Law of Contract: Repudiation and Rescission Last updated 26-Aug-2015

When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.
Mr. Justice Dixon in McDonald v Dennys Lascelles Ltd. (1933) 48 C.L.R. 457 at pp. 476-477.

Imperfection of terminology

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.

Repudiation

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. However, Lord Porter noted in Heyman v Darwins Ltd [1942] AC 356, usage of word repudiation in relation to termination of contract is ambiguous. It may mean that the original existence of the contract rejected or that an intention disclosed 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. Lord Porter further explained:

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.

Thus in instances where repudiation is used to signify a right of the innocent party to treat the contract at end, it’s 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 (see below) and means that because of misrepresentation or fraud or mistake the contract never came into existence at all.

Rescission

The word rescission is often used in the same sense, meaning a termination of the contract for breach following alleged defect in the performance of the contract. In such case both parties are discharged from further performance of the contract, but all rights which have already been unconditionally acquired are not divested or discharged. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected.

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".

Another common usage of the word rescission is rescission ab initio, which 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.

Finally, there is a way to rescind contract by consent. While still executory on both sides, contract can be rescinded by mutual agreement, express or implied, in which case contract is considered as completely terminated and cannot be revived. Such rescission differs from both repudiation and right to rescind for fraud or lack of consent, misrepresentation, duress and mistake because it can be triggered only by mutual consent of both sides to contract and does not involve an element of default or indication of non-performance.

When allowing rescission as a remedy for misrepresentation the Court is to decide whether restitutio in integrum is or is not possible. This question becomes a complex one when the goods in question represent a depreciating asset which was used after sale, as for example a car. In Salt v Stratstone Specialist Ltd (t/a Stratstone Cadillac Newcastle) [2015] EWCA Civ 745 the Court of Appeal, cleared vagueness of previous case law, holding that neither depreciation not intermittent enjoyment of the goods sold should be regarded as reasons for saying restitution is impossible.

Longmore LJ stated at para 30:

Rescission is prima facie available if "practical justice" can be done. If "practical justice" requires a representor to be compensated for depreciation, it is for the representor so to assert and prove; likewise if the representor asserts that use of the car is to be taken into account, which may well be difficult if the car was as "troublesome" (to use Judge Harris’s words) as this Cadillac was. The absence of evidence about depreciation or the value of the use of the car should not operate to the disadvantage of the representee who should never have been put in the position of having a troublesome old car rather than a brand new one.

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