Equity - Rescission - Lecture notes 2 PDF

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Rescission - Handout Introduction This is a discretionary equitable remedy. O’ Sullivan, in his article ‘Rescission as a selfhelp remedy: a critical analysis’ [2000] CLJ 509, is of the opinion that rescission is the process by which a subsisting contract … is avoided at the instigation of one of the parties, on account of some defect vitiating or otherwise tainting that party’s entry into the contract, such as fraudulent or innocent misrepresentation, undue influence, duress or certain shared mistakes. Rescission is said to avoid or nullify the contract ‘ab initio’, which involves not just the cancellation of future executory obligations, but also the restoration of the parties to the positions they occupied before the contract. In the case of an executed or partly executed contract, then, rescission involves the restoration of benefits … transferred pursuant to the contract. The circumstances in which a court will intervene in the exercise of its equitable jurisdiction were summarised by Henchy J I Northern Bank Finance Corporation Ltd v Charlton, where he said that relief in the form of rescission ‘will be granted when the court considers that it would be just and equitable to do so in order to restore the parties, at least substantially to their respective positions’ before the vitiating conduct occurred, a point which was echoed by Griffin J in his judgment in the same case. He went on to say that the primary purpose of all proceedings for rescission is to restore the status quo and bringing back the original position by undoing all that has intervened between it and the present. A. Misrepresentation A contract may be rescinded by the court where its execution was acquired by means of fraudulent misrepresentation by one of the parties to that contract. The most important Irish authority on the right to rescind in equity on grounds of fraudulent misrepresentation is Northern Bank Finance Corporation Ltd v Charlton [1979] IR 149. In this case the plaintiff bank loaned the defendants a sum of money to facilitate their objective of acquiring control of a public company. When the defendants defaulted on the loan repayments, the plaintiff claimed the balance and interest and the defendant counter-claimed that they had entered into the original transaction because of the fraudulent misrepresentations of the plaintiff. In the HC, Finlay P made an order dismissing the plaintiff’s claim and allowing the defendant’ counterclaim on the basis that the defendants had been induced by a fraudulent misrepresentation to enter into the transactions. The SC agreed that the plaintiffs claim should be dismissed but the majority of the court held that the order of rescission granted by the HC should be set aside based on the principle of restitution in integrum (origincal contract) could not apply. O’Higgins CJ pointed out that in the case of a fraudulent misrepresentation, the fact that the contract has already been executed or the transaction completed is no bar to rescission unless restitution in

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integrum has become impossible as a result. In his view it was the duty of the court to do what was ‘practically just’ in the circumstances, even though the precise restoration of the parties to their previous position was no longer possible. However, the majority view was to the contrary as Henchy J put it, an order of rescission would in the circumstances run counter to the object of the restoration of the status quo ante. Henchy J stated that Where a person has been induced by a fraudulent misrepresentation made collaterally by the other party to a contract to alter his position to his disadvantage, there are two alternative courses open to him: he may claim damages in tort for the deceit or he may sue for rescission of the contract which was induced by the misrepresentation. The latter relief, which is an equitable one, will be granted when the court considers that it would be just and equitable to do so in order to restore the parties, at least substantially, to their respective positions before the fraudulent misrepresentation was acted on. Innocent Misrepresentation The principles which apply to rescission in cases of innocent misrepresentation are not as free from doubt. The situation that arises where the contract has not yet been completed was examined in Gahan v Boland (IEHC). Murphy J said that where a false representation was made, even though made in good faith and with no intention to mislead, rescission could be granted where the plaintiff could establish that ‘the representation was made by the defendant with the intention of inducing the plaintiff to act thereon and secondly, that the plaintiff did in fact act or rely on the representation’. This view was echoed by Henchy J in the SC where he stated that an innocent yet false representation could suffice where it was a material one made with the intention of inducing a plaintiff to act on it and where it was one of the factors which induced the plaintiff to enter into the contract. It would appear that in circumstances where the contract is complete, rescission would only be granted in cases of fraudulent misrepresentation. This point was made by Lord Shelborne in Brownie v Campbell in the following manner ‘it is not the principle of equity that relief should afterwards be given against a conveyance, unless there be a case of fraud, or a case of misrepresentation amounting to fraud, by which the purchaser may have been deceived.’ This dictum was referred to by O’Connor J in Lecky v Walter (Irish -1914) in holding that where a contract has been completed and there has been no fraud, but only an innocent misrepresentation, the agreement cannot be set aside. A further distinction which must be drawn between cases of fraudulent and innocent misrepresentation is that in the former case it is sufficient to show that misrepresentation has been made ‘as to any part of that which induced the party to enter into the contract which he seeks to rescind’ whereas in the latter it is necessary to show that as a result there is ‘a complete difference in substance’ between what was contracted for and what was delivered. As a general principle,

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failure to disclose material facts to a contract will not constitute grounds for rescission unless by his silence a person implicitly alters the meaning of a representation previously made by him. Exceptions: contracts of insurance and facility settlements, B. Mistake Rescission – depends on the nature of the mistake. Flanagan J stated in Gun v McCarthy that where there being a clear undoubted mistake by one party in reference to a material term of the contract which he entered into with another, the other party knowingly seeking to avail himself of that and seeks to bind the other to the mistake, the law of this court will not allow such a contract be binding on the parties. The type of mistake which will render a contract void in law was identified by Lord Atkin in Bell v Lever Brothers LTd as one ‘as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be’. However, for many years a well-established line of authority in England laid down the principle that equity would permit rescission of a contract on grounds of common mistake where the contract was valid at common law. While the COA held in Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd that there is no jurisdiction in equity to grant such rescission of a contract on such grounds when it is valid and enforceable on ordinary principles of contract law. Given the controversial nature of the decision and the fact that the courts in this jurisdiction may prefer to follow the previous authorities on this issue, it remains necessary to trace how this equitable jurisdiction has been developed and applied. The starting point in examining decisions in which relief was granted in equity on the grounds of mistake in England is Cooper v Phibbs. An individual agreed to take a lease of a salmon fishery from the trustee of a settlement in circumstances, where to both parties, it already belonged to him and the HOL agreed to set aside the agreement subject to a lien (loan of property) on the fishery for such monies as had been expended on improvements. These decisions also illustrated the ability of equity to set aside a contract on such terms as the court sees fit to impose, in this instance involving the imposition of a lien, and shows the flexible nature of equitable rescission. The leading English case is Raffles v Wichelhaus where A agreed to buy and B to sell a cargo of cotton to arrive “ex Peerless (a ship) from Bombay”. It emerged that two distinct ships bearing that name had set sail from Bombay with such a cargo, one in October and one in December. The parties were at crosspurposes over which ship the contract related to. The court held that a reasonable man would conclude that no contract had been entered into, since as an objective matter the parties could have been regarded as entering into either of two possible contracts. Common Mistake

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Perhaps the most extensive consideration of the circumstances in which rescission will be granted in equity on the grounds of common mistake is contained in the judgment of Denning LJ in Solle v. Butcher[1950] 1 KB 671 Mr Butcher had a flat that was rent controlled. It was not supposed to be leased at more than £140. But neither party knew this and he leased it to Mr Solle for £250 pa. When Mr Solle found out, he sought to recover the amount overpaid. Mr Butcher counterclaimed for rescission of the lease on ground of mistake. The question for the court was whether the mistake was fundamental to the contract. 2 ways to deal with it – common law (Bell) and equity (Solle). This action failed and the lease was set aside on the grounds of common mistake. Denning LJ stated that a contract will be set aside if the mistake of the one party has been induced by material misrepresentation of the other even though it was not fraudulent. He continues to stated that a contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault. The suggestion made by Denning LF that a contract, which although was not void as a result of mistake at law, may nevertheless be voidable in equity, was upheld in Ireland in O’Neill v Ryan and was accepted by Goff J in Grist v Bailey. Goff J said that the essential questions to be decided were first, whether there had been a common mistake, secondly, whether it was fundamental and thirdly whether the defendant was at fault. He was satisfied that in the case before him there had been a common mistake of a fundamental nature. While Goff J said that it was not absolutely clear what Denning meant by the third requirement, namely that they party seeking to take advantage of the mistake must not be at fault, clearly there must be some degree of blameworthiness beyond the mere fact of having made a mistake. In a more recent decision, there have been an acceptance of the principles enunciated by Denning in Solle. In William Sindall plc v Cambridgeshire County Council (1994), Evans J stated that it must be assumed that there is a category of mistake which is ‘fundamental’ so as to permit the equitable remedy of rescission and wider than the ‘serious and radical’ mistake which means that the agreement is void in law. In his view the difference may be that the common law rule is limited to mistakes with regard to subject matter of the contract while equity can have regard to wider unlimited category of fundamental mistake. In Great Peace Shipping Ltd. v. Tsavliris Salvage (International) Ltd. [2002] 3 WLR 1617 it was stated that there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law. It has been suggested that the COA in Great Peace was in fact bound to follow Solle and the decision itself has been the subject of considerable academic criticism. In this case, The Defendant [Tsavliris] chartered the Plaintiff's [Great Peace] because it needed to provide salvage services to another ship. It did so based on information that the Plaintiff's ship was pretty close to the ship the Defendant needed to salvage, but in fact is was actually 410kms away. When it found out, the Defendant waited until it managed to charter a closer ship, and then notified the Plaintiff that the agreement is cancelled. The Plaintiff sought payment. The test remains whether the mistake was 4

so great that the contract is essentially a different thing from what it was believed to be. If yes, it is void. In this case, the fact that the Defendant didn't immediately cancel the contract once it obtained knowledge of the mistake shows that the Defendant did not regard the contract as devoid of purpose, therefore there is no fundamental or essential mistake. Phang argues that the primary advantage of the doctrine of common mistake in equity is that it ties great flexibility and that it allows the court to impose appropriate terms in a context where the contract is not automatically rendered void. As he suggests, such flexibility is desirable ‘not least to ensure that as much justice can be achieved under the circumstances as is possible’. It is submitted that it is unlikely that the courts in Ireland would agree with the conclusions reached by the COA in Great Peace. Certainly, in O’Neill v Ryan, Costello J referred to the decision of Denning LJ in Solle as establishing that a court might set aside an agreement in the exercise or its equitable jurisdiction even though it is not void on the grounds of common mistake. Similarly, in Intrum Justitia BV v Legal and Trade Financial Services Ltd, O’Sullivan J having concluded that the plaintiff was not entitled to rescission at common law on the basis of mistake, went on to hold that he would also not be entitled to rescission in equity in accordance with the principles identified in Solle and applied by Costello in O’Neill. While no referencing was made to the decision of the COA in Great Peace the approach adopted by O’Sullivan shows a continued acceptance of a separate equitable jurisdiction to set aside a contract on the grounds of common mistake. There are strong grounds for arguing that this equitable basis for intervention should be allowed to continue as it allows for the setting aside of a contract where the justice of the case requires it also permits this to take place on terms which appear just to the court. Unilateral Mistake Unilateral mistake is where one of the parties to the contract is mistaken as to a fundamental matter and the other party is aware of the mistake. This issue has yet to be satisfactorily resolved as to whether the court will grant rescission in a case of unilateral mistake or whether the mistake must be common to both parties before it will intervene. This issue was considered by Russell LJ in the case of River late Properties Ltd v Paul, where the parties executed a lease prepared by the lessor’s solicitors which obliged the lessor to bear all the costs of exterior and structural repairs to the premises. Although the lessor had intended that the lessee should be liable to make a contribution towards this expenditure, neither the lessee nor her solicitor were aware of this. The COA accepted that the mistake was in no way attributable to anything said or done by the lessee and held that it was a case of ‘mere unilateral mistake’ which could not entitle the plaintiff to rescission of the lease. It would also seem to have been accepted in Ireland. At least in principle, that rescission for unilateral mistake may be granted in some circumstances. In Monaghan County Council v. Vaughan [1948] IR 306, Dixon J commented that

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‘Unilateral mistake arises where one of two or more parties is not ad idem with the other party or parties, and there is therefore, no real agreement between them. In such a case rescission may be appropriate.’ This statement was referred to by Griffin J in the course of his judgment in Irish Life Assurance Co Ltd v Dublin Land Securities Ltd [1989] I.R. 253, although as the SC was concerned solely with the issue of rectification in that case, no view was expressed on the circumstances in which the remedy of rescission would be granted. C. Undue Influence Equity will allow a contract to be set aside where if a party entered into it because of “undue influence” exercised over him by another person, such that he cannot be said to be have been exercising his own free will. As Lindley LJ made is clear in Allcard v Skinner, equity intervenes not to save individuals ‘from consequences of their own follow’ but to prevent them from being victimised by others. Two categories of undue influence 1. First, “class one”, which is actual undue influence. 2. “Class two”, which is presumed undue influence. In Allcard v. Skinner (1887) 36 Ch D 145, Cotton LJ stated that The question is – Does the case fall within the principles laid down by the decisions of the Court of Chancery in setting aside voluntary gifts executed by parties who at the time were under such influence as, in the opinion of the Court, enabled the donor afterwards to set the gift aside? These decisions may be divided into two classes – First, where the Court has been satisfied that the gift was the result of influence expressly used by the donee for the purpose [actual undue influence]; second, where the relations between the donor and donee have at or shortly before the execution of the gift been such as to raise a presumption that the donee had influence over the donor [presumed undue influence]. In such a case the Court sets aside the voluntary gift, unless it is proved that in fact the gift was the spontaneous act of the donor acting under circumstances which enabled him to exercise an independent will and which justifies the Court in holding that the gift was the result of a free exercise of the donor’s will. This is to protect vulnerable people not to be abused by others. Generally the courts have shied away from any attempt to define precisely what constitutes undue influence, but it has been described as where a person has exercised ‘unfair, undue and unreasonable mental control’ over another. One of the most comprehensive formulations of the type of conduct which will amount to undue influence is laid down by Lowry LCJ in R (Proctor) v Hutton where he stated that ‘the plaintiff must 6

prove that an unfair advantage has been gained by an unconscientiously use of power in the form of some unfair and improper conduct, some coercion from outside, some over reaching, some form of cheating’ undue influence will therefore arise in circumstances where the defendant caused the plaintiff’s judgment to become clouded through the exercise of some form of domination and caused him to enter a transaction disadvantageous to him. The question of what will amount to undue influence was also considered more recently in Royal Bank of Scotland v Etridge where he acknowledged that the circumstances in which one person acquires influence over another and the manner in which this influence may be exercised vary too widely to be defined precisely. However, he made it clear that if the intention to enter into a transaction was secured by unacceptable means it will not be permitted to stand and the means used will be regarded, as improper or undue influence whenever the consent thus procured ought not fairly to be treated as the expression of a person’s free will. The decision between actual and presumed was discussed by Costello J in O’Flanagan v Ray-Ger Ltd unreported, High Court, Costello J., 28 April 1983, THIS IS THE PRINCIPLE THAT UNDER PINS CASELAW WITH ACTUAL & PRESUMED UNDUE INFLUENCE: “The cases where a plaintiff seeks to set aside a gift or other transaction on the ground that it was procured by undue influence have been divided into two classes; firstly, those in which it can be expressly proven that undue influence was exercised, in which circumstances t...