Larson put his home on the market for sale. His good friend Bill came to look at the home for possible purchase or rental. Bill noticed a crack in the ceiling and inquired about it to Larson. Larson said that there had been a water leakage problem in

Question

the area but it had been fixed two years ago and had not leaked since. Bill made a written offer on the house which was accepted in writing by Larson the next day. On the day prior to closing, Bill went to make a final inspection. Bill observed water leaking through another crack in a ceiling of the house and in the garage. The next day, Bill informed the real estate agent that he was rescinding the contract because of the leaks. Larson subsequently rented the property to another party. A couple of months later, Larson filed a suit seeking a court order to make Bill purchase the house or in the alternative for money damages. Bill defended by claiming that Larson either defrauded him or there was a mutual mistake and asked for the return of his earnest money and/or damages for fraud. The trial court found there was no evidence to find fraud on the part of Larson because the roof had been previously fixed and the two parties had been good friends. What is the appropriate remedy when a court concludes that there has been a mutual mistake of material fact?

Answer 1

When there is a unilateral mistake, generally the court will not allow the injured party to rescind the contract unless enforcing the contract would be unconscionable or the non-mistaken party knew of the error. Here the court found that the mistake was a mutual mistake because both parties were under the assumption that the roof did not leak. Larson was mistaken because he had previously repaired the roof and expected those repairs to last. Bill was mistaken due to the representations made by Larson. Bill relied on the representations of a friend. When he saw the crack, he did investigate by asking Larson about the condition of the crack. It was reasonable to rely on the representations of Larson under the circumstance. Where there is a mutual mistake of material fact the contract is voidable by the injured party. The court ordered Larson to return the earnest money paid plus interest, thereby rescinding the contract.