Rescission may be thought of as the primary remedy for misrepresentation. It is available whether the misrepresentation is made fraudulently, negligently, or innocently. Rescission must be distinguished from the remedy of termination for breach of contract. Rescission operates to undo the contract ab initio: following rescission the contract ceases to exist. Rescission, then, involves the setting aside of the contract so as to restore the parties, as far as possible, to their pre-contract positions.
Rescission is the act of the representee rather than a curial remedy. To be effective, the representee must, as a general rule, communicate his intention to rescind to the representor. However, this is not a universal requirement.
Having advertised his Jaguar car for sale, Caldwell allowed two men, calling themselves Norris and Foster, to take the car away in return for a cheque and another car to be held as security. The following morning Caldwell presented the cheque at the branch where the account on which it was drawn was held. The cheque was not honoured. Caldwell immediately went to the police. Later that afternoon, Caldwell telephoned the AA. Both the police and AA endeavoured to find the car. The car changed hands several times before it was bought in good faith by the defendant. The Court of Appeal held that Caldwell’s actions were effective to rescind the contract he made with Norris and Foster.
‘If one party, by absconding, deliberately puts it out of the power of the other to communicate his intention to rescind which he knows the other will almost certainly want to do, I do not think he can any longer insist on his right to be made aware of the election to determine the contract. In these circumstances communication is a useless formality. I think that the law must allow the innocent party to exercise his right of rescission otherwise than by communication or repossession. To hold otherwise would be to allow a fraudulent contracting party by his very fraud to prevent the innocent party from exercising his undoubted right. I would hold that in circumstances such as these the innocent party may evince his intention to disaffirm the contract by overt means falling short of communication or repossession.’
Upjohn LJ at 555.
Rescission involves returning the parties to their pre-contract positions: it therefore requires ‘a giving back and a taking back on both sides’ (Newbigging v Adam (1886) 34 Ch D 582, 595 (Bowen LJ). Each party returns to the other what he received under the contract. If one party is unable to restore what he received, then rescission is not an available remedy.
C was induced by a fraudulent misrepresentation to acquire shares in a partnership. C subsequently agreed to the partnership being registered as a limited liability company. The company was then wound up. During the winding up, C discovered the fraud and sought to rescind the contract under which he acquired the shares. The Court of Queen’s Bench held that C’s only remedy was for damages for deceit.
Nevertheless, rescission may still be effected where substantial restitution is possible and compensation will put the party in as good a position as he was in before the contract: rather than insisting on precise restitution, the court will strive to achieve ‘practical justice’.
The defendants formed a syndicate which acquired a lease of an island in the West Indies, which contained valuable mineral deposits, for £55,000. The syndicate then formed a company to which it sold the lease for £110,000. The HL held that the defendants had breached the fiduciary duties they owed the company, and the company could rescind the contract of sale, by giving up possession of the island and accounting for any profits made from mining the minerals.
Note that rescission involves undoing the contract as a whole: partial rescission is not permitted.
A wife had agreed to grant a charge over the matrimonial home to secure loans to a business in which her husband held an interest. The wife was induced to grant the charge by the innocent misrepresentation that the maximum liability under the loans was £15,000 whereas in fact it was unlimited. The Court of Appeal held that the wife could rescind the charge in its entirety and the court had no power to set it aside on terms that the wife acknowledged that it was a valid security for £15,000.
Impossibility of restitution is not the sole bar to rescission. The following further restrictions should be noted:
C was induced to buy a lorry by D’s misrepresentation. Various defects came to light while C was driving the lorry. C accepted D’s offer to contribute to certain repairs. The following day C sent the lorry on another journey during which it broke down. C then sought to rescind the contract. The Court of Appeal held that C had accepted the lorry, and affirmed the contract, and so his purported rescission was ineffective.
By the time the claimant in Lewis v Averay [1972] 1 QB 198 discovered that he had been the victim of a fraudulent misrepresentation, the fraudster had already sold the car to an innocent third party. As such, the claimant was barred from rescinding his contract with the fraudster.
Under this sub-section of the Act, the court has a discretion to award damages as an alternative to rescission. The discretion only applies in the case of non-fraudulent misrepresentations.
In Leaf v International Galleries [1950] 2 KB 86, the Court of Appeal held that rescission was barred once a reasonable period of time had elapsed since the contract was made. But in Salt v Stratstone Specialist Ltd [2015] EWCA Civ 745 the Court of Appeal stated that lapse off time by itself was not a bar to rescission: something more was needed to bar the remedy.
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