Richard W. Gibbs v. Clint Gilleland ( 2016 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
January 27, 2016 Session
RICHARD W. GIBBS ET AL. V. CLINT GILLELAND ET AL.
Appeal from the Circuit Court for Rutherford County
No. 66580 Ben H. Cantrell, Senior Judge
No. M2015-00911-COA-R3-CV – Filed February 29, 2016
Buyers of unimproved real property seek rescission of a Lot/Land Purchase and Sale
Agreement on the ground of mutual mistake. Buyers purchased the property for the
purpose of constructing a house. It is undisputed that at the time of contracting, Buyers
and Sellers believed the property was suitable for that purpose. One week after obtaining
the necessary building permits and commencement of construction, Buyers were
informed by the county that the property was substantially below the required Base Flood
Elevation (“BFE”) and that construction must cease immediately. Buyers halted
construction and hired a professional engineer to address the issue. Based on unique
drainage and flooding concerns, the engineer concluded that the property was not suitable
for construction of a residential building and it had not been suitable for such purpose
since the land was subdivided in 1999. After Buyers sued for rescission of the contract,
both parties filed motions for summary judgment. The trial court found that when the
contract was entered into the property was suitable for construction of a house and it only
became unsuitable due to the subsequent action of the county in setting the BFE.
Therefore, the court concluded there was no mutual mistake of fact. Based on this finding
the court granted Sellers‟s motion for summary judgment and summarily dismissed the
complaint. Buyers appeal. We conclude that, at the time of contracting, the parties were
operating under a mutual mistake as to a contemporaneously verifiable fact; nevertheless,
the contract assigned the risk of mistake to Buyers. Therefore, rescission on the ground of
mutual mistake is not available. Accordingly, we affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Affirmed
FRANK G. CLEMENT, JR., P.J., M.S., delivered the opinion of the Court, in which D.
MICHAEL SWINEY, C.J., and ANDY D. BENNETT, J., joined.
L. Gilbert Anglin, Murfreesboro, Tennessee, for the appellants, Richard W. Gibbs and
Kathryn S. Gibbs.
Radford H. Dimmick, Nashville, Tennessee, for the appellees, Clint Gilleland and Kim
Gilleland.
OPINION
In 2012, Richard and Kathryn Gibbs (“Buyers”) were looking for a lot in
Rutherford County, Tennessee, on which they wished to build a house for their residence.
With the assistance of their real estate agent, Diana Collier, Buyers looked at a parcel of
unimproved property that was available for sale. At Buyers‟ request, the agent for Clint
and Kim Gilleland (“Sellers”) provided Buyers with a Property Disclosure Statement,
outlining the conditions of the real property known to Sellers. On this statement, Sellers
marked “Yes” in response to the question, “Are you aware of any past or present drainage
or flooding problems [on the property]?” Because of this disclosure, Ms. Collier
contacted Sellers‟ real estate agent to inquire further as to the nature of the drainage and
flooding issues with the property. Sellers responded stating that they marked “Yes”
because they were aware the property had flooded during the massive storm of May
2010, which affected many properties in Middle Tennessee.
Buyers then hired Mike Parker, a general contractor and builder, to visit the
property and assess whether there was any flooding or drainage problems with the lot that
could impede Buyers‟ ability to build a house on the lot. Mr. Parker inspected the
property and reviewed the Federal Emergency Management Agency (“FEMA”) flood
panel and Flood Insurance Rate Map (“FIRM”)1, after which he determined that there
were no flooding or drainage problems that would hinder Buyers‟ ability to construct a
house on the lot.
Thereafter, Buyers executed a Lot/Land Purchase and Sale Agreement whereby
they agreed to purchase the lot for $96,000. Importantly for purposes of this appeal, the
contract contained two distinct rights of inspection of the property. One appears in
Section 6 and the other appears in Section 7 of the contract.
1
FEMA is the federal agency that implements the National Flood Insurance Program (“NFIP”), a
federal program that enables property owners in participating communities to purchase insurance
protection, administered by the government, against losses from flooding. See Jennifer Wriggins, Flood
Money: The Challenge of U.S. Flood Insurance Reform in a Warming World, 119 PENN ST. L. REV. 361,
373-76 (2014). In order to participate in the NFIP, communities are required to adopt and enforce
floodplain management ordinances to reduce future flood damage. Id. at 381. Through this program
FEMA has created maps, known as FIRMs, which delineate the boundaries within a community of flood
hazard areas. Sarah Fox, This is Adaption: The Elimination of Subsidies Under the National Flood
Insurance Program, 39 COLUM. J. ENVTL. L. 205, 215 (2014). The FIRMs are divided into insurance risk
zones according to the likelihood of a flood occurring within a particular region. Id. The record indicates
that, at the time of Mr. Parker‟s inspection, the lot was in flood zone “X” under the community‟s FIRM; a
designation reserved for low-risk flooding areas.
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Section 6 of the contract made the agreement contingent upon Buyer‟s inspection
of the property. Specifically, Section 6 provides:
6. Inspections and other requirements made a part of this Agreement.
[B]uyer . . . shall have the right and responsibility to enter the property
during normal business hours for the purpose of making inspections and/or
tests. . . . Buyer shall make such inspections as indicated in this paragraph
and either accept the property in its present condition by written notice to
Seller or terminate the Agreement as provided for each section marked
below.
[Select any or all of the following stipulations. Unselected items are not
a part of this Agreement.]
Immediately below this paragraph appeared seven “stipulations” that were
available for selection by “checking” the box immediately preceding the stipulation. As
noted in Section 6, any stipulations that were selected were made a part of the agreement.
Conversely, as the contract expressly stated, “[u]nselected items are not a part of this
Agreement.” Only two of the seven stipulations were selected; the other five remained
“unselected.” The two stipulations selected by Buyers, that being subsection B., entitled
“Building Permit,” and subsection C., entitled “Permit for Sanitary Septic Disposal
System,” gave Buyers the option to withdraw from the contract if: (1) they were unable to
acquire the necessary licenses and permits to make specific improvements on the
Property and notified Sellers of this fact within thirty days of the date of contracting; or
(2) they were unable to obtain a permit for sanitary septic disposal from the respective
governmental authority and notified Sellers of this within 30 days of the date of
contracting.2
The other five available stipulations were not selected; thus, they were not made
part of the agreement. One of the “stipulations” that was not selected reads as follows:
G. No Inspection Contingencies. Buyer accepts the Property in its
present condition. All parties acknowledge and agree that the Property is
being sold „AS IS‟ with any and all faults.
By not selecting this stipulation, the “AS IS” provision in Section 6 was not made a part
of the agreement. Therefore, Buyers did not accept the property in the condition as of the
date the contract was executed.
2
The contract provided that if Buyers failed to provide proper notice, these contingencies would
be deemed waived. Also, Buyers added several additional stipulations in Section 14 of the contract which
made the agreement contingent upon: (1) Sellers having the corners of the lot staked and the soil site
identified; (2) Buyers‟ ability to pull a septic permit for the property; and (3) Buyers‟ ability to have
current drainage through the middle of the lot re-directed to the perimeter.
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Conversely, Section 7 of the contract addressed Buyers‟ right to a final inspection
prior to closing to confirm that the property was in the same or better condition as it was
when the contract was executed and, significantly, whether closing constituted
acceptance of the property in its condition as of the time of closing. This section reads:
7. Final Inspection. Buyer and/or his inspectors/representatives shall have
the right to conduct a final inspection of the Property . . . prior to Closing
Date only to confirm Property is in the same or better condition as it was on
the Binding Agreement Date, normal wear and tear excepted, and to
determine that all repairs/replacements have been completed. Property shall
remain in such condition until the Closing Date at Seller‟s Expense.
Closing of this sale constitutes acceptance of Property in its condition as of
the time of Closing, unless otherwise noted in writing.
Buyers inspected the property prior to closing and did not exercise any of their
rights under any of the contractual contingencies. On April 20, 2012, the parties closed
on the sale and the lot was conveyed to Buyers by warranty deed.
Over the next ten months, Mr. Parker, the contractor retained by Buyers,
developed building and site plans for the property. In February 2013, Mr. Parker obtained
a Zoning Compliance Certificate from the Rutherford County Regional Planning
Commission and a building permit from the Rutherford County Building and Codes
Department and began construction of the Buyers‟ new home on the property.
One week after construction commenced, Mr. Parker was informed by the
Rutherford County Building and Codes Department that the property was considered in
an area of localized high water and aerial flooding and that the county had established a
Base Flood Elevation (“BFE”) for the property, and that Buyers‟ property was
substantially below the required BFE.3 Mr. Parker immediately stopped construction and
notified Buyers of this development.
Buyers then hired a professional engineer, Robert Warren, to assess the
ramifications of the county‟s BFE determination. Following an extensive study, Mr.
Warren concluded that the property generally lies at a lower elevation than the
3
A BFE is the computed elevation to which floodwater is anticipated to rise during a “base
flood” (a flood having a one percent chance of being equaled or exceeded in any given year) and is the
regulatory requirement for the elevation or flood proofing of structures. Beth Davidson, How Quickly We
Forget: The National Flood Insurance Program and Floodplain Development in Missouri, 19 WASH. U.
J.L. & POL‟Y 365, 372 n. 48 (2005). The BFE for the property in this case was set at 606.0 feet, which
required a minimum pad elevation of 607.0 feet and a finished floor elevation of 609.0 feet. The
property‟s current elevation is approximately 599.00 feet.
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surrounding lots and often receives surface and subsurface rainwater runoff from the
adjacent lots.4 Mr. Warren determined that the BFE set by Rutherford County was
consistent with industry standards given the property‟s drainage issues. He further
determined that the lot would need extensive modifications to comply with the BFE and
to prevent flooding; however, these modifications would be extremely costly and may
subject the Buyers to future liability due to the displacement of water onto neighboring
parcels.5 Given the unique challenges of this particular parcel, Mr. Warren determined
the lot had not been suitable for residential construction since the neighborhood was
subdivided in 1999 and it would not be suitable now, even if the county waived the BFE
requirement. As a result, Buyers abandoned the thought of constructing a house on the
lot.
On June 13, 2013, Buyers commenced this action against Sellers, seeking
rescission of the contract on the grounds of mutual mistake. 6 Buyers contended that at the
time of contracting both parties were of the belief that the property was suitable for
constructing a residence, but the building requirements imposed by the county essentially
rendered this use impossible. Alternatively, Buyers sought monetary damages from
Sellers based on the theories of intentional misrepresentation, negligent
misrepresentation, and breach of warranty.
Sellers filed an answer in which they denied that a mutual mistake of fact existed
and asserted the affirmative defense of comparative fault. Sellers alleged that Buyers
4
Because of the lower elevation, Mr. Warren stated that during a “two year” storm event – a
storm that produces around 2.5 inches of rain in twenty-four hours and has a fifty percent (50%)
probability of occurring in any given year – the property could be expected to flood to a depth of
approximately two feet. He further stated that during a storm like the one that occurred in May of 2010,
which has a .05% probability of occurring in any given year, the property could be expected to flood to a
depth of approximately eight feet.
5
Mr. Warren stated that the only possibility for remedying the property‟s flooding issues is to
raise the building pad and footing by approximately nine feet. However, the engineer expressed concern
with this option because for every cubic foot of fill needed to raise the property‟s elevation, there would
be an equal displacement of water onto neighboring properties, which increases the flood water elevations
on adjoining sites in violation of Rutherford County ordinance.
6
The Rutherford County Planning and Engineering Department, and the Rutherford County
Regional Planning commission were also named as defendants in the initial complaint; however, the
claims against these defendants were dismissed on a Rule 12 motion. The trial court held that the claims
against the governmental entities were barred under the Tennessee Governmental Tort Liability Act
(“GTLA”), Tenn. Code Ann. § 29-20-205, and directed entry of final judgment as to the county pursuant
to Tenn. R. Civ. P. 54.02. Buyers appealed this decision arguing that the county did not have immunity
under the GTLA because the county‟s failure to timely notify them of the BFE constituted the negligent
performance of an operational duty, not a discretionary duty. We affirmed the dismissal of the action
against the Rutherford county defendants on the ground of governmental immunity in a prior appeal. See
Gibbs v. Gilleland, No. M2014-00275-COA-R3-CV, 2014 WL 3954873 (Tenn. Ct. App. Aug. 13, 2014).
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were more than forty-nine percent (49%) at fault for their own injuries as they had the
opportunity to fully investigate any potential flood or drainage issues prior to contracting.
Sellers also alleged that Ms. Collier and Mr. Parker were at fault by failing to take proper
measures to investigate the potential drainage issues disclosed by Sellers. Thereafter,
Buyers amended their complaint adding Ms. Collier, Mr. Parker, and Laurel Brooks
Homes, Inc. (Mr. Parker‟s construction company) as defendants; however, these
defendants subsequently filed motions for summary judgment which were granted by the
trial court.7
Buyers and Sellers then each filed their own motions for summary judgment.
Sellers asserted that there was not a mutual mistake of fact entitling Buyers to rescind the
agreement because there was no mistake, and even if there was a mistake, Buyers
assumed the risk of mistake by entering into an “as is” contract. Sellers also asserted that,
under the facts, the claims of intentional misrepresentation, negligent misrepresentation,
and breach of warranty could not be sustained as a matter of law.
Conversely, Buyers argued in their motion that a mutual mistake of fact existed
because they had contracted with Sellers to purchase a lot for the purpose of building a
house, Sellers were aware that was why Buyers were purchasing the lot and thought the
lot could be used for that purpose, and the lot cannot be used for that intended purpose.
However, in their response to Sellers‟ motion, Buyers conceded that the evidence
adduced does not support a finding that Sellers intentionally or negligently
misrepresented the past or present drainage issues with the lot.
Following a hearing on these motions, the trial court granted Sellers‟ motion for
summary judgment and denied Buyers‟ motion. The trial court found that at the time of
the contract, the lot was, as far as could be discovered, suitable for residence and only
became unsuitable by the subsequent action of the Rutherford County Engineering and
Codes Department; therefore, the court held there was no mutual mistake of fact by the
parties that would entitle Buyers to a rescission of the contract. The court also dismissed
Sellers‟ additional claims for intentional misrepresentation, negligent misrepresentation,
and breach of warranty, given that counsel for Buyers had stipulated that Buyers could
not sustain a cause of action on these grounds.
7
With respect to Mr. Parker and Laurel Brook Homes, the trial court found that Mr. Parker was
the president of Laurel Brook Homes and at all times was acting as their agent; Mr. Parker did not have
any prior knowledge that the subject lot had ever flooded previously other than the flood of May 2010; his
actions in obtaining the zoning compliance and building permits were in conformity with the standard of
care of residential builders; it was not until after Mr. Parker obtained the zoning compliance and building
permits that he was informed that the county had implemented a BFE; and Mr. Parker immediately
notified the Buyers of this new code requirement. Based on these undisputed facts, the trial court found
that Buyers do not have a claim against Mr. Parker or Laurel Brook Homes as a matter of law. As for Ms.
Collier, her motion for summary judgment was unopposed by Buyers; thus, the trial court entered an
order dismissing the claims against her with prejudice.
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Thereafter, Sellers filed a motion for an award of attorney fees based on Section
10 of the contract. That provision reads as follows:
10. Default. Should Buyer default hereunder, the Earnest Money shall be
forfeited as damages to Seller and shall be applied as a credit against
Seller‟s damages. Seller may elect to sue, in contract or tort, for additional
damages or specific performance of the Agreement, or both. Should Seller
default, Buyer‟s Earnest Money shall be refunded to Buyer. In addition,
Buyer may elect to sue, in contract or tort, for damages or specific
performance of this Agreement, or both. In the event that any party hereto
shall file suit for breach or enforcement of this Agreement (including suits
filed after Closing which are based on or related to the Agreement), the
prevailing party shall be entitled to recover all costs of such enforcement,
including reasonable attorney‟s fees.
Buyers filed a response asserting that the contract did not provide for such an
award based on the fact Buyers sought to set aside the agreement, not to enforce it, and
that they did not default on the agreement. Following a hearing, the trial court held that
Sellers were entitled to an award of attorney‟s fees and costs in the amount of
$10,071.38.
Buyers initiated this appeal and raise the following issues: (1) whether the trial
court erred by finding that there was no mutual mistake and thus granting Sellers‟ motion
for summary judgment; (2) whether Sellers met their burden of proof in order to sustain a
motion for summary judgment; (3) whether the trial court erred by denying Buyers‟
motion for summary judgment; and (4) whether the trial court erred by finding that the
Sellers were entitled to an award of attorney fees pursuant to the terms of the contract.
ANALYSIS
I. STANDARD OF REVIEW
This case involves an appeal from the trial court‟s grant of Sellers‟ motion for
summary judgment. We review a trial court‟s ruling on a motion for summary judgment
de novo, without a presumption of correctness. Rye v. Women’s Care Center of Memphis,
MPLLC, No. W2013-00804-SC-R11-CV, __ S.W.3d __, 2015 WL 6457768, at *12
(Tenn. Oct. 26, 2015). In doing so, we make a fresh determination of whether the
requirements of Tenn. R. Civ. P. 56 have been satisfied. Id. (citing Estate of Brown, 402
S.W.3d 193, 198 (Tenn. 2013)).
Summary judgment is appropriate when the “pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show that
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there is no genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law.” Tenn. R. Civ. P. 56.04; see also Martin v. Norfolk S. Ry.
Co., 271 S.W.3d 76, 83 (Tenn. 2008). The party moving for summary judgment bears the
burden of demonstrating both that no genuine dispute of material facts exists and that it is
entitled to a judgment as a matter of law. Martin, 271 S.W.3d at 83.
When the moving party does not bear the burden of proof at trial, the moving party
may satisfy its burden of production either: (1) by affirmatively negating an essential
element of the nonmoving party‟s claim; or (2) by demonstrating that the nonmoving
party‟s evidence at the summary judgment stage is insufficient to establish the
nonmoving party‟s claim or defense. Rye, 2015 WL 6457768, at *22.
A moving party seeking summary judgment by attacking the nonmoving party's
evidence must do more than make a conclusory assertion that summary judgment is
appropriate on this basis. Id. Rather, Rule 56.03 requires the moving party to support its
motion with “a separate concise statement of material facts as to which the moving party
contends there is no genuine issue for trial.” Tenn. R. Civ. P. 56.03. “Each fact is to be
set forth in a separate, numbered paragraph and supported by a specific citation to the
record.” Id. When such a motion is made, any party opposing summary judgment must
file a response to each fact set forth by the movant in the manner provided in Rule 56.03.
“[W]hen a motion for summary judgment is made [and] . . . supported as provided in
[Rule 56],” to survive summary judgment, the nonmoving party “may not rest upon the
mere allegations or denials of [its] pleading,” but must respond, and by affidavits or one
of the other means provided in Rule 56, “set forth specific facts” at the summary
judgment stage “showing that there is a genuine issue for trial.” Tenn. R. Civ. P. 56.06.
The nonmoving party “must do more than simply show that there is some metaphysical
doubt as to the material facts.” Rye, 2015 WL 6457768, at *22 (quoting Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)). The nonmoving party must
demonstrate the existence of specific facts in the record which could lead a rational trier
of fact to find in favor of the nonmoving party. Id. Summary judgment should be granted
if the nonmoving party's evidence at the summary judgment stage is insufficient to
establish the existence of a genuine issue of material fact for trial. Id. (citing Tenn. R.
Civ. P. 56.04 & 56.06). The focus is on the evidence the nonmoving party comes forward
with at the summary judgment stage, not on hypothetical evidence that theoretically
could be adduced, despite the passage of discovery deadlines, at a future trial. Id. We
now turn our attention to applying these standards in this appeal.
II. MUTUAL MISTAKE
Buyers argue that the trial court erred by finding that there was no mutual mistake
entitling them to rescission of their land sales contract, by granting Seller‟s motion for
summary judgment, and by denying their motion for summary judgment.
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Courts are to interpret contracts as they are written and we are not at liberty to
make a new contract for parties who have spoken for themselves. Sikora v. Vanderploeg,
212 S.W.3d 277, 286 (Tenn. Ct. App. 2006) (citations omitted). Accordingly, we do not
concern ourselves with the wisdom or folly of a contract, and we will not relieve parties
from contractual obligations simply because they later prove to be burdensome or
unwise. Id. Nevertheless, the policy favoring the enforcement of contracts as written must
occasionally give way and it is well settled 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. Id.
A “mistake” is an act that would not have been done, or an omission that
would not have occurred, but for ignorance, forgetfulness, inadvertence,
mental incompetence, surprise, misplaced confidence, or imposition. State
ex rel. Mathes v. Gilbreath, 17 Beeler 498, 181 S.W.2d 755, 757 (Tenn.
1944); Williams, 3 S.W.3d at 509-510. A mistake must relate to a past or
present fact, not an opinion as to the future result of a known fact. Collier v.
Walls, 51 Tenn. App. 467, 495, 369 S.W.2d 747, 760 (1962) (citing Metro.
Life Ins. Co. v. Humphrey, 167 Tenn. 421, 426, 70 S.W.2d 361, 362
(1934)). “In mistake cases, a „fact‟ is something that can be
contemporaneously verified, i.e., independently and objectively established
at the time of contracting.” 21 Steven W. Feldman, Tenn. Practice Series—
Contract Law and Practice § 6:45 (2006). Some examples of “material and
vital” mistakes include mistakes as to the existence of title, location of
boundaries, quantities and conditions of land being sold. Harris v. Spencer,
Williamson Ch. No. 21628, 1995 WL 413391, at *3 (Tenn. Ct. App. July
14, 1995) (citing Isaacs v.. Bokor, 566 S.W.2d 532, 541 (Tenn. 1978);
Wilson v. Mid-State Homes, Inc., 384 S.W.2d 459 (Tenn. Ct. App. 1964);
Robinson v. Brooks, 577 S.W.2d 207, 209 (Tenn. Ct. App. 1978)).
Hunt v. Twisdale, No. M2006-01870-COA-R3-CV, 2007 WL 2827051, at *7 (Tenn. Ct.
App. Sept. 28, 2007).
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. Pugh's Lawn Landscape Co., Inc. v. Jaycon Dev. Corp.,
320 S.W.3d 252, 261 (Tenn. 2010). “A court may not rescind a contract for mistake
unless the mistake is innocent, mutual, and material to the transaction and unless the
complainant shows an injury.” Id. (citing Klosterman Dev. Corp. v. Outlaw Aircraft
Sales, Inc., 102 S.W.3d 621, 632 (Tenn. Ct. App. 2002) (quoting Robinson v. Brooks, 577
S.W.2d 207, 209 (Tenn. Ct. App. 1978)). In order for relief to be granted on the grounds
of mistake, the mistake must have been: (1) mutual or fraudulent; (2) material to the
transaction; (3) not due to the complainant‟s negligence; and (4) the complainant must
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show injury. Robinson, 577 S.W.2d at 209 (citing 17A C.J.S. Contracts § 418(2) (1978));
Wilson v. Mid-State Homes, Inc., 384 S.W.2d 459 (1964)).
In this case, Buyers purchased the property at issue for the purpose of constructing
a house for their residence. It is undisputed that at the time the parties entered into the
Lot/Land Purchase and Sale Agreement both parties believed the property to be suitable
for such a purpose. The parties now agree that the lot cannot be used for constructing a
residence.
The trial court found that at the time of the contract, the lot was, as far as could be
discovered, suitable for a residence and that it only became unsuitable action of the
Rutherford County officials in setting a BFE for the property. Accordingly, the trial court
concluded that the parties‟ mutual mistake did not relate to a fact that could be
contemporaneously verified at the time of contracting; therefore, the court declined to
rescind the contract and granted Sellers‟ motion for summary judgment.
In support of their motion, Buyers presented an affidavit by Robert Warren, a
licensed engineer, in which Mr. Warren details his study of the property and concludes
that, given the property‟s elevation and drainage issues, the lot has not been suitable as a
building residence since it was subdivided in 1999. Mr. Warren states that, although the
county‟s BFE is consistent with industry standards, his opinion as to the suitability of the
lot for residential construction would not change regardless of whether the county agreed
to waive the BFE requirement. These conclusions were also included in Buyers‟
statement of material facts filed in support of their motion for summary judgment.
A careful review of the motions for summary judgment and responses indicates
that material facts set forth by the engineer, Mr. Warren, are not in dispute. Specifically,
there is no evidence to dispute his determination that had either party hired a professional
engineer to perform drainage studies prior to entering into the contract, they would have
known that the lot could not be used for the construction of a residential building and that
the lot was unsuitable for construction of a house prior to the county‟s BFE
determination. Thus, it is undisputed that both Buyers and Sellers were mutually
mistaken concerning a fact that was both material to the transaction and which was
contemporaneously verifiable at the time of contracting.
As noted earlier, proof that the parties were mutually mistaken concerning a
material fact that was contemporaneously verifiable at the time of contracting is a ground
for rescinding a contract; however, Sellers insist that a contractual provision renders this
fact immaterial.
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III. CONTRACTUAL ALLOCATION OF RISK OF MISTAKE
Rescission of a contract on the basis of mutual mistake is not available when the
contract at issue allocates the risk of the mistake to the party seeking rescission. See
Atkins v. Kirkpatrick, 823 S.W.2d 547, 553 (Tenn. Ct. App. 1991); see also Dairyland
Power Co-op v. U.S., 16 F.3d 1197, 1203 (Fed. Cir. 1994). For example, in Atkins v.
Kirkpatrick, this court found that the parties were mutually mistaken about the suitability
of a lot for a residential building site; nevertheless, we affirmed the trial court‟s denial of
rescission of the contract on the grounds of mutual mistake because the parties‟ real
estate sales contract allocated the risk of loss to the buyer. Atkins, 823 S.W.2d at 553. We
reasoned as follows:
Absent fraud or mistake, a contract should be interpreted and enforced as
written, even though it contains terms which may be thought of as harsh
and unjust. Taylor v. White Stores, Inc., 707 S.W.2d 514 (Tenn. App.
1985). Defendants contended at trial and before this Court as well that the
“as is” clause in the contract signed by the parties is an absolute defense to
the claim of mutual mistake, and that the risk of loss should be allocated to
Plaintiffs, pursuant to the intent of the parties.
This appears to be a case of first impression in this state. However, the
concept of allocating the risk of mistake is not new to our jurisprudence.
The Restatement (2d) of Contracts, § 154, at 402 (1981), entitled “When a
Party Bears the Risk of Mistake,” reads in part as follows: “A party bears
the risk of mistake when (a) the risk is allocated to him by agreement of the
parties . . . .”
The real estate sales contract signed by [the parties] contained the following
language which constitutes an “as is” agreement:
Unless otherwise specified herein . . . this property is
purchased “as is” and Seller nor agent nor Broker(s) makes
or implies any warranties as to the condition of the premises.
In Lenawee County Board of Health v. Messerly, 417 Mich. 17, 331
N.W.2d 203 (1982), the Michigan Supreme Court addressed a case of clear
mutual mistake in connection with the sale and purchase of an apartment
with a septic tank system that proved to be defective. The sales contract had
an “as is” clause in the agreement. While finding mutual mistake, the court
denied rescission, stating:
In cases of mistake by two equally innocent parties, we are
required, in the exercise of our equitable powers, to determine
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which blameless party should assume the loss resulting from
this misapprehension they shared. Normally that can only be
done by drawing upon our “own notions of what is reasonable
and just under all the surrounding circumstances.”
Equity suggests that, in this case, the risk should be allocated
to the purchasers. We are guided to that conclusion, in part,
by the standards announced in § 154 of the Restatement of
Contracts 2d . . . [which] suggests that the court should look
first to whether the parties have agreed to the allocation of the
risk [of mistake] between themselves. While there is no
express assumption in the contract by either party of the risk
of the property becoming uninhabitable, there was indeed
some agreed allocation of the risk to the vendees by the
incorporation of an “as is” clause into the contract which . . .
provided:
“Purchaser has examined this property and agrees to
accept same in its present condition. There are no other
or additional written or oral understandings.”
...
If the “as is” clause is to have any meaning at all, it must be
interpreted to refer to those defects which were unknown at
the time the contract was executed. Thus, the parties
themselves assigned the risk of loss to [the purchasers].
Id. at 32, 331 N.W.2d at 211.
Atkins, 823 S.W.2d at 553-54. Accordingly, in Atkins we held that the “as is” clause in
the parties‟ contract allocated the burden of loss to the purchasers; thus, rescission on the
grounds of mutual mistake was not available. Id. at 554.
Here, Sellers rely on Section 7 of the contract to support their argument that the
contract allocated the risk of mistake to Buyers.8 As discussed above, Section 7 provides
that “[c]losing of this sale constitutes acceptance of the property in its condition as of the
time of closing, unless otherwise noted in writing.” (Emphasis added). On the other hand,
8
Sellers also rely on the Property Disclosure Statement which provides: “I understand that . . . the
Property is being sold in its present condition only, without warranties or guarantees of any kind by Seller
or Broker.” However, because this document was not part of the sales contract and is not, in and of itself,
a contract, we have determined that it is insufficient to shift the risk of mistake to Buyers.
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Buyers argue that Section 6 of the contract prevents the agreement from being considered
an “as is” contract because Buyers did not select the provision within Section 6 entitled
“No Inspection Contingencies,” which that states: “Buyer accepts the Property in its
present condition.” We have determined that Sellers have the better argument on this
issue.
We are mindful of the fact the parties did not select the “AS IS” provision in
Section 6; however, that fact is not relevant or material to the present issue. Section 6
pertains to the condition of the property at the time of contracting. By leaving the “AS
IS” stipulation unselected and selecting two other provisions, Buyers reserved the right to
inspect conditions of the property and to either accept the property in that state or
terminate the contract prior to closing.
Section 7, however, addresses an entirely different circumstance, one that controls
in the event the parties decline to exercise their inspection contingencies and “close” on
the contract. In that event, Section 7 provides that the property is accepted “in its
condition as of the time of closing, unless otherwise noted in writing.” There was no
contradictory writing in the contract here; thus, Section 7 unambiguously shifts the risk of
fault concerning the condition of the property to Buyers at closing. See Allstate Ins. Co. v.
Watson, 195 S.W.3d 609, 611 (Tenn. 2006) (“A cardinal rule of contract interpretation is
to ascertain and give effect to the intent of the parties. . . . In interpreting contractual
language, courts look to the plain meaning of the words in the document to ascertain the
parties‟ intent.”). To conclude otherwise would render the language of Section 7
superfluous. See Adkins v. Bluegrass Estates, Inc., 360 S.W.3d 404, 411 (Tenn. Ct. App.
2011).9
For the foregoing reasons, we conclude that Buyers are not entitled to rescind the
contract and that Sellers are entitled to summary judgment. Therefore, we affirm the trial
court‟s decision to deny Buyers‟ motion for summary judgment and to grant Sellers‟
motion for summary judgment.10
9
In so holding, we are undeterred by Buyers argument that Section 7 cannot shift the risk of
mistake to Buyers because it does not expressly use the phrase “as is.” As discussed above, in Lenawee
County, the case relied on by this court in Atkins, the Michigan Supreme Court held that the parties‟
contract assigned the risk of mistake to the purchaser of real property. Atkins, 823 S.W.2d at 553-54.
Notably, however, the contract in Lenawee County did not expressly state that the purchasers were
accepting the property “as is”; instead, it provided that the purchaser “has examined the property and
agrees to accept same in its present condition.” Id. (emphasis added). Accordingly, the absence of express
“as is” language in Section 7 of the contract in this case is not dispositive on the issue of whether that
provision shifts the risk of mistake to Buyers.
10
“The Court of Appeals may affirm a judgment on different grounds than those relied on by the
trial court when the trial court reached the correct result.” City of Brentwood v. Metro. Bd. of Zoning
Appeals, 149 S.W.3d 49, 60 n.18 (Tenn. Ct. App. 2004).
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IV. AWARD OF ATTORNEY‟S FEES
Additionally, Buyers contend that the trial court erred by awarding attorney‟s fees
to Sellers pursuant to Section 10 of the Lot/Land Purchase and Sale Agreement, which
states:
10. Default. Should Buyer default hereunder, the Earnest Money shall be
forfeited as damages to Seller and shall be applied as a credit against
Seller‟s damages. Seller may elect to sue, in contract or tort, for additional
damages or specific performance of the Agreement, or both. Should Seller
default, Buyer‟s Earnest Money shall be refunded to Buyer. In addition,
Buyer may elect to sue, in contract or tort, for damages or specific
performance of this Agreement, or both. In the event that any party hereto
shall file suit for breach or enforcement of this Agreement (including suits
filed after Closing which are based on or related to the Agreement), the
prevailing party shall be entitled to recover all costs of such enforcement,
including reasonable attorney‟s fees.
Buyers argue that this section does not support the relief sought because, under the
contract, only suits for breach or enforcement of the agreement entitle the successful
party to an award of attorney fees. On the other hand, Sellers contend that an award of
attorney fees is appropriate for any “suits filed after Closing which are based on or
related to the Agreement.”
The interpretation of written agreements, like the contract at issue, is a matter of
law that we review de novo on the record without a presumption of correctness. Allstate
Ins. Co, 195 S.W.3d at 611. In construing contractual language, courts look to the plain
meaning of the words in the document to ascertain the parties‟ intent. Id. If the language
of a contract is clear and unambiguous, the literal meaning controls the outcome of the
dispute. Id.
In this case, the language, “[i]n the event any party hereto shall file suit for breach
or enforcement of this Agreement . . . the prevailing party shall be entitled to recover all
costs of such enforcement, including reasonable attorney‟s fees,” could be construed as
limiting the availability of attorney‟s fees to only suits for breach or enforcement.
However, we believe that the parenthetical language in Section 10 operates to broaden
the scope of this provision to include “suits filed after Closing which are based on or
related to the Agreement.” (Emphasis added).
Here, Buyers filed suit after closing to rescind the contract for the sale of real
property. This suit is based on or related to the agreement. Therefore, according to the
plain language of the parties‟ contract, Sellers are entitled to an award of costs and
attorney‟s fees.
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IN CONCLUSION
The judgment of the trial court is affirmed, and this matter is remanded with costs
of appeal assessed against Buyers.
______________________________
FRANK G. CLEMENT, JR., JUDGE
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