Bar to Rescission

The right to rescission may in four circumstances expire. Rescission is often a drastic solution, just as the right to terminate for a contractual "condition" can be an oppressive right when exercised. So as an equitable remedy, the courts developed principles which would take away the right if it seemed unfair on the defendant, some third party, or too rich for the claimant.

With a somewhat technical sounding name, this is the most important bar to rescission in practice. "Counter restitution" simply means "putting the parties back" to their positions before the contract was consummated. For example, if our contract was a pen for £1, counter restitution would mean you giving back the pound and me giving up the pen. The aim is to ensure that a claimant is not unjustly enriched as a result of rescission.^[38] It used to be that common law courts insisted on precise restitution. So in Clarke v Dickson^[39] it was held that a defrauded investor could not rescind the purchase of his shares because the investment was bound up in the company and the shares were now worth less. Precise counter restitution was impossible. However, the rule was mitigated, becoming more lenient. Now only substantial restitution is necessary. In Erlanger v New Sombrero Phosphate Co^[40] promoters (who are in law fiduciaries, and therefore subject to a duty to disclose material facts) did not tell investors that a mine on Sombrero island had been bought by the promoters for half the price that they were now valuing it for in the company. By the time investors realised, however, a substantial amount of phosphate had been mined. It clearly could not be put back in the ground. But Lord Blackburn held that since substantial restitution (i.e. the money equivalent) could be paid, rescission of the share contracts was not barred.

If a claimant through conduct has subsequently affirmed a contract despite some prior misrepresentation, she will be estopped from changing her mind. For instance, in the slightly harsh case of Long v Lloyd^[41] Mr Long bought from Mr Lloyd a lorry advertised as being in ‘exceptional condition,’ said to do 40 mph and 11 miles to the gallon. When it broke down after two days and was doing 5 miles to the gallon, Mr Long complained. Mr Lloyd said he would repair it for half the price of a reconstructed dynamo. Because Mr Long accepted this, when it broke down again, Pearce LJ held the contract had been affirmed. It was too late to escape for misrepresentation. A more lenient approach may now exist. As Slade LJ pointed out in Peyman v Lanjani,^[42] actual knowledge of the right to choose to affirm a contract or rescind is essential before one can be said to have "affirmed" a contract.

See also: Mistakes in English law

A clear bar to rescission is where unwinding a contractual exchange may cause injustice to an innocent third party. This will particularly be the case where an item has changed hands and then been sold on to a third person. If the first contract is declared void, then the second contract with the third person would also be void, due to the principle of nemo dat quod non habet. However the equity courts decided that a contract could not be declared void if a third party's rights had intervened, provided the third party had acted in good faith and given consideration (the principle of bona fide purchaser). So in Phillips v Brooks Ltd^[43] it was not possible for a jeweller that had been defrauded by a rogue to claim back a ring from the pawn shop where the ring had been sold on.

Phillips v Brooks Ltd, however stands tensely with another area of the law known as the doctrine of "mistake as to identity". The House of Lords by a thin majority recently reaffirmed in Shogun Finance Ltd v Hudson[44] that when a contract is done at a distance, but where the identity of the contracting party is essential to the transaction, the contract will ex ante be void. In these cases, the courts have deviated from a normal misrepresentation and bar to rescission analysis.

Main article: Laches (equity)

The fourth potential bar to rescission is that the right will be lost if a claimant takes too long to bring an action in court. The old term for lapse of time is "laches" (pronounced lay-cheese). The amount of time that needs to pass is not specified, and a judge will decide that on a case by case basis according to what he thinks is fair. The leading example is Leaf v International Galleries[45] where Mr Leaf was told he had bought the painting 'Salisbury Cathedral' by John Constable. It was in fact a photocopy. Mr Leaf was told this five years later at an auction. However, Denning LJ held that by this time it was far too late to rescind, even though the painter's identity was clearly a condition that went to the root of the contract. By contrast, the Limitation Act 1980 s 5 gives a six year limit from the date of a breach of contract to claim damages. This was an available remedy for Mr Leaf, though in pleading the case the lawyer had forgotten to include that point in the statement of claim![citation needed]

[21] There are other reasons (besides the issue of restitutio in integrum) to why rescission would be impossible: