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Tuesday, April 5, 2011

Contracts! Mistake

Lenawee County Board of Health v. Messerly:
Supreme Court of Michigan
417 Mich. 17 (1982)
Issue: Whether appellees should prevail in their attempt to avoid this land contract on the basis of mutual mistake and failure of consideration
Rule: Mistake, rescission
-Contractual Mistake: A belief that is not in accord with the facts (restatement)
-The erroneous belief of one or both of the parties must relate to a fact in existence at the time the contract is executed.
Application: The court of appeals correctly concluded that the parties were mistaken as to the income-producing capacity of the property in question.
-This court agrees
-Appellants assert that there was no mistake in the contractual sense because the defect in the sewage system did not arise until after the contract was executed.
-Appellees respond that the appellants are confusing the date of the inception of the defect with the date upon which the defect was discovered.
-The septic system was defective prior to the date on which the land contract was executed.
-A contract may be rescinded because of a mutual misapprehension of the parties, but this remedy is granted only in the sound discretion of the court.
-Appellants argue that the parties' mistake relates only to the quality or value of the real estate transferred, and that such mistakes are collateral to the agreement and do not justify rescission.
-Appellees contend that in this case, the parties were mistaken as to the very nature of the character of the consideration and claim that the pervasive and essential quality of this mistake renders rescission appropriate.
-Relief is afforded to cases which a mistake affects the essence of the consideration, but not to those cases where mistake affects the quality or value of the consideration
-Both parties mistakenly believed that the property could be used to generate income as rental property. Because it could not be used to human habitation deprived the property of its income-earning potential, thus making it less valuable.
-This mistake cannot accurately be characterized as collateral because it also affects the very essence of the consideration.
-The distinctions between mistakes affecting the value and the essence of the consideration only hinder analysis
-Therefore, A&M and Sherwood are limited to the facts of those cases
-New Rule: Case-by-case analysis, whereby rescission is indicated when the mistaken belief relates to a basic assumption of the parties upon which the contract is made, and which materially affects the agreed performance of the parties.
-Despite the significance of the mistake made by the parties, Court of Appeals is reversed, because equity does not justify the remedy sought by appellees
-The fundamental nature of the contract was mistaken. Thus, the parties mistake as to a basic assumption materially affects the agreed performance of the parties.
-Where there is a mutual mistake of two equally innocent parties, court has to determine which blameless party should assume the loss resulting from the misapprehension they shared.
-"as is" clause suggests that the appellees should bear the risk
Conclusion: There was a mutual misapprehension of fact, but the circumstances do not warrant rescission

-Appellees: Carl and Nancy Pickles
-Appellants: William and Martha Messerly

-1971: Appellants acquired the land (one acre + 600 square feet).
-Appellants predecessor in title had installed a septic tank on the property without a permit and in violation of the applicable health code
-Was used as an income investment property
-1973: Appellants sold property to James Barnes, who also used it as an income-producing investment
-1976: Mr. & Mrs. Barnes sell the 1 acre, default on the land contract, 600 square foot property was then offered for sale
-Pickles' expressed interest in the property, but were dissatisfied with the Barnes-Messerly contract.
-Thus, Mr & Mrs. Barnes executed a quit claim deed which conveyed the interest in the property back to the Messerlys
-Mar 1977: Appellees purchased a 600-square-foot tract of land (with 3-unit apartment building) from appellants.
-Shortly thereafter, the Lenawee County Board of health condemned the property and obtained a permanent injunction which prohibits human habitation on the premises until the defective sewage system is brought into conformance with Lenawee County sanitation code
-Property was sold for $25,500, clause in the contract stated that the purchaser has examined the property and is willing to accept it in its present condition
-5-6 days later, upon inspection of the property, the Pickles' discovered raw sewage seeping out of the ground
-Lenawee County  Board of Health subsequently condemned the property and initiated this lawsuit against the Messerlys and land contract vendors, and the Pickles' as vendees
-Injunction was granted, and Lenawee was permitted to withdraw from lawsuit as stipulated
-No payments were made on land contract, and appellants filed a cross-complaint against the Pickles' seeking foreclosure, sale of the property, and a deficiency judgment
-Appellees counterclaimed for rescission against appellants and filed a third party complaint against the Barnes'
-Count 1:
-Appelles alleged failure of consideration
Count 2:
-Charged Barnes' with willful concealment and misrepresentation as a result of their failure to disclose the condition of the sanitation system

Trial: (Bench)
-Held: Appellees had no cause of action against either party
-Predicated upon the conclusion that none of the parties knew of Mr. Bloom's earlier transgression, or of the resultant problem with the septic system until it was discovered by the pickles'
-Found that the property was purchased "as is"

-Affirmed the ruling with respect to the Barnes, but reversed the finding against appellants


  1. Really interesting cases, thanks for this

  2. That's a pretty interesting case. It serves as an example that we should check all contracts and look for anything that is hidden. Great info!

  3. I love these cases, keep em coming

  4. this is really interesting, i sucked up all the text! :)

  5. Money and contracts are so complex! Thanks for this :)