Rescission of Contract

Learn rescission of contract under Indian law, including Section 62, voidable contracts, legal effects, remedies and landmark case law.

Introduction

A contract creates legal obligations between the parties. However, circumstances may arise in which the parties agree to cancel their contractual relationship or one party becomes legally entitled to avoid the contract. The process of bringing a contract to an end in these circumstances is known as rescission of contract.

Rescission is an important concept in the law of discharge of contracts under the Indian Contract Act, 1872. It may arise when parties mutually agree to cancel an existing contract or when a party exercises a legal right to avoid a voidable contract, such as a contract induced by coercion, fraud or misrepresentation.

The principal provision governing mutual rescission is Section 62 of the Indian Contract Act, 1872. Section 64 deals with the consequences of rescinding a voidable contract, while Section 66 addresses how the rescission of a voidable contract is communicated or revoked. Section 75 provides for compensation to a person who rightfully rescinds a contract.

Understanding these provisions helps distinguish rescission from novation, alteration, termination and discharge by performance.

Meaning of Rescission of Contract

Rescission means cancelling or setting aside a contract so that the parties are released from the contractual obligations affected by the rescission.

In Indian contract law, rescission commonly arises in two situations:

1. Rescission by mutual agreement: The parties agree to cancel their existing contract under Section 62 of the Indian Contract Act, 1872.
2. Rescission of a voidable contract: A party who has the legal right to avoid a voidable contract exercises that right under the applicable provisions of the Act.

These situations must be distinguished because they do not have identical legal requirements.

Example of mutual rescission: A agrees to sell a motorcycle to B for ₹80,000. Before delivery, A and B mutually agree to cancel the contract. If their agreement validly rescinds the contract, the original obligations need not be performed, subject to any agreed or legally required consequences.

Example of rescission of a voidable contract: A induces B to enter into a contract by fraud. If B establishes the relevant legal grounds under the Indian Contract Act, B may be entitled to avoid the contract, subject to the applicable statutory conditions.

Section 62: Rescission by Mutual Agreement

Section 62 of the Indian Contract Act, 1872, is titled “Effect of novation, rescission, and alteration of contract.”

It provides that when the parties to a contract agree to substitute a new contract for it, rescind it or alter it, the original contract need not be performed.

Section 62 therefore recognises rescission as one of the ways in which contractual obligations may be discharged by agreement.

Essentials of Rescission Under Section 62

1. An existing contract must be in place.

Rescission under Section 62 concerns the cancellation of an existing contractual arrangement. The parties must have a contract whose obligations are to be brought to an end.

2. The parties must agree to rescind the contract.

Mutual rescission requires an agreement between the relevant parties. One party cannot ordinarily cancel a contract under Section 62 merely by announcing that they no longer wish to be bound by it.

3. The intention to cancel must be established.

The agreement must show that the parties intend to bring the original contract to an end. A subsequent discussion or modification does not automatically establish rescission.

4. The agreement must be legally effective.

The parties’ agreement must satisfy the applicable legal requirements. Any statutory restrictions, contractual conditions or formalities relevant to the transaction must also be considered.

Example of Rescission Under Section 62

A agrees to sell a plot of land to B for ₹10,00,000. Before completion of the transaction, both parties agree in writing to cancel the sale agreement.

If the agreement validly rescinds the original contract, the parties are released from the obligations that have been cancelled. If B has already paid an advance, the treatment of that payment depends on the rescission agreement and applicable law.

Rescission of an agreement to sell must also be distinguished from cancellation or reversal of a completed conveyance, such as a registered sale deed. The latter may involve additional property and registration law requirements.

Section 19: Rescission of a Contract Induced by Coercion, Fraud or Misrepresentation

Section 19 of the Indian Contract Act, 1872, deals with agreements whose consent was caused by coercion, fraud or misrepresentation.

Where consent is caused by one of these factors, the agreement is generally a voidable contract at the option of the party whose consent was so caused, subject to the statutory requirements and exceptions.

The affected party may have the option to avoid the contract or, in cases covered by the section, to insist that the contract be performed and that they be placed in the position they would have occupied if the representation had been true.

Rescission Due to Coercion

Coercion is defined under Section 15 of the Indian Contract Act, 1872. Where a contract is induced by coercion and the requirements of Section 19 are met, the party whose consent was so caused may have the right to avoid it.

Example: A threatens B with unlawful harm to obtain B’s consent to a contract. If B’s consent was caused by coercion within the meaning of the Act, B may be entitled to rescind the contract.

Rescission Due to Fraud

Fraud is defined under Section 17. Where fraud causes a party to enter into a contract, Section 19 may make the contract voidable at that party’s option.

Example: A knowingly makes a false statement about a machine’s condition to induce B to purchase it. If the statement constitutes fraud and caused B’s consent, B may be entitled to avoid the contract, subject to the Act.

Rescission Due to Misrepresentation

Misrepresentation is addressed by Section 18. Where a contract is induced by misrepresentation within the meaning of the Act, Section 19 may allow the affected party to avoid the contract.

The legal requirements must be examined carefully. Not every incorrect statement automatically makes a contract voidable; the statutory conditions and relevant exceptions apply.

Section 19A: Rescission Due to Undue Influence

Section 19A deals with contracts induced by undue influence. It empowers the court to set aside such a contract, either absolutely or, where the party seeking relief has received a benefit under it, on terms and conditions the court considers just.

Undue influence is addressed by Section 16 of the Indian Contract Act, 1872. It involves circumstances in which one party is in a position to dominate the will of another and uses that position to obtain an unfair advantage.

Example: A person in a position to dominate another person’s will uses that influence to obtain an unfair contractual advantage. If the requirements for undue influence are established, the court may grant relief under Section 19A.

Section 19A should not be confused with Section 62. Section 62 concerns rescission by agreement, while Section 19A addresses judicial relief for a contract induced by undue influence.

Section 64: Consequences of Rescission of a Voidable Contract

Section 64 of the Indian Contract Act, 1872, explains the consequences when a person who has the option to avoid a voidable contract rescinds it.

The section provides, in substance, that:

• The other party need not perform promises for which they are the promisor under the rescinded contract.
• The party rescinding the contract must restore any benefit received from the other party, so far as may be, under the contract.

Restoration of Benefits

Restoration is an important consequence of rescission. A party generally cannot rescind a voidable contract while retaining benefits that Section 64 requires them to restore.

Example: A fraudulently induces B to purchase a machine for ₹1,00,000. B pays the price and receives the machine. If B validly rescinds the contract, Section 64 requires B to restore the benefit received, so far as may be, while the corresponding consequences for A are determined under the applicable law.

The precise form of restoration depends on the circumstances. Where the benefit cannot be returned in its original form, the applicable legal rules must be considered.

Section 64 concerns the consequences of rescission of a voidable contract. It should not automatically be applied as though every mutually cancelled contract under Section 62 has identical restoration consequences. In mutual rescission, the agreement and other applicable legal provisions must be examined.

Section 66: Communication of Rescission

Section 66 provides that the rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as those applicable to the communication or revocation of a proposal.

This provision connects rescission with the general rules governing communication under the Indian Contract Act.

For example, where a party is entitled to avoid a voidable contract, the party must consider how the decision is communicated and whether the communication satisfies the applicable legal requirements.

Section 66 does not mean that every rescission must be communicated through one particular form. The applicable requirements depend on the circumstances and the rules governing communication.

Section 75: Compensation for Rightful Rescission

Section 75 provides that a person who rightfully rescinds a contract is entitled to compensation for damage sustained through the non-fulfilment of the contract.

This provision is significant because rescission does not necessarily eliminate every possible claim for compensation.

Example: A agrees to supply specialised equipment to B. A’s conduct gives B a lawful ground to rescind the contract, and B incurs loss as a result of the non-fulfilment. If B rightfully rescinds and establishes compensable damage, Section 75 may provide a basis for compensation, subject to the applicable legal requirements.

The party claiming compensation must establish the relevant basis for the claim and the loss for which compensation is sought. Section 75 does not automatically award a fixed amount merely because a contract has been rescinded.

Judicial Interpretation of Rescission

Chrisomar Corporation v. MJR Steels Private Limited

In Chrisomar Corporation v. MJR Steels Private Limited, (2018) 16 SCC 117, the Supreme Court of India examined the relationship between Sections 62 and 63 of the Indian Contract Act, 1872, in the context of an out-of-court settlement connected with an admiralty dispute. <Cite refs={[“turn109320search3″,”turn109320search0”]} />

The dispute concerned unpaid invoices for bunkers and other necessaries supplied to a vessel. After proceedings had commenced, the parties entered into a settlement arrangement dealing with payment of the outstanding amounts. One issue was whether the settlement had replaced the original agreement under Section 62 or instead operated under Section 63.

The Court explained that where parties agree to rescind a contract or substitute a completely different contract, performance under the original or rescinded contract comes to an end. However, a modification does not necessarily amount to rescission or novation. The court must determine whether the changes go to the root of the original contract and whether the parties intended the original contractual arrangement to cease.

On the facts, the Supreme Court rejected the conclusion that the settlement had novated the original agreement.

Legal principle: Whether an agreement rescinds or replaces an existing contract depends on the substance of the arrangement and the parties’ intention. A settlement or modification does not automatically extinguish the original contractual rights.

Although the case concerned an admiralty dispute, its interpretation of Section 62 is useful when analysing rescission and the effect of subsequent agreements.

Lata Construction v. Dr. Rameshchandra Ramniklal Shah

In Lata Construction v. Dr. Rameshchandra Ramniklal Shah, (2000) 1 SCC 586, the Supreme Court considered whether a later agreement had extinguished the rights arising from an earlier agreement concerning a flat. <Cite refs={[“turn108954search9″,”turn108954search2”]} />

The Court held that the rights under the earlier agreement had not been extinguished because the later arrangement preserved those rights until the stipulated payment was completed.

The Court explained that Section 62 requires a valid agreement to substitute, rescind or alter the earlier contractual arrangement. The existence of a later agreement alone does not establish that the original contract has been rescinded.

Legal principle: The intention and terms of the subsequent agreement determine whether the original contract has been rescinded or replaced. Where the original rights remain alive under the later agreement, rescission or novation cannot simply be presumed.

Difference Between Rescission and Novation

Rescission and novation are both recognised under Section 62, but they have different legal effects.

Basis	Rescission	Novation
Meaning	Cancellation of an existing contract	Substitution of a new contract for the existing contract
New contract	Not necessary	A substituted contract is created
Main effect	The obligations validly rescinded come to an end	The old contract is replaced to the extent agreed, and the new contractual obligations apply
Example	Both parties agree to cancel a sale contract	A creditor accepts a new debtor in place of the original debtor
Statutory provision	Section 62, for mutual rescission	Section 62

Difference Between Rescission and Alteration

Basis	Rescission	Alteration
Meaning	Cancellation of the existing contract	Modification of one or more terms
Continuation of contract	The rescinded obligations come to an end	The contract continues with the agreed modifications
New contract	Not necessary	Not necessarily created
Example	The parties agree to cancel a supply agreement	The parties change the delivery date

Difference Between Rescission and Termination

The terms “rescission” and “termination” are sometimes used in overlapping ways, but they should not automatically be treated as identical.

Rescission refers to setting aside or cancelling a contract in a legally recognised manner. Termination generally refers to bringing contractual obligations to an end for the future, often under an express contractual clause or a legal right.

The consequences depend on the applicable statute, the terms of the contract and the reason for bringing the contract to an end. For example, termination for breach may preserve accrued rights or claims, while rescission of a voidable contract may trigger restoration obligations under Section 64.

Difference Between Rescission Under Section 62 and Section 64

Basis	Section 62	Section 64
Main subject	Mutual novation, rescission and alteration	Consequences of rescission of a voidable contract
Basis	Agreement between the parties	Exercise of the option to avoid a voidable contract
Consent	Mutual agreement is required for rescission under this provision	The party entitled to avoid the contract exercises that right
Restoration	Depends on the agreement and applicable law	Restoration of benefits is expressly addressed
Example	Parties mutually cancel a contract	A party rescinds a contract induced by fraud

Important Points to Remember

• Rescission is a method of bringing contractual obligations to an end by cancellation of the contract or by exercising a legal right to avoid it.
• Section 62 governs mutual rescission, alongside novation and alteration.
• Sections 19 and 19A concern voidable contracts arising from coercion, fraud, misrepresentation and undue influence, subject to the statutory requirements.
• Section 64 deals with the consequences of rescinding a voidable contract, including restoration of benefits.
• Section 66 addresses communication and revocation of rescission of a voidable contract.
• Section 75 provides for compensation for damage sustained by a person who rightfully rescinds a contract.
• Rescission does not necessarily eliminate all accrued rights, claims or obligations that survive under the agreement or applicable law.
• In Chrisomar Corporation v. MJR Steels Private Limited, the Supreme Court emphasised that a settlement does not automatically rescind or replace the original contract.
• In Lata Construction v. Dr. Rameshchandra Ramniklal Shah, the Supreme Court explained that the original rights may survive where a subsequent agreement does not extinguish them.

Conclusion

Rescission is an important concept in the law of discharge of contracts under the Indian Contract Act, 1872. It may arise through mutual agreement under Section 62 or through the exercise of a legal right to avoid a voidable contract under the relevant statutory provisions.

Sections 64, 66 and 75 further explain the consequences of rescission, including restoration of benefits, communication and compensation for rightful rescission. The cases of Chrisomar Corporation and Lata Construction demonstrate that courts examine the substance of the agreement and the intention of the parties rather than assuming that a later arrangement automatically cancels the original contract.

For examinations, the most important distinction is between mutual rescission under Section 62 and rescission of a voidable contract under Sections 19, 19A and 64.