Rectification, Cancellation and Recission of Contracts- An undo button for your Contracts

This article is written by Siddhi P. Nagwekar, a student at Karnataka State Law University’s Law School.

This article discusses specific reliefs for the contracts like rectification, rescission and cancellation of instruments/contracts in the light of Indian legal framework while also touching upon common law jurisprudence.

INTRODUCTION

Contract was a concurrent jurisdiction shared by law and equity. In its recognition of mistake, equity presupposed that the contract was good at law—and within that sense valid—but it might provide relief of some sort on the idea of the error.

The concerns which were expressed with evidence and with the character of the relief granted attended to diminish, sometimes entirely, the expression of reasons for why equity provided relief for mistake. This didn’t mean that the relief was granted in an arbitrary fashion, for courts sought to determine when relief had been granted in earlier cases. Equity judges and lawyers conceived of mistake not as a ‘doctrine’ but as integrally associated with the discretionary relief a court could provide to stop an injustice during a particular case; such relief was granted where it had been within the past.

Courts of equity would intervene only where a specific contract was written. The idea of equitable relief was integral to the admission of parole evidence to elucidate the injustice arising from the fallacy. Equity allowed such evidence as a reason to not enforce the strict legal terms of the contract because doing so would be unconscientious.

Courts of equity offered three sorts of relief to a party where a flaw had seeped in. The primary of the two were positive: a plaintiff could seek rectification or rescission of an agreement on the reason of mistake. The third was negative: a defendant could deny specific performance on the basis of an error.

In India also, the law offers three types of relief to the parties to a contract where a fallacy has occurred: rectification and cancellation of instruments and rescission of contracts.

Section 2(14) of The Indian Stamp Act[1], 1899 goes on to defines ‘instrument’ as “every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded.”

Rectification

It is described that rectification is one of the most common forms of equitable relief in cases having fallacies. The most common instance during which such relief was sought in reference to the articles of agreement in anticipation of marriage where equity would reform marriage settlements not founded on the previous written agreements. While a court of law wouldn’t allow a clear mistake of a word to defeat the intentions of the parties, a court of equity could go further.[2] Equity would reform a contract, whether executed or executory, to have it conform to the precise intentions of the parties: (1) where, by mistake, the written contract contained less than the parties intended; or (2) where it contained greater than was intended; or (3) where it varied their intent by expressing something different in substance from what was intended.[3] It had been recognised in these instances that the parties had formed an agreement but that the written dossier didn’t meet the intentions of the parties once they had made their agreement.[4]

Rectification was provided to put an end to injustice. As Story explained: “A Court of Equity would be of little value, if it could repress only positive frauds, and leave mutual errors, immaculately made to figure intolerable mischiefs, opposite to the intention of parties. It might be to permit an act, originating in innocence, to function ultimately as a fraud, by warranting the party who receives the advantage of the error, to resist the assertions of justice, under the umbrella of a rule framed to market it.”

Chapter 3, Section 26 of The Specific Relief Act, 1963 deals with rectification of instruments specific to the Indian subcontinent. It provides basis as to when an instrument may be validly rectified.

An omission during a registered Sale deed is often rectified under this Section 26. But if the parties themselves execute a supplementary deed to rectify an omission within the original document, such supplementary deed isn’t an extraneous evidence, Both the documents need to be read together.[5]

Whenever a prayer is formed for rectification of an instrument, the question to be considered isn’t what the parties would have done, had they been up to anticipate subsequent developments, but what was their intention at the time contact was made. If the parties have deliberately overlooked something from the written instrument, that can’t be put in.

Rescission

This form of equitable relief was to rescind the contract, although this power was used sparingly. A court of equity had the authority to order up the delivery, cancellation or rescission of agreements, deeds and other instruments on the grounds of a protective or preventative justice (quia timet) in cases where there was concern that the instrument could be vexatious or injuriously used against a party in law when there was a good and honest defence against it in equity (although not in law). Rescission was a more drastic remedy than a refusal of specific performance because rescission prevented a party from any remedy at common law, as also in equity. Rescission was primarily directed to the circumstances where there was fraud and an inaccurate consideration and Jeremy opined that where both parties were mistaken the remedy wasn’t rescission but rectification. Story explained that rescission wasn’t generally an appropriate, adequate or equitable relief because in most cases: the accident or mistake could also be of a nature, which doesn’t attend the very foundation and merits of the agreement; but may only require that some amendment, addition, qualification, or variation should happen, to form it directly just, and reasonable, and suited to be enforced. Rescission is granted because to permit an agreement to stand when it had been formed under an error would be ‘manifestly unjust’.[6]

To have a rescission executed, both parties to the contract must be placed within the same position they occupied before the contract was made.

Chapter 4, Sections 27 to 30 entail the cases when rescission might be granted:

Where consent to an agreement is caused by coercion, fraud or mistake or misrepresentation, the agreement is a contract voidable at the choice of the party whose consent was so caused. At the same time, where both the parties to an agreement are under an error of fact crucial to the agreement, the agreement is void.

A person who fails to get specific performance of a contract, may have it rescinded and delivered up to be cancelled.

If the defrauded party chooses to sue, three remedies are available to him, namely –

He may rescind the contract absolutely and sue to recover the consideration parted with upon the fraudulent contract; or

He may bring an action to rescind the contract and, wherein that action, have full relief; or

He may retain what he has received and file a suit to recover the damages sustained.

An examination of this section shows that the relief of rescission could also be asked for in respect of contracts, whether in writing or not, wherever transfer of property Act is in force; and in respect of written contracts only on other places, and it could be asked for in the following classes of cases:

Voidable contracts;

Terminable contracts;

Unlawful contracts;

Void contracts.

Section 28: Rescission of contracts in certain circumstances where the specific performance for the sale or lease of immovable property is decreed.

Section 29. Alternative prayer for rescission in suit for specific performance.-A plaintiff instituting a suit for the specific performance of a contract in writing may pray within the alternative that, if the contract can’t be specifically enforced it could be rescinded and delivered up to be cancelled; and therefore the court, if it refuses to enforce the contract specifically, may direct it to be rescinded and delivered up accordingly.

Section 30. Court may require parties rescinding to do equity.-On adjudging the rescission of a contract, the court may require the party to whom such relief is granted to revive, thus far as could be, any benefit which he may have received from the opposite party and to form any compensation to him which justice may require.

Cancellation of instruments

In the matters of voidable contracts in writing, the powers of judicial rescission are co-extensive with those of directing the cancellation and surrender of the instruments.

A forged instrument, so long as the forgery has not been judicially determined, may source the greatest mischief, and a court of equity will command its cancellation in anticipation. And it doesn’t matter that the Plaintiff is not a party to such a document, it does not embody a contract which binds him personally.

Section 31.Where cancellation may be ordered: Cases occurs where a written instrument, originally valid, becomes ineffective by subsequent events, such as, by satisfaction or payment, or other causes; and its existence casts either a cloud upon the title of the opposite party or subject him to the danger of some future litigation; under such and like circumstances, although the written instruments have become void, courts interpose to put a stop to injustice or hardship and will decree a delivery and cancellation of the instrument.

Section 32. What instruments may be partially cancelled: the court is not bound by any obligation to entirely annul the whole of the instrument impugned, but may in its discretion, allow a part of it to sustain, if it is evidence of various rights or different obligations.

Section 33. Power to require benefit to be restored or compensation to be made when instrument is cancelled or is successfully resisted as being void or voidable.

As Alexander Pope once said that to error is human i.e., to make mistakes is intrinsic to human nature but to forgive is a divine quality. The Specific Relief Act of 1963 gives us three chances or provisions to restore the prima facie intention of the contracts and helps in the continuity and longevity of the contracts as also the trade relations among individuals and the nations.

[1] Enacted on 27 January, 1899

Enforced on 1 July, 1899

[2] Sugden (n 31) 140 fn (i).

[3] Story (n 54) 133–34, §152

[4] Henkle v Royal Exchange Assurance Company (n 6) 318; 1055.

[5] Brij Lal versus kartar Kaur – (1989) 1 LLR 622, 623, 624 (P&H).

[6] Per Lord Langdale MR in Colyer v Clay (1843) 7 Beav 188; 49 ER 1036 at 193; 1038.

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