Garb-Ko, Inc v. Lansing-Lewis Services, Inc , 167 Mich. App. 779 ( 1988 )

167 Mich. App. 779 (1988) 423 N.W.2d 355

GARB-KO, INC.
v.
LANSING-LEWIS SERVICES, INC.

Docket No. 91808.

Michigan Court of Appeals.

Decided April 18, 1988.

Honigman, Miller, Schwartz & Cohn (by Gary A. Trepod and Frederick M. Baker, Jr.), for plaintiff.

Dykema, Gossett, Spencer, Goodnow & Trigg (by John B. Curcio, James G. Fausone and Mark G. Hess), for defendants.

Before: DANHOF, C.J., and G.R. McDONALD and E.M. THOMAS,^[*] JJ.

E.M. THOMAS, J.

Plaintiff appeals as of right from the trial court's order denying specific performance of a sales contract against defendants and the trial court's order denying plaintiff's motion for a new trial or to alter or amend the judgment. We affirm.

This case presents an anomalous situation in which the seller seeks to rescind a contract for the sale of land based on a defect in the property discovered after the sales agreement was entered into. Garb-Ko and Action Auto, the parent company of Lansing-Lewis Services, Inc., entered into a buy-sell agreement on or about February 11, 1985, by which plaintiff was to purchase a gas station and automotive parts store in East Lansing from defendants for $320,000. The buy-sell agreement contained an "as is" clause. The site was to be used for a 7-Eleven store. The property has seven underground storage tanks which hold four thousand to six thousand gallons of gasoline each.

Garb-Ko did not inquire into the environmental condition of the property or the integrity of the gasoline tanks prior to making the offer to purchase. Action Auto subsequently learned that the gasoline storage tanks on the property might be leaking and contaminating the ground and groundwater. Neither party was aware of any contamination on the property at the time the buy-sell agreement was executed. Garb-Ko was informed of the contamination on the property in a letter dated April 5, 1985, and given the option of terminating the agreement or providing Action Auto with full indemnification for all costs and penalties arising out of any gasoline storage leakage and proceeding with the sale. Garb-Ko did not agree to indemnify the sellers for the costs and expenses arising out of the contamination and did not accept the seller's offer to terminate the agreement. Instead, Garb-Ko requested additional information before making a decision.

Negotiations between the parties were unsuccessful and in July, 1985, Garb-Ko filed suit and obtained a temporary restraining order enjoining the sellers from selling or encumbering the land. At a show cause hearing on August 7, 1985, the court refused to issue a temporary injunction and dissolved the TRO. On September 13, 1985, Garb-Ko amended its complaint to seek specific performance of the buy-sell agreement.

In the meantime, Action Auto set out to determine the extent of the contamination problem and hired Horner Creative Metals to test the tanks. Horner confirmed leakage so severe that it was unable to measure the magnitude of the leakage. Action Auto also hired a hydrogeologic consulting firm, EDI Engineering and Science, to study the site's contamination and to recommend a cleanup solution. EDI confirmed the presence of gasoline constituents in the soil. However, the full extent of the contamination could not be ascertained without further costly testing.

A bench trial was held on December 23, 1985, to determine whether specific performance of the buy-sell agreement should be ordered. The court found that a mutual mistake affecting a basic, material assumption of the contract had occurred and that it would be unreasonable and unjust to enforce the terms of the buy-sell agreement. In an order dated January 24, 1986, the court denied plaintiff's request for specific performance and dismissed plaintiff's complaint. On March 31, 1986, the court denied plaintiff's request for a new trial or to alter or amend judgment.

A contract may be rescinded because of a mutual mistake of the parties; however, this equitable remedy is granted only in the sound discretion of the trial court. Lenawee Co Bd of Health v Messerly, 417 Mich. 17, 26; 331 NW2d 203 (1982). The determination whether plaintiffs are entitled to rescission involves a bifurcated inquiry: (1) was there a mistaken belief entertained by one or both of the parties to a contract? and (2) if so, what is the legal significance of the mistaken belief? Messerly, supra at 24; Dingeman v Reffitt, 152 Mich. App. 350, 355; 393 NW2d 632 (1986).

In its opinion and order, the trial court found that the parties had clearly entered into the agreement under a serious mistake of fact since, at the time the agreement was signed, neither party was aware of the gasoline leakage. We agree.

A contractual mistake "is a belief not in accord with the facts." Messerly, supra at 24, citing 1 Restatement Contracts, 2d, § 151, p 383. This mistake must relate to a fact in existence at the time the contract is executed. Messerly, supra at 24. The testimony at trial clearly revealed that there had been a large gasoline leak on the property that could result in contamination of both soil and groundwater. The testimony also indicated that none of the contracting parties were aware of that fact at the time they executed the buy-sell agreement. We defer to the trial court's finding that both parties were under a mutual mistake of fact as to the environmental condition of the property at the time they entered into the buy-sell agreement.

We also agree with the trial court's ruling that rescission should be granted in the instant case. In Messerly, supra, our Supreme Court stated that legal or equitable remedies are not mandated in every case in which a mutual mistake has been established; rather, a case-by-case analysis should be done and rescission should be granted only when the mutual mistake is a legally significant mistake. Messerly, supra at 24. 1 Restatement Contracts, 2d, § 152(1), p 385, delineates the legal significance of the mistake:

[W]here a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of mistake under the rule stated in § 154.

The Messerly Court adopted this Restatement approach and stated that rescission should only be granted "when the mistake relates to a basic assumption of the parties upon which the contract is made, and which materially affects the agreed performances of the parties." Messerly, supra at 29-30.

Here, the mutual mistake relates to a basic assumption of the parties upon which the contract was made. Additionally, this mistake materially affects the agreed performance of the parties. In any commercial real estate sale, the parties assume and desire that the sale will result in a complete transfer of rights, obligations, and responsibilities. The purchaser does not want the seller involved in, or disrupting, the new business in any way. Likewise, the seller desires to sever all ties with the property and any obligations. Under the common law, a sale of property resulted in such a transfer of rights and obligations. However, environmental-protection statutes have altered the common law and made previous owners of sites liable for environmental contamination. See MCL 299.601 et seq.; MSA 13.32(1) et seq.; 42 USC 9601 et seq. Under these laws, a previous owner may be required to conduct a site investigation and cleanup and would have a continuing liability after contaminated property is sold. It is this continuing responsibility for the land in question which requires us to affirm the trial court's ruling rescinding the buy-sell agreement and denying plaintiff's request for specific performance of the agreement.

We are not persuaded by plaintiff that the "as is" clause contained in the buy-sell agreement controls and bars rescission of the contract. Paragraph 11 of the buy-sell agreement states:

PURCHASER HAS PERSONALLY EXAMINED THIS PROPERTY AND AGREES TO ACCEPT SAME IN ITS PRESENT CONDITION EXCEPT AS MAY BE SPECIFIED HEREIN AND AGREES THAT THERE ARE NO OTHER ADDITIONAL WRITTEN OR ORAL UNDERSTANDINGS.

Under this clause, the risk was clearly allocated to the purchaser. 1 Restatement Contracts, 2d, § 152, p 385 states that when a legally significant mutual mistake has occurred, the contract is voidable by the adversely affected party, unless he bears the risk of the mistake. However, the purchaser is not the adversely affected party; thus, the "as is" clause holds no significance. Here, due to the state and federal environmental-protection statutes which impose continuing liability after the sale of the land on defendant sellers for contamination that occurred while defendants owned the property, it is clear that they are the adversely affected party. The "as is" clause of the buy-sell agreement would not operate to relieve defendant sellers of their liability under these statutes. Had plaintiff agreed to indemnify Action Auto for all costs and penalties arising out of any gasoline storage leakage, rescission possibly would not have been granted. However, since plaintiff did not do so, defendant sellers remain the adversely affected party having incurred the "burden" imposed by law of cleaning up the contamination. The contract is voidable under § 152(1) of the Restatement.

In this case, equity requires that we affirm the trial court's ruling. Defendants have a continuing obligation and responsibility for the contaminated property. One expert estimated that the cost of cleanup could be anywhere from $100,000 to $1,000,000. In order to contain further cleanup costs and third-party claims arising from use of the contaminated land, defendants need control over the use of the property. Sale to plaintiff would not give them such control.

Indeed, this case is unique since rarely does a purchaser of property, after discovering that the property is contaminated, request that the sale continue and ask the court to order specific performance of the contract. However, due to the continuing nature of the obligation and responsibilities defendants have over the environmental contamination of the property, we conclude that the trial court did not err in ordering rescission of the contract and denying plaintiff's request for specific performance.

Affirmed.

NOTES

[*] Recorder's Court judge, sitting on the Court of Appeals by assignment.