E. Rescission and Restitution
| Author | John D. McCamus |
| Profession | Professor of Law. Osgoode Hall Law School, York University |
| Pages | 337-348 |
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A party who is able to establish that an agreement was induced by an operative misrepresentation may seek the remedy of rescission. In essence, the remedy of rescission involves an unwinding or setting aside of the contractual relationship between the parties. Upon rescission, the as yet unperformed obligations of the party become unenforceable. With respect to obligations that have been performed, an agreement that is subject to the remedy of rescission is voidable rather than void ab initio, with the consequence that the agreement is considered to be an enforceable one until a rescission of the agreement is achieved. Upon rescission, however, the parties are to be restored to their initial pre-contractual position by requiring restoration of benefits transferred
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under the agreement. In this sense, then, the rescission of the contract in question has a retrospective or ab initio effect. Thus, in the case of a rescission of a simple contract for the purchase and sale of goods, rescission will be coupled with return of the goods to the seller and a return of the purchase price to the buyer. During the period prior to rescission of the agreement, however, the fact that the agreement is voidable rather than void has the effect that property in the goods in question would pass to the buyer in the manner intended by the parties until such time as rescission has the effect of revesting the property in the goods in the seller.
There are a number of limitations or "bars" to rescissionary relief. The most important of these is that relief will not be available if it is not possible to effect a mutual restoration of the benefits conferred by the parties, one upon another, or, as is sometimes said, a restoration of the status quo ante or a restitutio in integrum. Upon an equitable decree of rescission, then, any orders required to effect a mutual restoration of benefits conferred would be issued. Indeed, courts of equity possessed a greater ability than courts of common law to tailor orders with this objective in mind. Hence, even in the case of fraudulent misrepresentation, the misrepresentee might choose to seek a decree of rescission in equity. Although the remedy of rescission for misrepresentation developed initially in equity, it ultimately came to be recognized that in cases of fraudulent misrepresentation, the courts of common law would also treat agreements induced by fraud as voidable.61In equity, however, the remedy was not limited to cases of fraud. Equitable rescission is available for agreements induced by merely non-fraudulent or innocent misrepresentations.
Equitable rescission of an agreement would normally be accomplished by the obtaining of a judicial decree to this effect. Nonetheless, the action of a misrepresentee in giving notice of an election to rescind the agreement to the misrepresentor may have the practical effect of achieving rescission because the ultimate decree of rescission would normally treat the rescission as effective on the date of giving notice of the election to rescind. In this limited sense, then, rescission may be considered to be a "self-help" remedy.62Indeed, if a mutual restoration
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of the parties can be achieved without judicial intervention, the election to rescind coupled with restoration could render a judicial proceeding unnecessary. If, however, either the misrepresentor brought an action to enforce the agreement against the misrepresentee or the misrepresentee required judicial intervention in order to effect a restoration of the status quo ante, the misrepresentee would be required to seek a rescissionary decree in order to achieve an effective rescission of the agreement.
Although notice of an election to rescind would normally be effective upon communication of the election to the misrepresentor,63 communication of the election to rescind may not be required in all circumstances. Thus, in Car and Universal Finance Co. Ltd. v. Caldwell,64 the seller of a car was held to have effectively rescinded the agreement of sale even though no communication with the misrepresentor had taken place. In this case, a buyer, acting fraudulently, purchased the car from the seller in return for a cheque that was subsequently dishonoured. When the seller discovered the fraud, he was unable to find the purchaser but he immediately contacted the police and the automobile association. Subsequently, the buyer sold the car to a good-faith purchaser. It was held by the Court of Appeal that the seller had effectively rescinded the agreement by contacting the police and the automobile association, this being all that the seller could reasonably do in the circumstances. Accordingly, title to the car did not pass to the third-party purchaser. This exception to the general requirement that notice of the election to rescind be communicated to the misrepresentor is not likely to be extended, however, beyond the circumstances of this case.65
Thus, in the absence of fraud or, perhaps, of a situation in which the misrepresentor has made the giving of notice impossible, the requirement of actual notice of the election to rescind is very likely to obtain.
Under traditional doctrine, the decree of rescission will not be made available in a case where a restoration of the status quo ante is not pos-
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sible.66Such a restoration is obviously possible where the benefits that have passed between the parties can be restored in specie. The more difficult question, however, is whether rescission can be granted in circumstances where this is not literally true - for example, where goods that have been transferred have perished. Similarly, in the case of the sale of a business, the possible deterioration in the value of the business and the profits made by the purchaser while in possession of the business may complicate the exercise effecting a restitutio in integrum. Courts of equity were able to achieve practical justice in such cases by coupling a decree of rescission with orders for an accounting of profits or an indemnity. As Lord Blackburn observed in Erlanger v. New Sombrero Phosphate Co.:67"But a court of equity could not give damages, and, unless it can rescind the contract, can give no relief. And on the other hand, it can take accounts of profits, and make allowance for deterioration. And I think the practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract."68The objective of such awards is restitutionary in nature, however, rather than providing a more comprehensive award of damages for injuries sustained as a result of entering into the agreement.69In Whit-tington v. Seale-Hayne,70for example, the plaintiff had entered into an agreement to lease a farm on the faith of a false representation that the property was in a sanitary condition. The plaintiff lessee took possession of the property and incurred various expenses in the course of conducting a poultry business. The plaintiff purchased poultry stock, made certain improvements to the premises in the form of repairs required by the local municipality and paid taxes on the property. The plaintiff sought, in addition to rescission of the agreement, compensation for the poultry stock that died as a result of the unsanitary conditions, for the improvements made to the premises and for the municipal taxes paid on the property. As well, the plaintiff claimed for the profits that could have been made on the poultry business were it not for the
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unsanitary condition of the premises. In the result, the plaintiff recovered only the cost of the improvements and the municipal rates, both of which expenditures had conferred value on the misrepresentor. The other items of loss required compensation of a kind that was not available in equity.
The courts are more prepared to exercise their discretionary powers to unwind a transaction in a case of fraud than in a case of innocent misrepresentation. This proposition was relied upon by the British Columbia Court of Appeal in rescinding an agreement for the purchase of a motel company in Kupchak v. Dayson Holdings Co. Ltd.71The Kupchaks had purchased the shares of a motel company from Dayson Holdings in return for two properties conveyed to the holding company and mortgages taken back by the holding company on the assets of the motel company securing payment of the remainder of the purchase price. The Kupchaks took possession of the business and operated it for only a few months before discovering that Dayson Holdings’ representations with respect to the profitability of the business were fraudulent...
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