Who can bring suit for rescission of contract and on what grounds?

"Any Person Interested" — The Width of Standing

The language of the section is deliberately generous. It does not confine the remedy to the parties to the contract alone. The words "any person interested in a contract" extend the right of suit to anyone whose interests are affected by the contract, even if he is not named as a contracting party

Three categories of persons particularly stand out. First, members of a joint Hindu family are entitled to rescind a contract entered into by the Karta or manager, where that contract would defraud or prejudice the other members. In Ravji Janardan v Gangadhar (1880 ILR 4 Bom 29), the manager of a joint family, while ostensibly selling forest-cutting rights for Rs. 4,000, had secretly agreed to receive an equal sum as a personal bribe from the purchaser. A junior member of the family brought a suit for rescission and succeeded — the court holding that every member of a family whose interests are defrauded by a manager's contract is "interested" within the meaning of the section.

Second, legal representatives, heirs, and successors of the original contracting party may sue for rescission, provided the original party has not, by his own conduct, disentitled himself to the relief. In Shravan v Kashiram (ILR 51 Bom 533), the court confirmed that the right passes to the legal representative, subject to this important qualification — that the representative's right is no better than, and is co-extensive with, the right of the person he represents.

Third, rescission may be raised by the defendant as a defence to an action on the contract, without the defendant being obliged to institute a separate suit. A plea of rescission is open to a defendant as a shield even when no formal suit for rescission has been brought.

There is, however, one significant limitation. A legal representative who was not a party to the suit for specific performance cannot, after a decree has been passed, seek rescission under section 27 to prevent the decree-holder from realising the fruits of that decree — particularly when the representative was aware of the pending suit and failed to intervene. The courts have been clear that the provision contemplates an original proceeding for rescission, not an attempt to unravel an already-decreed specific performance under the guise of rescission. That post-decree rescission is governed exclusively by section 28, and only at the instance of the vendor or lessor.

Ground I — Voidable Contract

The first and most commonly invoked ground for rescission under clause (a) of sub-section (1) is that the contract is voidable at the option of the plaintiff. A contract is voidable when it is enforceable by law at the option of one party but not of the other — defined thus in section 2(i) of the Indian Contract Act, 1872. The circumstances that render a contract voidable are exhaustively enumerated in sections 19, 19A, 39, 53 and 55 of the Contract Act.

The most important of these are:

• Fraud — under section 17 of the Contract Act. Where a vendor of property fraudulently conceals a material fact known to him personally, such as a right of way, the purchaser is entitled to rescission. As the illustration to the old section 35 put it: if A sells a field to B, and there is a right of way over the field which A knows of but conceals from B, B is entitled to have the contract rescinded.

• Misrepresentation — under section 18. Where one party has made an honest but incorrect assertion of fact, which induced the other to enter into the contract. The Allahabad High Court in Shiromani Sugar Mills Ltd v S Devi Prasad (AIR 1950 All 508) held that a shareholder must rescind within a reasonable time of discovering the misrepresentation in the prospectus.

• Coercion and undue influence — under sections 15 and 16 of the Contract Act. In Dalbir Singh v Dalbir Singh (AIR 2001 PH 216), a commission agent who occupied a position of dominating influence over a farmer was found to have exerted undue influence in obtaining a sale of the farmer's entire holding at a grossly inadequate price, entitling the farmer to rescission.

• Repudiation of obligation — under section 39. When a party refuses to perform his promise in its entirety, the contract becomes voidable at the instance of the promisee.

• Prevention by one party — under section 53. When one party prevents the other from performing his promise, the prevented party may treat the contract as voidable.

• Time being of the essence and breach — under section 55. Where time is essential and one party fails to perform at the fixed time, the contract is voidable at the option of the promisee.

One important qualification must be immediately noted. Fraud in the performance of a contract — as distinguished from fraud in its making — is not a ground for rescission. The Bombay High Court affirmed this in Jamsetji Nassarwanji Ginwalla v Hirjibhai Naoroji Anklesaria (1912 ILR 37 Bom 158): the vitiating conduct must go to the formation of the contract, not merely to its performance.

Ground II — Terminable Contract

Clause (a) also includes contracts that are terminable by the plaintiff — contracts which contain an express or implied right to rescind or put an end to the agreement upon the occurrence or non-occurrence of a specified event. These include contracts which reserve a power of rescission to one or both parties upon certain conditions, such as failure to show good title, failure to pay within a specified time, or non-satisfaction of a condition precedent.

A terminable contract differs in one important conceptual respect from a voidable one. In a voidable contract, the defect lies in the formation of the contract, and rescission undoes the contract from the beginning. In a terminable contract, the defect lies in the performance or the non-fulfilment of a condition, and termination operates prospectively. As Treitel states, and the courts in India have recognised, not every case of termination would warrant a rescission in the full equitable sense — the question being whether the purpose of the rescission is to restore the parties to the position as if the contract had never been.

Ground III — Unlawful Contract: Clause (b) and the Doctrine of Pari Delicto

The second ground under sub-section (1) — under clause (b) — is that the contract is unlawful for causes not apparent on its face, and the defendant is more to blame than the plaintiff. This ground gives statutory recognition to an important equitable doctrine, and its limitations are as significant as its scope.

If the illegality appears on the face of the contract, the contract is void ab initio under section 23 of the Contract Act, and the remedy would be cancellation under section 31 rather than rescission. The domain of clause (b) is precisely the illegality that lies concealed beneath the surface — where a contract appears on its face to be lawful, but is tainted by an illegality discoverable only by looking behind it.

Even where such concealed illegality exists, the plaintiff cannot obtain rescission unless he can show that he is less to blame than the defendant. This is the doctrine of in pari delicto — where both parties are equally guilty of the illegality, neither can seek the aid of the court to unscramble the transaction, and equity leaves the mischief where it lies. As the Bombay High Court observed in Hari Bal Krishna v Naro Moreswar (ILR 18 Bom 342), when both parties are equally and deliberately in the wrong, rescission under this clause will be refused.

The courts have, however, applied the doctrine sensibly. Where the plaintiff entered into the unlawful contract on account of his ignorance of fact or law, or was induced by the fraud or misrepresentation of the defendant, the parties are not equally at fault — and rescission may be granted. An attorney who induces his client to transfer property for the purpose of defrauding creditors cannot resist rescission by the client, since the attorney being the more culpable party, the client retains the right to rescind.

An Overarching Caution — Clean Hands and Promptness

The word "may" in section 27 — "any person interested in a contract may sue to have it rescinded" — carries the same significance as it does throughout the Specific Relief Act: the remedy is optional and discretionary. A party does not have to sue for rescission; he may assert his right to rescind as a defence, or exercise his option extrajudicially where the contract permits it.

But when he does come to court, he must come promptly and with clean hands. As the Supreme Court emphatically declared in Lalit Kumar Jain v Jaipur Traders Corporation Pvt Ltd (2002 5 SCC 383), an unexplained delay after communicating an intention to rescind — sitting on the fence to see how events unfold — will disentitle the party to the equitable relief under section 27, since equity does not assist those who treat their rights as a speculative option to be exercised only when convenient. The limitation period for such a suit is three years from the date when the facts entitling the plaintiff to have the contract rescinded first became known to him, as prescribed by Article 59 of the Limitation Act, 1963.