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Stormont v. Astoria Limited (2/17/95), 889 P 2d 1059
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501; (907) 264-0607.
THE SUPREME COURT OF THE STATE OF ALASKA
MICHAEL STORMONT, )
) Supreme Court No. S-5455
Appellant, )
) Superior Court No.
v. ) 4FA-92-1018 CI
)
ASTORIA LIMITED, an Alaska ) O P I N I O N
Corporation, )
) [No. 4167 - February 17, 1995]
Appellee. )
______________________________)
Appeal from the Superior Court of the
State of Alaska, Fourth Judicial District,
Fairbanks,
Mary E. Greene, Judge.
Appearances: Michael Stormont, pro se,
Fairbanks. James D. DeWitt and Michael
Stephan McLaughlin, Guess & Rudd, Fairbanks,
for Appellee.
Before: Moore, Chief Justice,
Rabinowitz, Matthews and Compton, Justices,
and Bryner, Justice pro tem.*
RABINOWITZ, Justice.
In April 1992 Michael Stormont signed a lease and an
option to purchase real property, including an eleven-unit
apartment complex and house (the property), from Astoria Limited
(Astoria). These documents repeatedly reiterate that Stormont
accepts the property "as is." In May, a city inspection
determined that the building was a "dangerous and substandard
building,"and in June a building inspector sent Stormont notice
that the property would have to be vacated and demolished.
Stormont sought rescission of the lease and option on the basis
of mistake, frustration and misrepresentation. He also sought
reliance damages, averring that he had expended considerable time
and money renovating the property. Astoria counterclaimed for
past due payments under the lease. The superior court granted
summary judgment in favor of Astoria, and Stormont appealed. We
affirm.
I. FACTS AND PROCEEDINGS
In 1987 a predecessor in interest to Astoria owned the
property. On June 11, 1987, a Fairbanks building official sent
the predecessor a Notice and Order describing deficiencies in the
disputed property, ordering repair, and threatening punishment by
fine or imprisonment.
In 1991 Astoria purchased the property. On April 6,
1992, Stormont and Astoria executed the lease and option to
purchase. According to both parties, it was immediately evident
to anyone who inspected the apartment building and house that
they were badly deteriorated and required extensive repair to be
habitable. Astoria claims that it had no knowledge of the 1987
letter.
Both the lease and the option contain "as is"clauses.
Four separate terms of the lease include the following language:
"It is understood and agreed by both Landlord and Tenant that
Tenant accepts said unit in 'as is' condition . . . ." The lease
also states that Stormont assumes the risk of any improvements
undertaken.
The option to purchase states that "[t]he property is
sold in _As Is_ condition with no representations or warranties
except those set out in this agreement." The term covering
"Seller's Warranties" states that "[t]he Seller makes no
warranties or promises regarding the Real Property or the
condition of the Real Property, except as are expressly set out
in this agreement."The most salient item in the option is "Risks
Assumed by Purchaser"which provides, in part, as follows:
a. The Purchaser assumes the risk
that all or part of the Real Property
will be inadequate, inappropriate or
unusable for the purposes intended by
the Purchaser. Before closing the
purchase in accordance with this
agreement, the Purchaser will make a
thorough and careful examination of the
Real Property and assure himself that
the Real Property is suitable for the
purposes to which he intends to put it,
and the Purchaser expressly and
unequivocally assumes the risk that
subsequent events or undiscovered,
unknown conditions will make the Real
Property unsuitable for those intended
purposes. The Purchaser expressly
acknowledges that the real property and
improvements are being sold in its
present "as is"condition.
b. Improvements. The Purchaser
acknowledges that improvements to the
Real Property are not new, but rather
are used, and the Purchaser accepts the
risk that there may be unknown, and even
undiscoverable defects to the
improvements to the Real Property.
In a section entitled "Other,"one of the final terms of the
option agreement once again acknowledges the absence of any
warranties relating to the property.
Stormont allegedly spent 240 hours and either $2,500
(according to his affidavit) or $20,000 (according to his brief)
working on the premises. On June 2, 1992, the City of Fairbanks
notified Stormont that the apartment complex would be demolished.
The inspection resulting in the condemnation notice was
undertaken specifically to confirm whether the property was in
compliance with the earlier Notice and Order.
Neither Astoria nor Stormont had any indication that
the City might order demolition; the condemnation came as a
surprise to both parties. Though Stormont admits that he
realized the property "would need a lot of repair work," he
contends that "there is a world of difference between the
premises 'needing a lot of work' and the DEMOLITION ORDER . . .
received from the City." According to Stormont, the parties
talked about how to get the apartments "on line,"and how to get
four units rented so that Stormont could receive rent while
working on the other units. Additionally, Astoria provided
Stormont with sample lease agreements and eviction notices and
gave guidance on how much rents should be.
Stormont filed a complaint against Astoria, alleging
that Astoria had intentionally misled Stormont about the
condition of the building. He requested damages for his
expenditures on the building and rescission of the lease and
option agreements. In the alternative, he asked for damages for
fraud and breach of implied obligations. He later amended the
complaint to allege misrepresentation,1 mutual mistake and
frustration of purpose. Astoria answered and filed a
counterclaim to recover past due payments under the lease
agreement. Astoria later filed a motion for summary judgment.
The superior court entered summary judgment in favor of Astoria
on Stormont's complaint, and on Astoria's counterclaim. This
appeal followed.
II. STANDARD OF REVIEW
We will affirm summary judgment only when no genuine
issue of material fact exists, and the moving party is entitled
to judgment as a matter of law. Wright v. State, 824 P.2d 718,
720 (Alaska 1992). This court reviews de novo summary judgments
based upon interpretation of a contract. Peterson v. Wirum, 625
P.2d 866, 871-72 (Alaska 1981). All reasonable inferences are
drawn in favor of the non-moving party. Zeman v. Lufthansa
German Airlines, 699 P.2d 1274, 1280 (Alaska 1985).
III. ARGUMENTS
A. Mutual Mistake
Stormont's discussion of the mistake issue apparently
embodies three allegations of mistake: (1) a belief that the
structure would not be demolished; (2) a belief that the
apartments were in better condition at the time of the agreement
than they in fact were; and (3) a belief that there had not been
a condemnation order.2
When the parties to an agreement share a mistaken
belief about a material fact, the agreement may be voidable. See
Restatement (Second) of Contracts 152 (1981). The Restatement
sets forth three requirements for a successful mistake argument.
The party seeking to void the contract must prove that (1) the
mistake relates to a "basic assumption on which the contract was
made," (2) the mistake has a material effect on the agreed
exchange of performances, and (3) the party seeking relief does
not bear the risk of the mistake. Restatement (Second) of
Contracts 152 cmt. a (1981).
The first mistake Stormont alleges is that at the time
of the signing neither party anticipated the imminent demolition
order which was sent on June 2, 1992. The order was a result of
an inspection by the Fairbanks Building Department on May 29,
1992. However, this error does not qualify as a mistake
justifying rescission because it concerns a future event. See
Beals v. Tri-B Assocs., 644 P.2d 78, 80 (Colo. App. 1982) ("If
the parties harbor only mistaken expectations as to the course of
future events and their assumptions as to facts existing at the
time of the contract are correct, rescission is not proper.");
Restatement (Second) of Contracts 151 cmt. a (1981).
Stormont also alleges that the parties did not know how
severe the building's problems were at the time they signed the
agreements. The first question is whether this acknowledged
mistake relates to a fundamental assumption underlying the
contracts. The property was listed as "income property," and
Stormont was interested in it for its rental value. Thus,
assumptions about the building's suitability for commercial
leasing (i.e. its habitability) went to the heart of the
contracts.
The second requirement is that the mistake must have a
material effect on the agreed-upon exchange. Stormont has not
satisfied this requirement because he has not alleged that he
received something fundamentally different from what the parties
believed he would. Thus, the mistake could not have had a
material effect on the agreed exchange of performances.
The third requirement also fails as all the evidence
offered suggests that Stormont bore the risk of a mistake as to
the condition of the building.3 Astoria sold the property "as
is." See Frank J. Wozniak, Annotation, Construction and Effect
of Provision in Contract for Sale of Realty by Which Purchaser
Agrees to Take Property "As Is"or in Its Existing Condition, 8
A.L.R. 5th 312 14, at 366 ("as is"clause is strong evidence
that the risk of mutual mistake has been allocated to the
purchaser). As Astoria notes, "this is not a case of a single
'as is' clause buried in the middle of fine print."4 Although
caveats are more prevalent in the option than in the lease, the
agreements are substantially interrelated, the parties executed
them at the same time, and they should therefore be construed
together. Sea Lion Corp. v. Air Logistics of Alaska, 787 P.2d
109, 115 (Alaska 1990). Moreover, the parties discussed the
condition of the building, and Stormont had opportunities to
inspect it.5 By signing the contracts, Stormont treated his
knowledge of the building's condition as adequate. He does not
allege that Astoria concealed significant information from him.6
Nor does he assert that the defects were hidden. See Wozniak,
supra, 5, at 328 (some courts have even relied on as is clauses
to bar actions based on fraud claims when defects were patent).
Additionally, the fact that he was an experienced contractor at
the time weighs against him. We hold that Stormont has not made
out a case for relief based upon mistake.
B. Frustration
Stormont argues that he is entitled to judgment as a
matter of law based on the doctrine of frustration of purpose, or
that at a minimum there is a genuine issue of material fact that
precludes summary judgment in favor of Astoria on this issue.
Frustration is an affirmative defense, and Stormont bears the
burden of proof.
Allocation of risks is an important consideration when
a party pleads frustration.7 That factor weighs against
Stormont. The agreements did not explicitly mention demolition
or condemnation. However, under the agreements, Stormont assumed
the risk that the building would not be suitable for his purposes
due to unknown or undiscovered defects. Thus, we conclude that
Stormont has not met his burden of proving frustration.
IV. CONCLUSION
The superior court's grant of summary judgment in favor
of Astoria is AFFIRMED.
_______________________________
* Sitting by assignment made pursuant to article IV,
section 16 of the Alaska Constitution.
1 Although Stormont's complaint raises the issue of
misrepresentation, he virtually ignored the argument in both his
opposition to summary judgment and his brief on appeal.
Therefore, we treat the argument as waived.
2 Although this last argument appears in the complaint,
it does not appear in the amended complaint or the memorandum
opposing summary judgment. Consequently, Stormont has waived it.
3 As to bearing the risk of the mistake, the Restatement
(Second) 154 (1981), states as follows:
A party bears the risk of a mistake when
(a) the risk is allocated to him by
agreement of the parties, or
(b) he is aware, at the time the
contract is made, that he has only limited
knowledge with respect to the facts to which
the mistake relates but treats his limited
knowledge as sufficient, or
(c) the risk is allocated to him by
the court on the ground that it is reasonable
in the circumstances to do so.
4 Although the Uniform Commercial Code section 2-316
requirement of conspicuousness does not apply to contracts for
the sale of real property,
[c]ourts do require that at a minimum
any disclaimer be written so that it is
reasonable to conclude that the buyer has
read the language. As in sale of goods
cases, this means that the size of the print,
location of the clause in the contract, and
whether it is in bold or contrasting color is
relevant to that determination.
Frona A. Powell, Disclaimers of Implied Warranty in the Sale of
New Homes, 34 Vill. L. Rev. 1123, 1141-42 (1989).
While there are a number of exceptions, courts
generally enforce "as is"clauses. See Wozniak, supra, 2[a],
at 327.
5 Traditionally, American law gave great weight to the
principle of caveat emptor. See Nicola W. Palmieri, Good Faith
Disclosures Required During Precontractual Negotiations, 24 Seton
Hall L. Rev. 70, 74 (1993). This meant that courts would often
refuse to penalize nondisclosure of material information even
without an as is clause. See id. The term caveat emptor emerged
in England in the sixteenth century. Id. at 110. And it has
always been in tension with an older notion, that of dealing in
good faith, which has existed as an ideal for as long as humans
have interacted, and which was developed extensively in Roman
Law. See id. at 80-81. Before the relatively recent appearance
of caveat emptor, sellers generally took strict responsibility
for what they sold. Id. at 110. "Eventually, however, the
combination of increased geographic mobility, changing economic
and social demographics, the rise of trade and the weakened grip
of the Church on society contributed with other factors to the
advent of caveat emptor." Id. at 111.
The appeal of caveat emptor began to fade by the
beginning of the twentieth century. Id. at 112. America began
to put in place a regime of enforced good faith, particularly
with regard to goods. Id. at 112-14. States have adopted the UCC
and other laws, and expanded the scope of common law liability,
for example by applying strict liability to injuries resulting
from defective goods. Id.
Unlike the law governing the sale of goods, however,
real property law has largely remained sympathetic to caveat
emptor. There have been protections for buyers, such as the
implied warranty of habitability for new homes. See id. at 114-
15. And some courts have created exceptions to caveat emptor
when material misrepresentations have been made. See id. at 115
n.163; see also Wozniak, supra, 4-8 (courts generally do not
allow as is clauses to preclude actions for fraudulent
concealment of defects).
6 See Wozniak, supra, 2[2], at 328 ("[I]t has generally
been held or recognized that an 'as is' provision in a contract
for the sale of realty does not bar a vendee's claim based on
allegations of fraud, misrepresentation, or nondisclosure.").
Since Stormont has not sufficiently argued fraud,
misrepresentation, or nondisclosure, we need not determine the
effect of an as is clause where any of these circumstances have
been shown.
7 Under the Restatement (Second) of Contracts 265,
Where, after a contract is made, a
party's principal purpose is substantially
frustrated without his fault by the
occurrence of an event the non-occurrence of
which was a basic assumption on which the
contract was made, his remaining duties to
render performance are discharged, unless the
language or the circumstances indicate the
contrary.
Comment A notes three requirements implicit in this statement:
First, the purpose that is frustrated must
have been a principal purpose of that party
in making the contract. . . . Second, the
frustration must be substantial. . . . The
frustration must be so severe that it is not
fairly to be regarded as within the risks
that he assumed under the contract. Third,
the non-occurrence of the frustrating event
must have been a basic assumption on which
the contract was made.
The Comment further notes that foreseeability is an important
component of the third factor.
We have adopted the Restatement's test for frustration.
See U.S. Smelting, Ref. & Mining Co. v. Wigger, 684 P.2d 850, 857
(Alaska 1984).
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