Rescission

Rescission means terminating a contract and there are two types of rescission. Firstly, rescission ab initio which is applicable to contracts voidable for lack of consent. Such contracts are voidable under section 19 and 20 of the Contracts Act 1950 giving the innocent party the option whether to rescind or affirm the contract. The effect of the rescission is as if no contract was entered into. Thus, the remedy is restitutionary in nature. Second is rescission for breach applies when an innocent party is given the right to rescind when the defaulting party has refused or disabled himself from performing under section 40 of the Contracts Act. The rescission takes effect from the date the rescission is communicated to the other party. All rights and obligations under the contract which came into existence prior to that date survive allowing a claim in damage. There are three sections of the Act that apply when voidable contract is rescinded that is section 65, 66 and 76.

Section 40 of the Contracts Act stated that ‘when a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.’ This was applied in the case of Muralidhar Chatterjee v International Film Co Ltd where although the section did not use the term voidable or rescind, the Privy Council held that a contract which may be put to an end under section 39 of the Indian Contract Act (in pari material with section 40 of the Contracts Act) is a voidable contract and rescission under section 64 of the Indian Contract Act (in pari material with section 65 of the Contracts Act) applies. The Privy Council also held that a party rescinding a contract is also allowed to damages under section 75 of the Indian Contract Act (in pari material with section 76 of the Contracts Act).

In the case of Yong Mok Hin v United Malay States Sugar Industry Ltd, the fact of the cases are as follows, the appellant, a building contractor, entered into an oral agreement with the respondents to construct two stores for and an office building. The work on the two projects started but construction of the stores was delayed because of several reasons. During the progress of the work the appellant received interim payments on quantum meruit less 10% retention money as certified by the architect. The first three progress payments were made in share scripts. The fourth, at the request of the appellant, was paid in cash. However, as a condition precedent to this payment he was asked to sign a document which he did. The document contained an undertaking to the effect that he will not receive any more progress payments and that he would accept the balance of the contract price only after the completion of the whole work.

At the trial the appellant denied knowledge of the contents of the document when he signed it but did not say what he thought he was signing. From the surrounding circumstances it would appear that he was in desperate need of money to meet the extra expenditure entailed by the structural changes and additions made to the original project.

That the appellant was in short supply of money is further evidenced by the fact that notwithstanding his promise, he asked the architect to issue a certificate for the 5th progress payment. The architect turned down the application but later, on the intervention of the chairman of the board of directors of the respondent company, issued the 5th progress payment certificate. This sum, however, was not paid to the appellant because of the refusal of the managing director to sign the cheque. The appellant in consequence stopped work and refused to complete the same unless the payment was made.

MacIntyre J stated in his judgement ‘In the circumstances, the refusal by the appellant to carry on the work in respect of contract "B" because of non-payment of the 5th progress payment clearly amounted to a repudiation of the contract. The respondents had therefore rightly rescinded contract "B" and are entitled not only to claim compensation for damages under the provisions of section 75 of the Contracts (Malay States) Ordinance but also for the restoration of any advantage, if any, received by the appellant under the contract by virtue of the provisions of section 66.’

Since the rescission falls under section 40, thus as shown above section 65 and 76 should apply in this case. Section 65 of the Contracts Act stated that ‘when a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore the benefit, so far as may be, to the person from whom it was received.’ While section 66 states that ‘when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.’ In this case, there was a breach under section 40 and the party puts an end to the contract and rescission under section 65 applies. MacIntyre J noted that under section 65 only the party rescinding have to restore the benefit he received. However, under section 66 any person who received benefit has to restore it. Thus the Court held that section 66 applies as well. This decision was a very good decision because application of only section 65 might not be fair the rescinding party. The rescinding party decided to rescind the contract only because the other party did not fulfil their duty and it will not be fair for them to restore everything they have receive when it was the other party which is at fault.

Analysing the judgement, MacIntyre J said that section 75 applies to the rescinded contract “B”. However section 75 states that ‘When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.’ In this case, there was not anything stated in their contract that a certain amount has to be paid if there was breach of contract. So the usage of this section to decide on the damages might not be suitable. Instead of section 75, the more appropriate section to be used is section 76 which states that states ‘a person who rightly rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract.’ In the case of Muralidhar Chatterjee v International Film Co Ltd, the Privy Council held that section 76 is more appropriate to grant relief for breach under section 40. This case which referred to Muralithar case should have applied section 76 in the decision of the case.