Mutual Mistake Doctrine in Tennessee Not Applicable when Contract Allocates Risk of Mistake to Party Seeking Rescission of Contract

A recent Tennessee Court of Appeals decision, Gibbs v. Gilleland, 2016 WL 792418 (Tenn. Ct. App. 2016) dealt with a situation where both the buyer and seller were not aware that the lot sold in the real estate transaction was not appropriate for the construction of a house.  The Tennessee Court of Appeals found that a mutual mistake existed because both parties to the contract were unaware that the fundamental reason for the purchase, to build a house, was faulty.  A “mistake” in the contract exists under Tennessee law when “a person acting on erroneous conviction of law or fact, executes an instrument he or she would not have executed but for the erroneous conviction” citing Pugh’s Lawn Landscape Co. Inc. v. Jaycon, Dev. Corp., 320 S.W.3d 252, 261 (Tenn. 2010).  The Court noted that in order for relief to be granted on the basis of a mutual mistake, the mistake must have been: (1) mutual or fraudulent; (2) material to the transaction; (3) not due to the complainant’s negligence; and (4) the complainant must show injury.” citing Robinson v. Brooks, 577 S.W.2d 207, 209 (Tenn. Ct. App. 1978). 

In this Gibbs case at issue, the court found there was a mutual mistake that met the requirements for relief to be granted under Tennessee law.  However, the key issue in this case is whether the mutual mistake is enforceable when the contract actually provides an allocation of risk for mistake.  This is basically a provision in the contract that shifts the risk to one party for any mistakes.  The Court found that “rescission of a contract on the basis of mutual mistake is not available when the contract at issue allocates that risk of mistakes the party seeking rescission.” citing Atkins v. Kirkpatrick, 823 S.W.2d 547, 553 (Tenn. Ct. App. 1991).  Within the contract in this case under subsection 7 it provided that “Closing of this sale constitutes acceptance of Property in its condition as of the time of closing, unless otherwise noted in writing.”  The Court of Appeals found that this specific language “unambiguously shifts the risk of fault concerning the condition of the property to Buyers at closing.” Gibbs at 9.  As a result, the Court found that the buyers were not entitled to rescind the contract under the mutual mistake theory.