Most often, courts do not want to invalidate a contract because of the changes in time. People may say that it was a mistake to enter into a contract because hindsight reveals that it was a bad idea to do so. Courts push to have contracts enforced which may have been made with little wisdom. However, under certain circumstances, a mistake will invalidate the terms of a contract.
Lenawee County Board of Health v. Messerly
331 N.W.2d 203 (Mich. 1982).
The buyers lost in trial court but won in the court of appeals. Messerly appealed the court of appeals decision.
Was there a mistake and what are the legal implications?
A mistake is a belief that is not in accordance with the facts. When there is a mutual mistake the contract will be voidable by the party who is adversely affected by the mistake. However, if the adversely affected party bears the risk of the mistake, there is no remedy.
Although there was a mistake, the buying party bore the risk. Reversed.
The land in question has a small apartment complex. Prior to the Messerly’s purchase, the previous owner installed a smaller septic tank without a permit. The Messerlys purchased the property and continued to rent it out for an investment income. Another party purchased part of the land. Later, they wished to sell it but the land needed to be sold together. So the Messerlys repurchased the land and sold to the property altogether.
Included in the contract for sell was an “as is” clause where the buyer said that they had inspected the land and was accepting it in the condition that it was.
Some time later, the buyers visited the land, discovered sewage oozing onto the land, and had it inspected. The County Board of Health condemned the land for unsanitary reasons and declared it uninhabitable. At the time of purchase, neither party knew the septic tank had been installed without a permit.
Thus, the sellers want to collect the money for the sale of the land and the buyers want to rescind the contract because it cannot be used for the intended purpose at the time of purchase.
A mistake is a belief that is not in accordance with the facts. Here, there was a mistake. The belief was that the land could be used as an income creating investment through the apartment complex. However, the discovery of the septic issue makes the land uninhabitable and the purpose is impossible to meet.
Here, the buyer argues that rescission is necessary because the material consideration of the property is affected (the complex). However, the seller argues that recession is not necessary because the mistake only interfered with the value of the property. Both cited case law to make their points. Unfortunately, the case law has a lot of overlap. A mistake will always affect the value of the consideration. As such, the analysis conducted by those cases should not be adopted. Instead, when there is a mistake, the following approach should be used.
Because this is a mutual mistake (neither party knew of the septic issue), then the party who is adversely affected gets the benefit of the contract. Here, enforcement would adversely benefit the buyer.
However, if a party assumes the risk of the contract, then the contract will be enforced against them. Here, the buyer had accepted an “as is” clause, making the contract enforceable against them.
Adjustment to facts:
Barnes, who originally purchased from the Messerlys, sold an acre to a third party, and sold the remaining 600 square feet to the Messerlys. The Messerlys then sold the remaining 600 square feet to the Pickles. Because of the sewage situation, the Pickles did not pay for the land contract. As such, the Messerlys sue for foreclosure, sale of the property, and a deficiency judgment (because the property is worth almost nothing).
Here, there was no fraud or misrepresentation because neither party knew of the installment of the septic system. The other way to get out of the contract was through a mistake.
Restatement 2d Contracts § 151 – A mistake is a belief that is not in accord with the facts. This needs to be a current fact at the time of the contract, not a prediction. This does not apply to aesthetics. Here, there is a mistake.
Because there is a mistake, we need to determine what the effect is.
§ 152, 154 – “Rescission is indicated when the mistaken belief relates to a basic assumption of the parties upon which the contract is made.” However, this is not available if they assumed the risk in connection with the mistake. Here, Equity suggests that the risk should be allocated with the purchasers. This is because the Pickles agreed to take the property “as is.”
The Pickles should have protected themselves by conducting an actual inspection of the property or by not signing a contract that says they are taking the property “as is.”
151 – Definition of mistake
154 – When a party bears the risk of the mistake
152 – Bilateral mistake: When the contract has a basic assumption to a material effect then it is voidable unless there is a party who bears the risk of mistake.
153 – Unilateral mistake: Same elements as a bilateral mistake but also enforcement would be unconscionable or, “the other party had reason to know of the mistake or his fault cause the mistake.”
BMW Financial Services NA, LLC v. Deloach
2017 WL 1832250 (Cal. Ct. App. 2017).
Who bears the risk and would it be unconscionable to rescind the settlement agreement?
A contract could be rescinded if:
- The party made a mistake about a basic assumption leading to the development of the contract.
- The mistake has an effect on the performances of parties which negatively affects the mistaken party.
- Third, the mistaken party does not bear the risk of the mistake. The party bears the risk if:
- Contract says the party bears the risk
- Is aware that the party does not know the facts, but assumes that the knowledge is sufficient.
- The court appoints the risk to the mistaken party.
- Finally, enforcing the contract due to the mistake, would be unconscionable.
The court appointed the risk to the mistaken party and it would not be unconscionable to enforce the contract. Affirmed.
Once upon a time, Deloach received a leased vehicle from BMW. Deloach failed to make payments on the lease, tampered with the odometer, and did not respond to the lawsuit. At which time a default judgment was issued against Deloach.
Before the default judgment took place, the car was sold at action. Additionally, the balance of the remaining cost was sent to a collection agency by mistake (if the case is in litigation, it is not supposed to go to the collection agency. Here, it was in litigation but was not flagged and was therefore sent to the agency). At this point, Deloach’s father became involved and asked for a settlement agreement which would release Deloach from any court action taken by BMW.
The collection agency reached a settlement agreement of 14,000 dollars a few days after the court issued a default judgment against Deloach for 114,677 dollars. The counsel for BMW wished to rescind the settlement, return the 14,000 and execute the default judgment because of the mistake. Deloach countered with a motion to compel BMW to be satisfied with the judgment in the settlement.
The issue here was a mistake. The balance should not have been sent to the collection agency. Therefore, the first two elements of the mistake test are met. However, the court determined that BMW bears the risk of the mistake. Although they did not neglect a legal duty, it was their responsibility to check the records and ensure that no mistake took place. Additionally, the mistake was made by BMW and not by a third party. Finally, BMW did not immediately determine to rescind the settlement once they discovered a mistake had been made.
Finally, it would not be unconscionable to enforce the mistake. California courts prefer settlement agreements instead of going through the expenses of litigation. Additionally, the settlement was well within the means of a normal settlement.
Here, there was no mistake of fact, unilateral or bilateral. What happened here was that BMW had messed up on their own procedures.
Going through each element:
- Basic assumption – Not of fact.
- Material and adverse – Yes
- Bearing the risk – Yes
- This was caused by BMW.
- Unconscionable to enforce? – Would not be unconscionable.
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.