Rescission of contracts as a rule enforced by court
Sections 27 to 30 of the Specific Relief Act, 1963
In one minute
Rescission means undoing a contract. A person who signed a voidable contract, or a contract that is unlawful for a hidden reason, can ask the court to set it aside. The parties are then put back, as far as possible, to where they stood before the contract.
Chapter IV of the Specific Relief Act, 1963 (sections 27 to 30) deals with this. The court "may" rescind and "may" refuse, so the four bars in section 27(2), sections 28 and 29 and the duty to do equity matter as much as the grounds. In exams, the grounds in section 27(1), the bars, the effect on benefits received, and the difference from cancellation and rectification are the main points.
Exam focus
- Frequency: No data
- Usually asked as: No data
Legal provision
- Section 27(1): any person interested in a contract may sue to have it rescinded. The court may adjudge rescission where the contract is voidable or terminable by the plaintiff, or where it is unlawful for causes not apparent on its face and the defendant is more to blame than the plaintiff.
- Section 27(2): the court may refuse rescission in four cases (ratification, no restoration possible, third-party rights, part not severable).
- Explanation to section 27: where the Transfer of Property Act, 1882 does not extend, "contract" means a contract in writing.
- Section 28: rescission after a decree for specific performance of a sale or lease of immovable property, where the buyer or lessee does not pay.
- Section 29: a plaintiff in a suit for specific performance may pray in the alternative for rescission.
- Section 30: the court may require the party granted rescission to restore benefits and make compensation as justice requires.
Meaning and definition
Rescission is the setting aside of a contract by the court. The Act uses the word for a contract. Its word for undoing a written instrument is cancellation. A contract is voidable where consent was caused by coercion, fraud or misrepresentation (section 19, Indian Contract Act, 1872) or by undue influence (section 19A).
The injured party has two ways to rescind. He can tell the other side that he rescinds. Or he can ask the court under section 27. The diagram shows the grounds for rescission by the court.
- Suit to rescind a contract section 27(1)
- Contract voidable by the plaintiff section 27(1)(a)
- Coercion, fraud or misrepresentation Contract Act, section 19
- Undue influence Contract Act, section 19A
- Contract terminable by the plaintiff section 27(1)(a)The plaintiff has a right to end it.
- Contract unlawful for causes not apparent on its face section 27(1)(b)Only if the defendant is more to blame than the plaintiff.
- Contract voidable by the plaintiff section 27(1)(a)
Detailed explanation
1. Who may sue
The Act says "any person interested in a contract". This is wide. Usually it is a party. A person may also be interested because the contract affects his rights.
2. Ground one: a voidable contract
A contract is voidable at the option of the party whose consent was not free. Section 19 covers coercion, fraud and misrepresentation. Section 19A covers undue influence. Such a party may sue under section 27(1)(a) and ask the court to rescind.
Example. Venu in Kakinada buys a rice mill after the seller falsely claims that it makes 500 bags a day. The mill makes 300. The contract is voidable by Venu, as in illustration (a) to section 19 of the Contract Act. Venu can sue to have it rescinded.
A void agreement is different. An agreement with a minor is void from the start, so there is no contract to rescind. This was the point in Mohori Bibee v. Dharmodas Ghose (1903), where the Privy Council said the question of void or voidable "presupposes the existence of a contract".
3. Ground two: a terminable contract
A contract is terminable by the plaintiff where he has a right to end it, for example for the other side's breach. He may ask the court to declare the rescission.
4. Ground three: a contract unlawful for hidden reasons
Section 27(1)(b) covers a contract that is unlawful for causes not apparent on its face. The defendant must be more to blame than the plaintiff. Without this rule, an innocent party would be left bound by an unlawful deal.
Example. A supplier in Vizag knows that his licence does not cover a chemical. He tells the buyer that it does and signs a contract to supply it. The contract is unlawful for a cause that is not apparent on its face. The supplier is more to blame, so the buyer may sue to rescind.
5. Rescission by the party and by the court
A voidable contract can be rescinded by the injured party himself, by notice, under section 64 of the Contract Act. He need not go to court. The consequences are set by that section. The other party need not perform his promises. The rescinding party must restore any benefit he has received.
A court order under section 27 helps when the other side disputes the rescission, or when a binding declaration is wanted. The decree then takes effect with the conditions in section 30 of the Specific Relief Act.
The court does not rescind automatically. Unlike specific performance, where the court shall enforce, here the Act says the court "may" rescind and "may" refuse. It rescinds through a decree and on its own terms, after looking at the whole position of the parties. The flowchart shows the questions after a ground for rescission has been proved.
- 1. Does a ground for rescission exist under section 27(1)?No: there is no rescission.
- 2. Has the plaintiff ratified the contract, expressly or impliedly?Yes: the court may refuse rescission (section 27(2)(a)).
- 3. Can the parties still be substantially restored to their earlier position?No, because of a change not caused by the defendant: the court may refuse (section 27(2)(b)).
- 4. Have third parties acquired rights in good faith, without notice and for value?Yes: the court may refuse (section 27(2)(c)).
- 5. If only part is to be rescinded, can that part be separated?No: the court may refuse (section 27(2)(d)).
- 6. No bar applies.The court may adjudge rescission on terms of restoration and compensation (section 30).
6. Ratification
If the plaintiff approves the contract after learning the truth, he cannot undo it later. Approval may be express, such as a letter. It may also be implied, for example by taking further benefits under the contract.
Example. Venu learns that his rice mill was sold by a false claim. He keeps running it and pays two more instalments for a year. The court may refuse rescission because he has impliedly ratified.
7. Restoration no longer possible
Rescission aims to put both parties back. If circumstances have changed so that this cannot be done substantially, the court may refuse. The change must not be due to an act of the defendant himself.
8. Third-party rights
A third party who acquired rights during the contract, in good faith, without notice and for value, is protected. Undoing the contract would unfairly harm an innocent outsider.
9. Part not severable
A plaintiff cannot choose to rescind only the part of a contract that suits him. If the part cannot be separated from the rest, the court may refuse.
10. Section 28: rescission after a decree for sale or lease
The court may decree specific performance of a sale or lease of immovable property. The buyer or lessee must then pay within the time allowed. If he does not, the seller or lessor may apply in the same suit to rescind the contract. The court may rescind it in whole or only against the defaulter, as justice requires.
- The court shall direct the buyer or lessee to restore possession, if he obtained it.
- It may direct payment of rents and profits from the date of possession, and a refund of earnest money or deposit if justice requires.
- If the buyer pays in time, the court may give him further relief, such as a conveyance and delivery of possession.
- No separate suit lies for these reliefs (section 28(4)). The costs are in the court's discretion.
Example. A court in Guntur decrees the sale of a house to Kiran and fixes 60 days for payment of the balance. Kiran does not pay. The seller applies in the same suit and the court rescinds the contract. Kiran must return possession if he had taken it. The court may also direct payment of rent for the period he held it.
11. Section 29: the alternative prayer
A plaintiff suing for specific performance of a written contract may ask that, if it cannot be enforced, it be rescinded and delivered up to be cancelled. The court may then grant this without a fresh suit.
12. Section 30: do equity
When the court adjudges rescission, it may require the party who gets the relief to restore any benefit he received and to pay such compensation as justice requires. This follows the maxim he who seeks equity must do equity.
13. The result of rescission
The contract ends. Section 30 allows the court to require the party who gets rescission to restore any benefit received and to make any compensation justice requires. The principle is that the court helps only a party who does fairness in return.
Example. After Venu's contract is rescinded, he must give the mill back to the seller. The seller must refund the price Venu paid. The court may also direct payment for any damage that Venu caused to the mill while in possession.
14. Section 65 of the Contract Act
If an agreement is void, or a contract becomes void, a person who got an advantage must restore it or compensate (section 65). It applies where the contract is void. Rescission applies where the contract is voidable or terminable.
Rescission by the party and by the court
| Point | By the injured party (Contract Act, section 64) | By the court (Specific Relief Act, section 27) |
|---|---|---|
| How | By notice, without going to court | By a suit and a decree |
| Contracts covered | Voidable contracts | Voidable, terminable, and unlawful for hidden causes |
| Restoration of benefits | The rescinding party restores benefits | The court may require restoration and compensation (section 30) |
| Best used when | The other side accepts or does not dispute | The other side disputes or a binding declaration is needed |
Don't confuse: rescission, cancellation and rectification
Students often use the three words as if they meant one thing. They do not.
| Point | Rescission | Cancellation | Rectification |
|---|---|---|---|
| Section | 27 to 30 | 31 to 33 | 26 |
| What is acted on | A contract | A written instrument that is void or voidable | The wording of a written instrument |
| Effect | The contract ends | The instrument is delivered up and cancelled | The instrument survives, corrected |
Inside the concept (rescission). A buyer was induced by fraud to buy land. He sues to rescind the contract of sale and to get back his money.
Just outside it (cancellation). A man's forged signature appears on a promissory note held by a moneylender. He sues to have the note delivered up and cancelled, though he never made any contract.
Rescission and specific performance also differ in how the court uses its power.
| Point | Specific performance (section 10) | Rescission (section 27) |
|---|---|---|
| Wording of the Act | "Shall be enforced", subject to three bars | "May be adjudged", and the court "may refuse" |
| Aim | Carry the contract out | End the contract and restore the parties |
| Conditions | Readiness and willingness (section 16) | Restoration and equity (sections 27(2) and 30) |
Common mistakes
- Saying that a void agreement can be rescinded. Rescission needs a contract that is voidable or terminable.
- Thinking that the injured party must always go to court. Under section 64 of the Contract Act he may rescind by notice.
- Forgetting that the defendant must be more to blame in the unlawful-contract ground (section 27(1)(b)).
- Forgetting the duty to restore benefits and to pay compensation (section 30).
- Writing that the court must rescind once a voidable contract is proved. It "may", and the four bars apply.
- Forgetting ratification as a bar.
- Forgetting that section 28 is used in the same suit and no separate suit lies.
- Using "rescission" for a written instrument. The Act's word for that is cancellation.
Apply it
Problem
Harsha buys a flat in Kurnool after the builder, who knows the building plan was never sanctioned, falsely says it was. Harsha pays Rs 25 lakh. A week later he learns the plan was never sanctioned. The builder refuses to refund the money. What can Harsha do?
Issue. Can Harsha have the contract set aside and recover his money?
Rule. A contract caused by fraud or misrepresentation is voidable at the option of the party whose consent was so caused (section 19, Contract Act). He may sue to have it rescinded (section 27(1)(a)). The court may require restoration of benefits (section 30).
Application. The builder made a false statement knowing it was false, and it induced Harsha to buy. That is fraud. The contract is voidable. The Exception to section 19 protects only misrepresentation and fraudulent silence, not an active false statement made knowingly.
Conclusion. Harsha may sue for rescission. He should return possession of the flat, if he has taken it, and the court may order the builder to refund the Rs 25 lakh.
Leading case laws
- Mohori Bibee v. Dharmodas Ghose (1903)
Facts. An infant mortgaged houses for Rs 20,000 to a moneylender whose attorney knew he was under age. He sued to have the mortgage cancelled. [1903] UKPC 12.
Principle. An infant's agreement is not a contract, so it is void and not voidable. Sections 64 and 65 of the Contract Act do not require him to repay. The court's power under the earlier Act to require compensation was not used, because the lender knew the truth.
Why it matters. It shows that rescission needs a contract, and how a court weighs restoration.
How to write this answer in the exam
5-mark answer
- Define rescission: setting aside a contract (section 27).
- Give the grounds: voidable or terminable by the plaintiff; unlawful for hidden causes with the defendant more to blame.
- Say who may sue: any person interested in the contract.
- List the four bars in section 27(2) on which the court may refuse.
- Mention restoration of benefits (section 30).
- Add rescission by notice under section 64 of the Contract Act.
10-mark answer
- Meaning, and the link with voidable contracts (sections 19 and 19A of the Contract Act).
- The tree diagram of grounds, with an example for each.
- Rescission by the party and by the court (table).
- The four bars in section 27(2) with a flowchart, and an example for ratification.
- Section 28 with its sub-sections, and section 29: the alternative prayer.
- Effects: section 30 and section 64 of the Contract Act.
- Rescission, cancellation and rectification compared.
- Mohori Bibee and a short problem.
Key points to remember
- Rescission (sections 27 to 30) undoes a contract. Cancellation (sections 31 to 33) undoes an instrument.
- Grounds: voidable or terminable by the plaintiff; unlawful for causes not apparent on its face if the defendant is more to blame.
- Any person interested in the contract may sue.
- The court "may" rescind and "may" refuse (section 27). Four bars: ratification, no restoration, third-party rights, part not severable.
- Section 28: rescission in the same suit after a decree for sale or lease if the buyer does not pay. Section 29: rescission as an alternative prayer.
- The injured party may rescind by notice (Contract Act, section 64) or sue under section 27.
- The court may require restoration of benefits and compensation (section 30).
Quick self-test
1. In which cases may the court adjudge rescission under section 27(1)?
Where the contract is voidable or terminable by the plaintiff, or unlawful for causes not apparent on its face and the defendant is more to blame.
2. Which section of the Contract Act lets a party rescind a voidable contract without going to court?
Section 64.
3. Name the four cases in which the court may refuse rescission.
Ratification; restoration not substantially possible; good-faith third-party rights for value; and a part that is not severable.
4. In which suit does a seller apply for rescission under section 28?
In the same suit in which the decree for specific performance was made.
5. What may the court require of a party granted rescission?
To restore any benefit received from the other party and to make any compensation that justice requires (section 30).