Group members :

 Muhammad Junaid Khan

 Annus Zaib
 Khuzaima Kafeel
 Hassaan Siddique
 Rehan Maqsood
 Table of Contents

• Discharge of contract
• Contract of indemnity & guarantee
• Contingent contract
• Wagering contract
• Alteration & rescission of contract
Discharge of
Contract.
 Discharge of Contract.
•“Discharge of Contract means Termination of
Contractual relationship between parties.
•A contract is discharged when the rights and
obligations created by it come to an end.

•Eg # If A & B have entered into a contract of

building a house. Due to some reasons the
contract gets discharged. Now, both the parties
are free from performing their part of
obligations
 How a Contract can get
Discharged?
• 1. By Performance: If both parties have
performed what they have agreed to, the
contract is discharged.

• Eg. If A had a contract of building a house for

B. A has made the house as specified by B and B
has given consideration in return to A.The
contract is discharged by Performance
• 2. By Agreement or by Consent: A contract can be discharge by mutual express
or implied agreement between the parties, in any of the following ways:
i) By Novation: Alteration in Original contract or replacing with new contract.

ii) By Waiver: Party to the contract abandons his rights.

• Eg # A promise to paint a picture for B. B afterwards forbids A to do so. A is no
longer bound to perform his promise.

iii) By Rescission: When a person at whose option a contract is voidable rescinds

it, the other party need not perform his obligation.
• Eg # A induces B to enter into contract by fraud. B can rescind the contract as it
is voidable at his option.
• 3. By impossibility of Performance: The
contract becomes void, if the performance of
the contract becomes subsequently impossible.

• Impossibility must be physical or legal

impossibility.

• Eg # A promise to sell B his horse on certain

date. The horse dies before that date. The
promise is impossible to be performed.
4. By Death: Where a contract is personal in
character, or where personal skill or ability is
involved, death of the promisor discharge the
contract.
• Eg # A promise to paint a picture for B on a certain
date. A dies before that date. The contract is
discharged.

5. By unauthorised Material alteration of contract:

Material alteration by one party to the contract, in
terms of contracts, without the consent of the other
party, discharges the contract
6.Discharge by Lapse of time :
If a creditor doesn’t file a suit to recover his debts
within the period of limitation, the remedy is debarred.

7. Discharge by operation of law:

• Bankruptcy/ Insolvency : the insolvent is discharged
from all his obligations arising from all his earlier
contracts.

8. By Breach of Contract: When a party has refused to

perform his part of obligation, the contract is
discharged. It can be Actual or Anticipatory Breach of
contract.
INDEMNITY
AND
GUARANTEE
 Indemnity
Literally meaning:
security or protection against a loss or other financial burden.
Definition:
Indemnity is compensation for damages or loss, and in
the legal sense, it may also refer to an exemption from
liability for damages. The concept of indemnity is based
on a contractual agreement made between two parties,
in which one party agrees to pay for potential losses or
damages caused by the other party.
• CONTRACT OF INDEMNITY
 A contract by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or by the conduct of any other person, is
called a ‘contract of indemnity. [section 124].

 For Example - A contracts to indemnify B against the consequences of any

proceedings which C may take against B in respect of a certain sum of 200 rupees.
This is a contract of indemnity.

• PARTIES TO CONTRACT OF INDEMNITY:

 INDEMNIFIER: The person who promises to indemnify.
 INDEMNITY HOLDER: The person whose loss is to be indemnified.

• Examples:
 Motor insurance
 Marine insurance
 Fire insurance

• Life insurance is not the contract of indemnity.

• RIGHTS OF INDEMNITY-HOLDER WHEN SUED(Sec.125)

The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor.

 (1) all damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies.

 (2) all costs which he may be compelled to pay in any such suit, if in bringing of
defending it, he did not contravene the orders of the promisor, and acted as it would
have been prudent for him to act in the absence of any contract of indemnity, or if
the promisor authorized him to bring or defend the suit. 

 (3) all sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contract to the orders of the promisor, and was one
which it would have been prudent for the promise to make in the absence of any
contract of indemnity, or if the promisor authorized him to compromise the suit.

 RIGHTS OF INDEMNIFIER:

 The contract act is silent about the rights of indemnifier.

 Guarantee
Literally:
a formal assurance (typically in writing) that certain conditions will be
fulfilled, especially that a product will be repaired or replaced if not of a
specified quality.
Law:
an undertaking to answer for the payment or performance of another
person's debt or obligation in the event of a default by the person primarily
responsible for it.
• CONTRACT OF GUARANTEE 

 A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a

third person in case of his default. A guarantee may be either oral or written. [section 126].

• PARTIES TO CONTRACT OF GUARANTEE

 SURETY: The person who gives the guarantee is called the “surety”. Person giving guarantee is
also called as ‘guarantor’. ;
 PRINCIPAL DEBTOR: the person in respect of whose default the guarantee is given is called
the “principal debtor”, and
 CREDITOR: the person to whom the guarantee is given is called the “creditor”.

• Three parties are involved in contract of guarantee. Contract between any two of them is not
a ‘contract of guarantee’. It may be contract of indemnity.

• Primary liability is of the principal debtor. Liability of surety is secondary and arises when
Principal Debtor fails to fulfill his commitments. However, this is so when surety gives
guarantee at the request of principal debtor. If the surety gives guarantee on his own, then it
will be contract of indemnity. In such case, surety has all primary liabilities.
Consideration for Guarantee(Sec.127)
• Any thing done
• Any promise made
 
for the benefit of the Principal Debtor is the sufficient
consideration to the surety for giving the guarantee.

Example:
B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises
to guarantee the payment in consideration of A's promise to deliver the
goods. This is a sufficient consideration for C's promise
Essentials of Contract of Guarantee
Tripartite Agreement:
A contract of guarantee entails three parties, principal debtor, creditor and
surety. In a successful contract of guarantee, there must be three
separate contracts between the three parties and each and every contract
must be consenting.

Liability:
Here the main liability lies with the principal debtor. Secondary liability lies
with the surety which can only be invoked once the principal debtor
defaults on its payment.
Essentials of Contract of Guarantee

Essentials of a Valid Contract:

Like any other general contract, it maintains free consent, consideration, lawful
object and competency of contracting parties as the essentials of a valid contract.

Medium of Contract:
The Contract Act, 1872, does not strictly mention the need for any written form of
contract of guarantee. Both oral and written form will suffice.
• Distinguish between Contract of Indemnity and Contract of Guarantee.

BASIS CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

1. No. of parties There are two parties to the contract viz. There are three parties to the viz.
indemnifier (promisor) and the creditor, principal debtor and the
Indemnified (promise). surety

2. Liability of parties Liability of the indemnifier to the Liability of the surety to the creditor is
indemnified is primary and independent. collateral or secondary, the primary
liability being that of the principal
debtor.

3. No. of contracts There is only one contract in case of a In a contract of guarantee there are
contract of indemnity, i.e., between the three contracts, between principal
indemnifier and the indemnified. Debtor and Creditor; between creditor
and the surety and between surety
and principal debtor.

4. Liability is due The liability of the indemnifier arises only There is usually an existing debt or
on the happening of a contingency. duty, the performance of which is
guaranteed by the surety.
 Kinds of Guarantee
• Specific Guarantee
A guarantee to a single debt or transaction is called specific guarantee.

•Example:

Takes 5 Bags of Wheat from On the Surety by Mr Shoaib

Mr Yasir Mr Sannan

Again Takes 5 Begs of Wheat

Mr Yasir Mr Sannan

Mr Yasir But failed to pay

Mr Sannan Can not sue for second transaction Mr Shoaib

 Kinds of Guarantee
• Continuing Guarantee
A guarantee which extended to more than one debt or
transaction is called continuing guarantee.

Example:

Can buy food to the extent of 10k Mr Sannan On the Surety by Mr Shoaib
Mr Yasir

Mr Yasir Can do many transaction to the extent of 10k

 Rights to Surety

1. Rights against the Creditor

A.Risk to Security:
In this, the creditor will take Mortgage, in
terms of recovering if the debtor fails to pay.

B.Risk to claim Set off:

In this, the debtor (who takes the loan or
stuff) find anything
faulty, then he can have the discount from
Creditor.
 Rights to Surety
2. Rights against Principle Debtor:
A. Right to Indemnify:
The surety is entitled to an indemnity from the principal debtor to
recover any sum he has paid rightfully under the Guarantee.

Example:
Surety
Takes a loan with his car on
Mr. mortgage Mr by Mr
Fahad Adnan Farhan

Mr. Mr
Fahad Fails to pay the loan
Adnan
Mr Will pay instead of Mr
Farhan Fahad to Adnan
Mr
Farhan Will also take Fahad’s car Mr Adnan
 Rights to Surety
2. Rights against Principle Debtor:

B. Right of Subrogation

The terms subrogation may be defined as the substitution of one person with
another with same right and liabilities.

3. AGAINST THE CO-SURETIES

When several co-sureties have given guarantee for the same debt with their
maximum limits, they are liable to pay equally but subject to the limits they have
fixed.
DISCHARGE OF SURETY(Sec.131-141)

1.Revocation by notice.

Notice of revocation as regards future transactions in case of a continuing

guarantee. For example, A gives a guarantee to B to the extent of Rs50000, that C
will pay all the bills that B will draw upon him. B draws bills on C and C accepts the
bill. A gives notice of revocation. C dishonors the bill at maturity. A is liable as it
was a transaction before the notice of revocation.

2. Revocation by death

The death of a surety as regards future transactions in case of a continuing

guarantee in the absence of a contract to the contrary.
DISCHARGE OF SURETY

3. Discharge of surety by variance in terms of contract. 

Any variation in the terms of the contract between the principal debtor and the
creditor without surety’s consent.

4. Discharge of surety by release or discharge of principal debtor.

If the creditor releases the principal debtor, the surety also automatically
discharges.

5. Discharge of surety when creditor compounds with, gives time to, or agrees
not to sue, principal debtor.

When the creditor makes an arrangement for composition or promises to give time or not
sue the principal debtor without surety’s consent, the surety will be discharged.
DISCHARGE OF SURETY

6. Discharge of surety by creditor's act or omission impairing surety's eventual

remedy.

Any act or omission to do an act by the creditor which results in harming the
rights of the surety, and also impairs the eventual remedy of the surety himself
against the principal debtor, discharges the surety.
B contracts to build a ship for C for a given sum, to be paid by installments as the work
reaches certain stages. A becomes surety to C for B's due performance of the contract. C,
without the knowledge of A, prepays to B the last two installments. A is discharged by this
prepayment.

7. By the creditor losing his security.

Where the creditor loses or parts with any security which he receives from the
principal debtor without the consent of the surety, this discharges the surety to
the extent of the value of such security.
Contingent Contract
 Meaning
• When the performance of a contract is not
immediately due but it becomes after the
happening or non-happening of some
contingency (i.e., some uncertain event) it is
known as Contingent Contract. The contract of
insurance, is an example of contingent
contract. In simple words, it is a conditional
contract
 Definition
• According to Section 31:
“A "contingent contract" is a contract to do or
not to do something, if some event, collateral
to such contract, does or does not happen.’’
• Example:
A contracts to pay to B Rs. 10,000 if B's house
is burnt. This is a contingent contract.
 Essentials
1. Depends on happening or non-happening of
a certain event:
The contract is contingent on the happening or
the non-happening of a certain event.
• Example: A promises to pay B Rs 5,000 if the
Train reaches to its station on time. This is a
contingent event.
2. The event is collateral to the contract:
It is important that the event is not a part of
the contract. It cannot be the performance
promised or a consideration for a promise.
• Example: A enters into a contract with B and
promises to deliver 5 television sets to him if
Brazil wins the FIFA World Cup provided B
pays him Rs 25,000 before the World Cup
kicks-off. This is a contingent contract since
A’`s obligation arises only when Brazil wins the
Cup which is a collateral event.
3. The event should not be a mere will of the
promisor:
• The event cannot be a wish of the promisor.
• Example: A promises to pay B Rs 5,000 if
Argentina wins the FIFA World Cup provided
he wants to. This is NOT a contingent contract.
Actually, this is not a contract at all.
4. The event should be uncertain:
• If the event is sure to happen, then the contract
is due to be performed. This is not a contingent
contract. The event should be uncertain.
• Example: A promises to pay B Rs 500 if it rains
in his city in the month of July. This is not a
contingent contract because in July rains are
almost a certainty in his city.
 Rules Regarding Contingent contracts:

•Section 32 Contingent contract depends on the

happening of an event:
depends on the happening of some specific
uncertain future events.
• Example: A agreed to pay a sum of money to B
(her younger son) in case C (her older son)
failed to pay.
• Section 33 Contingent contract on the Non-
happening of an event:
it is to be on the Non-happening of some
specific uncertain future events.
• Example: A agrees to pay a sum of money to B
if a certain ship does not return. This contract
can only be enforced when the ship sinks.
• Section 34 Contingent contract depends on
the future conduct of a person:
it depends upon ‘the way’ in which a person
will act at an unspecified time.
• Sec. 35 Contingent contract depends on the
happening of an event within fixed time:
Depends upon happening of an uncertain future
event within a fixed time.
• Example: X insures his factory by getting fire
insurance for one year. Such contracts can be
enforced if the factory gets destroyed by fire
within a period of 1 year.
• Sec 35(2) Contact contingent on the non-
happening of an event within a fixed time:
Depends upon the non happening of a future
uncertain event within a fixed time.
• Example: A promises to pay Rs. 10000 to B if a
certain ship does not return within a year. The
contract may be enforced if the ship does not
return within a year.
• Sec. 36 Contingency of impossible events:
Depends upon the happening of an impossible
event. The contract is void because it can never
be enforced as the impossible event on which
the contingent contract is dependent will never
happen.
• Example: A agrees to pay Rs.5000 to B If two
straight parallel lines enclose an area, The
agreement is void.
Wagering Contract
 Wager Contract
(Sec 30)
A wager contract is a contract in which one person
promises to another to pay money or money’s worth
by the happening of an uncertain future event in
consideration for other person’s promise to pay if
the event does not happen.

Jay Shah, FMS-B.

 Essential Elements of
Wagering
• There are two persons.
• There must be an uncertain future event.
• No control over the event by both the parties.
• There must be a reciprocal promise.
• Others are not interested in the contract.

Jay Shah, FMS-B.

 Exampl
e:
In wagering agreement A agrees to pay B 20 rupees
if it rains on Monday and if it does not rain B will
pay 20 rupees to A. In the above example there is
mutuality of agreement but this mutuality of
promises is not necessary in case of a contingent
contract.

Jay Shah, FMS-B.

 Exampl
e:
In a wrestling bout, A
tells B that wrestler
no.1 will win.
B challenges the
statement of A.

They bet with each

other over the result of
the bout. This is a
wagering agreement.

Jay Shah, FMS-B.

 Differences Between a Wagering
Agreement and a Contingent Agreement:

• Wager agreement • Contingent agreement

• There is a reciprocal promise. • There is no reciprocal promise.
• It is a void contract. • It is a valid contract.
• Others are not interested in the • Others are interested in the
contract.
contract.
• It is contingent in nature. • It may not be wagering in
• Here, the parties have no • nature.
interest in the subject matter. • Here, the parties may
• It is a game, losing and gaining have interest in the subject
• alone matters matter.
• It is not a game, only losing and
• gaining doesn’t matters.
Jay Shah, FMS-B.
In literal meaning, the word wager means a ”bet”
Example:
A and B mutually agree that if it rains today A will pay B
Rs. 100 and if it does not B will pay A Rs. 100.
 Essential Elements of Wagering
• There are two persons.
• There must be an uncertain future event.
• No control over the event by both the parties.
• There must be a reciprocal promise.
• Others are not interested in the contract.
• Each party must stand to win or lose under the
terms of the agreement
• No party should have a properiatary interest on the
event, other than the stake that they already have.
 Section 30
• Section 30 states that “agreements by way of
wager are void: and no suit shall be bought for
recovering anything alleged to be won on any
wager, or entrusted to any person to abide by
the result of any game or other uncertain
event on which any wager is made”
 Example
• Where C and D enter into a wagering and each
deposits Rs. 100 with Z instructing him to pay or
give the total sum to the winner, no suit can be
brought by the winner for recovering the bet
amount from Z, the stakeholder. Further if Z had
paid the sum to the winner, the loser cannot
bring a suit, for recovering his Rs. 100, either
against the winner or against Z even if Z had
paid after loser’s definite instructions not to pay.
 Commercial Transactions
• Agreements for sale and purchase of any
commodity or share market transactions in
which there is a genuine intention to do
legitimate business are not wagering
agreements.
• “In order to constitute a wagering contract,
neither party should intend to perform the
contract itself, but only to pay the differences”
In literal meaning, the word wager means a ”bet”
Example:
A and B mutually agree that if it rains today A will pay B
Rs. 100 and if it does not B will pay A Rs. 100.
 Section 30
• Section 30 states that “agreements by way of
wager are void: and no suit shall be bought for
recovering anything alleged to be won on any
wager, or entrusted to any person to abide by
the result of any game or other uncertain
event on which any wager is made”
 Example
• Where C and D enter into a wagering and each
deposits Rs. 100 with Z instructing him to pay or
give the total sum to the winner, no suit can be
brought by the winner for recovering the bet
amount from Z, the stakeholder. Further if Z had
paid the sum to the winner, the loser cannot
bring a suit, for recovering his Rs. 100, either
against the winner or against Z even if Z had
paid after loser’s definite instructions not to pay.
 Commercial Transactions
• Agreements for sale and purchase of any
commodity or share market transactions in
which there is a genuine intention to do
legitimate business are not wagering
agreements.
• “In order to constitute a wagering contract,
neither party should intend to perform the
contract itself, but only to pay the differences”
 Alteration of Contract

Introduction:

Contract alteration occurs after a contract has been signed but one party seeks to
modify the terms or key points of the contract with or without the consent of the
other party. The effect of contract alteration is that, legally, a new contract has been
created because it no longer reflects the intention of the parties at the time the
original contract was signed.

It is not illegal to alter a contract once it has been signed. However, it must be
materially changed, meaning that if an important part of the contract is altered by
the change, it must be made by mutual consent of both parties. If only one party
modifies the contract without the agreement of the other, then it is unlikely the
changes will be enforceable.
Relevant Provision:

Section 62 of Contract Act 1872.

Meaning:
• An alteration is a variation made in the language or terms of a legal docum
ent that affects the rights and obligations of theparties to it. When this occ
urs, the alteration is material and the party who did not consent to the cha
nge can be releasedfrom his or her duties under the document by a court.

• When an essential part of a writing has been cut, torn, burned, or erased, t
he alteration is also known as a mutilation.

• The alteration of a document by someone other than a party to it is called 
a spoliation.
Definition:

Alteration of contract is the modification of the terms of a contract with the

assent of both parties. Effect of alteration of a contract is that a
new contract is formed, to be supported by a good consideration.

Examples of Alterations include:

• A change to any dates existing in the document, including the date of

execution, which revises the time frame under which the duties of the
contract will be performed. This is especially true if it affects payment
terms or performance schedules.
• If the signature of either party is erased or replaced by a new signature. In
addition, if any language that indicates that the signatory is authorized to
act on one of the party’s behalf is changed, it is considered a material
change. However, if that signer was never given authority to sign the
document in the first place, then the change is not deemed to be material.

• When the obligations of either party to the other are changed.

Commissions promised or payment schedules established between parties
cannot be legally altered without the consent of both parties.

• Any changes in the description of the goods or services that are involved
in the transaction are deemed material. For instance, if the property
described in a mortgage or deed is made larger or smaller, or if the days of
a week when services are to be performed changes, then it is a material
modification.
Essentials:
• If a contract includes language that describes the process for modifying
the terms or conditions, and those procedures are followed, contract law
decisions have determined that those changes are valid. Thus, the parties
will proceed to act under the modified terms of the altered contract. In
effect, it’s a new contract.

• To be considered a modification or alteration of a contract, the changes

must appear directly on the signed legal document. It might appear as a
change in the handwriting of a signatory to the agreement, or words may
be erased or crossed out.
• Whatever the change, it must significantly revise the intention of what the
original document established. As a result, if agreed to by competent parties
to the contract, it releases the original signers from the obligation contained
in the original document.

• However, if the modification has been performed with the consent of both
parties, it does not hold the non-consenting party liable for the changes. Even
if the non-consenting party changes the document back to reflect the original
intention by deleting the unauthorized modifications, the contract is still
considered invalid. A new contract must be created.
 Rescission of Contract:

Introduction:

In contract law, the term “rescission” refers to the undoing, or “unmaking” of a

contract between parties. Rescission of a contract may be ordered by a court as an
equitable remedy in a civil lawsuit, and is intended to bring the parties as close to
the same position they were in before they entered into the contract as possible.
While there are a number of reasons for which a contract may be cancelled, not all
contracts may be rescinded.
Relevant Provision:

Section 62 of Contract Act 1872.

Meaning:

Contract rescission refers to the termination or cancellation of a contract.

The word rescission comes from the word “rescind” which means to cancel
or annul. The purpose of contract rescission is to restore the parties to their
original status before the contract was made (the “status quo ante”)
Definition:

The undoing or termination of a contract that may have been entered into as a
result of misrepresentation, fraud, or undue influence.
 Essentials:

• Use and Effect of Contact Rescission:

Contract rescission requires that all parties give back any benefits they have
received while the contract was in force, and be returned to their original states,
as though the contract had never been formed in the first place. While some
jurisdictions use the words rescission and cancellation interchangeably, others use
the term rescission to refer to making something void, or for reversing a contract
or a judicial decision. For example, a higher court can rescind a judgment based
on errors made by the court during a criminal trial.
Typically, contract rescission can only be effected through equitable or legal
means. When effected through equitable means, a judicial decree voids the
contract and returns the parties immediately to the state in which they were
before they entered into the contract. The court does not award either party
damages.

In this case, rescission prevents either party from taking any future action
regarding the contract. As a legal remedy, the rescinding party provides the
other party with notice of rescission or cancellation, and returns any monies or
other benefits received from the contract.
• 3-Day Right of Rescission:

The Truth in Lending Act of 1968 gives homeowners an opportunity to think

about their mortgage, or the refinancing of their mortgage, even after signing
the documents. When refinancing a mortgage, the borrower has three days,
commonly referred to as a “3-day right of rescission,” to change their mind.
The 3-day rescission period ends at midnight three business days after the
loan documents were signed. If the borrower decides to cancel the loan
within the rescission period, any fees paid in relation to the loan are to be
refunded by the lender. The 3-day right of rescission provision of the Truth in
Lending Act is intended to protect consumers, who often are overwhelmed by
the amount of legal jargon, and loan terms they are unfamiliar with.
• Grounds of Rescission:

Rescission can only take place if the contract was fully formed to begin with,
which means that, if one party lacked understanding or intent, there was no
legal contract formed, so a rescission is not necessary or possible. Rescission is a
complete undoing of the contract, meaning all provisions are cancelled. There is
no thing as a “partial rescission.” Contracts are cancelled for a variety of reasons.
Common grounds for rescission include:

 Mutual Consent:

If both parties agree to have the contract rescinded, they should indicate their
intent and consent through a separate written document. In the event only one
party wants the contract to be rescinded, he must give proper written notice
stating on what statutory grounds the rescission is requested, and it may be
necessary to have a court of law determine whether a cancellation may be
made.
 Problems in the Contract Formulation:
Every contract must be made under legal conditions, and through legal means.
Consent to enter into a contractual agreement cannot be obtained through force or
intimidation, and all parties must clearly understand what they are getting into.
Problems in formation of a contract may include such issues as:

 Mistake:

A contract may be rescinded if a party entered into the agreement due to reliance
upon, or belief in, a mistaken fact, or a mistake of law. Rescission based on mistake of
fact may be allowed if the effect of the mistake causes such a change in the contract’s
intent, or makes enforcement of the contract unconscionable.
Rescission on a mistake of law may be granted when a party is aware of the true facts
of the contract, but is mistaken as to the legal ramifications of those facts. A mistake of
law exists only when (1) all parties believe they know the law as it pertains to the
contract, but are mistaken, or (2) one party misunderstands the law at the time he
entered into the contract, and the other party fails to remedy the other party’s
misunderstanding.
 Fraud:
Certain types of fraud support a recession and the fraud can be “actual” or
“constructive.” Actual fraudexists when one party misrepresents something with
the intent to deceive the other party. Constructive fraud occurs when one party
engages in misleading conduct without intending to defraud the other party. When
fraud of either type occurs, the innocent party may rescind the contract, as he
entered into the contract based on facts that were not true.

 Duress, Coercion, or Undue Influence:

An individual cannot be forced to enter into a contract under threat of being
harmed, coercion, or other hostile influence. When considering whether to grant a
rescission based on duress, coercion, or undue influence, the court takes into
account such issues as:
1. Whether or not the rescinding party acted with free will
2. Whether or not the parties involved were in a confidential relationship
3. Whether the contract was negotiated at arm’s length
4. The adequacy of the consideration afforded to the rescinding party
 Lack of Capacity:

Rescission can take place if one of the parties to the contract lacks the capacity to
legally enter into a contract. For example, a party does not have the capacity to
enter into a contract if he is under 18, intoxicated, mentally incompetent,
or incapacitated due to illness.
 Anticipatory Repudiation or Failure of Consideration:

When it becomes clear that one party will not be performing his part of the
bargain, whether intentionally or not, the contract may be rescinded for
“anticipatory repudiation.” In addition, if the contract consideration, which is
the thing of value given in return for goods or services, fails to become
available, is inadequate, or is illegal, the contract may be rescinded.
• Process for Rescinding a Contract:
It must first be determined whether the contract can be rescinded. This can be
done by reviewing the contract and the clauses within it to see if it contains
instructions for rescission. If the contract does not contain such a clause, the
person seeking the recession should contact an attorney or check the statutes in
their state.
If the contract cannot be rescinded according to state or federal law, the person
may attempt to negotiate a rescission with the other party. Any contract may be
rescinded by mutual agreement, even if the contract itself does not allow it.
The rescinding party must determine whether there are legal grounds for
rescission, such as mistake, fraud, or duress. Finally, written notice of rescission
must be given to the other party, after which the parties may negotiate a mutual
rescission, or either party may file a civil lawsuit.
• When Rescission is Not Available:
There are situations where rescission is not available as a remedy, and as an equitable
remedy, the decision is at the discretion of the court. A judge may deny rescission
based on certain facts, including:
1. One party has substantially fulfilled their part of the contract
2. A third party has already received some benefit from the contract
3. The requesting party has committed some wrong relating to the contract
(referred to as “unclean hands”)
4. The requesting party has unnecessarily delayed the request for rescission,
resulting in some prejudice to the other party
5. The requesting party has already asked for money damages. A contract
rescission cannot be obtained after requesting a monetary award.
• Related Legal Terms and Issues:
o Anticipatory Repudiation – A declaration by a party to a contract, whether
verbal or through actions, that he does not intend to uphold his obligations
under the contract. Also known as “anticipatory breach.”

o Civil Lawsuit – A lawsuit brought about in court when one person claims to
have suffered a loss due to the actions of another person.

o Clause – A section of a legal document that relates to a particular point or

issue.

o Consent – To approve, permit, or agree.

o Contract – An agreement between two or more parties in which a promise is

made to do or provide something in return for a valuable benefit.
o Damages – A monetary award in compensation for a financial loss,
loss of or damage to personal or real property, or an injury. Equitable
Remedy – An action ordered by the court for a party to complete his
duties under a contract. This is most often used when an award of
money damages cannot sufficiently rectify the damages.

o Intent – A resolve to perform an act for a specific purpose; a resolution

to use a particular means to a specific end.

o Judicial Decision – A decision made by a judge regarding the matter

or case at hand.

o Jurisdiction – The legal authority to hear legal cases and make

judgments; the geographical region of authority to enforce justice.

o Rescind – To revoke or cancel.

o Unilaterally – Doing something without the agreement or permission

of the other party involved.
Thank You