustrations:

• Example 1: A sells land to B but conceals a right of way over the land. B is entitled to have the contract rescinded due to A’s misrepresentation.
• Example 2: A lawyer influences a client to transfer property to defraud creditors. Here, the client is not equally at fault and can seek rescission.

Case Law:

• Prem Raj v. D.L.F. Housing and Construction (Private) Ltd. (1968): This case highlights that a person who sues for rescission of a contract cannot claim alternative relief of specific performance, but a person filing a suit for specific performance can claim rescission as an alternative remedy.
• Hungerford Investment Trust v. Haridas (1972): The Supreme Court held that a party has the option to rescind a contract without the aid of the court, but the court adjudicates the antecedent rights of the parties.

Section 28: Rescission in Certain Circumstances of Contracts for Sale or Lease of Immovable Property

Section 28 specifically addresses contracts related to the sale or lease of immovable property. It lays out the conditions under which a decree for the specific performance of a contract can be rescinded. This section is important in real estate transactions, where buyers or lessees may fail to comply with the terms of the decree.

• Grounds for Rescission: If a purchaser or lessee fails to pay the purchase price or any other sum within the time allowed by the decree, the vendor or lessor can apply for rescission of the contract. The court can then rescind the contract, either entirely or partially, depending on the justice of the case.
• Consequences of Rescission: If the contract is rescinded, the purchaser or lessee must restore possession of the property to the vendor or lessor. The court may also order the lessee to pay any accrued rents or profits from the property during the period of possession.
• Further Relief: If the purchaser or lessee pays the required sum within the time allowed, the court may award further relief, such as execution of the proper conveyance or lease.
• No Separate Suit: Section 28 prohibits any separate suit for relief related to rescission. All relief must be sought within the same suit where the decree for specific performance was made.

Case Law:

• Abdul Shaikh Sahib v. Abdul Rahiman Sahib (1923): The Madras High Court ruled that the trial court retains control over the contract and has the authority to extend the time for payment of the purchase price, even after a decree for specific performance.
• M. Sakuntala Devi v. V. Sakuntala (1978): The Andhra Pradesh High Court clarified that while Section 28 recognises the court’s power to extend the time for payment, it does not explicitly confer this power.

Section 29: Alternative Prayer for Rescission in Suit for Specific Performance

Section 29 provides that in a suit for specific performance, a plaintiff can alternatively pray for rescission of the contract. This allows flexibility in cases where the court may refuse specific performance but still grant rescission.

1. Dual Relief: The plaintiff may ask the court to enforce the contract, and if it cannot be enforced, to rescind it.
2. Case Law: Roopchand Chaudhari v. Ranjit Kumar: A plaintiff suing for specific performance may also sue for rescission of the contract. However, a plaintiff suing for rescission cannot ask for specific performance as an alternative.

Section 30: Court May Require Parties Rescinding to Do Equity

Section 30 emphasises the principle of equity in rescission. The court, while adjudicating rescission, may require the party seeking rescission to restore any benefit received from the other party and to compensate for any loss.

1. Restoration of Benefits: The court may order the rescinding party to return any benefits received under the contract or to make compensation as justice requires.
2. Equitable Doctrine: This section upholds the maxim, “he who seeks equity must do equity.” It ensures that rescission is granted in a fair and balanced manner, without causing undue harm to the other party.

Illustration:

A moneylender induces an agriculturist to sign a bond for an unfair amount. The court may rescind the bond but still order the agriculturist to repay the original loan amount with fair interest.

Case Law:

M. Mohamad Aslam v. CNA Gowthaman (2003): The court ruled that a purchaser who deposits money in the court cannot withdraw it without first applying for a court direction to the vendor to execute the sale deed.

Grounds for Rescission in Indian Law

Rescission is generally based on the principle that the contract was not validly formed or that it became impossible or inequitable to perform. The following are the primary grounds for rescission under Indian law:

1. Fraud or Misrepresentation: If one party has been induced to enter into the contract through fraudulent means or false representation, they have the right to rescind the contract.
2. Mistake: A mutual mistake regarding the terms or subject matter of the contract can provide grounds for rescission.
3. Undue Influence or Coercion: If one party is forced into a contract under pressure, threats, or undue influence, the contract can be rescinded.
4. Failure of Consideration: If the consideration for the contract fails, the party who suffers the loss can seek rescission.
5. Illegality: If the contract involves illegal activity or is contrary to public policy, it can be rescinded.

Limitations on Rescission

While rescission is a powerful remedy, there are limitations that courts consider:

1. Substantial Performance: If one party has already substantially performed their part of the contract, rescission may not be granted.
2. Third-Party Rights: If a third party has acquired rights under the contract in good faith and without knowledge of the grounds for rescission, the court may protect those rights.
3. Laches (Delay): If there has been an unreasonable delay in seeking rescission, the court may refuse the remedy on the grounds of laches.

Conclusion

The doctrine of rescission under the Specific Relief Act, 1963 plays a vital role in providing relief to parties who have entered into contracts based on misrepresentation, fraud, undue influence, or other unfair conditions. It serves as an equitable remedy that seeks to restore parties to their original position, ensuring that justice is served. However, the courts exercise discretion in granting rescission, balancing the rights of both parties and considering any potential harm to third parties.

The framework provided by Sections 27 to 30 of the Specific Relief Act offers a comprehensive guide to understanding when and how rescission can be granted, as well as the limitations and conditions attached to this remedy. Through various case laws, Indian courts have further elaborated on these provisions, helping shape the landscape of contract law in India.

Ultimately, rescission as a remedy underscores the importance of fairness, equity, and justice in contractual relationships. By allowing parties to nullify contracts that were unfairly formed or that became unenforceable due to unforeseen circumstances, the doctrine of rescission ensures that no party is unduly burdened by the legal obligations of an invalid contract.