Listen to this articleAn explanation to confusing terminology in the Law of Contract
The words in question are “rescission”, “to rescind”, “void”, “void ab initio”, “to avoid”, “voidable”, “frustration of contract”, “termination of contract” and “discharge of contract”.
- I) “Void”, “void ab initio” and “to avoid”.
“Void” and “void ab initio” are usually used synonymously. A contract which is void or void ab initio never came into existence in eyes of law, though it may have done so in fact. Once a contract is declared “void” no other act is required in law, though there are usually significant consequences in fact, as the parties will have been treating the contract as subsisting in fact.
Sometimes, the word “to avoid” is used to signify that an otherwise subsisting contract has been brought to an end.
- ii) “Voidable”and “rescission”or “to rescind”
“Voidable” means that there is some factor which has vitiated the formation of the contract which entitles the party that has been prejudiced or injured, to treat the contract as not having come into existence, at their choice. If such party chooses to treat the contract as not having come into existence, then it will “rescind” or undo the contract i.e. there will be a “rescission” of the contract. “Rescind” does NOT mean the bringing to an end of an otherwise subsisting contract. The word “termination” signifies the same.
“Voidable” in contract law usually means the option that becomes available to a party to a contract to avoid or undo or unwind i.e. to rescind (not in the sense of terminate) the contract due to some factor like fraud or misrepresentation or undue influence that vitiates the consent underlying the contract i.e. when there is a formation defect in the contract. This is provided for in Ch. II of the Contract Act, 1872, inter alia in Ss. 13 to 19. Such a situation is fundamentally different from when a contract is brought to an end or terminated or discharged (not avoided or rescinded) due to either a failure of performance by the other party, a fundamental breach of contract, a breach of condition, or frustration of the contract, etc.
There is a confusion in the usage of these two words in the statute itself which seems to be contained in Section 55 of the Contract Act, 1872. It would seem that Section 55 in providing that, under the circumstances mentioned in Section 55, the contract “becomes voidable at the option of the promisee” uses the word “voidable” in an ambiguous sense, and it is submitted, erroneously. The correct word that should have been used is “terminable” i.e. the relevant part of Section 55 should read “becomes terminable at the option of the promisee”.
iii) “Termination” or “discharge”
These are used to signify the bringing to an end of a subsisting contract, either by the parties or by operation of law.
iv) “Frustration of contract”
This only means that a subsisting contract has come to an end by operation of law when certain prerequisites for the same have been satisfied.
Avoiding or Rescinding A Contract V. Ending or Terminating or Discharging A Contract
For the sake of our convenience let us consider that situations where avoiding or rescinding of a contract occur are Situation A and situations where ending or terminating or discharging a contract are Situation B. Then the difference between the two are as follows:
|
|
Point of Difference |
Situation A |
Situation B |
|
2 |
Remedies available to parties |
a) The option to the wronged party to avoid or rescind the contract is itself a kind of remedy since it can get out of a contract which it was wrongly induced to get into, and which was or it has discovered, is not in its interests. When a party rescinds a contract then it is freed from performing or having any liability for any obligations that it might have had under the contract right from the very formation of the contract.
b) The further remedies available to the wronged party in Situation A would be a remedy in tort law. E.g: suing in the tort of deceit for compensation in case the rescinded contract was induced by misrepresentation or fraud.
A restitutionary remedy could also be available to the wronged party if the other party has gained some advantage or profit i.e. has been unjustly enriched by or while the rescinded contract was operation, prior to its rescission.
c) It may be noted that the principle of subsidiarity applicable to tortious or restitutionary remedies would not be applicable in Situation A, since the legal result is that no contract ever existed: thus there is no question of considering if tortious or restitutionary remedies have been excluded by the terms of the contract.
d) In Situation A, the wronged party has no claim to contractual damages since it has chosen to undo or unwind the contract to bring about the result that the contract had never existed. If the legal result of rescission is that the contract had never existed, the wronged party it follows cannot rely on something that did not exist to claim compensation. |
a) The availability of the option to bring the contract to an end or to terminate it is itself a kind of remedy since the party can get out of performing the contract any further. Apart from this, the wronged party in Situation B would be a claim to contractual damages for breach of contract, if such a breach can be proved. There may be situations where failure of performance will not amount to a breach because there may be some lawful excuse in which latter (and rare situation) there may not be any liability to pay contractual damages.
b) There may be some restitutionary remedies that may be available to the wronged party, but they would be subject to the subsidiarity principle i.e. it would have to be examined whether the restitutionary remedies are not excluded by the terms of the contract, explicitly or by necessary implication. Tortious remedies, if any, would also be subject to the subsidiarity principle subject to whether the law permits contracting out of the tortious situation concerned. |
|
|
Inference: Thus it can be seen that there is a fundamental difference both in theory and in practice between Situation A and Situation B. Now Section 55 of the Contract Act, 1872 occurs in Ch. IV of the Act which is entitled “Of the Performance of Contracts”. Section 55 falls under the further sub-heading “Performance of reciprocal promises”. The margin heading of Section 55 reads “Effect of failure to perform at a fixed time, in contract in which time is essential” (emphasis supplied). These clearly imply that what is contemplated under Section 55 is that a validly formed contract (presumably without any formation defects) has come into existence, only the performance of which is in question, not the existence of which is in question. Thus, it is submitted that Section 55 clearly falls in Situation B and not in Situation A. Thus the remedy that Section 55 really provides for is the option of terminating the contract to the wronged party, not the option of rescinding or avoiding it.
Another statutory provision that creates some confusion is Section 27 of the Specific Relief Act, 1963. It would seem that Section 27 deals with both Situation A and Situation B described above, since it provides inter alia that: “… any person interested in a contract may sue to have it rescinded, and such rescission may be adjudged … in any of the following cases, namely … where the contract is voidable or terminable by the plaintiff”. Thus, Section 27 provides for the specific remedy of approaching the court to rescind or avoid or undo the contract in cases of formation defects when it “is voidable by the plaintiff” i.e. Situation A; and Section 27 provides for the specific remedy of approaching the court to terminate or discharge or end it in cases of refusal of performance, breach of contract, etc. when the contract “is terminable by the plaintiff” i.e. Situation B.
Case Laws An interesting case that came before the Supreme Court where the plaintiff mixed up his remedies is Syed Israr Masood v. State of M.P., (1981) 4 SCC 289. The said case brings out the difference between the remedy of rescission which can be claimed in case a contract is found to be voidable and the remedy of a party to a contract to repudiate a contract in case of fundamental breach. In an another case of U.P. SEB v. Shiv Mohan Singh, (2004) 8 SCC 402, it has been held: “116. It is one thing to say that a contract is illegal being opposed to public policy so as to render the same void in terms of Section 23 of the Contract Act, 1872 but it is another thing to say that by reason of breaches of the terms and conditions thereof by one of the parties it becomes voidable [terminable] at the instance of the other party to the contract. If a contract is valid in law the breaches thereof would not render it invalid but the same may only enable a party thereto, who had suffered by reason of such breach, to avoid [terminate] the contract. Unless the terms and conditions of a contract are avoided [terminated] by a party thereto the contract remains valid and all consequences flowing therefrom would enure to the benefit of the parties thereto.” |
||
Discussion on Remedies
Many of the remedies that are available in the contractual context are not really contractual remedies. A contractual remedy would be a remedy that arises from the terms and conditions of the contract in some way either explicitly or as provided by the law of contract. The remedy to claim damages for breach of contract or specific performance of the contract on breach are contractual remedies propio vigore. A condition precedent for the availability of a contractual remedy would be the coming into existence of a valid contract. However, situations in which parties frequently seek remedies are situations where a contract fails to come into existence or is vitiated with formation defects or a situation which results after a contract has been terminated and contractual remedies have been exhausted or are unavailable for some reason. A person is not remediless in such situations and there are various sorts of remedies which might be available such as the remedy of rescission, restitution integrum, restitutionary remedies, tortious remedies, equitable remedies, public law remedies, etc. some of which may have found statutory recognition or may have been provided by statute.
The difference in damages claimed in tort and damages claimed on the (rescinded) contract would be as follows. In awarding tortious damages, the party is usually sought to be restored to the situation that the party would have been had the tort not taken place at all i.e. had the rescinded contract not been entered into at all. In awarding contractual damages the party is usually sought to be brought to the situation where the party would have been if the contract had been duly performed as per the contract i.e. the party is awarded what has been called its “expectation interest”.