Rescission Dr Stephen Janes Notes PDF

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WESTERN SYDNEY UNIVERSITY SCHOOL OF LAW REMEDIES SPRING 2020 RESCISSION LECTURE NOTES by Stephen Janes

Introduction A party to a contract may decide it would rather get out of the contract than complete it or sue for damages for a breach. The ability to do this depends on whether there are grounds to rescind. A party to a contract can only rescind in very limited circumstances and if they exist the party may elect to do so and notify the other party of its decision. Generally, those circumstances arise when the agreement or assent of the parties to the bargain can be questioned. The decision whether to pursue this right and how to go about it may depend on whether other remedies are sought as well as or instead of recession. A distinction must be drawn between rescission and termination of a contract. These terms are often confused and wrongly used interchangeably.  Termination for breach of contract brings to an end the future obligations of the parties to a contract.  Rescission ends all obligations and rights under the contract past and future by placing the parties in the position as if there had been no contract. This is often referred to as rescission ab initio. The right to terminate for breach depends upon the nature of the term breached and this forms part of the law of contract. Damages may exist independently of whether there is termination. The requirements for rescission may be stated as:  The contract is in some way voidable or the assent of a party to the contract has been improperly procured such as by undue influence or duress etc.  The party with the right to rescind elects to take that option rather than affirm the contract.

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 Rescission is possible by way of restitutio in integrum. That is restoration of the parties to their pre contract position. A distinction must be made between voidable and void contracts. A void contract cannot be rescinded, as it is a nullity from its inception. However, a voidable contract is one which is valid until it is rescinded. A right of rescission can also be given by statute or by contract, although the remedy there given differs from that under discussion. Section 4(2) of the Sale of Goods Act 1923 (NSW) states that the rules of the common law relating to the effect of fraud, misrepresentation, coercion, mistake or other invalidating cause shall continue to apply to contracts for the sale of goods. The Competition and Consumer Act 2010 (Cth) in Schedule 2 (The Australian Consumer Law) s.243(c) permits a court to refuse to enforce a contract or any of its provisions. If a court refuses to enforce the whole of a contract this is akin to rescission even though the language of the statutory remedy dies not speak of rescission. Section 243(d) permits the refund of money and return of property. Section 87 (“Other Orders”) also permits compensatory orders to be made by a court. The power to grant relief under the statutory provisions is wider than in equity where relief although discretionary is given only on the basis of the traditional categories; JAD International Pty Ltd v International Trucks Australia (1994) 50 FCR 378 at 380. In some contracts most notably those for the sale of land a right of rescission can be given so that if an event does not happen one or both parties can rescind upon the giving of notice. In neither case does the quality of a party's assent to the contract have to be in issue or the contract voidable. Some of the principle areas where rescission can operate in terms of contracts where the assent of one of the parties has been improperly procured concern Misrepresentation, Mistake, Duress and Undue Influence. This list should not be seen as exhaustive. In the field of equity unconscionable conduct and breach of fiduciary duty can give rise to rescission; see Maguire v Makaronis (1997) 188 CLR 449.

Misrepresentation Here the issue is with the traditional category of misrepresentation that gives rise to rescission not more recent and more popular statutory inventions such as s.18 of the

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Australian Consumer Law, which need not even be concerned with contracts or rescission. There must be a representation and the representation must be of fact and not opinion, provided the opinion is honestly held; Biset v Wilkenson [1927] AC 177. Where the opinion is not honestly held and is therefore fraudulent it becomes a statement of fact being a representation that the person honestly held that opinion; Smith v Land and House Property Corp (1884) 28 Ch D 7. A statement of intention will be treated the same way as an opinion and will not constitute a misrepresentation if honestly held; Edgington v Fitzmaurice (1885) 29 Ch D 459. The representation must be false at the time it was made. If there are continuing and changing circumstances the representor is under a duty to correct the representation if aware of such changes; With v O'Flanagan [1936] Ch 575. The representation must induce the representee to enter into the contract. At common law in the case of fraudulent misrepresentation it must have been the intention of the representor to induce the other party to enter in to the contract. The representation need only be one of a number of reasons for entering into the contract and not even the main reason. It is not up to the representee to question or to satisfy itself as to the representation; Redgrave v Hurd (1881) 20 Ch D 1. But if representee does enquire it ceases to rely on the representation. The representation must be by another party to the contract or its agent. At common law in order to obtain rescission for misrepresentation required the additional element of fraud in making the representation; Derry v Peek (1889) 14 App Cas 337 at 374. This required making the representation with:  Knowledge of its falsity; or  Without belief in its truth; or  Recklessly was to whether it was true. The harshness of this position was that there was no remedy for rescission at common law unless fraud was established or unless the representation was a term of the contract in which case its breach would give rise to damages and possibly the right to terminate.

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This lead ultimately to actions for negligent misrepresentation; see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Equity however permitted rescission for innocent misrepresentation on the basis that intent to deceive was not necessary so long as there was “equitable fraud”; Redgrave v Hurd (1881) 20 Ch D 1 at 12-13. Thus a person who now knows a representation to be false cannot have the benefit of it even though it was made innocently.

Mistake There are three categories of mistake;  Common mistake is where both parties have made the same mistake.  Mutual mistake is where both parties are mistaken but each has made a different mistake.  Unilateral mistake is where only one party is mistaken. Traditionally the mistake must have been one of fact and not law. Mistake of law is now recognised; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353. This case is considered later in the subject under “restitution”. Three consequences of mistake: * Prevents the formation of a contract * Renders the contract void at common law * Renders the contract voidable in equity Common Mistake At common law a common mistake which is fundamental rendered a contract void; Bell v Lever Bros Ltd [1932 AC 161. Common Mistake is considered to have limited application in Australia both at common law and in equity. The courts tend to see the matter as one involving the construction of the contract even where the mistake concerns the very existence of the subject matter of the contract; McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. Contracts which are not void at common law for common mistake can be set aside in equity if there is a common mistake as to facts or rights which are fundamental and the party seeking to set it aside is not at fault; Solle v Butcher [1950] 1 KB 671 at 693. But

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this authority may be doubted in Australia in view of McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 and Savanosio v McNamara (1956) 96 CLR 186. Mutual Mistake Goes to the formation of the contract and the reality of the agreement. While there may objectively be agreement in reality there is no consensus and no contract. In equity there is no authority permitting rescission on this ground. Unilateral Mistake Not generally available at common law; see Taylor v Johnson (1983) 151 CLR 422 and Solle v Butcher [1950] 1 KB 671. Possible exceptions:  informal contracts  mistake as to the identity of the other party  mistake as to the nature of the contract - Non est factum. Equity will order rescission by a party for a unilateral mistake where: 1. The other party was aware of the mistake of the first party as to content or subject matter. 2. The other party deliberately takes steps to ensure the first party does not become aware of the mistake. Thus rescission in equity for unilateral mistake is based on fraud; Taylor v Johnson (1983) 151 CLR 422 at 432.

Duress Duress concerns the use of illegitimate pressure upon the will a party to a contract. Originally this was seen as the overborne will theory however in more recent times it is seen in terms of the party's will being deflected; Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40. The deflected will theory accords more with the view that a contract is voidable for duress rather than void. Duress to the Person

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Actual or threatened physical harm to the person of a party to the contract or a close relative; see Barton v Armstrong [1976] AC 104 (PC).  Such duress need not be the sole reason but only the dominant reason for entering the contract.  Duress can apply notwithstanding the fact that the contract was advantageous to the oppressed party. Duress to Goods Actual or threatened detention damage or destruction of goods without lawful excuse operates in the same way as duress to the person. Payments made under duress are recoverable by way of restitution for unjust enrichment. Economic Duress This is illegitimate economic pressure; Universe Tankships Inc v Monrovia v International Transport Workers’ Federation (The Universe Sentinel) [1983] 1AC 366. The threatened breach of a contract may amount to duress; North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd (The Atlantic Baron) [1979] 1 QB 705. In Crescendo Management Pty Ltd v Westpac Banking Corp (1988) 19 NSWLR 40 at 46 McHugh JA stated that commercial pressure will be illegitimate where it constitutes of unlawful threats or unconscionable conduct. But mere pressure no matter how great that is not illegitimate will not amount to economic duress. A threat of lawful conduct can be illegitimate of done in support of an unlawful demand; J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 41 ALR 539.

Undue Influence The scope of duress is limited and equity has intervened making contracts and other transactions involving the disposition of property voidable where they have been brought about by the use of an unconscentious influence by one person over another for the benefit of the first person or a third party. Undue influence involves a relationship of influence and the exercise of that influence. The Relationship There are on the one hand assumed or presumptive relationships of undue influence and on the other proved relationships of undue influence in the particular circumstances.

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This is an important distinction and the onus of proof concerning the relationship varies accordingly. The following relationships give rise to a presumption of undue influence:      

Parent and child Guardian and ward Priest and penitent Solicitor and client Doctor and patient Express trustee and beneficiary

These are rebuttable presumptions of law. The onus is therefore on the party seeking to propound the transaction to rebut the presumption and show that the weaker part entered the transaction of their own free will; Allcard v Skinner (1887) 36 Ch D 145. If you cannot establish a presumptive relationship you must proceed to prove a relationship of influence exists in the particular circumstances; Johnson v Buttress (1936) 56 CLR 113. The Exercise of Undue Influence The undue exercise of influence is the abuse of a position of dominance to obtain an unfair advantage. Where this occurs equity will not allow the stronger party to retain this unconscientious advantage by reason of their own wrongful act. Where the presumption is not rebutted equity will not for reasons of public policy let stand the transaction; Allcard v Skinner (1887) 36 Ch D 145. Once the necessary relationship is established either by presumption or proof the onus is on the dominant party to justify the transaction. The Place of Third Parties The doctrine of undue influence generally applies to parties to the transaction but the remedy may be applied against a recipient who has notice of the application of undue influence, Bank of New South Wales v Rogers (1941) 65 CLR 42. Rebutting the Presumption In considering whether the presumption is rebutted the court will normally have regard to whether there was independent advice and adequate consideration. On the quality of independent advice see; Farnham v Orrell (1989) NSW Conv R 55-443, Collier v Morlend Finance (1989) A.S.C. 55-716.

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Election Where the right to rescind arises such as in the above cases it arises because the contract is voidable not void. Therefore, the party with the right to rescind must make a choice to elect between rescission or affirmation of the contract. These are mutually exclusive choices; Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (1992) 182 CLR 26. If the contract is rescinded then this has effect ab initio. If it is affirmed what was a voidable transaction becomes valid and enforceable by both parties. Election can be made by express choice or can be implied by conduct. Thus delay in acting to rescind may be taken to be an election to affirm. A person must be aware of the facts that give rise to the right to rescind before any election can be made; Immer (No 145) Pty Ltd v Uniting Church Property Trust (1992) 182 CLR 26.

Restitutio in integrum In order that rescission would be permitted it had to be possible to restore the parties to their pre contract positions. The common law was stricter in this regard than equity. The common law required that there be restitution in specie whereas equity required only substantially the status quo or 'practical justice'. This equity achieves by various remedies; Altati v Kruger (1955) 94 CLR 215. Where a party would not have entered into the contract at all but for the conduct of the other party it is appropriate to rescind the whole contract ab initio. However, can the court remake the contract so that it accords with what the innocent party intended and was led to believe by the other party? The answer is yes; see Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102. See also Bridgewater v Leahy (1998) 194 CLR 457. However, where rescission in equity is ordered the court will insist on the maxim 'he who seeks equity must do equity' thus all benefit of the transaction must be given up by way of restitution. In this sense the court would not remake the parties bargain by allowing the innocent party to keep the fruits of the transaction; Maguire v Makaronis (1997) 188 CLR 449.

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