The Pickles bought a tract of land containing an apartment building from the Messerlys with the intention of using the land for rental income.
Before the Messerlys owned the property, the previous owner installed a septic tank without a permit and in violation of the health code. Neither the Messerlys or the Pickles knew anything about this.
The contract contained an "as is" clause.
After the sale, the Pickles noticed raw sewage on the ground. The health board condemned the land.
The Pickles sought rescission of the contract under mutual mistake and misrepresentation. The Messerlys sued for foreclosure.
Procedural History:
Lower court found Pickles had no cause of action, foreclosure ordered against the Pickles.
Court of Appeals reversed, found the Pickles did have a cause of action.
MI Supreme Court reversed, found the Pickles had no cause of action, foreclosure ordered against the Pickles.
Issues:
How should a court decide cases of mistake between two equally innocent parties?
Holding/Rule:
In cases of mistake by two equally innocent parties, the court should determine which blameless party should assume the loss resulting from the misapprehension they shared.
Reasoning:
The parties in this case were laboring under a mutual mistake of fact which materially affected the essence of the contractual consideration.
The best approach to decide cases of mutual mistake is by the courts doing 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.
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.
Rescission is not available, however, to relieve a party who has assumed the risk of loss in connection with the mistake.
The court should look to whether the parties have agreed to the allocation of the risk between themselves. Through the "as is" clause, the risk was allocated to the buyers.
