year one contracts brief # 8

Lenawee County Board of Health v. Messerly – (Mistake/Recession)

Lenawee County Board of Health v. Messerly, 416 Mich. 17, 331 N.W.2d 203 (1982)

BY: James F. Polk – AISOL YEAR ONE STUDENT

Facts/Court/History: 

  • William and Mary Messerly bought an Apartment and Surrounding Land as an Income Producing Investment.
  • The Messerly Couple did not know that the prior owner had installed an unpermitted septic system which violated the health code.
  • 5 years later the Messerly Couple sold it to the Pickleses Couple who also purchased it as an Income Producing Investment.
  • The Land Contract expressly stated that the Buyers Purchased the Property “As Is”, and that they inspected the property and accepted it in it’s condition.
  • Within a week the Buyers found Raw Sewage seeping out of the ground.
  • There was not any viable economic solution to remedy the physical issue with the property.
  • The Lenawee County Board of Health condemned the property.
  • The Board sued the Buyers & Sellers in which they sought an injunction which would prohibit human occupancy until the property was brought up to code.
  • The Court granted the Injunction.
  • The Board withdrew from the Litigation.
  • The Buyers made no payments on the Land Contract.
  • The Sellers cross-claimed against the buyer’s seeking Foreclosure and a Monetary Judgment.
  • The Buyers countersued the sellers seeking rescission of the land contract.
  • The Trial Court discovered that neither the Buyers nor the Sellers had known of the hidden defect in the property and it had not been discovered until after the close of escrow.
  • Furthermore, the Buyers had purchased “AS IS” and after signing off on an inspection, thus the Buyers had assumed the risk of hidden problems.
  • The Trial Court found for the Sellers.
  • The Michigan Court of Appeals Reversed.
  • The Michigan Court of Appeals found that a “Mutual Mistake” had occurred and that therefore Rescission of the Land Contract was a Proper Remedy.
  • The Seller Appealed to the Michigan Supreme Court.
  • The Michigan Supreme Court granted the Seller’s Appeal.

Issue:  How does a Mutual Mistake concurrent with a Contractual Allocation of Losses affect an Agreement?  Is Rescission a proper remedy?

Conclusion: Justice Ryan Opined for the Majority: Rescission is not appropriate in the event of a Mutual Mistake if the Contract Allocates the Risk of Loss in such an event.  He noted that the Courts grant the Equitable Remedy of Rescission on a case by case basis.  Court concluded that the Buyer’s were not entitled to the Equitable Remedy of Rescission and REVERSED THE JUDGMENT OF THE COURT OF APPEALS.

Rule:

  • A Mutual Mistake exists when there is a Mistaken Belief which relates to the Basic Assumption Underlying the Contract.
  • A Hidden Condition unknown to both parties is covered under an “AS IS” Clause coupled with an Inspection.
  • The Buyer Assumes the Risk of Almost Anything that Goes Wrong AFTER THE SALE.

Rule Proof:

  • Courts grant rescission on a case by case basis.
  • “Caveat Emptor”, “Buyer Beware”.

Application to these Facts:

  • Both Parties believed that the property was in acceptable, up to code condition and good to use for human habitation and valuable with respect to it’s suitability for producing rental income.
  • The assumption as to the proper condition of the property was a faulty assumption and therefore a mutual mistake of a material fact occurred.
  • Hidden risks related to the property assumed by the buyers because of the “AS IS” Clause and the Inspection Contingency.

Counterargument: Appellees contend, on the other hand, 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. They cite in support of that view Sherwood v Walker, 66 Mich 568; 33 NW 919 (1887), the famous “barren cow” case. In that case, the parties agreed to the sale and purchase of a cow which was thought to be barren, but which was, in reality, with calf.

Conclusion: The mistake affected the substance of the whole consideration, and it must be considered that there was no contract to sell or sale of the cow as she actually was. The thing sold and bought had in fact no existence. She was sold as a beef creature would be sold; she is in fact a breeding cow, and a valuable one.

Application and Influence of Counterargument/Conclusion in Law System: Differentiation between mutual mistake which relates to the value and quality of the basic assumption underlying the contract v. mutual mistake which relates to the actual categorical substance of the consideration.  Respectively in the first there is a contract and no basis for Rescission and in the second there is no contract and therefore basis for Rescission.