In the last class, we talked about Sherwood v. Walker and we're introduced to the concept of mutual mistake. We learned the principle that mutual mistake as to a basic assumption renders a contract unenforceable. We're going back now to look at another case, Lenawee County Board of Health versus Messerly. Another case involving mutual mistake decided by the Supreme Court of Michigan which the very same Supreme Court, which had the temerity to modernize the standard articulated in Sherwood. The case involved a 600-square foot tract of land, on which three-unit apartment building also sat. If you think about it, 600-square feet is an incredibly small area on which to stack three apartments. The case involves a number of sometimes confusing conveyances concerning this land. A man named Bloom once owned the land and installed a septic tank on the property without a permit and in violation of the Lenawee County Health Code. Bloom subsequently sold the land and the apartment to the Messerlys. The Messerlys used the building on the land as an income investment property but eventually, they too sold the land and building. This time, the buyer was one James Barnes, who also used it primarily for income investment. Barnes sold an acre of the property and later offered the rest for sale when they defaulted on their contract. A husband and wife, Mr. and Mrs. Pickles showed interest but were not happy with the terms of the contract between Barnes and Messerly. In order to allow the Pickles instead to contract directly with the Messerlys, the Barneses executed a quitclaim conveying all and any of their interests that they had in the property back to the Messerlys. Ultimately, the Messerlys and the Pickleses entered a $25,000 agreement for the land. A provision of that contract included a term that which said, "Purchaser has examined this property and agrees to accept the same in its present condition. There are no other additional written or oral understandings." A few days later, the new owners discovered raw sewage seeping out of the ground. The Pickles found themselves in a real pickle. The Lenawee County Board of Health then discovered this inadequate sewer system and condemned the property and sought a permanent injunction against human habitation of the property until it came into conformance with the county's sanitation code. This injunction was granted and Lenawee County withdrew from the lawsuit. The Pickleses ceased pain on their land contract and the Misserlys filed a cross complaint seeking for closure sale of the property and a deficiency judgment. The Pickleses counterclaimed for rescission and filed a third-party complaint against the Barneses. The alleged failure of consideration and willful concealment and misrepresentation were the basis of this suit. The trial court ruled that there is no cause of action because there was no misrepresentation. Neither of the previous owners had known about the septic tank and the property was purchased as is. But the appellate court reversed the ruling as to the claims against the Messerlys determining that there was mutual mistake that went to a basic element of the contract. This mistake concerned "The income producing capacity of the property in question and the property was uninhabitable. And therefore, unsuitable for residential use." The instant court agreed that a mutual mistake existed but it declined to reason within the framework of the precedents offered by the parties. The Messerlys had argued that a case A&M Land Development versus Miller a 1959 Michigan Supreme Court case, dictated that mistakes that went to the value or quality of real estate sold were collateral to an agreement and did not justify rescission. The Pickleses by contrast argued following Sherwoods v. Walker that a different result was dictated. Rescission was dictated and appropriate when the parties are mistaken as to the essence of the consideration. So, what kind of mistake is the one in question in this case. In this case, the mistake was about the quality and value of the land but the court found it was also simultaneously and materially affected the essence of the contractual consideration. According to the court then, "The inexact and confusing distinction between contractual mistakes running to value and those touching the substance of considerations serves only as an impediment to a clear and helpful analysis for the equitable resolution of cases in which mistake is alleged and proven. Accordingly, the holdings of A&M Land Development and Sherwood with respect to material or collateral nature of a mistake are limited to the facts of those cases." This is a polite way for the Michigan Supreme Court to overrule Sherwood and A&M Land or at least overrule it with regard to future disputes. Instead, the court looked to two provisions of the restatement of contracts which we already looked at in the last class. Section 152 of the restatement advises that, "Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party." First, note that just because an agreement was voidable did not mean it was automatically void. The court emphasized, rescission is an equitable remedy which is granted only in the sound discretion of a court. So a court need not grant rescission in every case that a mutual mistake fell within the language of Section 152. Here, the court emphasized that both parties were innocent. But more importantly for our purposes, Section 152 contained an additional clause unless the adversely affected party bears the risk of the mistake under the rules stated in section 154. And section 154 provides that, "A party bears the risk of mistake when, among other things, the risk is allocated to him by agreement of the parties" Had the sale agreement allocated risk to one party? The court determined it had. It pointed to the as-is clause of the contract. Purchaser has examined the property and agrees to accept same in its present condition. There are no other or additional written or oral understandings. This clause indicated the parties had allocated risk regarding the present condition of the land to the purchasers. Because of this, rescission based on mistake was not available to the purchasers. The Pickleses were stuck with a judgment for the amount owed on their promise to buy the contract to buy the land. Before we finish our discussion of mistake. Let me say a few words about unilateral mistake. Does contract law ever set aside contracts if only one of the parties is mistaken? The answer is yes. Section 153 of the restatement makes that contract voidable under the same conditions required for voidability because of mutual mistake. That is, a mistake as to a basic assumption that materially affects the agreed upon exchange without that risk being allocated to the mistaken party. Those are the same kinds of conditions that we have for mutual mistake. But to qualify for voidability in a unilateral mistake case, a plaintiff must also show one of two additional things. Either that enforcement would be unconscionable or that the other side had reason to know about the plaintiff's mistake. There are a few important takeaways from the Lenawee County case. For starters, we see the court expressly limit the holding of Sherwood v. Walker to the facts of that case. Instead of following Sherwood, the court adopted the restatements standard for mutual mistake based on basic assumptions. Next, the court emphasizes discretion in granting contractual rescission. Rescission is an equitable remedy and courts need not granted if justice doesn't demand it. That's important to keep in mind when reading some of these cases. The fact that one fact pattern resulted in contractual rescission, doesn't necessarily mean a similar fact pattern also will or should. At least not if we take seriously the requirement that the court weigh what would best avoid injustice in a given case. Finally, we see the importance of the way parties allocate risk in an agreement. If the as-is clause were absent, it seems likely that equity would have favored the Pickleses.
