We have observed earlier that a contract brought about by coercion, undue influence, misrepresentation or fraud is voidable at the option of the party whose consent was so caused. He has the option either to rescind the contract or to affirm it. But his right of rescission is lost in the following cases:
1. Affirmation:
ADVERTISEMENTS:
If after becoming aware of his right to rescind, the aggrieved party affirms the transaction either by express words or by an act which shows an intention to affirm it, the right of rescission is lost.
So, for example, if a person, who has purchased shares on the faith of a misleading prospectus, subsequently becomes aware of its falsity, but accepts dividends paid to him, he will not be permitted to avoid the contract. Paying for the goods purchased (if not paid so far), attempting to sell the goods are some other examples of implied affirmation.
Image Source:i.ytimg.com
2. Restitution not possible:
If the party seeking rescission is not in a position to restore the benefits he may have obtained under the contract, e.g., where the subject-matter of the contract has been consumed or destroyed, the right to rescind the contract cannot be exercised.
ADVERTISEMENTS:
3. Lapse of time:
It may be treated as evidence of affirmation where the party misled fails to exercise his right promptly on discovering the representation to be untrue or on becoming aware of the fraud or coercion. As such the right of rescission may also be lost by too long-a-delay.
4. Rights of third parties:
Since the contract is valid until rescinded, being a voidable contract, if before the contract is rescinded third parties, bona fide for value, acquire rights in the subject matter of the contract, those rights are valid against the party misled, and the right to rescind will no longer be available.
ADVERTISEMENTS:
Thus where a person obtains goods by fraud and, before the seller rescinds the contract, disposes them off to a bona fide party, the seller cannot then rescind (Phillips vs. Brooks Ltd).