417 Mich. 17
The Court of Appeals (Michigan) entered judgment in favor of plaintiff buyers in their action initiated against defendant sellers that sought to rescind the parties’ land sale contract.
A landowner constructed an apartment building on his property and installed a septic system without a permit and in violation of the health code. The landowner conveyed title to the property to the sellers. Pursuant to a land sale contract, the buyers purchased the property from the sellers. The county health board then obtained a permanent injunction prohibiting human habitation of the property due to the defective sewage system. The buyers initiated an action against the sellers to rescind the land sale contract on the basis of mutual mistake and failure of consideration. The appellate court entered judgment in favor of the buyers.
On appeal, the court found that the buyers were not entitled to rescission. Both the buyers and the sellers believed that the property was suitable for human habitation when they entered into the land sale contract. Both parties were blameless because neither the sellers nor the buyers knew of the defective septic system.
The court was faced with two equally innocent parties and concluded that the risk should be allocated to the buyers. The parties’ land sale contract also contained an “as is” provision allocating the risk to the buyers.
-A court need not grant rescission in every case in which there is a mutual mistake that relates to a basic assumption of the parties upon which the K was made and which materially affects the agreed performances of the parties.
- A contractual mistake is a belief that is not in accord with the facts. The erroneous belief of one or both of the parties must relate to a fact in existence at the time the contract is executed. That is to say, the belief which is found to be in error may not be, in substance, a prediction as to a future occurrence or non-occurrence.
- A contract may be rescinded because of a mutual misapprehension of the parties, but this remedy is granted only in the sound discretion of the court.
- 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 performances of the parties. Rescission is not available, however, to relieve a party who has assumed the risk of loss in connection with the mistake.
- 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 unless he bears the risk of the mistake. In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.
- A party bears the risk of a mistake when: (a) the risk is allocated to him by agreement of the parties; or (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient; or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
- Rescission is an equitable remedy which is granted only in the sound discretion of the court. A court need not grant rescission in every case in which the mutual mistake relates to a basic assumption and materially affects the agreed performance of the parties.
- For determining when a party bears the risk of mistake, the court should look first to whether the parties have agreed to the allocation of the risk between themselves.
- An “as is” clause waives those implied warranties which accompany the sale of a new home or the sale of goods. Since implied warranties protect against latent defects, an “as is” clause will impose upon the purchaser the assumption of the risk of latent defects, even when there are no implied warranties.
- An “as is” clause does not preclude a purchaser from alleging fraud or misrepresentation as a basis for rescission.
The court reversed the decision because the buyers were not entitled to rescind the parties’ land sale contract.