For more than 30 years, the Restatement Second of Contracts has guided state and federal courts. Recently, sections of that Restatement were adopted by the supreme courts of three states.
In Land Baron Inv. v. Bonnie Springs Family Ltd. P’ship, 356 P.3d 511 (Sept. 17, 2015), the Supreme Court of Nevada adopted Restatement Second of Contracts § 154(b) in holding that mutual mistake could not be the basis for rescission of a contract where one party bore the risk of the mistake. In that case, a real-estate development company sought to rescind a multimillion-dollar agreement to purchase undeveloped land in Nevada, alleging that both parties to the agreement “mistakenly believed there would be sufficient access and water rights for a subdivision on the property.” In adopting § 154(b) and affirming the trial court’s order granting summary judgment for the seller, the court reasoned that the developer bore the risk of the mistake because it was a sophisticated purchaser that drafted the contract itself, yet it failed to account for water access and basic infrastructure for a large neighborhood located in a remote area of Nevada. The court concluded that, because the developer had not done its due diligence, and because there was no evidence that the seller represented that water and utilities would be available, the developer “assumed the risk by proceeding with the contract despite having limited knowledge of the actual conditions,” and the contract would not be rescinded on the basis of a mutual mistake.
In EverBank v. Marini, 2015 VT 131 (Oct. 16, 2015) the Supreme Court of Vermont adopted in large part Restatement Second of Contracts §§ 174-176. In that case, which was brought by a mortgage lender seeking foreclosure on residential property, the court reversed a grant of summary judgment for one co-mortgagor—who had alleged that the mortgage was void as a result of duress in its signing—and remanded for trial as to whether the mortgage was voidable. The court relied heavily on the Restatement in analyzing whether or not the contract was void or voidable, noting that the Restatement established “an appropriate general framework to differentiate between the two varieties of improper conduct and their attendant impacts on and consequences for the bargaining process.” The court then adopted §§ 174-176 as they related to duress, excepting, in accordance with Vermont law, those provisions that dealt with physical compulsion. The court considered the co-mortgagor’s evidence that, on the night before she signed the mortgage, her ex-husband (the other co-mortgagor) wielded a pair of scissors, berated her repeatedly in front of her children, and threatened to divorce her, if she would not sign. It ultimately determined that this was insufficient evidence of duress, because the alleged actions did not constitute a “threat of imminent physical violence” upon her at the time she signed the mortgage, since the signing did not occur until the following day. The court remanded for the trial court to determine whether the alleged threatening behavior rendered the mortgage voidable based on the factors set out in the Restatement.
In another foreclosure action, Erkins v. Alaska Trustee, LLC, 355 P.3d 516 (July 31, 2015), the Supreme Court of Alaska adopted Restatement Second of Contracts § 15. In that case, a home mortgagor alleged that he had been incapacitated as a result of being on strong pain medication at the time that he obtained his mortgage, and thus contended that the contract was void. The court determined that the effect of incapacity on a contract’s validity was an issue of first impression in Alaska, and adopted § 15 for the proposition that incapacity rendered a contract voidable, rather than void. Because the defendant lender had been assigned the note without knowledge of the mortgagor’s alleged incapacity, the defendant was a holder in due course and was immune from the mortgagor’s incapacity defense under Alaska law.
The Institute is currently working on Restatement of the Law, Consumer Contracts, which largely follows the structure of the Second Restatement, but is more narrowly focused. To learn more about these projects, visit the projects page.