Remedy of Partial Rescission in Australian Law

I INTRODUCTION

There is still significant uncertainty around the precise operation of the remedy of partial rescission in Australian law. However, while it has been criticised for lack of judicial articulation it is clearly a decision that fits in with the Australian legal landscape and statutory scheme of New South Wales. Closer inspection of that scheme reveals that the remedies available are in fact wider than in equity, providing courts with significant discretion as to how they apply the principles of rescission to commercial contracts.

While perhaps it is fair to say that this was not well articulated in the case of Vadasz v Pioneer Concrete (SA) Pty Ltd [1] (“Vadasz”), the application of the remedy of partial rescission is not misconstrued. In a commercial context where contractual efficacy is key, and where a statutory scheme with the express aim of promoting that efficacy exists, the unity of the doctrine become paramount.

The approach taken in Vadasz reflects a realisation that the equitable remedy of rescission and the statutory versions of it should be unified in Australian law, with both doctrines able to dynamically guide the other as this body of law develops and ensures that the equitable principle is serving its purpose of producing just results where the law may otherwise be unable to provide relief.

II RECISSION AS A RESPONSIVENESS TO STATUTORY INNOVATION

The uncertainty about the operation of the remedy of partial rescission is because one of the underlying principles of rescission at common law and in equity  namely ‘resutio in integrum’ is no longer an essential element of the doctrine.[2] For example, rather than acting as a bar to rescission in equity, the ability to restore parties to their pre-contractual positions is merely a discretionary matter.[3] This can have the result of producing more just results – particularly in cases where the property exchanged has changed in value making it impossible to restore parties to their original positions.[4] This has implications for the application of the doctrine of rescission at law, particularly when applied to contracts entered into under a misrepresentation.

Similarly, the remedy of rescission has been modified by the Australian Consumer Law (“ACL”). While the Competition and Consumer Act 2010 (NSW) does not use the term “rescission”. Rather the idea is that a person might have suffered a loss or damage owing to the conduct of another person in contravention of relevant provisions.[5] Similarly under Schedule 2, section 243(c) the court is permitted to refuse to enforce a contract or any of its provisions. In the event the court refuses to enforce the entire contract, this will have the effect of rescission.

The court does have powers to make compensatory orders for those who have suffered loss or damage[6]  and further permits the refund of money and return of property to the aggrieved person.[7]  Unequivocally  the Sale of Goods Act 1923 (NSW), also undertakes common law principles of fraud, misrepresentation, coercion, mistake or other invalidating causes in contracts for the sales of goods. [8] Unlike other statutes that are interpreted through common law, these statutory provisions themselves modify the common law rules underlying them.

This is evident in the decision of JAD International Pty Ltd v International Trucks Australia[9]in which the court held that the court’s power to grant relief under the statutory provision is actually wider than it had been under equity. This has significant implications for the future application of the remedy of rescission, and in particular appears to validate the High Court’s present approach to partial rescission as an available remedy in Australia.[10]

The question therefore becomes whether the statute which arguably allows for partial rescission to undo “unjust contracts” should influence the operation of the remedy of rescission at equity. The tension here appears to lie in the position between judge made law and statute law. If it is acknowledged that the legislation in question is intentionally “vague”,[11] then arguably the equitable doctrine rather than the statutory invention of partial rescission should prevail.

It is uncontroversial that common law should be used in statutory interpretation. However, it must be considered whether the reverse should also be applied – that is if statutes influence the development of common law doctrines.[12]

When section 52 of the Trade Practices Act (since replaced by the ACL) was introduced but remained regulated through judicial interpretation by the common law. The regular adoption of enhanced remedial regimes under this legislation has had the effect of creating disunity between the common law and statute though both arguably continue to rely on each other for interpretation.[13]

The real concern is the relationship between common law and statute, and how it should be dealt with when it comes to partial rescission in particular. Four possible approaches to dealing with legislative change were outlined by Roscoe Pound:

1. Receive the legislation fully into the law, allowing it supremacy;
2. Receive fully into the body of law to be reasoned from by analogy – as any other rule of law;
3. Might refuse to receive it fully and give effect to it only when it is directly relevant (as opposed to adopting it as a new general principle); or
4. Give a strict and narrow interpretation.[14]

The idea that the first two categories should be the approach taken is based on an understanding of statute as indicative of social policies around law.

That is, society expressing its will through law. However, this is arguably not the case when it comes to the ACL and the doctrine of misleading and deceptive conduct.[15]

Further, to help achieve a clear guidance for the interpretation of common law in coherence with statute, it has been suggested by critics that there is a strong need for an alternative approach. The greater influence and use of common law authorities in statute reasoning will provide the courts discretion and guidance to utilise a case by case approach in statute interpretation.    This approach is not always justified, but in cases where there is a strong need for coherence for example, for commercial efficacy, it is a suitable technique for promoting uniformity.[16]

In the case of rescission, it is contentious having one remedy in equity and a wider available remedy under statute to promote the policy goal of commercial efficacy in contracts. However, arguably the need for uniformity requires that the doctrine of rescission be widened in equity in response to the surrounding statutory provisions. The suggested dynamic guidance approach could provide an innovative way forward to allow rescission to develop collectively between common law and equity on the one hand, and under statute on the other.

III THE WIDER EFFECTS OF RESPONSIVENESS

Under the requirement of restitutio in integrum once an election is make for the innocent party to terminate, it is as though the contract has never existed.[17] Property must be retuned and money repaid. At common law, if that restitution cannot occur then the contract cannot be rescinded.

The equitable remedy of rescission is not self-help. A court order is mandatory and it is within the courts discretion whether or not rescission should be granted.[18] Although equity allows restoration to pre-contractual position for aggrieved parties, it further provides more safeguards to achieve substantive restitution. [19]

Partial rescission cannot follow the principle of restitutio in integrum as the parties will not be restored to their former pre-contractual positions but will be in new positions that the court has the discretion to determine. It is for this reason that partial rescission is best understood as being embedded firmly in contract.[20] This allows it a degree of separation from the concepts of both ‘conditional’ forms of relief whose basis lies in restitution.[21]

For example, if a business is sold and there is no prospect of being returned to the vendor because the premises has been vacated then common law rescission is not an available remedy. However, the High Court has made orders on those facts that the vendor is to repay the purchase price (less the chattels that could be returned and the value of the stock in trade).[22] This is an example of using the equitable doctrine of rescission along with available remedies to return parties to their pre-contract position as best as possible. Arguably, partial rescission allows for a more just approach in some factual circumstances.[23]

IV ADOPTING UK APPROACH

It has been argued that Vadasz was wrongly decided owing to incomplete analysis and the misapplication of the principles laid down in Amadio.[24] However, there is an argument to be made that the departure from the UK position is justified, particularly in the Australian legal context in which statute has begun to influence the interpretation of the equitable remedies available under the ACL and related law.

The High Court has expressly rejected the approach taken by UK courts that the setting aside of a contract is an “all or nothing process”.[25] However, this conclusion was drawn with express reference to the Trade Practices Act and the Contracts Review Act. The reasoning has been controversial among academics especially whether the High Court should have given so much weight to statute in their reasoning.

Further, that case acknowledged that unconscionability can work in two ways. Firstly justifying setting aside a transaction, and secondly can prevent one party from obtaining an unwarranted benefit over the other.[26] Arguably this leads to more just results by understanding the discretion of the courts is not limited to doctrine, but is in order to restore parties as best as possible even if not via identical terms to before the contract was entered into. This also acknowledges the possibility that the party wishing to rescind may also have acted unconscionably in some circumstances.

In order to understand the position at UK common law, it is necessary to look in detail at TSB Bank Plv v Camfield[27] and the reasoning adopted in relation to rejecting partial rescission. That case concerned a bank that failed to ensure a wife to a business owner had independent legal advice. The issue was whether the wife had a right to rescind on the basis that she was induced by her husband as to the extent of her liability if she stood surety.

This case relied on a line of English authority that found the concept of partial setting aside of a contract on the basis was inducement is an “elusive one”.[28] Similarly, this reflects the ‘but for’ notion whereby the aggrieved party would not have entered into a contract but for the misrepresentation or fraudulent conduct of the other party.[29] Accordingly equitable remedies are able to achieve restitutio in integrum as if there was never a breach in contract. [30]

However, it was conceded that the argument on partial rescission was “interesting”. It was held in Bank Melli Iran v Samadi-Rad[31] that the parties cannot be restored to their original position because the borrower cannot discharge the liability for the mortgage without the sale of the matrimonial home. In such a case, it was argued that equity should be flexible in restoring parties to their original position or an equivalent result based on the maxim that “he who seeks equity must do equity.”[32] However, ultimately this judgement was rejected in favour of a line of authority as outlined above.

A competing characterisation of the partial rescission of the contract in Vadasz is that it should be seen as a part of contract law, based on the idea of intention rather than the equitable principle of restitution.[33] This is a perspective that deals with many of the problems encountered with partial rescission not least of which is that it requires a rejection of the equitable restitutionary principle that gave rise to it in the first place.

The problem with such a position is that it further entrenches a separation between the common law and equitable and statutory positions on restitution. It may be argued that in the UK this is an important priority in their commercial law scheme. However, the Australian landscape has developed very differently and it is to be expected that our relationship to equitable principles and remedies is similarly different. While there are clearly benefits to both positions, ultimately the Vadasz decision is the one best suited to the Australian legal landscape.

V CONCLUSION

It is clear that the doctrine of partial rescission sits uneasily with strictly equitable doctrines and principles. Most notably, the incompatibility of the remedy with the principle of restitutio in integrum has proven to be both problematic and created uncertainty in this area of law.

However, rather than reject the development of the useful and often necessary remedy of partial rescission as the UK have done, it makes more sense to adopt a new approach to the interaction of equity and statute. This approach would allow a more flexible remedy to be developed simultaneously at common law and in legislation.

While this dynamic guidance is not a suitable approach to statute in many cases, in the area of commercial law in which both certainty and efficacy are key, it is the best approach forward. It can only be hoped that the link between this policy aim and the approach of the Australian courts can be better and more fully articulated in future decisions.

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[1] (1995) 184 CLR 102.

[2] JAD International Pty Ltd v International Trucks Australia (1994) 50 FCR 378, 380;Clarke v Dickson (1858) EB & E 148.

[3] Sale of Goods Act 1923 (NSW) s 4(2); JAD International Pty Ltd v International Trucks Australia (1994) 50 FCR 378, 380.

[4] Clarke v Dickson (1858) EB & E 148; Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274; Akron Securities Ltd v lliffe (1997) 41 NSWLR 353,367.

[5] ACL, s 18.

[6] Competition and Consumer Act 2010 (Cth) s 87.

[7] Competition and Consumer Act 2010 (Cth), Sch 2 (‘Australian Consumer Law’) s 243(d).  

[8] Sale of Goods Act 1923 (NSW), s 4(2).

[9] (1994) 50 FCR 378, 380.

[10] Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102, 116.  

[11] Mark L Humphrey-Jenner (2009) ‘Should Common Law Doctrines Dynamically Guide the Interpretation of Statutes?’ Legisprudence 171-189.

[12] P Finn, “Statutes and the Common Law: The Continuing Story”, in S Corcoran and S Bottomley (eds), Interpreting Statutes (Sydney, Federation Press, 2005); P S Atiyah, “Common Law and Statute Law” (1985) 48 Modern Law Review, 1; Paul Finn, ‘Statutes and the Common Law’ (1992) 22 West Australian Law Review 1.

[13] Ibid.

[14] R Pound ‘Common Law and Legislation’ (1908) 21 Harvard Law Review 383, 385-386.

[15] Finn, above n 12, 21.

[16] Humphrey-Jenner, above n 10, 173.

[17] Steven Lurie ‘Towards a Unified Theory of Breach’ (2003) 19 Journal of Contract Law 250, 1.

[18] Finnane, Newton and Wood, ‘Equity Practice and Precedents’ (Thomson Lawbook Co, 2008)

[19] Clarke v Dickson (1858) EB & E 148

[20] D J Meikle ‘Partial Rescission – Removing the Restitution from a Contractual Doctrine’ (2003) 19 Journal of Contract Law 40, 41.

[21] Ibid.

[22] Alati v Kruger (1995) 94 CLR 214; Blomley v Ryan (1956) 99 CLR 362.

[23] Bank Melli Iran v Samadi-Rad (9 February 1994, unreported) (Walker SC).

[24] Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447.

[25] Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102, 116

[26] Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102, 114.

[27] [1995] 1 WLR 430.

[28] Barclays Bank plc v O’Brien [1993] 4 All ER 417, 432 (Lord Browne-Wilkinson).

[29] Maguire and Makaronis [1997] HCA 23 115-121 (Kirby J); Union Fidelity Trustee Company Limited v Perpetual Trustee Company Ltd (1966) 2 NSWR 211, 215 (Justice Street).

[30] Re Dawson; Union Fidelity Trustee Company Limited v Perpetual Trustee Company Ltd (1966) 2 NSWR 211, 216 (Justice Street)

[31] (9 February 1994, unreported)

[32] Barclays Bank plc v O’Brien [1993] 4 All ER 417, 432 (Lord Browne-Wilkinson).

[33] Meikle, above n 18, 63.