Remdies available to the parties where the consent is NOT free

 If the consent given in a contract is given due to coercion, undue influence, fraud or misrepresentation the contract is voidable at the option of the party whose consent is not free. The agreement is valid until the option to rescind the contract is exercised by the party entitled to it. Therefore, the parties have the option to either affirm the contract or rescind it. A third party cannot rescind a voidable contract. (Bakatawar Singh v. State of Madhya Pradesh AIR 1992 MP 318). However, an exception to this rule is available under section 88 of the Indian Trusts Act, 1882 which allows any person who has acquired a pecuniary advantage due to a fiduciary position and section 35 of the Specific relief Act, 1963 which allows any interested person or the legal representative of the entitled party to rescind the contract.

In case of fraud and misrepresentation, the party whose consent is not free can either

1.     avoid the contract or

2.     can demand that he be put in the position in which he would have been if the false representations that were made to get him to sign the contract were actually true. This second option is available only in cases where consent is affected due to fraud or misrepresentation. Where consent is affected due to coercion or undue influence, this option is not available to the parties.

 

For e.g., A, the owner of a company named LawVastutah, falsely informs a potential investor that their company’s shares are on the rise by the day. The investor based on this information invests into the company and then comes to know that the company is actually bankrupt. The investor can avoid the contract and get back his money or can insist that he get returns as promised. (Section 19 of ICA)

In case of undue influence, the party whose consent is not free can set aside the contract absolutely. If the party who has the option of avoiding the contract has gotten any benefit from the contract then the contract will be set aside based on the terms and conditions that the Court may deem just. For e.g., a person, A sold his business to his father at a very low price due to undue influence. A may opt to avoid the contract. The court may require A to return the money received for the sale to his father with or without interest. (Section 19A of ICA)

If the consent is given due to mistake, the agreement is void. In such cases, wherein due to fraud or mutual mistake of the parties the agreement does not express the real intention of the parties then the parties can have instrument(agreement) rectified. (Section 26 of the SRA)

Mode of Rescission

A party can rescind the contract by-

1.     giving a notice to the other party- communication of such notice should be done in the same manner as the communication of a proposal is done. (section 66 of ICA) Communication to the agent of the other party is also sufficient {Official Receiver, Jhansi v. Jugal Kishore, Lachhi Ram Jaina, Hyderabad AIR 1963 All 459, (1961) ILR 1 All 382, (1963) All LJ 152 (FB)}. In this case, Sri Chand and Jugal Kishore Lacchi Ram (hereinafter referred to as the plaintiffs) entered into a contract of sale of certain goods. In regards to the agreement between them Sri Chand sent two railway receipts and a Hundi (a financial instrument used in trade and credit transactions) by post through Central Bank(which acted as an agent between the parties) which were collected by the plaintiff by paying Rs. 15,000 to the Bank. The plaintiff consequently discovered that the receipts were useless and did not cover any goods and directed the bank to stop the payment which was done accordingly. Before the plaintiff could file a suit against Sri Chand an insolvency judge ordered the bank to freeze the amount. The plaintiffs filed a suit to recover the amount. The court was of the view that the plaintiff had paid the money in lieu of fraud and had acted as soon as he came to know the truth by informing the bank to stop the payment. He had thus rescinded the contract and was entitled to the money.

 

In the words of the court,

 

“In my judgment, the Central Bank was the agent of Sri Chand…Inasmuch as the Central Bank was the Agent of Sri Chand and the former had been informed by the plaintiffs that they had been defrauded and the sum of Rs. 15,000/- should not only be withheld from Sri Chand but should be paid back to them, they had in effect informed the Agent of Sri Chand about rescission of the contract. Consequently, I am unable to hold that the contract had not been rescinded by the plaintiffs.”

 

2.     filing a suit against the other party.

3.     using it as a defence in a suit for performance of contract. (Gosto Behari Roy v. Ramesh Chandra Das AIR 1978 Cal 235, 82 CWN 617, (1978) ILR 1 Cal 317) (section 9 of SRA)

 

Effect of Rescission

When a contract is voidable at the option of one party and that party rescinds it, the other party does not need to fulfil the terms of the contract. If the party rescinding the agreement has received any benefit from the other party then he/she shall restore that benefit to the person from whom it was received. The same obligation applies to the parties of a contract which is discovered to be void or which is declared void. (Section 64 & 65 of ICA)

 

Act	Effect	Remedy Available	Section applicable
Coercion	Voidable	Rescission, Restoration	19(ICA)
Undue Influence	Voidable	Rescission, Restoration	19 A(ICA)
Fraud	Voidable	Rescission, Performance as if representation true	19(ICA)
Misrepresentation	Voidable	Rescission, Performance as if representation true	19(ICA)
Mistake	Void	Instrument rectifiable	20(ICA), 26(SRA)

 

Restrictions on the right of Rescission

1.     Affirmation

Where the party who has the right to rescind being aware of that right, affirms the contract then he loses the right to rescind the contract. The affirmation can be either express or implied. Express affirmation can be through words, written or spoken whereas implied affirmation can be through conduct. For example, when a person being aware that he has been sold a certain property for more than it is worth uses or attempts to use the property or sells or attempts to sell it to someone else then he affirms the contract impliedly. Another illustration of this rule is the case of Long v. Lloyd {(1958) 1 WLR 753 (CA)}. In this case, the defendants sold a lorry to the plaintiffs falsely claiming that it was in very good condition. However, the plaintiff came to know of some faults in the lorry in the very first journey. He instead of rescinding accepted an offer of the defendants to bear half the costs of the repairs. The lorry broke down in the second journey and the plaintiff moved to rescind the contract. The court held that the plaintiff had gained knowledge of the fraud on the very first journey and by sending the lorry to a second journey he had actually affirmed the contract giving absolute acceptance and thus he could not rescind it now. It has also been held by the Indian Supreme Court in a case (Ningawwa v. Byrappa Shiddappa Hireknrabar, AIR 1968 SC 956, 958: (1968) 2 SCR 797, 800-01, quoting from Clough v. London & N.W. Rly Co, (1871) LR 7 Exch 26, 34.) that

“if it can be shown that the party defrauded has at any time after knowledge of the fraud either by express words or by unequivocal acts affirmed the contract, his election is determined forever. The party defrauded may keep the question open so long as he does nothing to affirm the contract.”

2.     Delay in rescission

Where a party seeks to rescind the contract on the basis that their consent was not free and was influenced, they should do within reasonable time after the removal of the influence. For e.g., in case the consent is affected due to undue influence the agreement should be rescinded within a reasonable period of time after the influence wears off OR in case of fraud or misrepresentation, the contract should be rescinded as soon as the party came to know about the false representation. Delay acts as proof while claiming that the party had affirmed the agreement.

For e.g., a person purchases share based on a misleading prospectus and comes to know about it soon after. He cannot file a suit five months after knowing about the misrepresentation to rescind the contract. A party can rescind only within reasonable period of time after becoming aware of the fraud.

3.     Rights of the third parties

When a third party acquires an interest in the subject matter of the voidable contract, then the right to rescission is lost. For example, a contract in which a property is sold through fraud cannot be avoided if the right to rescission is not exercised before a third party acquires an interest in property.

BY

LAWVASTUTAH