Rescission is the revocation (cancellation) of a contract. It is a legal remedy usually provided by a court order cancelling the contract. The court also makes orders that aim to restore the parties to the position they were in before the contract. This means that any money or goods that passed from one party to the other are returned.
Usually, the basis for rescission is the breach of a condition of the contract. Where the breach relates to a warranty, rescission is not normally available, and the wronged party only receives damages. (For the differences between conditions and warranties, see ‘The terms of a contract’ in Chapter 7.1: How contract law works.)
The remedy of rescission is very restricted. It is important that action to rescind be taken as soon as a breach of the contract is discovered. The right to rescind is lost if the wronged party does not complain promptly or deals with the contract in a way that suggests acceptance of the breach.
A further restriction on the right to rescind is that it must be possible to return the parties to the position they were in before the contract. For example, if it is not possible to return the parties to their positions before the contract because the item bought has been used up, or cannot be restored to its original condition, the contract will not be permitted to end by rescission.
The most commonly used remedy for breach of contract is payment of money, called damages. The sum of money is calculated to compensate the wronged party for the loss caused by the breach of contract.
The aim of an award of damages is to place the wronged party in the same position as they would have been in if the contract had been properly performed. The amount of damages to be paid is the loss that the wronged party could be expected to suffer as a reasonable consequence of the breach. In addition, damages are payable if it can be proved that the party in breach of the contract knew that the other party would suffer a special or unusual loss if the contract was breached.
At the same time, the wronged party is always required to minimise the damage suffered. So, all reasonable steps to ensure that the loss suffered is as small as possible must be taken by the wronged party.
Damages available to the buyer
The remedies available to the consumer in damages vary according to the circumstances.
First, where the seller has wrongfully failed to deliver the goods, or there has been a breach of condition entitling the buyer to reject the goods, the buyer may sue for damages for non-delivery. Damages are usually calculated at the point of breach to reflect the loss at that point. However, where a contract relates to the delivery of goods, loss can be calculated on a number of different bases, such as the retail price of the goods or, alternatively, the wholesale price of the goods. In these circumstances, the general rule is that the loss should be calculated by reference to the available market.
An ‘available market’ is a market in which buyers for goods like the contract goods are readily available. This is a question of fact in a given situation.
If there is an available market for the goods, then the damages will be the difference (if any) between the contract price and the market price of the goods when they should have been delivered. For example, if a buyer agrees to purchase a television for $500, but the seller fails to deliver it, normally the buyer will be forced to go and buy a television elsewhere. If, in the meantime, the price of televisions has gone up by $100, the buyer may sue the seller for that amount under section 57 of the Goods Act 1958 (Vic) (‘Goods Act’).
If there is no available market, then the measure of damages is in accordance with the normal rule (i.e. loss directly and naturally resulting in the ordinary course of events from the seller’s breach of contract (s 57(2)). This is also related to market factors.
Second, where there has been a breach of warranty, or where there has been a breach of condition that the buyer elects (or is forced) to treat as a breach of warranty, the buyer may:
- refuse to pay the whole or part of the price (depending on the gravity of the breach);
- sue the seller for damages; or
- where the damage is substantial, do (1) and (2).
The measure of damages is the loss directly and naturally owing from the breach of warranty. Where there is a breach of the quality warranty, the measure of damages is the difference between the value of the goods at the time of delivery and the value of the goods if they had satisfied the warranty (the latter is usually the contract price of the goods) (s 59).
Normally, in consumer transactions, damages will cover the cost of repairs and matters associated (e.g. transport of the goods to the place of repair). In most cases, damages will also be recoverable when defective goods have caused personal injury or damage to other property.
Damages available to the seller
The seller may sue for damages where the buyer is in breach of contract, as follows:
- where property (i.e. ownership) in the goods has passed to the buyer and the buyer wrongfully refuses or neglects to pay for them, the seller may sue for the price of the goods, or damages (s 55);
- where the buyer wrongfully refuses to accept and pay for the goods, the seller may sue for damages (s 56(1)).
Where there is an available market (see definition under ‘Damages available to the buyer’, above) for the goods, the amount of damages is the difference between the contract price and the market price at the time the goods ought to have been accepted; the amount of damages depends on market factors.
If there is no available market, the measure of damages is in accordance with the normal rule (i.e. loss directly and naturally resulting in the ordinary course of events from the buyer’s breach of contract). This amount is also calculated according to market factors.
If it is established that the seller can resell the goods for the same or a higher price, then no loss has been suffered and only a small amount of damages can be claimed for. The seller, however, may argue that two sales would have been made (i.e. in addition to selling the goods to you, they could have also sold the goods for the same or a higher price to a second person).
While this argument may be valid in the case of mass-produced goods – each of which is exactly the same – it does not apply where the goods are all different. Thus, it may be true in the case of new cars that the seller has made only one sale, where two would have been made. But with second-hand cars, which are all different, the test is ‘what could reasonably be expected’ to be in the contemplation of the parties as a natural consequence of the breach. The buyer in this case could not have contemplated that the dealer would sell one car less. At most they would contemplate that, if the dealer resold this very car at a lower price, they should recover the difference (see Lazenby Garages v Wright  All ER 770).
Sometimes a party may want to insist that the other party complies strictly with the contract that has been made. This is called requiring specific performance.
If one party refuses to comply with the contract, it may be possible for the other party to apply to a court for an order for specific performance. This will not be granted if:
- the party has been guilty of some ‘sharp’ practice, even though within the strict letter of the law;
- the remedy requires the court to supervise and see that the services were properly performed; or
- another adequate remedy (which is usually damages) is available. This is of particular relevance to contracts for the sale of goods. Where goods which are freely available on the market are concerned, the court will order payment of damages rather than specific performance. Where the goods are rare or have some special quality, the court is more likely to order specific performance.
Prohibition on penalties for a breach of contract
Quite frequently, parties to a contract agree on a sum that is to be paid on breach of contract by either of the parties. It is common for the deposit to be agreed on as the amount to be forfeited if a breach of contract occurs by the contract not going ahead.
If the amount agreed on by the parties represents a genuine pre-estimate of what is likely to be the loss suffered on breach of contract, then the courts endorse this agreement. It should be noted that if the actual loss owing from the breach of contract is more than the amount agreed on, then the party suffering the breach has to forego the amount by which the actual loss exceeds the pre-estimate. On the other hand, if the amount of damages owing from the breach is less than the amount agreed on, the party in breach of contract still has to pay the agreed amount.
If the amount agreed on takes the form of a penalty for breach of contract, rather than a genuine pre-estimate of loss, the courts will restrict the person suffering the breach to their actual loss and will not enforce the penalty. The actual loss may be more or less than the amount agreed on.
The case of Andrews v ANZ Banking Group Ltd  HCA 30 establishes the broad reach of the rule against penalties and makes clear that the rule cannot be avoided through contractual drafting alone. The case establishes that the doctrine applies to any fee that in substance is designed to secure the performance of a contractual obligation, irrespective of whether the fee is actually triggered by a breach.
Whether a sum is a penalty depends on the parties’ intentions; but the courts have laid down some guidelines:
- the expression used in the contract by the parties will not be decisive. For example, if the parties described the sum to be paid on breach of contract as a genuine pre-estimate of damages, and in all the circumstances it is apparent to the court that the sum is really a penalty, then the court will disregard the language used;
- if the sum is extravagant in comparison to the greatest loss that could flow from the breach, then it will be regarded as a penalty. It is not enough for the sum to be disproportionate, it must be ‘all out of proportion’. This should be assessed at the time of entering into the contract, rather than comparing the sum with the actual loss incurred;
- where the obligation is, for example, to pay a certain amount of money and it is provided that failure to do so will mean that a higher sum of money is payable, then that will usually be regarded as a penalty. An agreement to pay a sum of money with a rebate for a prompt payment will be valid but a penalty for late payment is usually invalid;
- if there is a range of contract breaches, each of which producing differing amounts of loss and yet one sum is provided for breach of contract, then that sum is likely to be regarded as a penalty; and
- consideration of the actual loss incurred is only relevant after the sum is found to be a penalty, in order to determine compensation to the penalised party. The ‘indirect consequences’ incurred as a result of a breach of an obligation can be taken into account, not just direct loss incurred.
In Paciocco v ANZ Banking Group  HCA 28, the High Court found that a credit card late payment fee was not penal as it protected the bank’s legitimate commercial interests, including loss provision costs, regulatory capital costs and collection costs. This is despite the fee not representing a genuine pre-estimate of the loss that might be caused by a particular breach. This decision signals that courts will be reluctant to interfere with contractual provisions of this kind and will take a broad view of the legitimate commercial interests that the provision seeks to protect.
See Ringrow Pty Ltd v BP Australia Pty Ltd  HCA 71; O’Dea v Allstates Leasing System (WA) Pty Ltd  HCA 3; Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd  AC 79; Paciocco v ANZ Banking Group  HCA 28.