Thank You For Submiting Feedback!
Under the Restatement (Second) of Contracts, a party bears the risk of mistake when he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient.
Gregory and Susan McMahon (“Sellers”) owned a duplex in Sedona but lived in Michigan and rented out the duplex. They engaged a property manager and visited approximately once per year. In March 2005, Sellers listed the property for sale. The following month, Lori DeLuca, Jo-Ellen Doorn, and Cheryl Kaminski (“Buyers”) saw an advertisement for the duplex. They called the listing agent, Harry Christie, to make an appointment to see the duplex and spent approximately 20 minutes there. During their visit, Doorn, noticing a musty odor, asked Christie "if the house had ever taken on water." Christie replied that the property had not taken on water and that the odor was caused by the prior tenant, who was a smoker and had large dogs. Later in the day, Buyers made an offer on the property. They also executed a document entitled "Consent to Limited Representation," by which they agreed that Christie would represent them as well as the Sellers. The parties executed a purchase contract a few days later. The contract included the following advisory: "Buyer is advised by Broker to obtain inspections and investigations of the Premises." The contract also included the following warranties: "(a) Buyer warrants to Seller that Buyer has conducted all desired independent investigations and accepts the Premises and (b) Buyer acknowledges that there will be no Seller warranty of any kind, except as stated in Lines 280-286." Lines 280 to 286 stated in part: "Seller warrants that Seller has disclosed to Buyer and Broker(s) all material latent defects and any information concerning the Premises known to Seller, excluding opinions of value, which materially and adversely affect the consideration to be paid by Buyer."
In connection with the sale, Sellers completed a Seller's Property Disclosure Statement ("Disclosure"). In response to a question in the Disclosure about problems related to drainage, Sellers wrote, "Side yard to front drainage — pipe installed." In the Disclosure Sellers denied knowledge of "any water damage or water leaks of any kind" or "any past or present mold growth." The Disclosure included a seller's certification that the information it contained was "true and complete to the best of Seller's knowledge." It further included the following acknowledgement: “Buyer acknowledges that the information contained herein is based only on the Seller's actual knowledge and is not a warranty of any kind. Buyer acknowledges Buyer's obligation to investigate any material (important) facts in regard to the Property. Buyer is encouraged to obtain Property inspections by professional independent third parties and to consider obtaining a home warranty protection plan.” Buyers then obtained an inspection of the property. With respect to grading, the inspection stated, "Drainage of site/slope of soil at foundation is proper based upon visual observation," "[s]ome visible signs of soil erosion were noted around the site," and "[s]igns of poor drainage/erosion." With respect to the roof, the report stated the roof appears "serviceable/within useful life" and appeared to be "typical for age of home," but showed "evidence of prior patching/repairs." The inspection report cautioned: "The inspection does not report on the possible presence of mold. If you have concerns for the presence of mold, we recommend hiring an independent [sic] specializing in mold testing and abatement."
The parties closed escrow on the house on or about June 15, 2005. In September 2005, Buyers received a report based on an investigation conducted in August that "water intrusion has taken place in both the back wall cavities, resulting in microbial growth." Thus, Buyers filed suit against Sellers and others, including Christie and his employer. The first amended complaint alleged Sellers breached a duty to disclose all known defects, including mold, waste and termite events. They asserted the duplex suffered a long history of water, mold and pest damage, which Sellers failed to disclose, and that Buyers had incurred repair costs. Buyers alleged breach of contract, negligent misrepresentation, mutual mistake and consumer fraud pursuant to Arizona Revised Statutes ("A.R.S.") sections 44-1521 et seq. (2003 & Supp. 2009). After the close of discovery, Sellers moved for summary judgment. Over Buyers' objection, the court granted Sellers' motion, reasoning that Christie's knowledge of issues with the duplex was imputed to Buyers as well as to Sellers.
Did the superior court err in concluding that Buyers’ claim for mutual mistake was barred by their ‘conscious ignorance’ of the facts?
Viewing the facts in the light most favorable to Buyers, it is clear that Christie told them that the house had not "taken on water" and that Sellers did not disclose problems with drainage or roof leaks. Buyers acknowledged at the time of purchase their obligation to investigate the property, however, and the inspector they hired reported water and drainage issues. The inspection report disclosed evidence that the roof had been patched and that there were signs of poor drainage and erosion. The inspector also warned Buyers that the inspection did not address the possible presence of mold and recommended an independent inspection if mold was a concern. Doorn testified Buyers were provided a list of inspectors that included roofers and mold inspectors, and that despite knowing that they could have a mold inspection, they chose to purchase the property without one.
Buyers argue the principle of "conscious ignorance" does not apply because Sellers were obligated to disclose defects in the property, including drainage issues and roof leaks. But in their claim for rescission based on mutual mistake, Buyers assert that they and the Sellers were mutually mistaken about "substantial adverse conditions" of the property. That allegation is inconsistent as a matter of law with Buyers' argument that Sellers knew of the adverse conditions and should have disclosed them. On this record, there is no error in the superior court's conclusion that Buyers' conscious ignorance of the adverse conditions precluded their claim for rescission based on mutual mistake.