Claiming Rescission Remedy Involves Voiding of Unconscionable Contract TransactionsPage last modified: January 01 2023
Share to Facebook
What Is Meant By Rescission of Contract?
Rescission May Be Granted By a Court Due to Misrepresentation, Among Other Issues, During Contract Negotiations. When Such Occurs, the Parties Are to Reset Back to the Original Conditions As Existed Prior to the Contract.
Understanding the Remedy of Contract Rescission Including the Resetting to the Original Positions Held By the Parties
The legal remedy known as rescission is, generally, available when a Plaintiff was misled into a contractual relationship by deceit, by misrepresentation whether as innocent or negligent misrepresentation, or by another factor that was introduced by the Defendant and was relied upon by the Plaintiff. Essentially, rescission provides a judicially imposed reset button.
When a Plaintiff claims and a judge grants rescission, the intended result is that a relevant contract is deemed rescinded and the parties to that contract should be put back into the position, as best possible, as if the contract failed to ever exist. Rescission is well explained in many cases including the following:
 Rescission is an equitable remedy that is meant to put the contracting parties back in the positions they were in before entering into the contract (restitutio in integrum): Guarantee Co. of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC),  3 S.C.R. 423, at para. 39; Place Concorde East Ltd. Partnership v. Shelter Corp. of Canada Ltd. (2006), 2006 CanLII 16346 (ON CA), 270 D.L.R. (4th) 181 (Ont. C.A.); and Gerald H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at p. 762.
 Rescission is available to a party that has been improperly induced to enter into a contract, for instance, by a fraudulent misrepresentation: Guarantee Co., at para. 39; Deschenes v. Lalonde, 2020 ONCA 304, 447 D.L.R. (4th) 132, at para. 29, leave to appeal to S.C.C. refused, 39288 (February 11, 2021); and Kingu v. Walmer Ventures Ltd. (1986), 1986 CanLII 142 (BC CA), 10 B.C.L.R. (2d) 15 (C.A.), at pp. 6-8. Indeed, as Lord Wright noted in Spence v. Crawford,  3 All E.R. 271, at p. 288, the court will be more willing to order rescission when the plaintiff was induced to enter the contract by fraud:
[T]he court will be more drastic in exercising its discretionary powers in a case of fraud than in a case of innocent misrepresentation. … There is no doubt good reason for the distinction. A case of innocent misrepresentation may be regarded rather as one of misfortune than as one of moral obliquity. There is no deceit or intention to defraud. The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff.
 Rescission requires proof that the misrepresentation was material and was relied on by the party seeking to rescind the contract: Deschenes, at para. 29; Barclays Bank v. Metcalfe & Mansfield, 2011 ONSC 5008, 82 C.B.R. (5th) 159, at paras. 156-59, aff’d 2013 ONCA 494, 365 D.L.R. (4th) 15, leave to appeal refused,  S.C.C.A. No. 374.
 A “material misrepresentation” is one that a reasonable person would consider to be relevant to the decision to enter the agreement, though it need not be the only reason to enter into the agreement: York University v. Markicevic and Brown, 2016 ONSC 3718, 33 C.C.E.L. (4th) 26, at para. 145, aff’d 2018 ONCA 893, 51 C.C.E.L. (4th) 30, leave to appeal refused,  S.C.C.A. No. 134.
 Whether a contracting party relied on the misrepresentation, at least in part, to enter into the agreement is a “question of fact to be inferred from all the circumstances of the case and evidence at trial”: Barclays Bank, at para. 159.
 I begin by setting out the relevant legal principles. The point of departure is that there is a strong presumption in favour of the finality of settlements: Tsaoussis (Litigation Guardian of) v. Baetz (1998), 1998 CanLII 5454 (ON CA), 165 D.L.R. (4th) 268 (Ont. C.A.), at paras. 15-16, leave to appeal refused,  S.C.C.A. No. 518; Mohammed v. York Fire & Casualty Insurance Co. (2006), 2006 CanLII 3954 (ON CA), 79 O.R. (3d) 354 (C.A.), at para. 34, leave to appeal refused,  S.C.C.A. No. 269. A settlement agreement will not be rescinded on the basis of information that has come to light following the settlement that indicates that a party has entered into an improvident settlement. As the motion judge recognized here, “it is not enough to revisit a settlement decision based on the better vision of hindsight”: at para. 2.
 A settlement agreement, as a contract, may be rescinded on the basis of misrepresentation. The interest in the finality of settlements will not “trump” the need to rescind a settlement agreement in such cases. In Radhakrishnan v. University of Calgary Faculty Association, 2002 ABCA 182, 215 D.L.R. (4th) 624, at paras. 30, 43, Côté J.A. stated that “[t]he recognized ways to upset a settlement contract are the same as those to upset any other contract”, and that “[in a settlement] [i]nterests of finality prevail, unless there are contractual problems such as fraud, misrepresentation, duress, undue influence, unconscionability, or mutual or unilateral mistake”. See also Teitelbaum v. Dyson (2000), 7 C.P.C. (5th) 356 (Ont. S.C.), at para. 38, aff’d (2001), 2001 CanLII 32771 (ON CA), 151 O.A.C. 399 (C.A.), leave to appeal refused,  S.C.C.A. No. 532.
 The equitable remedy of rescission is available for a false or misleading representation that induces a contract: Guarantee Co. of North America, at para. 39. Rescission requires proof that the misrepresentation was material and was relied on by the party seeking to rescind the contract: 1323257 Ontario Ltd. o/a “Hyundai of Thornhill” v. Hyundai Auto Canada Corp. (2009), 2009 CanLII 494 (ON SC), 55 B.L.R. (4th) 265 (Ont. S.C.), at para. 71; Barclays Bank v. Metcalfe & Mansfield, 2011 ONSC 5008, 82 C.B.R. (5th) 159, at paras. 156-59, aff’d 2013 ONCA 494, 365 D.L.R. (4th) 15, leave to appeal refused,  S.C.C.A. No. 374. To be material, a misrepresentation must relate to a matter that would be considered by a reasonable person to be relevant to the decision to enter the agreement, but it need not be the sole inducement for acting: York University v. Makicevic and Brown, 2016 ONSC 3718, 33 C.C.E.L. (4th) 26, at para. 145, aff’d 2018 ONCA 893, 51 C.C.E.L. (4th) 30, leave to appeal refused,  S.C.C.A. No. 134. Whether a contracting party did in fact rely on the misrepresentation, at least in part, to enter into the agreement is a “question of fact to be inferred from all the circumstances of the case and evidence at trial”: Barclays Bank, at para. 159.
 The remedy of rescission is available even if the misrepresentation was made innocently, that is, by a party who believed it was true: “Where rescission is claimed it is only necessary to prove that there was misrepresentation. Then, however honestly it may have been made, however free from blame the person who made it, the contract, having been obtained by misrepresentation, cannot stand”: Derry v. Peek (1889), [1886-90] All E.R. Rep. 1 (H.L.), at p. 13, per Lord Herschell. In Kingu v. Walmar Ventures Ltd., 1986 CanLII 142 (BC CA),  B.C.J. No. 597 (C.A.), McLachlin J.A. (as she then was) set out a list of requirements for rescission of a contract on the basis of innocent misrepresentation. In addition to the requirement of a positive misrepresentation of an existing fact that induced the plaintiff to enter into the contract, in order for rescission to be granted, the plaintiff must have acted promptly upon discovery of the misrepresentation to disaffirm the contract, no third party may have acquired rights for value as a result of the contract, and it must be possible to restore the parties substantially to their pre-contract position: Kingu, at para. 15.
 A material misrepresentation, whether innocent or fraudulent, may be grounds to set aside a contract entered into by one party in reliance on the representation. A fraudulent misrepresentation is a statement known to be false or made not caring whether it is true or false. For innocent misrepresentation the misrepresentation might be entirely honest and careful, there is no need for promissory intention, the negligence of the party seeking relief is no defence, and there is a presumption that a material representation did in fact cause the misrepresentee to enter into the transaction. The presumption can be rebutted by proof of no reliance on the misrepresentation. See S.M. Waddams, The Law of Contracts, 6th ed. at para. 419-421.
 The requirement that the misstatement of fact be material means that the misrepresentation must relate to a matter that would be considered by a reasonable person to be relevant to the decision to enter the agreement in question. See J. D. McCamus, The Law of Contracts (Toronto: Irwin Law, 2005) at p. 300. McCamus further states at p. 301:
In addition to being shown to be material, the misrepresentation must have constituted an inducement to enter the agreement upon which the misrepresentee relied. Thus, a representee who undertakes his or her own separate investigation of the facts would not be held to have relied on the misrepresentation. On the other hand, is clearly established that the representee has no obligation to engage in "due diligence" and make such an independent investigation, even where the means of doing so are made available by the misrepresentor. Further, it is clearly established that the misrepresentation need not be the exclusive or even a predominant inducement for entering the agreement. It must be established, simply, that it was an inducement. Moreover, once it is established that a misrepresentation is of such a nature that it is liable to induce the misrepresentee to enter the contract, it would be presumed against the misrepresentor that such inducement did occur.
 As stated by McCamus, supra, it is not necessary for a plaintiff to establish that the misrepresentation was the sole inducement for acting and it matters not if the misrepresentation was only one of several factors contributing to the plaintiff’s decision. See Sidhu Estate v. Bains (1996), 1996 CanLII 3332 (BC CA), 25 B.C.L.R. (3d) 41 at paras 35-36; Kripps v. Touche Ross & Co. (1997), 1997 CanLII 2007 (BC CA), 89 B.C.A.C. 288 (C.A.) at paras. 102-103; NBD Bank, Canada v. Dofasco Inc. (1999), 1999 CanLII 3826 (ON CA), 46 O.R. (3d) 514 (C.A.) at para 81.
As per the cases above, where a party is induced into a contract by a misrepresentation, whether the misrepresentation is fraudulently, negligently, or innocently, made, the contract may be rescinded. The factors for court review when determining whether to Order a contract rescinded include whether the misrepresentation was a material inducement to entering into the contract, whether rescission remains possible, and whether rescission may unfairly affect a third party.
Rescission remedy involves the voiding from inception of a contractual relationship by restoring the parties back into a position as if the contractual relationship failed to ever exist. A claim for rescission may be granted where a party to the contract was induced to enter into the contract by wrongful statements issued by the other party.