Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

تمرين 16

FACTS In May 1995, the plaintiffs, Vernon and Janene Lesher, agreed to purchase an eighteen-acre parcel of real property from defendant with the intention of using it to raise horses. In purchasing the property, the plaintiffs relied on their impression that at least four acres of the subject property had a right to irrigation from Slate Creek. The earnest money agreement to the contract provided:
D. Water Rights are being conveyed to Buyer at the close of escrow.… Seller will provide Buyer with a written explanation of the operation of the irrigation system, water right certificates, and inventory of irrigation equipment included in sale.
The earnest money agreement also provided:
THE SUBJECT PROPERTY IS BEING SOLD ''AS IS'' subject to the Buyer's approval of the tests and conditions as stated herein. Buyer declares that Buyer is not depending on any other statement of the Seller or licensees that is not incorporated by reference in this earnest money contract [Bold in original].
Before signing the earnest money agreement, the defendants presented to the plaintiffs a 1977 Water Resources Department water rights certificate and a map purporting to show an area of the subject property to be irrigated (''area to be irrigated'' map), which indicated that the property carried a four-acre water right. Both parties believed that the property carried the irrigation rights and that the plaintiffs needed such rights for their horse farm. The plaintiffs did not obtain the services of an attorney or a water rights examiner before purchasing the property.
After purchasing the property and before establishing a pasture, the plaintiffs learned that the property did not carry a four-acre water right. The plaintiffs sought rescission of the contract for sale, alleging mutual mistake of fact or innocent misrepresentation regarding the existence of water rights. The trial court ruled in favor of the plaintiffs and the defendant appeals.
DECISION Judgment of the trial court affirmed.
OPINION Wollheim, J. Grounds for rescission on the basis of a mutual mistake of fact or innocent misrepresentation must be proved by clear and convincing evidence. [Citations.] An innocent misrepresentation of fact renders a contract voidable by a party if the party's ''manifestation of assent is induced by *** a material misrepresentation by the other party upon which the recipient is justified in relying[.]'' [Citations.] A mutual mistake of fact renders a contract voidable by the adversely affected party, ''where the parties are mistaken as to the facts existing at the time of the contract, if the mistake is so fundamental that it frustrates the purpose of the contract,'' [citation], and where the adversely affected party does not bear the risk of the mistake. [citation]. A mistake ''is a state of mind which is not in accord with the facts.'' [Citation].
Even though it appears that the trial court did not apply the clear and convincing standard, ***, we find that plaintiffs' evidence meets that standard. Both defendant and plaintiffs testified that they believed that the four acres of water rights were appurtenant to the subject property. Defendant does not dispute that the 1977 water rights certificate and the ''area to be irrigated'' map are her representation about the water right.
***
Plaintiffs also established by clear and convincing evidence that the existence of the four-acre water right was material and essential to the contract. Vernon testified that the motivation for the purchase was to expand his ability to raise horses from property they already owned where they had a two-acre irrigation right and that the subject property's water right was essential to the contract. Certainly, a smaller water right would limit, not expand, plaintiffs' ability to raise horses. The mistake, therefore, goes to the very essence of the contract.
We next consider defendant's arguments that plaintiffs bore the risk of that mistake. The Restatement (Second) of Contracts § 154 explains that a party bears the risk of a mistake, in part, if the risk is allocated to the party by agreement of the parties, or if the risk is allocated to the party ''by the court on the ground that it is reasonable in the circumstances to do so.'' We find nothing in the contract that would allocate to plaintiffs the risk of a mistake as to the existence of a four-acre water right.
Defendant argues in the alternative that plaintiffs' mistake of fact is the result of defendant's misrepresentation, on which plaintiffs could not reasonably rely. An ''innocent misrepresentation may support a claim for rescission of a real estate agreement if the party who relied on the misrepresentations of another establishes a right to have done so.'' [Citations.]
Defendant argues that her representations about the four-acre water right were extrinsic to the contract and that the contract's ''as is'' clause expressly excluded reliance on such extrinsic representations. *** The ''as is'' clause specifically contemplated reliance on any statements by the seller that were ''incorporated by reference'' in the earnest money agreement. The earnest money agreement specifically referred to the conveyance of water rights.
INTERPRETATION If both parties to a contract have a common but erroneous belief as to a basic assumption on which the contract is made, the contract is voidable.
CRITICAL THINKING QUESTION Should all contracts provide for this type of situation? If so, how? Explain.