Lenawee County Board of Health v. Messerly

The Messerlys sold a three-unit apartment building to the Pickles. Neither party knew that the building's septic system had been illegally installed by a previous owner and was in violation of the county health code. After the sale, the Lenawee County Board of Health condemned the property and ordered that it could not be used as a dwelling, rendering the building essentially worthless. The Pickles sought to rescind the contract on the ground of mutual mistake.

Justice Ryan, writing for the court, declined to apply the Sherwood v. Walker substance-versus-quality distinction, finding it an inadequate analytical framework. Instead, the court adopted the approach of the Restatement (Second) of Contracts Section 154, which focuses on risk allocation. Under this framework, a party bears the risk of a mistake when: (a) the risk is allocated by the agreement, (b) the party is aware of limited knowledge but treats it as sufficient, or (c) the court allocates the risk on grounds of reasonableness. Here, the 'as is' clause manifested the parties' intent to allocate the risk of defects to the buyers. The court acknowledged that the mistake was mutual and material but concluded that rescission was inappropriate because the buyers had assumed the very risk that materialized.

Lenawee County v. Messerly significantly influenced the modern approach to mutual mistake by shifting the focus from the nature of the mistake to the allocation of risk. The case has been widely cited for the proposition that courts should look to contractual provisions, the parties' knowledge, and equitable considerations to determine who bears the risk of a shared mistake. It effectively supplanted the Sherwood v. Walker substance-versus-quality test in many jurisdictions.