Opinion
No. 492.
Submitted under sec. (Rule) 251.54 June 5, 1975. —
Decided June 30, 1975.
APPEAL from a judgment of the circuit court for Rock county: ARTHUR L. LUEBKE, Circuit Judge. Reversed and remanded.
For the appellant the cause was submitted on the briefs of David J. MacDougall, Thomas S. Hornig and Campbell, Brennan, Steil Ryan, S.C., all of Janesville.
For the respondents the cause was submitted on the brief of Nowlan, Mouat, Lovejoy, Wood Cripe, attorneys, and Richard E. Rosenberg of counsel, all of Janesville.
The judgment appealed from dismissed the complaint of plaintiff-appellant John S. Sorce and awarded costs and disbursements to defendants-respondents John and Marie E. Rinehart.
It was the trial court's conclusion that the standard offer to purchase for the sale of real estate, which had been signed by the Rineharts, as purchasers, and accepted by Sorce, as seller, was unenforceable because there was no meeting of minds as to the consequence of the buyers' breach; and that Sorce was limited in his damages to $10 earnest money.
In the early fall of 1972, Sorce, a Janesville real estate broker and residential contractor, was attempting to sell a three and one-half acre lot with a large house and a horse barn. In late November, Sorce spoke with John Rinehart at the latter's taxidermy shop and learned that he was interested in buying a new home. On November 30th, Sorce showed the premises to the Rineharts. On the following day, Mrs. Rinehart returned to again look over the property with some of her children and her parents. On December 2d, Sorce spoke with Mr. Rinehart regarding the possibility of the Rineharts trading in their current home as partial payment for the property. Sorce came to the Rineharts' home on December 4th to view it for trade-in purposes.
Sorce arrived at the Rinehart home at about 1:30 p.m., with Daniel Adams, his sales manager. The two stayed until 6 p.m., except for a brief hiatus during which Sorce and Adams had to leave for an errand. During the course of the meeting the Rineharts signed an offer to purchase prepared by Sorce and Adams, whereby the Rineharts offered to purchase the property for $90,000. The Rinehart home was to be taken in trade and credited toward the purchase price in the amount of $45,000, title to be transferred at closing. Earnest money of $10 was paid on December 4th and the balance of the purchase price, $44,990, was to be paid at closing. The offer was accepted by Sorce while at the Rineharts' on December 4th.
The effectiveness of the accepted offer was contingent upon the Rineharts' approval of certain restrictions on the use of the property. The restrictions were approved by Mr. Rinehart on behalf of his wife and himself on December 18th.
After the signing the Rineharts obtained a key to the premises and visited it several times. The deal was set to close on January 15, 1973, due to the Rineharts' desire to move after the first of the year. On or about December 20th, however, Mr. Rinehart phoned Sorce and informed him that he and his wife were backing out of the deal. According to Sorce, the reason for the breach was the inability of the Rineharts to acquire more land around the property.
An action for specific performance was commenced by Sorce on January 10, 1973, by service of summons and complaint. Pursuant to a stipulation between the parties, and in an effort to mitigate his damages, Sorce sold the property for $90,000 on May 30, 1973, thereby reducing this action to one for damages incurred as a result of the Rineharts' breach.
The offer to purchase was the standard No. WB-IC Offer to Purchase — With Acceptance, approved by the Wisconsin Real Estate Commission. With respect to the consequences of the buyers' breach, the document provided:
"Should the undersigned Buyer fail to carry out this agreement, all money paid hereunder shall, at the option of the Seller, be forfeited as liquidated damages and shall be paid to or retained by the Seller, subject to deduction of Broker's commission and disbursements, if any."
Aside from the fact that the offer was executed and accepted, there is little agreement between the parties as to what transpired at the meeting. Sorce and Adams testified that they had felt that the amount of earnest money involved was unimportant, but that some amount was necessary to result in a binding contract. Sorce stated that it was very common in his business to use earnest money deposits of $10, and that he did so in 50 percent of such transactions. Another Janesville realtor, James Masterson, testified that in his business he used earnest money deposits in amounts from one dollar to $5,000.
Sorce and Adams also testified that during the negotiations on December 4th, Mr. Rinehart inquired jokingly whether, in the event of his breach, he would be required merely to forfeit the $10. Sorce allegedly responded to the effect that it didn't work that way and that once the offer was signed and accepted, "you have bought yourself a home."
Sorce and Adams also testified that at one point Sorce suggested to Mr. Rinehart that he might wish to have an attorney look over the document prior to signing, to which the latter allegedly responded that he was well-versed in real estate matters, that he knew what he was doing, having owned residential and business property at several locations, and that an attorney was therefore unnecessary.
The Rineharts conceded that they were no strangers to real estate matters, having purchased six parcels of real estate in the past and having sold four of them. The earnest money, if any, had always been at least $500. Rinehart had once acted as his own contractor in the construction of a new house. Both of the Rineharts read the offer to purchase in question prior to signing.
With respect to having an attorney look over the offer to purchase, neither Mr. nor Mrs. Rinehart could remember any discussion with Sorce on that topic. Mrs. Rinehart stated, however, that she was absent during forty-five minutes to one hour of the negotiations. Rinehart testified that he did tell Sorce and Adams at the time he signed that he thought he knew what he was doing.
Neither Mr. nor Mrs. Rinehart could recall any discussion as to the effect of their breach, but both fully intended to go through with the deal at the time they signed the offer. Rinehart testified that as far as he understood, "the only binding part on the whole contract was $10. That's all I can remember." He refused to deny that Sorce had told him it didn't work that way, but insisted that he simply could not remember any conversation to that effect. He further stated that he simply assumed that in the event of his breach he would merely forfeit the $10. Mrs. Rinehart stated that the matter of earnest money was discussed in her absence.
The trial court, in its findings and conclusions, found that "there was no meeting of the minds and hence no agreement or contract of the parties as to the effect of a breach by the buyer," that the Rineharts believed that $10 would be the limit of their liability in the event of a breach, that Sorce ignored his opportunity to clarify this point in the document, and that the Rineharts would not have signed the instrument except for the fact that the earnest money required was only $10.
The trial court concluded that the document was questionable, that it was to be construed most strictly against the seller, and that due to the lack of meeting of the minds the offer to purchase was unenforceable and Sorce was limited in his recovery to the $10 earnest money.
Three issues are raised in this appeal:
1. Is the offer to purchase contract unenforceable because there was no meeting of the minds on the consequences of breach by buyers?
2. Did seller's retention of earnest money estop him from suing buyers for specific performance or damages?
3. Does public policy require the denial of damages due to the breach of this contract?
The offer to purchase provides in part:
"Should the undersigned Buyer fail to carry out this agreement, all money paid hereunder shall, at the option of the Seller, be forfeited as liquidated damages and shall be paid to or retained by the Seller . . . ."
The only "money paid" under the offer to purchase was the $10 earnest money. The trial court specifically found, based upon the credible evidence, that the Rineharts "obviously believed that the $10 would be the limit of their obligation in the event of a breach."
This court, however, has held the precise offer to purchase clause here under consideration to have a quite different effect. As stated in Moritz v. Broadfoot (1967), 35 Wis.2d 343, 346, 347, 151 N.W.2d 142:
"It is apparent from the clause in question that it is the seller who has the option of taking the earnest money as liquidated damages in the event of the buyer's default. . . . It was not designed as an option to the buyer to pay liquidated damages as an alternative to performing the contract. The purpose of this clause is to protect the seller and not to provide an exculpatory method of avoiding the purchase of the real estate.
". . . In [ Zimmermann v. Thompson (1962), 16 Wis.2d 74, 114 N.W.2d 116] . . . , we held that a liquidated-damages clause to be exercised at the seller's option did not foreclose the seller from seeking his actual damages, though he could not keep the earnest money as liquidated damages and in addition seek actual damages. It is equally true that the presence of a liquidated-damages clause does not prevent the injured party from seeking equitable relief as a complete alternative to damages. . . .
It is apparent that what is involved is a mistake of law as to the legal effect of the document on the part of the Rineharts.
The general rule as to the effect on contracts of mistakes of law, especially when unilateral in nature, is stated at 17 C.J.S., Contracts, p. 900, sec. 145:
". . . Mere mistake of a party as to the legal meaning, scope, or effect of an instrument does not vitiate it; and a mistake of law made by one party to a contract does not excuse him from the obligations thereof, nor will ignorance of the law relieve one of the legal effect of his contract obligations." See also: Birkhauser v. Schmitt (1878), 45 Wis. 316.
There is a trend among the commentators toward disregarding distinctions between mistakes of fact and mistakes of law in determining the effect of the latter insofar as the enforcement of contract is concerned. 3 Corbin, Contracts, p. 752, sec. 616; 13 Williston (3d ed.), Contracts, p. 537, sec. 1581.
Even applying that more liberal approach, however, the Rineharts' misapprehension as to the consequences of their breach of the contract is without legal effect, since the mistake was not shared by Sorce. As stated in Restatement, 2 Contracts, p. 966, sec. 503:
"A mistake of only one party that forms the basis on which he enters into a transaction does not of itself tender the transaction voidable . . . ."
As stated in Chicago, St. P., M. O. Ry. Co. v. Bystrom (1917), 165 Wis. 125, 133, 161 N.W. 358, "[i]n order to reform a contract on the ground of mistake the general rule is that the mistake must be mutual, or mistake on one side and fraud on the other." That rule has been followed in Langer v. Stegerwald Lumber Co. (1952), 262 Wis. 383, 391a, 55 N.W.2d 389, 56 N.W.2d 512, and Findorff v. Findorff (1958), 3 Wis.2d 215, 224, 88 N.W.2d 327.
In the instant case, the mistake was clearly unilateral and there is no finding nor evidence of fraud.
We conclude, therefore, that the Rineharts' mistake as to the legal consequences of their breach did not justify the reformation of the contract by restricting Sorce in his remedies to the retention of the $10 earnest money.
In its written opinion the trial court held that Sorce was estopped from suing for specific performance or damages because he failed to specifically disavow any intention to rely solely on the earnest money as liquidated damages. Such conclusion was based on this court's holding in Zimmermann v. Thompson, supra, regarding the interpretation of the same contract language under consideration here.
In Zimmermann, the seller, upon default by the buyer, retained the $500 down payment and brought suit for actual damages. On the seller's appeal from a lower court judgment dismissing its appeal, this court stated at pages 76, 77:
". . . The question is whether under the circumstances the contract confines the seller to liquidated damages, $500, or whether he may recover his actual damages, whatever they may be. The contract clause already quoted gives the seller an option to keep the down payment as liquidated damages. Such an option does not prevent the seller from waiving the forfeiture and bringing an action for his actual damages, as appellant submits. However, there is more here than a simple forfeiture. `. . . at the option of the seller [the $500 may] be forfeited as liquidated damages and shall be paid to or retained by the seller, . . .'
"This gives the seller an option to take liquidated damages or to take whatever actual damages he can prove, but it does not give him the right to both. If he chooses liquidated damages he may retain the down payment without further fuss or bother. If he chooses actual damages the contract gives him no additional present, simultaneous, right to retain the down payment. He has retained it and is now trying to expand the limited right of retention into a right to keep the money and apply it on whatever larger damages he can establish. The contract does not so provide.
"Under this contract that part of the down payment in excess of broker's commissions or disbursements, as specified by the contract clause in question, can be rightfully retained by the seller only in accordance with seller's option to take liquidated damages. It can neither be assumed that the seller has retained the money without right, nor that he has acquired additional rights by a wrongful retention. The seller has kept the money as he rightfully may do, but he can do so only by recognizing it as liquidated damages. Thereby he exercised his option to treat the cash in his hands as liquidated damages. Accordingly, no cause of action for actual damages remains to him."
Subsequently, however, in Moritz v. Broadfoot, supra, this court was faced with a situation in which the seller retained a $1,000 earnest-money check and notified the defaulting buyer that he was electing to consider the $1,000 "as a payment on account of the purchase price" and not as liquidated damages. The seller then commenced an action for specific performance. In upholding the seller's right so to do, we stated at pages 349, 350:
" Zimmermann is precedent for the situation wherein the seller accepts the breach of contract and sues the defaulting buyer for damages. It is not precedent for the instant case, where the seller has elected to stand on his contractual rights and to seek specific performance. We have recently said:
"`Under this remedy the vendor elects to affirm the contract by having the property auctioned at judicial sale.' Kallenbach v. Lake Publications, Inc. (1966), 30 Wis.2d 647, 651, 142 N.W.2d 212.
"The general rule as stated in Corpus Juris Secundum is in accord: `The vendor by bringing an action for the purchase price affirms the contract.' 92 C.J.S., Vendor Purchaser, p. 450, sec. 477.
"Hence, we see no inconsistency in the retention of the earnest money and the action to specifically enforce the sale contract. Under these circumstances the liquidated-damages clause is irrelevant. The seller does not seek damages but his purchase price. It would be highly inconsistent to require the seller to yield up the earnest money which was intended as part payment and then to sue at equity to get the same funds back also as part payment. This is entirely different than the situation where the seller stands on the liquidated-damages clause to get his damages without `fuss and bother' and, in addition, tries to get whatever other damages he could prove. Such would be highly inequitable and beyond what the parties had bargained for. Here, however, the seller seeks only what he and the buyer have agreed that he is entitled to — the purchase price. To sue in specific performance to affirm the whole contract and to enforce the full payment, he is not required to forego what he has already obtained under that contract."
In this case, Sorce's action was originally for specific performance and it was only pursuant to stipulation with the Rineharts, in an attempt to mitigate damages, that Sorce sold the property to a third party and decided to content himself with recovery of the costs incurred in so doing. Thus, we hold that this case is controlled by Moritz rather than Zimmermann.
The trial court, in its opinion, suggests that the instant case is distinguishable from Moritz because of the notice election involved in the latter case. While the language from Moritz cited above does not seem to so restrict its holding, it is clear that the summons and complaint served in the case at bar comprised as timely and effective a notice as was involved in Moritz. The summons and complaint in this case, which in requesting specific performance alleged the receipt of the $10 and demanded title to the Rineharts' home and the payment of $44,990, was served on January 10, 1973, just six days after the agreed-upon closing date.
We hold, therefore, that Sorce was not estopped from commencing this action.
Finally, the Rineharts contend that due to the alleged inequality of bargaining power and adhesive nature of the contract involved, they should not be held to the terms of their agreement.
We conclude, however, that the facts of this case do not merit such relief. The disputed language clearly provides that the earnest money was to be treated as liquidated damages "at the option of the Seller." Both Mr. and Mrs. Rinehart read the offer to purchase before they signed. Both fully intended to perform at that time. Mr. Rinehart, by his own admission, told Sorce that he thought he knew what he was doing. The Rineharts were both business persons and had been previously involved, both as buyers and sellers, in numerous real estate transactions. The terms of the offer to purchase were fully negotiated between the parties.
These facts do not amount to a situation wherein the positions of the parties are so unequal as to require refusal of enforcement of the contract and resulting damage.
By the Court. — Judgment reversed and cause remanded for a determination of damages.