The effect of a misrepresentation is generally to make a contract voidable, rather than void, so the contract continues to exist unless and until the innocent party chooses to have it set aside by means of rescission.
Rescission is an equitable remedy which sets aside and put the parties back in the position they were in before the contract was made. This remedy is available for all the types of misrepresentation.
An injured party who decides to rescind the contract can do so by notifying the other party or, if this is not possible owing to the conduct of their defaulting party, by taking some other reasonable action to indicate the intention to rescind.
An injured party can also apply to court for a formal order of rescission, which provides that any property exchanged under the contract reverts to its former owner. Sometimes it will be done by ordering a payment of money known as an indemnity. It is important to note that this payment is not damages; it is designed to put the parties back into their former positions, and is only available for obligations necessarily and inevitably created by the contract.
Bars to rescission
There are some circumstances in which it is clearly unreasonable to put contracting parties back into their pre-contractual position, and in these cases, the injured party may lose the right to rescission. The three circumstances in which this may occur are where there is some practical reason why the parties cannot be restored to their original position, where a third party has gained rights under the contract, and where the innocent party affirms the contract.
- Impossibility of restitution: The most common practical reason why parties cannot be restored to their original position is that the subject matter of the contract has been used up or destroyed. In the case of Vigers v Pike (1842), the subject matter of the mining contract had been worked out and nothing was left of the mine. So rescission was impossible.
If however, most of the subject matter of the contract can be restored to the other party, or if it can be restored, but not in its original condition, a court may order return of the property, along with financial compensation for the partial loss of value.
- Third party rights: Rescission cannot be ordered where a third party has acquired rights under the contract.
- Affirmation: If an innocent party, once aware of the misrepresentation, states that they intend to continue with the contract, or does something which suggests an intention to continue with it, that party is considered to have affirmed the contract, and so will not be allowed to rescind.
Strictly speaking, simply doing nothing about a contract does not amount to affirmation, but the courts do appear to take into consideration the amount of time that lapses between a contract being made and a party asking for rescission.