RECESSION AND CANCELLATION OF CONTRACTS

This article is written by Samia Mirza of Himachal Pradesh National Law University, Shimla, an intern under Legal Vidhiya  

ABSTRACT

A contract is legally a binding agreement which is binding on the parties that have agreed to the terms and conditions mentioned. Contracts form the basis for many modern day business relationships and are an essential part of the modern society. But not every contract reaches its completion, due to some unforeseeable conditions some contracts may loose their utility and there may be no use of continuing them or the relationship between the parties may have disrupted to further proceed with the contract. In such cases there is a concept of discharge of contracts and one of the most prominent method of discharge of contract is recession which will be dealt below. Another method of termination of contracts is cancellation of the contracts completely. There can be many reasons for the termination by cancellation such as breaches of terms, misinterpretation, fraud, or mutual consent. This article explores both the concepts extensively.

Keywords: Contracts, Discharge, Recession, Termination, cancellation, agreement.

INTRODUCTION

Discharge of contracts can be easily understood as the end of relevance of contractual relationship between both the parties which have agreed to fulfil some obligations. In contract law, discharge has different methods such as by breach, by performance, novation, alteration, remission merger etc. and one of the widely used methods are recession and cancellation of contracts. A contract does not continue for an indefinite period and the end of relevance of a contract is referred to as termination. These are the two important ways of termination of contractual relationship and they are being discussed in this article. Recession, as a legal doctrine, provides a means for parties to a contract to void or cancel the contract under specific circumstances. The cancellation of contracts in Indian law is a legally recognised mechanism that provides parties with the means to terminate agreements under circumstances. Understanding the legal framework and implications of contract cancellation is essential for businesses and individuals with legal interest alike to navigate contractual relationships and contract law  effectively and seek remedies when necessary.

DISCHARGE OF CONTRACTS

The formation of a contract is the primary step of a contractual relationship but what is concluding step? The concluding step for a Contract is either the completion of the contract or the termination of the contractual relationship. The end of relevance of contracts or the termination is referred as discharge of contracts. We will discuss two eminent ways of discharges, recession and cancellation in this article.

METHODS OF DISCHARGE OF CONTRACTS

• Discharge by Performance
• Discharge by Agreement
• Discharge by Impossibility of Performance
• Discharge by Operation of Law
• Discharge by Breach

PROBLEMS FACED IN FORMATION OF A CONTRACT

Contracts are rescinded mostly when there is some problem faced during the formation of the contract. Some of the common problems faced are-

• Fraud- If one of the parties uses fraudulent methods or any type of fraud influence, does concealment of facts or uses misleading statements to get the consent of the party to enter into the contract, it constitutes fraud and is a barrier in formation of contracts.
• Mistake- In certain cases, sometimes both the parties are mistaken about the essential features or the terms of the contract. This constitutes a mistake and is also a barrier in formation of contracts.
• Undue influence- When one party exercises undue influence over the other party , and this influence results in the formation of a contract among both the parties, it is known as undue influence and is also a barrier in formation of contracts.

 RECESSION OF CONTRACTS

Recession is a method of termination of contracts which comes under form of discharge of agreement. The word ‘rescind’ means to cancel or end. Here recession is the end of termination of contractual relationship between two parties which have formulated a contractual relationship earlier. The concept of Recession has its roots from English common law and was greatly incorporated in Indian contract law during colonial times and in current times in present in the primary law governing contracts which is the Indian Contract Act, 1872.

WAYS TO RESCIND FROM A CONTRACT

Recession can be done by any one of the parties by different ways, they are being discussed below-

• Recession by notice– One of the prominent ways of recession of contracts is by recession by sending a notice by the party who wants to end the contractual relationship to the other party. The communication of the notice is same as the process of communication as to the rule of the communication of a proposal as per Section 66.
• Recession as a defence– Recession can be used a defence by a party if the contractual relationship between the two parties is not formed under normal circumstances. In some cases the will or consent of the parties is not said to be free. It can be influenced under many circumstances such as fraud, coercion, undue influence etc. The innocent party may claim for recession under Section 9 of the Specific Relief Act.
• Setting aside by the court– Generally, the process of rescinding of contract is done by the will of the parties but it is also common for the court to ‘set aside’ or rescind the contract. A certain decree of recession is required for the recession to be done by the entity of the court and a decree of recession will become essential where property has been transferred on the execution of the greed. Section 27 to 30 of The Specific relief act, 1963 provides for the recession by the court.

CANCELLATION OF CONTRACTS

Cancellation under the Indian Contract Act, 1872, is a concept that primarily revolves around the termination or annulment of a contract. While the Act itself does not explicitly use the term “cancellation,” it provides for various situations and principles under which a contract may be terminated or rendered voidable.Cancellation of contracts is another way of discharge of contracts. It also leads to the end of the relevance of the contract and complete termination of the contract. Cancellation means entire termination of the contract by the parties and recession is a way of cancelling a contract.

IS RECESSION AND CANCELLATION THE SAME THING?

Recession can be defined as a way of cancelling of contracts. Cancellation refers to termination of a contract and through recession one can cancel a contract. In simple words, cancellation is a wider term in usage. While recession restores the parties to their original position before the formation of the contract, cancellation may lead to fulfilment of some basic obligations after termination. Cancellation mostly occurs by mutual decision among parties thus it is less likely to be taken up to the courts.

PARTIAL RECESSION OF A CONTRACT

A  party who is entitled to rescind from a contract cannot rescind a part or partially only. Section 26(2)(d) of the Specific Relief Act 1963 gives the power to the court to rescind the contract if only a part is sought to be rescinded, and such part is not removable from the rest of the contract. This appears to suggest that the recession of a part of the contract can be severed from the rest of the contract. This would be a power only with the court, and not the right of one of a party thus this can be exercised by the power of court only.

GROUNDS FOR RECESSION OF A CONTRACT

Recession provides a remedy when a contract has been formed under conditions that undermine its fairness or legality. Some of these conditions are-

• Coercion (Section 15 of the Indian Contract Act, 1872)

Coercion refers to use of force or threats to obtain consent of a party. It undermines the factor of voluntary consent of the party and thus if one party compels to give consent under coercion, the affected party can reach the court for recession of contract.

• Undue Influence (Section 16 of the Indian Contract Act, 1872)

When one party exercises undue influence over the other party , and this influence results in the formation of a contract among both the parties, the affected party has the right to rescind  or cancel the contract. Undue influence may occur due to a dominant position such as owner servant relationship, trust such as among business classes, or a fiduciary relationship.

• Incompetence to Contract (Section 11 of the Indian Contract Act, 1872)

Sometimes contracts are formed among parties where one of the parties may be incompetent to contract such as a minor or a person of unsound mind is a voidable contract. The party which is incompetent to contract may rescind the contract.

• Mistake (Section 20 and 21 of the Indian Contract Act, 1872)

In certain cases, sometimes both the parties are mistaken about the essential features or the terms of the contract. In such cases the contract can be voided by mutual consent of both the parties through recession.

• Fraud (Section 17 of the Indian Contract Act, 1872)

If one of the parties uses fraudulent methods, does concealment of facts or uses misleading statements to get the consent of the party to enter into the contract, the party which has been deceived by the other party can seek recession of the contract.

• Impossibility of Performance (Section 56 of the Indian Contract Act,1872)

If the performance of the obligations of the contract become impossible to be formed by any one of the parties and there is no relevance of continuing the contract, the parties can rescind  the contract on mutual agreement or by the will of one party as well.

WHEN IS RECESSION NOT AVAILABLE?

There are certain situations where the provision of recession is not available to the parties. They are stated below-

• The party which is demanding damages has already demanded it earlier.
• One of the parties has fulfilled its contractual obligations.
• The party claiming damages has done some mistake on it’s own end.
• A third party has already received some sort of benefit from the contract.
• After a request for monetary compensation is made, a contract cannot be rescinded.
• The demanding party has intentionally delayed the demand of recession.

CAN A CONTRACT BE CANCELLED?

As per Indian Contract Law, a contract can be cancelled in the following cases-

• Cancellation in the case of late performance of obligations
• Cancellation in the case of inability to perform
• Cancellation in the case of breach of contract by one party

PROVISION IN INDIAN CONTRACT ACT, 1872

Section 19 of the Indian Contract Act, 1872, outlines the circumstances under which a contract may be voided through recession or cancellation. It states that a contract may be voidable if consent to it was given through these means or mutual consent( for cancellation):

• Obtained by coercion (Section 15)
• Obtained by undue influence (Section 16)
• Obtained by fraud (Section 17)
• Given by a party who is incompetent to contract (Section 11 and 12)
• Given by a party who is not of sound mind (Section 12)
• For unlawful consideration or object (Section 23)
• In certain cases of mistake (Section 20 and 21)
• By mutual consent(Section 64)

WHO IS THE GUILTY PARTY?

The party which acts fraudulently in the contract is the guilty party. That party, if it acts in an unreasonable manner, does fraud or does not comply with the terms and conditions of the contract cannot plea for the enforcement of the contract in the courts of law. If both the parties have acted fraudulently, the court of law will refuse to enforce the fraudulent transaction.

PROCESS FOR RECESSION OR CANCELLATION

The process for recession or cancellation of contracts can vary depending on the specific circumstances, the governing laws, and the terms of the contract itself. Here is a general overview of the steps involved in the process for rescission or cancellation of contracts:

• Review the Contract Terms
• Identify the grounds for recession or cancellation
• Consult a legal council if needed
• Return any consideration if taken
• Seek legal remedies
• Comply with contractual obligations
• Resolution or settlement( if possible)
• Recession or cancellation of contracts is completed

KEY PRECEDENTS

• Derry v. Peek (1889)-This English law precedent has had an impact on Indian contract law. It dealt with fraudulent misrepresentation, which is also recognised as grounds for recession and termination in India under Section 17 of the Indian Contract Act.
• Mohan Lal v. Hukam Chand (1968)– The Indian Supreme Court emphasised the importance of genuine and free consent in contracts in the contract law. The Court held that if consent is obtained through coercion, the contract is voidable at the option of the coerced or the effected party.
• Lallan Prasad v. Rahmat Ali (1967)- This case underlines the significance of undue influence in determining the validity of a contract. The Court held that when one party exercises undue influence over the other, it vitiates the consent, rendering the contract voidable.

PRACTICAL IMPLICATIONS

Recession and cancellation in Indian contract law serves as a safeguard against agreements  or contracts entered into under unfair or coercive conditions. It protects parties from being bound by contracts that they did not willingly or knowingly consent to. It also protects the parties from continuing a contract which is of no benefit and demands termination.This legal remedy aligns with the principles of justice and equity and promotes fair dealings in the business world.

CONCLUSION

Contracts are one of the essential features of contract and they play an important role in modern business world. It thus becomes essential for one to understand the concept of recession and cancellation of contracts as well.The cancellation of contracts in Indian law is a legally recognised mechanism that provides parties with the means to terminate agreements under certain circumstances. Understanding the legal framework and implications of contract cancellation and recession is essential for businesses and individuals alike to navigate contractual relationships effectively and seek remedies when necessary. It is important to note that the Indian Contract Act provides the legal framework for canceling or voiding contracts under specific circumstances. The exact procedures and consequences of cancellation and recession may vary depending on the nature of the contract and the specific grounds for voiding it. Parties seeking to cancel a contract should consider consulting legal enthusiasts to navigate the process effectively and ensure their rights are protected.

REFERENCES

• Indian Contract Act, 1872.
• Bhattacharya, J., & Rajagopalan, A. (2016). Breach of Contract: Remedies and Grounds for Cancellation. NUJS Law Review, 9(2), 1-16.
• Pollock, F., & Mulla, D. F. (2018). Pollock & Mulla: The Indian Contract Act. LexisNexis.
• Mohan Lal v. Hukam Chand (1968) AIR 546 (SC).
• Lallan Prasad v. Rahmat Ali (1967) AIR 132 (SC).
• Derry v. Peek (1889) 14 App Cas 337 (HL).

C