Law of Contract: Repudiation and Rescission
Imperfection of terminology concerning to repudiation and rescission is well known. It is said that owing to the historical difference between common law and equity, the language adopted is far from uniform: while common lawyers usually use the word repudiation, equity lawyers inclined to employ words rescission or setting a contract aside. Main contributory factor to the said ambiguity is perhaps that nondiscriminating way in which the word repudiation is often used; it equally describes an election of the aggrieved party to terminate the contract if another side committed a breach which went to the root of the matter, and a conduct of the party in fault whose act or acts tantamount either to repudiatory or anticipatory breach.
Legal effect of repudiation of contract by the innocent party when consequences of the breach are so serious as to frustrate its commercial purposes, is to discharge the parties from further performance of the contract, leaving liabilities already accrued unaffected. The word rescission is often used in the same sense, meaning a rescission for breach, which follows alleged defect in the performance of the contract, see also McDonald v Dennys Lascelles Ltd. (1933) 48 C.L.R. 457. If, however, one speaks about rescission for misrepresentation, mistake, fraud or lack of consent such rescission, involves an allegation that there was a defect in the formation of the contract, and sets the contract aside both retrospectively and prospectively . This distinction is well illustrated by the following words of Lord Wilberforce in Johnson v Agnew [1979] 1 All ER 883, at p.889:
At this point it is important to dissipate a fertile source of confusion and to make clear that although the vendor is sometimes referred to in the above situation as ‘rescinding’ the contract, this so-called ‘rescission’ is quite different from rescission ab initio, such as may arise for example in cases of mistake, fraud or lack of consent. In those cases, the contract is treated in law as never having come into existence. In the case of an accepted repudiatory breach the contract has come into existence but has been put an end to or discharged. Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about ‘rescission ab initio’.
Rescission ab initio means that contract was void from the very beginning and therefore parties are to be restored to the same position they were before the contract was made. Since no contract ever came into existence no one can claim damages under it.
Another notable difficulty related to the usage of word repudiation is that when it relates to termination of contract its meaning is hardly accurate. Lord Porter addressed this problem in Heyman v Darwins Ltd [1942] AC 356 at p.398:
Indeed, the word "repudiation", accepted or unaccepted, is an ambiguous expression. As Scott L.J. pointed out in Toller v Law Accident Insurance Society, Ld. [1936] 2 All E. R. 952:
"It may mean: repudiate the original existence of the contract. It may mean: disclose an intention to disregard it in toto and refuse to be bound by its terms altogether. Or it may mean: a mere contention that under the terms of the contract the defendant is completely free from liability by reason of some fact."Except in the first case the contract is not repudiated. Even in the second all that is repudiated is the defendant’s future liability under it. Where the contract itself is repudiated in the sense that its original existence or its binding force is challenged, e.g., where it is said that the parties never were ad idem, or where it is said that the contract is voidable ab initio (e.g., in cases of fraud, misrepresentation or mistake), and that it has been avoided, the parties are not bound by any contract and escape the obligation to perform any of its terms including the arbitration clause unless the provisions of that clause are wide enough to include the question of jurisdiction. Where, however, the existence of the contract is acknowledged but one of its terms is relied on as disentitling the claimant to recover, the arbitration clause is effective.
Summarising it can be concluded that in instances where repudiation is used to signify a right of the innocent party to treat the contract at end, its true meaning is that the contract is neither abrogated nor terminated, but that the injured party elected to cease any further performance. The contract remains in existence at least so far as apportionment of liabilities already accrued concerns. Accordingly even when the purposes of the contract have failed, stipulations incorporated for determining the mode of their settlement, such as arbitration clauses for example, survive. Repudiation of original existence of the contract is equal to rescission ab initio and means that because of either misrepresentation or fraud or mistake the contract never came into existence at all.
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