CRITICAL ANALYSIS OF RESCISSION OF CONTRACTS UNDER SPECIFIC RELIEF ACT
Author: Yukti Gupta
The Specific Relief Act (hereinafter referred to as ‘the Act’) 1963 provides a network of reliefs to remedy the violation of a legal right and does not confer any rights in itself. The Specific Relief Act 1877 was first enacted which was later amended and succeeded as ‘Specific Relief Act, 1963’ on the recommendation of the 9th Law Commission Report. Substantive laws such as the law of contract and law of tort could not be exhaustive in terms of their remedies and reliefs and this is where this act comes into play widening the sphere of reliefs afforded by civil courts It is based on the Principle of Equity. A person seeking relief must come to the court with clean hands and it is the discretion of the court to grant any relief specified in the Act. The act is concerned with the enforcement of civil rights only and not penal rights. The various reliefs that may be granted by the Court under the provisions of this Act are, namely-
- Recovery of possession of the property
- Specific Performance of Contracts
- Rectification of Instruments
- Rescission of Contracts
- Cancellation of Instruments
- Declaratory Decrees
In this article, we will be analyzing the concept of Rescission of Contracts
In general words, the term ‘Rescission’ connotes annulment, destruction, repeal or unwinding of a transaction. The Act prescribes ‘Rescission of Contract’ as a relief to a person on whom a contract has been imposed using a fraud or illegality. Such a person has a right to seek relief by way of asking the court to declare the contract not binding upon him. Thereby, getting rid of the contract i.e. ‘Rescission of Contract’. The right to rescind a contract heavily relies on the assumption that the contract never really existed because of the defects it accompanied. It is well settled that a person who sues for rescission of contract cannot claim alternative relief of specific enforcement but a person who filed a suit for specific enforcement can alternatively claim for rescission of the contract.
Illustration- ‘A’ purchased a picture from ‘B’ on the pretext that said picture has been painted by a particular renowned artist. ‘A’ within some time got to know that it was a false representation. Here, A is entitled to have the contract rescinded.
- RESCISSION WHEN ADJUDGED
Section 27(1) of the Act provides for the cases in which the court may allow the relief of rescission, namely-
- On contract being Voidable (Sec 27 (1) (a))
Any person entitled to avoid a contract may sue to have it rescinded by the court where the contract is voidable by the plaintiff and where the contract is induced by actual fraud, it will be voidable and the court may set it aside on the ground of fraud. But a contract cannot get rescinded by a purchaser where the defendant misrepresented but was innocent and had no knowledge of actual facts. Section 15, 16, 17, and 18 of The Indian Contract Act, 1872 provides that a contract may be voidable where the consent has been induced by coercion, under influence, misrepresentation, or fraud.
Illustration- A sold a car to B in consideration of a cheque. B committed fraud as the cheque given was dishonored. ‘A’ the seller, in lieu to rescind the contract tried contacting ‘B’ the purchaser but failed to trace him. A then immediately informed the police and the Automobile Associate about the fraud committed on him by B. Meanwhile, B sold the car to C who acting in a good faith bought the car. In this scenario, C could not get a good title to a car as the immediate communication to the police by ‘A’ had resulted in the rescission of the contract and ‘C’ had purchased the car after rescission of the contract by the seller.
- On contract being terminable (Sec 27 (1) (a))
While entering into a contract, a party may reserve a right in his favour to rescind or terminate the contract on the happening of a certain event or a breach of contract. The court may at its discretion rescind the contract if it is satisfied that the party claiming the rescission has performed his part of the contract. It is pertinent to mention that court’s aid is not necessary in cases where a party has an option to rescind a contract and it simply declares the precursory rights of the parties instead of creating a right in favour of the parties.
Illustration- ‘B’, the manager of a theatre entered into a contract with ‘A’ a singer. The contract stated that ‘A’ will sing at his theatre two nights in every week during the next two months and shall be paid with @Rs 100/each night. On the 5th and 6th night, ‘A’ willfully absents herself from performing. Here, ‘B’ may rescind the contract as he reserved the right to rescind on the breach of the contract.
- On contract being unlawful (Sec 27 (1) (b))
The court may adjudge the rescission of contract which is unlawful on the grounds not probable on its face and where the fault of the defendant is more than that of Plaintiffs. The cases where the parties are equally at fault, sub-section 1 of Section 27 will not apply. Section 23 of the Indian Contract Act, 1872 provides that a contract is unlawful when it is forbidden by law, is fraudulent or of such a nature that if entered into would defeat the provisions of any law or implies injury to the person or which is regarded as immoral and opposed to public policy by the Court.
Illustration- ‘A’ an attorney to defraud B’s creditors induced his client ‘B’ who is a widow, to transfer property to him. Here, B is entitled to have the contract rescinded as both the parties are not equally at fault.
- WHO CAN SUE FOR RESCISSION
Sub-section (1) of Section 27 provides that any person who is interested in the contract may sue to have it rescinded. Such a person may include legal representatives, heirs, and assignees and in a case where the contract has been entered into by the manage or Karta of a joint family, then any member of such family.
- LOSS OF RIGHT OF RESCISSION (Sec 27 (2))
Relief of Rescission is restricted to a certain time limit only because if a voidable contract is not avoided in time then circumstances may change such as to make it undesirable to put an end to the contract. Subsection 2 of Section 27 provides cases in which the right of rescission is not available. The court may refuse to rescind the contract if the following situation exists-
- When the contract is Affirmed (Sec 27(2)(a))
If the plaintiff chooses to ratify the contract instead of exercising the right of rescission even after being aware of such right, then such a contract cannot be avoided afterward. The court may refuse to rescind the contract which the plaintiff has affirmed expressly or impliedly or by way of conduct. A party has a right to rescind a contract may expressly affirm it by openly waiving the right to rescind or impliedly affirm it by reaping the benefits of the contract instead of exercising the right.
Illustration- ‘A’ sold his truck to ‘B’ by making a false representation that the truck was in ‘excellent condition’. B discovered some serious defects in the truck during the first journey. But instead of rescinding the contract, B accepted A’s offer to half the cost of repairs. Later, during the second journey, the truck completely broke and B wanted to rescind the contract. It can be construed from this situation that by accepting A’s offer to share the cost of repairs, B had affirmed the contract and lost the right to rescind it.
- Where Restitution not possible due to change in circumstances (Sec 27(2)(b))
The court may refuse to rescind the contract when owing to the change of circumstances the position of the parties has been altered to such an extent that they cannot be put to their original status. Such a change of circumstance took place since the making of the contract not due to any act of the defendant himself. Lord Atkinson clarified the object behind the right of rescission in the case of Abram Steamship Co. v. Westville Shipping Company Ltd. He stated that when parties entitled to avoid a contract do so in clear terms then such right of rescission restores the parties to the position in which they stood before the contract was made. Bu the court may in the exercise of its discretion declare the rescission of the contract of the change in circumstances took place due to the act of the defendant himself.
Illustration- ‘A’ entered in a contract with ‘B’ to purchase a suit piece. ‘A’ got the suit piece made into a suit. Here, ‘A’ right to rescind the contract cannot be exercised because A will not be in a position to return the suit piece.
- The intervention of third-party rights (Sec 27(2)(c))
The court in order may refuse to declare the rescission of a contract where any third party has acquired rights in good faith during the subsistence of such a contract. The burden of proof is placed on the third-party to prove that the right acquired is in good faith and without any notice or value. 
Illustration- ‘A’ entered in a contract with ‘B’ to sell certain goods. But the consent of ‘A’ has been obtained by misrepresentation thereby giving him a right to avoid the contract. Before ‘A’ could avoid the contract, ‘B’ sold those goods to ‘C’ who was acting in a good faith and had no notice of the defective title of ‘B’. Here, ‘C’ has acquired a good title to the goods and ‘A’’s right to rescind or avoid the contract has come to an end.
- Severance (Sec 27(2)(d))
The court may refuse to rescind the contract where the plaintiff seeks rescission of only a part of the contract and that part is not separable from the rest of the contract. But if the plaintiff seeks rescission of that part of the contract which is independent of the rest of the contract then the court may allow rescinding such an independent part of the contract.
Illustration- ‘A’ an automobile manufacturing unit entered in a contract with ‘B’ the dealer, for the supply of 50 cars to his store. The contract contains a clause which provides that the requisite supply of car will be met only when the required amount of raw material is supplied to it on time. Here, in this situation, B cannot rescind the contract if A does not supply the requisite number of cars as per the contract due to scarcity of raw material.
- RESCISSION IN DECREE OF SPECIFIC PERFORMANCE (Sec 28 (1)(2))
Section 28(1) (2) of the Act provides that where in a suit for a decree of specific performance has been passed in respect of the contract for the sale or lease of immovable property, but the party (purchaser or lessee) in whose favour such relief is granted does not pay the purchase money within the limit allowed by the decree or such time further allowed by the court, the vendor or lessor may ask the court to rescind the contract by applying to the same suit in which decree is made. After considering the application, the court may order to rescind the contract and –
- In a case where the purchaser or lessee has already taken the possession of the property under the contract, shall direct them to restore it to the seller or lessor and;
- In a case where purchaser or lessee has accrued any rent or profit in respect of the property from the date of the possession obtained until the restoration of possession of the property, may direct them to pay such profit or rent to the vendor or lessor
- To serve the Justice, it may order the seller or lessor to refund any sum paid by the purchaser or lessee as earnest money or deposit in connection with the contract.
In Ramankutty Gupta v. Avara, the Hon’ble Supreme Court made the following observations-
- Section 28 indicates that the vendor or lessor may apply to rescind the contract in the ‘same suit’ in which the decree for specific performance has been made. Therefore, in a case where a trial court refuses to pass a decree of specific performance then such decree made by an appellate court shall be deemed to have taken place in the same suit.
- Section 28 (1) confers powers on the court to extend the time within which the purchase money or any other sum may be deposited. In such a case, an application to extend the time may be made in the trial court or the appellate court because the decree of trial court merges with the decree of an appellate court. Thereby, removing the element of technicalities to subserve substantial justice.
- Proceedings for the execution of decree do not fall within the expression “pendency of suit”.
In Kedar Nath Dhingra v. Kanwal Bhatia , the trial court while passing a decree of specific performance directed the plaintiff to deposit the balance money on or before 10th Sept 1996 otherwise the suit for specific performance would be dismissed. The Punjab & Haryana High Court observed that the decree of specific performance is like preliminary decree and the suit is deemed to be pending even after the grant of such decree. Thus, a decree of specific performance is not aimed to divest the court of its power to pass consequential orders including an order for extension of time as provided by Section 28 of the Act. The High Court, therefore, ordered that as the plaintiff has not paid the sale consideration to the defendant on the date mentioned in the agreement to sell and again by the time as ordered by the trial court, he shall pay Rs, 10,000 as compensation along with the sale consideration of Rs, 5 Lakh to the defendant.
In Sardar Mohan Singh v. Mangailal, the Hon’ble Supreme Court observed that Court does not lose its jurisdiction after the grant of the decree of specific performance nor it becomes functus officio. The trial court retains its power and jurisdiction to deal with the decree of specific performance until the sale deed is executed in the execution of the decree. It also stated that the court has the discretion to extend the time for the compliance of the conditions mentioned in the decree for specific performance.
- OTHER RELIEFS WHEN THE DECREE OF SPECIFIC PERFORMANCE HAS BEEN EXECUTED (Sec 28 (3))
Subsection 3 of Section 28 of the Act provides that when the purchaser or lessee pays the money as directed by the court under the decree of specific performance within the specified period then on an application made to the court in the same suit, the court may award such relief to the purchaser or lessee as he may be entitled to including all or any of the following reliefs in appropriate cases, namely-
- Execution of a proper conveyance or lease deed by the vendor or lessor;
- Delivery of possession, or partition and separate possession, of the property on the execution of such conveyance or lease.
In Grandhi Subramanayan v. Vissamsethi Visweswar Rao, the ‘A’ (plaintiff) entered in an agreement with ‘B’ (defendant) to purchase two rolling machines from ‘B’ and also paid part od consideration amount. Later on, the plaintiff filed a suit for refund of his consideration money alleging that ‘B’ had changed the machines. The Full Bench of the Andhra Pradesh High Court while upholding the order of the lower court and that of a learned single judge to be improper, observed that ‘A’ cannot claim the refund of the amount as ‘B’ all along had been ready and willing to perform his part of the contract. H did not accept repudiation on the part of the plaintiff, either expressly or implicitly.
- BAR OF SEPARATE SUIT (Sec 28 (4))
Section 28(4) of the Act provides that no vendor, purchaser, lessor or lessee shall file a separate suit in respect of any relief to be claimed under Section 28
- COST IN THE DISCRETION OF SUIT (Sec 28 (5))
The cost of any proceeding under Section 28 shall be at the discretion of the court. It is pertinent to mention here that an application for rescission ought to be filed within 3 years from the date of the decree for specific performance.
- ALTERNATIVE PRAYER FOR RESCISSION IN SUIT FOR SPECIFIC PERFORMANCE(Sec 29)
Section 29 of the Act provides that a plaintiff while suing for specific performance of the contract may alternatively sue for the rescission of the contract but it is not open to a plaintiff to sue for rescission of the agreement and in the alternative sue for specific performance of the contract. A party becomes entitled to treat a contract as repudiated or ended where the other party to the contract is guilty of anticipatory breach, but in this situation, the party cannot claim specific performance of the contract.
In Krishnabai C Kadam v. Wellworth Developers , the plaintiff filed a suit for declaration that agreement entered into was void as he had been deceived to accept for lessor consideration along with that, he filed an alternative relief for a decree of specific performance of the said agreement. The Bombay High Court while upholding that the alternative plea was maintainable stated that the defendant’s submission that they were ready and willing to perform and complete the transaction knowing well that an alternative relief for specific performance was sought after seeking a declaration that the agreement was void, cannot be ignored.
- COURT MAY REQUIRE PARTIES TO DO EQUITY (Sec 30)
‘He who seeks equity must do equity” is a well-known maxim of law which means that a party who seeks relief in any transaction must give also some sort of relief to the other party as well. Section 30 of the Act is based on the lines of above maxim and provides that the court while adjudging the rescission of a contract may direct restoration of any benefit received by the plaintiff under the contract along with the payment of the compensation to the defendant. The court may ask the party at whose instance the contract is canceled to restore any benefits received by him under the contract to the extent to which justice requires.
In Akshayalingam Pillai v. Ayyambala Ammal, the Division Bench held that a decree for specific performance ensures benefit not only for the plaintiff but also for the defendant. It also stated that the passing of a decree does not result in termination of the suit because all the reliefs which are open to the plaintiff after the judgment are equally available to the defendant.
Rescission of Contract is a relief provided to a party whose consent to the contract has been obtained by coercion, misrepresentation, fraud, or undue influence. Based on the principle of Equity, the right of rescission has been interpreted by the Indian Courts in such a way as to provide relief to both the parties i.e. one who wants to rescind the contract and the other who might get affected by such rescission.
 Lalit Kumar Jain v. Jaipur Traders Corpn. (P) Ltd (2002) 5 SCC 383
 Prem Raj v. D.L.F. Housing and Construction Co. Ltd., (1968) AIR 1968 SC 1355
 Law of Contract & Specific Relief, 5th Edition, By Moitra
 Wide v. Gibson, (1848) 1 HLC 605, 632-633
 Hungerford Investment Trust v. Haridas, AIR 1972 SC 1826: (1972) 3 SCC 684.
 Hari v. Naro, (1894) 18 Bom 342.
 Dr Avtar Singh, Law of Contract and Specific Relief (11th Edition at 892-897)
 See Rangaswami Gowden v. Nachiappa Gowden, AIR 1918 PC 196: 42 Mad 523; Ramgowda v. Annagowda, AIR 1927 PC 227 (PC)
 (1923), A.C. 773, at p. 781
 Nirmal Singh v. Gejo Mihan Singh, AIR 1997 P&H 260.
 Sub- section (1) and Sub section (2) of Section 28, The Specific Relief Act, 1963
 (1994) 2 SCC 642: AIR 1994 SC 1699
 Kumarsesan v. M.P. Sheshadri, AIR 2002 Ker 198, 203.
 AIR 1998 P&H 86, 88.
 (1997) 9 SCC 217; see also Ramankutty Guptan v. Avaza, AIR 1994 SC 1699; (1994) 1 Ker LT 453: (1994) 2 SCC 642.
 AIR 2002 AP 71 (FB).
 M. Mohammad Aslam v. C.N.A. Gowthannan, AIR 2003 Mad 248, 251-251
 Prem Raj v. D.L.F. Housing and Construction (P) Ltd., AIR 1968 SC 1355
 Jawaharlal Wadhawa v. Haripad Chakrobarty, AIR 1989 SC 609
 AIR 2001 Bom 9, 17-18.
 AIR 193 Mad 386