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A contract may be rescinded when it is shown by clear and convincing proof that a mutual mistake existed when the contract was executed that was so substantial that there was no true meeting of the parties' minds.
Plaintiff was a corporation owned by third-party defendants, Ravinder Sharma and Yosho Lakshmi. In the summer of 2010, Sharma contacted James Metz, an officer of defendant with whom Sharma had previously had successful business dealings, to inquire about commercial opportunities in New York. Metz responded that a gas station and convenience store owned by defendant was available for lease. After discussions with Metz and defendant's president, Alicia Metz, plaintiff agreed to take over the store and made certain payments to defendant. Third-party defendants signed a combined lease and contractor agreement but, almost immediately after taking control of the store, discovered records indicating that the store's sales were lower than plaintiff had been led to believe. After attempting unsuccessfully to modify the contract terms, third-party defendants vacated the store and requested a refund of their initial payments, which defendant refused to pay. Consequently, plaintiff brought the present action for rescission of the contract based upon fraudulent inducement. Defendant joined issue and commenced a third-party breach of contract action against third-party defendants. During the subsequent bench trial, plaintiff moved to conform the pleadings to the proof and pursue rescission based upon an additional theory of mutual mistake. Supreme Court granted the motion, found that a mutual mistake had occurred, awarded damages to plaintiff, rescinded the contract and dismissed the third-party action. Defendant appealed.
Under the circumstances, should the commercial lease be rescinded?
The Court held that the commercial lessee was entitled to rescission on the basis of mutual mistake because the defendant acted erroneously in sending incorrect sales figures to the plaintiffs, the true figures were not discovered until after the contract was signed and were too low to permit successful operation of the business, and, as such, there was no meeting of the minds as to the basis for the store's profitability. The Court further held that there was no negligence by the plaintiff sufficient to bar rescission because the plaintiff asked repeatedly for the August 2010 sales records before receiving what proved to be erroneous information, asked to inspect the store's books but was not permitted to do so, and was told that he could visit the store while posing as a customer, but could not speak to employees or inspect sales records. Accordingly, the judgment was affirmed.