Discuss briefly principles underlying rescission of contracts by court. When may court refuse to rescind?

Sections 27 to 30 of the Specific Relief Act, 1963 deal with rescission of contracts by the court. It is a remedy rich in equitable heritage, governed by clear principles and equally clear limits. Understanding both — the grounds that invite rescission and the bars that repel it — is essential to appreciating how this chapter of the Act operates in practice.

The Nature and Object of the Remedy

Rescission, as a judicial remedy, is the converse of specific performance. While specific performance compels a party to honour his bargain, rescission discharges all parties from any obligation under it and restores them to the position they were in before the contract was entered into. As Lord Atkinson stated in Abraham Steamship Co v Westville Shipping Co (1923 AC 773), rescission "terminates the contract, puts the parties in status quo ante and restores things as between them, to the position in which they stood before the contract was entered into."

It is important to understand, at the threshold, that rescission under section 27 is a unilateral remedy — one party approaches the court seeking to treat the contract as void, over the objection or indifference of the other. This is what sets it apart from rescission under section 62 of the Indian Contract Act, which contemplates a consensual abandonment of the contract by both parties acting together. In Hungerford Investment Trust v Haridas Mundhra (AIR 1972 SC 1826), the Supreme Court clarified that in a suit for rescission, the court does not itself rescind the contract — it only adjudicates upon and declares the validity of the rescission already exercised by the party at whose instance the contract was voidable. The right to rescind exists anterior to and independent of the court's intervention.

Grounds on which Rescission May be Adjudged — Section 27(1)

Section 27(1) provides that any person interested in a contract may sue to have it rescinded in two situations.

Clause (a): Voidable or terminable contract. A contract is voidable under sections 19 and 19A of the Indian Contract Act when the consent of one party has been caused by coercion, fraud, misrepresentation, or undue influence. The contract may also become voidable due to subsequent default of the other party — such as where a party refuses to perform his promise in its entirety (section 39), or creates an impossibility of performance (section 53), or fails to perform when time is of the essence (section 55). A terminable contract, on the other hand, is one that contains a stipulation enabling a party to bring it to an end upon the happening or non-happening of a particular event. The important distinction between the two is this: rescission of a voidable contract involves an allegation of a defect in formation, whereas termination involves an allegation of defect in performance.

There is, however, one qualification worth noting. Fraud in the performance of a contract, as opposed to fraud in its making, is no ground for rescission. The Bombay High Court drew this line clearly in Jamsetji Nassarwanji Ginwalla v Hirjibhai Naoroji Anklesaria (1912 ILR 37 Bom 158), where it was held that a defect in the execution or carrying out of a contractual obligation cannot serve as grounds for having the contract itself rescinded under section 27.

Clause (b): Unlawful contract. Where a contract is unlawful for causes not apparent on its face, and the defendant is more to blame than the plaintiff, the court may adjudge rescission. This clause is a statutory recognition of the equitable doctrine of pari delicto — where both parties are equally at fault, the court will not intervene. The illegality that attracts this clause must be hidden — one not discernible from the face of the contract. If the illegality is patent, the contract is altogether void under section 23 of the Contract Act, and no question of adjudging rescission arises.

The Supreme Court's illustration is instructive: where an attorney induces his client, a Hindu widow, to transfer property to him for the purpose of defrauding her creditors, the parties are not equally at fault and the widow may sue for rescission. But in Kamarbai v Badrinarayan (AIR 1977 Bom 228), the Bombay High Court refused rescission to a man who sought to recover property transferred to his mistress, on the ground that he was equally guilty of the immoral transaction. The court stated the governing maxim plainly: "He who seeks equity must come with clean hands."

Who May Sue for Rescission

Section 27 uses the expression "any person interested in a contract" — a phrase deliberately wider than the parties to the contract. It encompasses heirs, legal representatives, assignees, and any member of a joint Hindu family who would be defrauded by the contract. In Ravji Janardan Sarangpani v Gangadharbhat (1880 ILR 4 Bom 29), the court held that where a manager of a joint Hindu family made a collateral secret bargain for his own benefit while ostensibly selling family property, any member of the family had the right to sue for rescission. However, a legal representative who was not a party to the suit for specific performance cannot seek rescission so as to frustrate a decree holder from securing the fruits of a decree, if he was aware of the suit at the relevant time.

When the Court May Refuse to Rescind — Section 27(2)

Sub-section 2 is the heart of the equitable doctrine governing this remedy. It codifies four bars to rescission — circumstances in which the court may, in the exercise of its discretion, decline to grant the relief even though the plaintiff has made out a prima facie case.

Ratification. Where the plaintiff has expressly or impliedly ratified the contract after acquiring knowledge of the facts giving him the right to rescind, the right is lost. The principle is captured in Rangaswami Gounden v Nathiappa Gounden (1918 ILR 42 Mad 523 PC) — "he who has the right to complain must do so when the right of action is properly open to him." If, with full knowledge of the defect, the plaintiff acts in a manner consistent with affirming the contract — such as accepting benefits, performing his own obligations, or relying on the contract before a court of law — he is taken to have elected to abide by it. Affirmation may be express or implied, and once made, it is irrevocable. The courts have also held that even long lapse of time, without any step towards repudiation, may, in appropriate circumstances, be treated as conclusive evidence of affirmation.

Restitutio in integrum impossible. The very object of rescission is to restore the parties to the position they occupied before the contract. If, owing to a change of circumstances — not caused by any act of the defendant — the parties cannot be substantially restored to their original positions, the court may refuse rescission. This is the principle of restitutio in integrum. In Satgur Prasad v Har Narain Das (AIR 1932 PC 89), the Privy Council held that where the subject matter of the contract has been destroyed or so fundamentally altered that restoration is impossible, rescission cannot be granted. Courts, however, take a pragmatic approach to this principle. In Halpern v Halpern (2007 EWCA Civ 291), the Court of Appeal of England held that monetary compensation may sometimes substitute for counter-restitution where perfect restoration is impracticable, and that courts may do "what is practically just, though it cannot restore the parties precisely to the state they were in before the contract."

Rights acquired by third parties. Where a bona fide third party has, during the subsistence of the contract and without notice of the defect, acquired rights in the subject matter of the contract for value, the right of rescission is defeated. The burden of establishing bona fides — that the purchase was for value, in good faith, and without notice of the original contract — lies on the person claiming to be such a third party. The rule is premised on the equitable protection of innocent third parties who, relying on the apparent validity of the transaction, have altered their position to their detriment.

Rescission of an inseverable part. A contract must generally be rescinded as a whole, not in part. Section 27(2)(d) makes it clear that where only a portion of a contract is sought to be rescinded, and that portion is not severable from the rest, the court will decline to grant the relief. The principle was firmly stated in Ohid Bux v Dorshu (AIR 1926 Cal 959) — a party seeking to set aside a contract on the ground of fraud must set it aside altogether and cannot pick and choose which obligations to escape. The concession made by the provision is that if the offending part is genuinely severable and independent, partial rescission may be allowed.

The Equity Dimension — Section 30

Even where rescission is granted, it does not operate as a license for unjust enrichment. Section 30 requires the party rescinding to do equity — meaning that the court, as a condition of granting rescission, may require the party to restore any benefit received under the contract or to make compensation. This reflects the fundamental equitable principle that he who seeks the aid of equity must also be prepared to restore what he has received. In the case of contracts by minors or persons of unsound mind, the court has a discretion to direct restoration of benefits as a condition of granting rescission, recognizing that even contracts by incompetent persons may have conferred real benefits that ought not to be retained free of charge.

The Bar of Unexplained Delay

One principle running as an undercurrent through the entire chapter deserves separate mention. A suit for rescission must be brought within three years from the date when the facts entitling the plaintiff to rescind first became known to him (Article 59, Limitation Act, 1963). But limitation apart, the courts have consistently held that unexplained delay in filing the suit may, independently, defeat the equitable relief. As stated in one authoritative passage, an unexplained delay after exchange of notices implies that the plaintiff either did not stand by his declaration to rescind, or was "sitting on the fence, waiting to see whether the turn of events would be to his advantage or disadvantage." Such conduct disentitles the plaintiff to an equitable remedy that demands promptness and clean hands.