Renner v. Kehl

150 Ariz. 94, 722 P.2d 262 (1986)

Quick Summary

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Roy Renner (plaintiff) sought to grow jojoba on land leased from the Kehls (defendant), believing there was sufficient water. After discovering inadequate water supplies, Renner sought to rescind the purchase contract.

The Supreme Court of Arizona held that mutual mistake justified rescission but denied Renner’s claim for consequential damages, only allowing for restitution that accounted for the enhanced value of land minus its rental value during occupancy.

Facts of the Case

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Roy Renner and his business associates (Renner) (plaintiffs) had ambitions to cultivate jojoba on a large scale, which led them to enter into a contract with the Kehls and the Moyles (Kehls) (defendants) for over 2000 acres of unimproved land.

The essential premise for Renner’s interest in the land was the belief, shared by both parties, that there was an adequate underground water supply to sustain commercial jojoba cultivation—a crop that requires substantial water.

After the contract was signed and a down payment was made, Renner’s subsequent test wells, revealed that the water supply was neither sufficient in quantity nor quality for their intended use.

This fundamental error in the underlying assumption about water availability prompted Renner to seek a rescission of the contract, which led to the legal proceedings.

Procedural Posture and History

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  1. Renner initiated legal action seeking rescission of the land contract on grounds of mutual mistake of fact.
  2. The trial court granted rescission, ordering the Kehls to refund Renner’s down payment and expenses incurred in property development.
  3. The Kehls appealed the decision, which was affirmed by the court of appeals.
  4. The Kehls then appealed to the Supreme Court of Arizona.

I.R.A.C. Format

Issue

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Whether a contract can be rescinded based on mutual mistake regarding a material fact, and if so, what is the measure of damages available upon rescission?

Rule of Law

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In cases of mutual mistake, a contract may be rescinded when the mistake pertains to a basic assumption on which the contract was made and has a material effect on the agreed exchange of performances. The parties are entitled to restitution in order to prevent unjust enrichment. However, consequential damages are not typically recoverable in such cases unless there is proof of fraud or misrepresentation. (Restatement (Second) of Contracts § 152)

Reasoning and Analysis

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The Supreme Court of Arizona agreed that both parties operated under a significant misunderstanding regarding the water supply, which was critical to Renner’s purpose for the land. This mutual mistake was deemed to have upset the very basis of the contract, justifying its rescission.

However, the court clarified that while Renner was entitled to restitution, including their down payment and any enhancement in land value due to their efforts, they were not entitled to recover expenses incurred in developing the property—dubbed consequential damages—since there was no fraud or misrepresentation by the Kehls.

This decision balanced the equities by ensuring that Renner would not bear all the risks of the mutual mistake while preventing the Kehls from being unjustly enriched by Renner’s improvements to the land.

Moreover, it upheld the principle that restitution aims to restore parties to their original positions rather than compensate them for losses resulting from their own mistaken beliefs.

Conclusion

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The Supreme Court of Arizona partially affirmed and partially reversed the lower courts’ decisions. While upholding the contract’s rescission, it rejected consequential damages for property development costs. The case was remanded for further proceedings to determine restitution based on enhanced land value and fair rental value.

Key Takeaways

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  1. A mutual mistake regarding a material fact can justify contract rescission if it significantly alters the contract’s basis.
  2. Upon rescission for mutual mistake, parties are typically entitled to restitution rather than consequential damages unless fraud or misrepresentation is involved.
  3. The measure of restitution should aim to restore parties to their original positions, adjusted for any unjust enrichment or benefit conferred.

Relevant FAQs of this case

What constitutes a mutual mistake in contract law, and what are its implications for the contract?

A mutual mistake occurs when both parties to a contract are mistaken about a material fact that is essential to the agreement. When such a mistake is discovered, it can render the contract voidable, allowing for rescission where neither party receives the anticipated benefit of the bargain.

  • For example: If two parties enter into a contract for the sale of a painting believed to be an original, but it is later discovered to be a copy, this mutual mistake about a core aspect of their agreement allows either party to seek rescission.

How is restitution calculated in rescission cases concerning mutual mistake?

Restitution in mutual mistake cases aims to return the parties to their pre-contractual positions. This typically includes refunding any payments made and may include compensation for any benefits conferred, like property enhancements, but offset by obligations such as the value of interim property use.

  • For example: A purchases land from B to build a commercial orchard, believing there’s ample water. After discovering water scarcity, A can recover the purchase price, and B must account for any land value increment due to A’s improvements minus any fair rental value during A’s possession.

Can consequential damages be recovered upon rescinding a contract?

Consequential damages may be recoverable if there is evidence of fraud or willful misrepresentation by one of the parties in inducing the other into the contract. One example involves a buyer intentionally misled about the profitability of a business; they may claim consequential damages when overturning the sale.

  • For example: If a seller fraudulently claims that an appliance is energy-efficient leading to its purchase, and it’s not, consequent utility overcharges might be recoverable.
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