rescission

Rescission is a legal remedy where the parties' positions are restored to what they were before the contract was entered (ie the status quo ante). To do so, the parties return money, property and other interests so arrive at their pre-contractual positions. The legal effect of rescission is to terminate the contract and restore matters to the pre-contractual positions.

The remedy arises in cases of misrepresentation and when a contract has be executed by one party but not the other. For example, where a purchaser pays money for services, and those services are not provided within the terms of the contract, the paying party is entitled to 'rescind' or cancel the contract and return to the status quo ante.

Availability of Rescission

Rescission is not possible in all circumstances. This is because it is a fundamental feature of the remedy that the parties are placed in the position they were before the contract was entered (restitutio in integrum); if this is not possible the remedy is not available. Where substantial restitution of the positions of the parties is possible to obtain the remedy. Whether or not substantial restitution is possible depends on the facts of the case. For example, the nature of a business sold may have changed, the property which was the subject of the transaction is destroyed or been transformed with other property (such as seeds growing into tree or flour made into bread), with the result that the positions of the parties cannot be restored. It is 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.

In the event that the innocent party has incurred expenses in reliance of the contract, the Court has jurisdiction to order payment of money over by the defaulting party to restore the position of the innocent party to the pre-contractual position where the expenses were to be incurred under the contract by the innocent party.

Furthermore, where a third party's rights would be adversely affected, the remedy is not likely to be available. For instance, where property is sold and has been transferred to third party for value without notice.

Notice

When a party has the right to rescind the contract the other party must be notified of the exercise of the right in order to be effective.

Affirmation

When a party has the right to rescind a contract, the right is lost when the party affirms the contract. Affirmation takes when the innocent party has two mutually inconsistent positions and selects one of them; there is no turning back from an election once it is made.

In order to make a legally binding affirmation, the innocent party must be aware of all of the facts giving rise to the right to make the election, and the legal consequences of those facts. In this way, relevant events may have taken place to entitle the party to make an election, but with the knowledge of the right to either affirm or rescind, an affirmation of the contract cannot usually be made.

As an example, a contract may be affirmed by continuation of use of property provided under the contract (such as software or hired property) other than for the purposes of testing, continuing to receive profits from shares purchases pursuant to a contract tainted by misrepresentation.

In any event, the affirmation must be clear and unambiguous, and consistent with an intention to continue with the contract. It may be communicated directly or indirectly to the party making the representation or in breach of contract.

Time of Affirmation

A right to affirm must be exercised within a reasonable time and thus depends on the facts of the case, or the right will be lost. The time allowed is to allow the innocent party to consider his position, take advice on what the options are and thereafter make a decision. Whether or not the representor has had change of circumstance in the intervening period may also be a factor in what is a reasonable time, rather than decisive.