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Rescission - Contract Law Remedy - Misrepresentation, Mistake, Fraud
Rescission - Contract Law Remedy - Misrepresentation, Mistake, Fraud
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Bars to Rescission
For the remedy of rescission to be available:
the contracting party seeking the remedy must not have affirmed the contract
restitutio in integrum must be substantially possible: both sides of the
transaction must be able to be undone
a bona fide purchaser for value without notice must not have taken an interest in
property which would be affected by the rescission
If those bars to rescission have not been satisfied, rescission should be available as a
remedy for the causes of action to which it applies as a remedy.
Contrast as a Remedy
Rescission may also provide a better remedy or the best remedy for an innocent party
when compared to other remedies, such as termination of a contract for breach.
For instance, when an innocent party rescinds a contract it may mean:
Grounds to Rescind
Contracts are rescinded when the parties thought they had a deal, but the basis was
wrong, or didn’t exist.
Accordingly, rescission of a contract is available for causes of action such as:
distribution agreements
intellectual property assignments and licences
sales of products and services,
provided that (1) restitution in integrum is possible, and (2) the remedy is no longer
available, because a bar to rescission applies to the case.
More on that below.
for a contract where ownership of physical property was transferred from one
party to another, ordering that the property be returned to the original owner
where a payment of money took place in reliance of the contract, ordering that
money (in the form of damages) be returned to the original owner, or
where expenses were incurred by a party in reliance of the contract, payment of
damages by one party to the other to compensate them for the expense incurred
in reliance of the contract.
In this way, courts orders are customised to suit the situation in the case – to undo
what needs to be undone.
Therefore the remedy is fact sensitive. It permits what is practically just to restore the
parties to their positions before the contract was made.
Adjustments
Adjustments may be necessary to be made between the parties in cases. That may
require specific, customised orders for damages to give effect to the rescission.
Depending on the contract rescinded, court orders may be required to:
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Enforcement of Rescission
A party entitled to rescission is likely to apply for court orders such as:
1. Contract Affirmed
In common with affirmation of a contract in the context of breach of contract, the
right to rescind can be lost.
There’s no turning back from an election to affirm the contract once it is made.
However, if it’s too late to rescind, the innocent party might be able to bring the
contract to an end for the future, and terminate it for breach of contract. Whether
that’s possible depends on precisely what has happened previously.
For rescission to be effective the innocent party must:
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Knowledge Requirement
There will be a point in time that the innocent party becomes aware of the right to
rescind, before they rescind it.
If the innocent party with that knowledge affirms the contract – elects to continue
with the contract – the right to rescind is lost.
A legally binding affirmation to continue a contract requires:
the innocent party must be aware of all of the facts giving rise to the right to
make the election
the legal consequences of those facts
clear and unambiguous conduct, consistent with an intention to continue with
the contract. The election may be implied by conduct.
However, a relatively short period of time is allowed for the innocent party to
consider their position and make their election. They’re entitled to make all
enquiries needed to learn all relevant facts.
Typically affirmation takes place by relying on a term of the contact or asserting a
right under the contract.
In cases of fraudulent misrepresentation where the fraud has been concealed
affirmation is not likely to be possible until the fraud could have been discovered.
Affirmation Examples
A contract may be affirmed by:
2. Impossibility of Restitution
It’s a precondition of availability of the remedy that the positions of the parties must
be able to be restored to their positions before the contract was made.
It’s also a fundamental requirement feature of rescission is that the parties are placed
in the position they were before the contract was entered.
That is, their positions before the contract was formed – sometimes referred to as
“the status quo”.
Restitutio in Integrum
The process of restoration is known as restitutio in integrum:
If restitutio in integrum is not possible, the remedy to rescind the contract is not
available
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Both sides of the transaction must be undone: not just one side of the
transaction, for one party.
In more modern times though, it’s more flexible than that. It’s not an absolute rule.
Courts are sometimes satisfied to grant the remedy when substantial restitutio in
integrum is possible. More so in cases involving fraud. It’s likely that the greater
reprehensible conduct on the part of the misleading party, the less stringent the
requirements on the part of the Court to insist on perfect restitution.
So restoration of the parties to their previous positions does not need to the exact or
precise position.
Whether or not substantial restitution is possible depends on the facts of the case. For
example:
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… the injured party is entitled to be replaced in status quo with this limitation
– that he is not entitled to be replaced in exactly the same position in all
respects, otherwise he would be entitled to claim damages, but is to be
replaced in his position so far as regards the rights and obligations which
have been created by the contract into which he has been induced to enter.
Rescission entitles the innocent party to a sort of – roughly speaking – indemnity for
entering into the contract. Sometimes an indemnity is especially ordered.
The innocent party to give credit for increases in the value of the property they
received before the contract was rescinded; and
The defendant must give credit for the actual proceeds of an asset received after
the contract was entered and before it was rescinded.
However, damages for fraud and similar causes of action are not limited to those
which were reasonably foreseeable. Consequential loss suffered by reason of having
acquired assets under a contract may also need to be accounted for, and taken into
consideration in a damages award.
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Examples of Rescission
Sale of Business
A claimant bought a hairdressing salon from the defendant. The defendant said that
he did not intend to continue to trade in the area. That was not true, and the
defendant knew it. After the sale, the defendant set up a new salon locally.
The business purchased did not retain a substantial part of its customer base.
The claimant was entitled to recover:
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The agreements would have contained more favourable terms for price and the profits
made by the claimants had the defendants not lied during the negotiations.
Damages are not awarded for the additional profits which would have been earned
had it not been for fraud of the defendant Clef Acquitaine SARL v Laporte Materials
(Barrow) Ltd [2001] QB 488
Summary
Rescission is the act of the person who claims to be entitled to rescind.
Courts simply approve or reject the entitlement and to make consequential orders so
as to achieve restitution in integrum.
Rescission can be awarded, even though precise restitutio in integrum is not possible.
Courts can do what is practically just between the parties, and by so doing restore the
parties substantially to the status quo to rescind the contract.
Contact Information
Hall Ellis Solicitors
89 Fleet Street
London EC4Y 1DH
contact@hallellis.co.uk
+44 20 7036 9282
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