Business Transaction Newsletter – November 2016

CONTRACTS CAN BE RESCINDED FOR MUTUAL MISTAKE OF FACT

It is well settled in Tennessee that courts have the power to alter the terms of a written contract where, at the time it was executed, both parties were operating under a mutual mistake of fact or law regarding a basic assumption underlying the bargain.  Such was the issue in the case of Gibbs v. Gilleland where the court ultimately found that the contract would not be rescinded because there was not a mutual mistake of fact.

The facts in the Gibbs case were that the Gibbs bought a lot in Rutherford County, Tennessee for purposes of building a house for their residence.  The sellers advised the Gibbs that there had been past drainage or flooding problems on the property.  However, the Gibbs’ general contractor checked FEMA Flood Maps and determined that there would be no problems with construction of a house.  The Gibbs inspected the property prior to closing and did not exercise any of their rights under the contractual contingencies.  Closing occurred in 2012.  Over the next ten (10) months, the contractor developed building plans and site plans for the property.  One week after construction began, the contractor was informed by the Rutherford County Building and Codes Department that the property was considered to be in an area of localized high water and aerial flooding and the County had established a base flood elevation (“BFE”), and the property was below the BFE.  The Gibbs hired a professional engineer who determined that the property generally laid at a lower elevation than the surrounding lots and would often receive surface and subsurface rainwater runoff from the adjacent lots.

As a result of this information, the Gibbs commenced action against the sellers seeking a rescission of the contract on the grounds of mutual mistake of fact.  The Trial Court ruled against the Gibbs finding that at the time of the contract, the lot was, as far as could be discovered, suitable for construction of a residence and that the lot only became unsuitable by the subsequent action of the Rutherford County Building and Codes Department.  Therefore, the court found no mutual mistake of fact.  The Court of Appeals affirmed.

The Court of Appeals explained in detail what is required to have a contract rescinded for mutual mistake of fact:    (1) The mistake must relate to a past or present fact, not an opinion as to future result of an unknown fact.  (2) The fact must be something that can be contemporaneously verified (i.e. independently and objectively established at the time of contract).  (3) A mistake exists in a legal sense when a person acting on an erroneous conviction of law or fact executes an instrument that he or she would not have executed but for the erroneous conviction.  (4) For the court to grant relief, the mistake must have been:  (a) mutual or fraudulent; (b) material to the transaction; (c) not due to the complainant’s negligence; and (d) the complainant must show injury.  Therefore, in the Gibbs case, both the Trial Court and the Court of Appeals concluded that the mistake did not relate to a fact that could be contemporaneously verified at the time of the contract.

MY RECOMMENDATION:   First of all, when buying property, be sure that you do all appropriate due diligence as to the suitability and condition of the property for the intended use.  Although unsuccessful in the Gibbs case, an aggrieved party should remember that rescission for mutual mistake of fact is a recognized legal principle in Tennessee and frequently can be a strong remedy when there has been a true mutual mistake of fact or law by the parties.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

William C. Bell, Jr., Attorney at Law