Carter v. Matthews 701 S.W.2d 374 Supreme Court of Arkansas January 13, 1986

Newbern, Justice. low, flat portion of land in question was suitable for This is a real estate sale case in which the chancellor granted rescission in favor of the appellant on the ground of mutual mistake but did not award the money damages she claimed. The damages she sought were for her expenses in constructing improvements that subsequently had to be removed from the land. The appellant claims it was error for the chancellor to have found she did not rely on misrepresentations made by the appellees through their real estate agent, and thus it was error to refuse her damages for fraud plus costs and an attorney fee. On cross-appeal, the appellees contend the only possible basis for the rescission was fraud, not mistake, and the chancellor erred in granting rescission once he had found there was no reliance by the appellant on any active or constructive misre- presentations of the appellees. We find the chancellor was correct on all counts, and thus we affirm on both appeal and cross-appeal. 1. Rescission The chancellor found that conversations between the appellant and the appellees' agent showed that both parties were under the mistaken impression that the low, flat portion of land in question was suitable for building permanent structures such as a barn, horse corral and fencing. In fact, however, the area where the appellant attempted to build a barn and corral and which she wanted to use as pasture for horses was subject to severe and frequent flooding. The chancellor held there was thus a mutual mistake of fact making rescission proper. While there was evidence the appellees had known of one instance of severe flooding on the land, the evidence did not show they knew it was prone to the frequent and extensive flooding which turned out to be the case. Other matters not known to the parties were that the low portion of the land, about two-thirds of the total acreage, is in the 100-year floodplain and that a Pulaski County ordinance ... requires a seller of land lying in the floodplain to inform the buyer of that fact no later than ten days before closing the transaction. The county planning ordinance also requires that no structures be built in the floodplain. If the chancellor's decision had been to permit rescission because of the parties' lack of knowledge of these items, we would have had before us the question whether the mistake was one of law rather than fact and thus perhaps irremediable....While the chancellor mentions these items, his basis for rescission was the mutual lack of knowledge about the extent of the flooding, and misunderstand- ing of the suitability of the property, as a matter of fact, for the buyer's purposes which were known to both parties. We sustain his finding that there was a mutual mistake of fact. A mutual mistake of fact as to a material element of a contract is an appropriate basis for rescission.... 2. Damages for Fraud The chancellor refused to allow the appellant any da- mages for the loss she sustained with respect to the improvements she had placed in the floodplain. He found the appellant had made an independent inves- tigation of the propensity of the property to become flooded and had ascertained, erroneously, that the property was not in the floodplain. Thus, in spite of the legal duty on the part of the appellees to tell the appellant that the land was in the floodplain, and what might have been the resultant constructive fraud upon failure to inform her, he held that fraud may not be the basis of a damages award absent reliance on the misrepresentation. For the same rea- son the chancellor refused to base his decision on any alleged fraud resulting from the appellees' failure to tell the appellant what they may have known about the land's propensity to flood. He was correct. An essential element of an action for deceit is reliance by the plaintiff on the defendant's misrepresentation.... In view of the strong evidence, including her own testimony, that the appellant made her own investi- gation as to whether the land flooded, the extent to which a creek running through the land was in the floodplain, and the feasibility of bridging the creek above the floodplain, we can hardly say the chancel- lor's factual determination that the appellant did not rely on the failure of the appellees to give her infor- mation known to them or which they had a duty to disclose to her under the ordinance was clearly erroneous.... When rescission is based on mutual mistake rather than fraud, the recoveries of the parties are limited to their restitutionary interests.... As the appellant could show no benefit conferred on the appellees from her attempted improvements on the land, she was entitled to no recovery in excess of the return of the purchase price, which was awarded to her by the chancellor, as well as cancellation of her note and mortgage.... Affirmed.

Case Questions

1. The plaintiff-appellant in this case went to court seeking rescission as well as damages. What, exactly, is the remedy called rescission?

2. Why did the chancellor agree to grant rescission? What was the rationale behind this ruling?

3. Why did the chancellor refuse to allow the appellant any damages for fraud?

4. What recovery was made by the appellant?