With the onset of the COVID-19 virus, the oil price war, and the resulting economic fallout from both events, the commercial environment has significantly changed. That change in the commercial environment has caused businesses and individuals to mitigate against risk and loss.
The commercial situation in which parties entered into contracts before the economic fallout, but for which closing was to occur after the fallout, poses a unique legal situation. Many of these parties are attempting to “stop”, “cancel” or “undo” the contract in such circumstances before closing. In these efforts, some have attempted to apply the doctrine of rescission.
Rescission is a discretionary remedy that renders a contract void ab initio (or from the beginning). This requires the parties to be put back into the position they would have been had the contract not been made. For rescission to occur the rescinding party must make an election to rescind within a reasonable time after obtaining knowledge of the grounds for rescission. This does not need to occur immediately; however, undue delay is grounds to bar rescission.
There are two types of rescission. The first is “common-law rescission” which is available where the contract has a clause which makes it voidable at one party’s option, or there is a legal basis to cancel the contract such as:
- Misrepresentation – Where a false statement of fact was made by one of the parties to the other to induce that other party to agree. If the misrepresentation is of a material fact, it makes the contract voidable;
- Mistake – Where one or more of the parties had an incorrect understanding of what the contract was about;
- Duress and undue influence – When one party compels or threatens the other to enter into the agreement against that party's will;
- Incapacity – Those entering into an agreement must have the legal capacity with regard to age, mental capacity and authority; or
- Illegality – A contract can be illegal if it violates a law.
[Swan City Taekwon-Do Club v Podolchyk, 2017 ABPC 244, para 141 and 142 (Swan City)].
The second type is “equitable rescission” which requires a party to ask the Court for relief from a contract where it would be inequitable to require the party to be bound. The Court will then determine what is “practically just” and apply the rules of equity to see if the contact should stand or be void ab initio [Swan City, para 143]. Equitable rescission has been found for the following reasons:
- A party has been subject to a unilateral or common mistake;
- Duress or undue influence;
- Contract amounts to an unconscionable transaction;
- Deception by a fiduciary;
- Breach of a duty of good faith in performing a contract; or
- Material misrepresentation by the opposite party.
The leading case in Canada which discusses rescission is Guarantee Co. of North America v Gordon Capital Corp.,  3 SCR 423, [Gordon]. In Gordon, the Court defined rescission as a remedy that is available to a representee, inter alia, when the other party has made a false or misleading representation [Gordon, para 39]. Citing Lord Atkinson in Abram Steamship Co. v. Westville Shipping Co.,  A.C. 773 (U.K. H.L.) at p. 781 the Court stated:
Where one party to a contract expresses by word or act in an unequivocal manner that by reason of fraud or essential error of a material kind inducing him to enter into the contract he has resolved to rescind it and refuses to be bound by it, the expression of his election, if justified by the facts, terminates the contract, puts the parties in status quo ante and restores things, as between them, to the position in which they stood before the contract was entered into.
As demonstrated by Gordon, the right to rescind a contract has traditionally been based on inequity due to a mistake, misrepresentation, or situation of duress, undue influence or an unconscionable situation caused by one of the parties or as between the parties, not as a result of external commercial events unrelated to either of the parties. However, it will be interesting to see how far the courts will extend the principles of equity in these extraordinary times.
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