Contract Rescission in Canada: Legal Test & Misrepresentation

Entering a contract is a major decision, whether for real estate, business loans, or commercial agreements. While most contracts are fair, sometimes agreements are based on false information or fundamental mistakes. In such cases, Canadian law provides a remedy called rescission, which allows the contract to be undone and the parties returned to their original positions.

Unlike damages, rescission treats the agreement as if it never existed, ensuring consent to a contract is genuine and informed.

What Is Contract Rescission?

Rescission is an equitable remedy that corrects agreements where consent was compromised. When granted, it sets aside the contract ab initio and restores the status quo ante, meaning the parties return to the position they were in before entering the contract.

Rescission applies when one party was induced to contract by misrepresentation, omission, or fundamental error, protecting them from unfairly being bound to a defective agreement.

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Key Legal Authority in Canada

In Guarantee Co. v. Gordon Capital (short for Guarantee Company of North America v. Gordon Capital Corp., 1999 CanLII 664 (SCC), [1999] 3 S.C.R. 423), the Supreme Court of Canada confirmed that a contract can be rescinded where a misrepresentation of a material fact induces a party to enter the agreement. Rescission restores parties to their pre-contract positions and prevents enforcement of agreements obtained under false pretenses.

The House of Lords also clarified rescission in Abram Steamship (short for Abram Steamship Co. v. Westville Shipping Co., [1923] A.C. 773 (H.L.) at 781), where Lord Atkinson stated:

“Where one party… by reason of fraud or essential error of a material kind inducing him to enter into the contract… resolves to rescind it… this terminates the contract, puts the parties in status quo ante and restores things… to the position in which they stood before the contract was entered into.”

These cases show that rescission focuses on correcting agreements that were never fairly formed, rather than punishing the other party.

When Can a Contract Be Rescinded?

Rescission is available when the contract is defective in formation, often due to:

• Misrepresentation: False statements of fact, negligent or fraudulent
• Mistake: Fundamental misunderstandings about the contract
• Fraud or deceit: Intentional deception
• Duress or undue influence: Pressure or manipulation
• Unconscionability: Extremely unfair terms imposed on a weaker party

For business contracts, see our Commercial Litigation Services.

Rescission does not apply to bad business decisions; it applies when consent was improperly obtained.

The Legal Test for Rescission

Based on Guarantee Co. v. Gordon Capital and Abram Steamship, rescission generally requires four elements:

1. Misrepresentation or Fundamental Mistake

There must be a recognized defect in contract formation, such as a false statement, omission, fraud, or fundamental error. Minor mistakes do not justify rescission.

2. Materiality

The misrepresentation or mistake must be material, meaning it significantly affects the decision to contract. Courts consider whether a reasonable person would view the information as important.

3. Inducement

The party seeking rescission must show that the misrepresentation or mistake actually influenced their decision. It need not be the sole reason but must be a significant factor.

4. Restoration

Rescission is discretionary. Courts consider whether it is practically possible to restore the parties to their pre-contractual positions. Perfect restoration is not required; financial adjustments can suffice.

Rescission may be denied if the party has:

• Affirmed the contract after discovering the misrepresentation
• Delayed unreasonably in seeking rescission
• Been unable to restore what was exchanged
• Third-party rights have intervened
• Acted in bad faith

Rescission vs. Damages

Rescission and damages are different remedies:

Rescission	Damages
Contract is treated as if it never existed	Contract remains valid
Focus on restoring the parties’ positions	Focus on compensating financial loss
Equitable and discretionary	Legal remedy available as of right

Both remedies may apply, but rescission is preferred when the contract itself is fundamentally flawed.

Practical Tips for Clients

If you believe a contract may be voidable due to misrepresentation or mistake:

• Act promptly — delays may bar rescission
• Seek legal advice immediately
• Avoid conduct that could affirm the contract
• Preserve evidence of misrepresentation or reliance
• Assess restoration feasibility

Prompt action improves the chances of successfully unwinding the agreement.

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Conclusion

Rescission is a powerful remedy in Canadian law that protects parties from contracts entered into under misrepresentation, mistake, or fraud. The Supreme Court of Canada in Guarantee Co. v. Gordon Capital and the House of Lords in Abram Steamship confirm that rescission requires:

• A material misrepresentation or fundamental mistake
• Actual inducement to enter the contract
• Restoration to pre-contract positions to prevent injustice

If you suspect you entered a contract under false or misleading circumstances, contact our lawyers today to protect your rights and explore rescission as a remedy.