Facts
- Sellers held state agricultural development leases for 2,262 acres of unimproved desert land near Yuma, Arizona, and agreed to assign their leasehold interests to buyers.
- Buyers intended only commercial jojoba cultivation and communicated that adequate underground water was required.
- Both parties believed sufficient underground water existed to support commercial jojoba production.
- The parties executed a purchase contract (June 5, 1981) for $222,200; buyers paid an $80,200 down payment with the balance payable in installments.
- Buyers began development, drilled five test wells, and found water inadequate in quantity and quality for commercial jojoba cultivation.
- After spending about $229,000 on development, buyers abandoned the project and sought rescission based on mutual mistake.
Issues
- Whether a mutual mistake concerning the existence of sufficient underground water for commercial jojoba production justified rescission of the lease-assignment purchase contract.
- If rescission was proper, whether buyers could recover consequential damages (development expenses) in addition to restitution, absent fraud or misrepresentation.
Decision
- The Arizona Supreme Court affirmed rescission based on mutual mistake of a basic assumption: the existence of sufficient underground water for the intended commercial jojoba use.
- The court reversed the award of consequential damages for development expenses.
- The court held the proper post-rescission remedy was restitution aimed at returning the parties to their pre-contract positions.
- The court remanded for calculation of restitution as: (1) down payment returned, plus (2) any net enhancement in value attributable to buyers’ improvements, minus (3) the reasonable rental value for buyers’ use and possession.
Legal Principles
- A contract is voidable for mutual mistake when both parties share a mistaken belief about a basic assumption that materially affects the agreed exchange, and the adversely affected party did not assume the risk.
- Rescission is an equitable remedy focused on restoring the status quo and preventing unjust enrichment, not awarding the benefit of the bargain.
- When rescission is granted solely for mutual mistake and there is no fraud, misrepresentation, or comparable wrongdoing, the remedy is restitution rather than expectation, reliance, or consequential damages.
- Restitution after rescission may include return of payments and the value increase conferred on the other party by improvements, offset by the value of the rescinding party’s use of the property.
Conclusion
The court permitted rescission because both parties mistakenly assumed adequate underground water existed for the only contemplated commercial use, but limited recovery to restitutionary measures designed to unwind the transaction and avoid unjust enrichment, not to reimburse development expenses as consequential damages absent wrongdoing.