LLB170 Lecture 12: Week 12 – Rescission and Abuse of Power
Week 12 – Rescission and Abuse of Power
Rescission
Vitiating Factors: mistake, misrepresentation, breach of fiduciary duty, duress, undue
influence, unconscionability and the rule in Yerkey v Jones
Relief available if vitiating factor is established
• renders contract voidable (except mistake at common law which renders the
contract void)
• damages only available in tort where a tort is established for either negligent or
fraudulent misrepresentation
Election
• Right to elect to rescind or affirm
• Rescission = act of party, but parties may need court to ratify and make adjustments
(Alati v Kruger)
• Need to communicate election by clear words / conduct (Coastal Estates)
• Election, once made, is final (Coastal Estates)
Relief: Rescission
• Set aside the contract and restore the parties to original position
• Not available if parties cannot be restored back to original position
• Need for communication
• Vitiating factors (other than mistake at common law) render contract voidable
• Innocent party has choice to elect to rescind or affirm the contract
• Need for 'restitutio in integrum' to be established for rescission to be possible
• If the subject matter of the contract has been wholly or substantially destroyed
there can be no rescission
Termination as distinguished from rescission
When a contract is rescinded, the contract is set aside from the beginning, therefore there
can be no claim for damages for breach of contract
If a claim is made for damages, there can be no rescission of the contract as the victim has
by suing for breach clearly elected not to rescind
Can receive additional funds:
1. Where there are permanent improvements which increase the resale value of the
property
2. When necessary repairs are made
- However, are the repairs too much?
3. Have to pay for the use and benefit of the item
No additional funds:
1. Improvements for the purpose of personal taste or enjoyment
2. Improvements were made after the awareness of the vitiating factor
Requirements
• Need for restitutio in integrum
• At common law, general rule → only allowed in cases of fraud or duress, or where
there is a total failure of consideration and only if precise restoration is possible
(Alati v Kruger)
▪ Damages could be rewarded for fraudulent and negligent
misrepresentation, but not for innocent misrepresentation
• In equity → recognised more innocent misrepresentation & other vitiating factors →
substantial restoration is enough (Alati v Kruger)
▪ more flexible approach using equity’s powers to make allowances and
take an account of profits – See Alati v Kruger; Brown v Smitt; (and recall
Solle v Butcher)
▪ damages not awarded for innocent misrepresentation
▪ in granting rescission, could award an indemnity → require the
representor indemnify the representee against obligations
Bars to rescission - right to rescind may be lost where
1. Innocent misrepresentation
• The common law does not allow rescission, and it is arguable whether equity has
jurisdiction over this issue (Watt v Wasthoven)
2. Executed contracts
• Cannot of be rescinded in the absence of fraud
3. The innocent party has affirmed
• Expressly by words or
• Impliedly by conduct?
• communication or conduct must be 'unequivocal' (Coastal Estates; Hawker Pacific;
Federal Commerce)
• Cannot be inferred from conduct that takes place while victim’s knowledge or
independence is still affected by vitiating factor. For example, if a party is still under
duress there is no election until the duress has passed
• But query if conduct irrelevant until innocent party also has knowledge of the right
to rescind? (Coastal Estates)
4. Time Lapse
• If lapse of time amount to affirmation, there can be no rescission
• Delay itself will not be a bar to relief in equity but is relevant to the court’s exercise
of discretion
5. Notification
• Rescission will only be effective if it is communicated to the Representor
• An exception to this bar is when it is impossible to communicate the rescission
6. Misrepresentation becomes a term of the contract
• There is authority to suggest that a party may still elect to rescind the contract on a
basis of a misrepresentation even if the misrepresentation becomes a term (i.e., he
does not have to sue under breach of contract)
• Is the representee restricted to his/her rights in respect of the breach of the
contract?
• Academy of Health and Fitness v Power → party induced to enter into contract due
to innocent misrepresentation did not lose equitable right to rescind by reason of
the representation having become a term of the contract that was at no time other
than a warranty
7. Third Parties
• Rescission may be barred in cases where a third party became involved and acquired
rights under the contract. However, monetary remedies are available
• McKenzie v McDonald , Lewis v Averay
• e.g. as a result of a misrepresentation to you, you sell your car to that person who
then sells it to an innocent third party (for value without notice of the
misrepresentation) before you take action to rescind (eg Lewis v Averay)
• Although note that 'pecuniary rescission' may sometimes still be granted between
original parties (eg McKenzie v McDonald). Can still rescind up to the point where
third party is affected
8. Exclusion/entire agreement clauses
• Non-fraudulent misrepresentations will be protected by disclaimers or entire
agreement clauses
• Exclusion clauses effective against innocent misrepresentation but ineffective
against fraudulent misrepresentation (Alati v Kruger, Byers v Dorotea)
9. Party with right to elect has acted unfairly or unconscionably (equitable maxim - he
who seeks equity must do equity)
• Alati v Kruger – What conduct did Alati rely upon to allege that Kruger had acted
unconscionably and thereby lost his right to rescind the contract to purchase the
business? Why did Alati’s argument fail?
10. Contract is fully executed?
• Need to be very careful with this ‘barrier’
• If contract for sale of land has been completed by conveyance, then there can be no
rescission if contract was induced by innocent misrepresentation or common
mistake (Svanosio v McNamara)
Right to rescind NOT lost where
Where the representation is also a term of the contract, P can choose whether s/he wishes
to pursue remedies available for breach of contract or remedies available for
misrepresentation
Document Summary
Week 12 rescission and abuse of power. Vitiating factors: mistake, misrepresentation, breach of fiduciary duty, duress, undue influence, unconscionability and the rule in yerkey v jones. Relief available if vitiating factor is established renders contract voidable (except mistake at common law which renders the contract void: damages only available in tort where a tort is established for either negligent or fraudulent misrepresentation. Innocent party has choice to elect to rescind or affirm the contract. If the subject matter of the contract has been wholly or substantially destroyed there can be no rescission. When a contract is rescinded, the contract is set aside from the beginning, therefore there can be no claim for damages for breach of contract. If a claim is made for damages, there can be no rescission of the contract as the victim has by suing for breach clearly elected not to rescind.
