Hinson v. Jefferson
215 S.E.2d 102 (1975)
287 N.C. 422
Barbara H. HINSON
William W. JEFFERSON et al.
No. 75.

Supreme Court of North Carolina.

June 6, 1975.

[106] Gaylord & Singleton by L. W. Gaylord, Jr., Greenville, for defendants-appellants.


Everett & Cheatham by C. W. Everett, Sr., Bethel, for plaintiff-appellee.

COPELAND, Justice.

Plaintiff excepted to the signing and entry of the foregoing judgment and this constitutes her only assignment of error on appeal. An exception to a judgment rendered by the trial court, without an exception to the evidence or to the court's findings of fact, presents for appellate review the sole question of whether the facts found support the judgment. See, e. g., St. George v. Hanson, 239 N.C. 259, 78 S.E.2d 885 (1954); Best v. Garris, 211 N.C. 305, 190 S.E. 221 (1937). See also Parker v. Insurance Co., 259 N.C. 115, 130 S.E.2d 36 (1963); Putnam v. Triangle Publications, Inc., 245 N.C. 432, 96 S.E.2d 445 (1957).


G.S. § 1A-1, Rule 52(a)(1) provides that "[i]n all actions tried upon the facts without a jury or with an advisory jury, the court shall find the facts specially and state separately its conclusions of law thereon and direct the entry of the appropriate judgment." (Emphasis supplied.) This rule has been interpreted by this Court to require the trial judge to do the following three things in writing: "(1) To find the facts on all issues of fact joined on the pleadings; (2) to declare the conclusions of law arising on the facts found; and (3) to enter judgment accordingly." Coggins v. City of Asheville, 278 N.C. 428, 434, 180 S.E.2d 149, 153 (1971). This was also the rule under former G.S. § 1-185. See, e. g., Morehead v. Harris, 255 N.C. 130, 120 S.E.2d 425 (1961); City of Goldsboro v. Atlantic Coast Line Ry. Co., 246 N.C. 101, 97 S.E.2d 486 (1957).


[107] In the instant case the court found the facts to be as stipulated and thereafter directed entry of judgment in favor of defendants. However, the court failed to state separately its conclusions of law. The mere assertion that "plaintiff is not entitled to the relief prayed for by her," without stating the grounds for such a bare legal conclusion, does not comply with the requirements of Rule 52(a)(1). The purpose for requiring the conclusions of law to be stated separately is to enable appellate courts to determine what law the trial court applied in directing the entry of judgment in favor of one of the parties. See, e. g., Morehead v. Harris, supra; Jamison v. City of Charlotte, 239 N.C. 423, 79 S.E.2d 797 (1954).


The problems engendered by non-compliance with Rule 52(a)(1) are readily apparent in the instant case. We do not know what law or legal theory the trial court applied to the facts in denying plaintiff the relief prayed for. We can only assume that the trial court found none of plaintiff's legal theories to be persuasive. Plaintiff states in her sole assignment of error that she relies on the following legal points in support of her exception to the judgment:


"1. That the stipulated facts show that there was a mutual mistake of an existing material fact, common to both parties, and by reason thereof each has done what neither intended, coupled with a failure of consideration.

"2. That in a conveyance of land by deed containing restrictions therein which restrict the use of the property for a certain purpose, the grantor thereby warrants that the property so conveyed and restricted can be used for the specific purpose to which its use is restricted by the deed of conveyance."


In general, we are bound by the findings of fact unless such facts are not supported by any competent evidence. See, e. g., Blackwell v. Butts, 278 N.C. 615, 180 S.E.2d 835 (1971); Knutton v. Cofield, 273 N.C. 355, 160 S.E.2d 29 (1968). Here the facts are conclusive since no exception was taken by either party to the court's findings. On the other hand, we are not precluded from reviewing the trial court's view of the applicable law arising on the facts. See generally 1 McIntosh N. C. Practice and Procedure §§ 1372-74 (1956) (Phillips' 1970 Supp.); 5A Moore's Federal Practice § 52.03(2) (1974); Wright & Miller, Federal Practice and Procedure: Civil § 2588 (1971). Hence, in the interest of justice, we deem it appropriate to proceed to determine the proper legal conclusions to be drawn from the trial court's findings.


Based on these uncontroverted facts, the Court of Appeals held that plaintiff was entitled to rescind the contract on the grounds of "mutual mistake of material fact" coupled with a "total failure of consideration." 24 N.C.App. at 238-39, 210 S.E.2d at 502-03. Assuming, arguendo, that the Court of Appeals was correct, and that this is a true mistake case, then it is one that must necessarily involve a mistaken assumption of the parties in the formation of the contract of purchase. In these mistaken assumption cases, unlike other kinds of mistake cases, the parties communicate their desires to each other perfectly; they intend to complete a sale, or a contract of sale, and their objective acts are in accord with their intent. Difficulties subsequently arise because at least one of the parties has, either consciously or unconsciously, mistaken beliefs concerning facts that make the sale appear more attractive to him than it actually is. For many cases see, e. g., J. Wade, Cases on Restitution (1966); J. Dawson & J. Palmer, Cases on Restitution (1958). See generally 3 A. Corbin, Contracts §§ 579-to-621 (2d ed. 1960); Restatement of Contracts § 502 (1962); Restatement of Restitution (1937); 6 S. Williston, Contracts (rev. ed. 1937); Annot., Vendor and Purchaser: Mutual Mistake as to Physical Condition of Realty as Ground for Rescission, 50 A.L.R.3d 1188 (1973); Atiyah & Bennion, Mistake in the Construction of Contracts, 24 Modern L.Rev. 421 (1961); Foulke, Mistake in the Formation and Performance [108] of a Contract, 11 Colum.L.Rev. 197 (1911).


In attempting to determine whether the aggrieved party is entitled to some kind of relief in these mistaken assumption cases, courts and commentators have suggested a number of factors as relevant. E. g., was the mistake bilateral or unilateral; was it palpable or impalpable; was one of the parties unjustly enriched; was the other party unjustly impoverished; was the risk assumed by one of the parties (i. e., subjective ignorance); was the mistake fundamental or collateral; was the mistake related to present facts or to future expectations; etc. See Rabin, A Proposed Black-Letter Rule Concerning Mistaken Assumptions in Bargain Transactions, 45 Tex.L. Rev. 1273 (1967) (hereinafter cited as Rabin). See also D. Dobbs, Remedies 716-84 (West 1973).


Our research has failed to disclose a prior North Carolina case applying the doctrine of mutual mistake pertaining to a physical condition of real property as a ground for rescission. But see MacKay v. McIntosh, 270 N.C. 69, 153 S.E.2d 800 (1967). However, we have found a few cases from other jurisdictions.


In Blythe v. Coney, 228 Ark. 824, 310 S.W.2d 485 (1958), the court allowed rescission where the vendor and purchaser of a residence were mistaken as to the adequacy of water pressure. The court declared that a contract may be rescinded for a mutual mistake regarding a material fact and that the mistaken assumption of the parties could be characterized as such a mistake in view of the evidence that the water meter in the home was unconnected at the time it was shown to the purchasers so that neither party was aware of the water shortage until after the sale.


Likewise, in Davey v. Brownson, 3 Wash. App. 820, 478 P.2d 258 (1970), cert. denied, 78 Wash.2d 997 (1971), the court relied on the doctrine of mutual mistake of a material fact in rescinding the sale of, inter alia, a 26-unit motel that, unknown to either party at the time of signing the contract, was infested with termites, a condition that could only be corrected by substantial structural repair. The court, quoting from Lindeberg v. Murray, 117 Wash. 483, 495, 201 P. 759, 763 (1921), stated: "We think it is elementary that, where there is a clear bona fide mistake regarding material facts, without culpable negligence on the part of the person complaining, the contract may be avoided, and equity will decree a rescission. We take it that the true test in cases involving mutual mistake of fact is whether the contract would have been entered into had there been no mistake. . . ." Id. at 824, 478 P.2d at 260.


One court has held that there were sufficient grounds for rescission of a sale of realty where both the vendor and the vendee were mistaken as to the suitability of the soil or the terrain for agricultural purposes. See, e. g., Binkholder v. Carpenter, 260 Iowa 1297, 152 N.W.2d 593 (1967); McDonald v. Benge, 138 Iowa 591, 116 N.W. 602 (1908); Smith v. Bricker, 86 Iowa 285, 53 N.W. 250 (1892); Hood v. Smith, 79 Iowa 621, 44 N.W. 903 (1890). Suffice it to say, all four decisions appear to be contra to the traditional doctrine of caveat emptor.


The closest mistaken assumption case we have found to our fact situation is A & M Land Development Co. v. Miller, 354 Mich. 681, 94 N.W.2d 197 (1959). In that case, the court held that the trial judge was correct in refusing to rescind the sale of 42 building lots slated for subdivision and development, because of mutual mistake regarding the poor absorptive qualities of the soil that resulted in a tentative refusal of septic tank permits to the subdivider. The court concluded that assuming there was a mutual mistake, to grant rescission would be improper since the purchaser received the property for which he contracted, notwithstanding that it was less attractive and less valuable to him than he had anticipated.


There are, however, several important distinguishing factors between the Miller case and our case. First, the purchaser in [109] Miller was a developer-speculator; in our case the purchaser is a consumer-widow. Second, the property in Miller was not rendered valueless for its intended use, but only rendered less valuable because it could not be developed as densely as originally anticipated; in our case the property was rendered totally valueless for the intended use.


In our view, the difficulty with the above listed factors and with the decisions we have examined is that in any given case several factors are likely to be present, and each may point toward a different result. For example, in A & M Land Development Co. v. Miller, supra, the mistake appears to have been mutual and it also appears to have been induced by misrepresentations of the vendor (i. e., vendor furnished reports of privately engaged engineers and local public sanitation officials indicating that the character of the soil was suitable for the use of individual septic tank systems). Yet, the court held that rescission would be improper since the purchaser received the property for which he had contracted. Perhaps the court felt that since the vendee was a developer-speculator he assumed the risk of soil defects. In short, the relation of one factor to another is not clear. Compare Vickerson v. Frey, 100 Cal.App.2d 621, 224 P.2d 126 (1950) (mistake regarding effect of building code held no grounds for rescission) with MacKay v. McIntosh, supra (mistake regarding zoning ordinance held grounds for rescission). But see Rabin, supra. In any event, because of the uncertainty surrounding the law of mistake we are extremely hesitant to apply this theory to a case involving the completed sale and transfer of real property. Its application to this type of factual situation might well create an unwarranted instability with respect to North Carolina real estate transactions and lead to the filing of many nonmeritorious actions. Hence, we expressly reject this theory as a basis for plaintiff's rescission.


Is plaintiff therefore without a remedy? Did plaintiff buy this property "at the end of the halter" (an expression of horse traders)? At this moment, plaintiff has naked legal title to a tract of real estate whose use to her is limited by the restrictive covenants and by the facts as stipulated to what she calls "the dubious pleasure of viewing the same." On the other hand, defendants have $3,500 of plaintiff's money. There can be no question but that the parties to this transaction never contemplated this particular use of the subject property. In fact, the deed, by its very terms, makes it clear that the intended use was for the construction of a single-family residence, strictly limited as to costs and as to design. The stipulation further indicates that both prior to and at the time of the conveyance neither defendants nor plaintiff knew that the property would not support a septic tank or on-site sewage disposal system.


In the face of these uncontroverted facts, defendants rely upon the doctrine of caveat emptor as a legal defense to plaintiff's action for rescission.


The common law doctrine of caveat emptor historically applied to sales of both real and personal property. Its application to personal property sales, however, has been restricted by the Uniform Commercial Code. See G.S. § 25-2-314 et seq. Over the years, as to real property, the number of cases that strictly apply the rule of caveat emptor appears to be diminishing, while there is a distinct tendency to depart therefrom, either by way of interpretation, or exception, or by simply refusing to adhere to the rule where it would work injustice. See, e. g., 7 Williston, Contracts §§ 926 and 926A (3d ed. 1963); 77 Am.Jur.2d Vendor and Purchaser §§ 329-37 (1975); 67 Am. Jur.2d Sales § 462 (1973); Haskell, The Case for an Implied Warranty of Quality in Sales of Real Property, 53 Geo.L.J. 633 (1965) (hereinafter cited as Haskell); Seavey, Caveat Emptor as of 1960, 38 Texas L.Rev. 439 (1960). See generally Annot., 50 A.L.R.3d 1188, supra; Annot., Liability of Builder-Vendor or Other Vendor of New Dwelling for Loss, Injury, or Damage Occasioned [110] by Defective Condition Thereof, 25 A.L.R.3d 383 (1969).


In recent years the rule of caveat emptor has suffered severe inroads in sales of houses to be built or in the course of construction. See generally Bearman, Caveat Emptor in Sales of Realty—Recent Assaults Upon the Rule, 14 Vand.L.Rev. 541 (1961); Bixby, Let the Seller Beware: Remedies for the Purchase of a Defective Home, 49 J. Urban Law 533 (1971); Haskell, supra; Jaeger, The Warranty of Habitability, 46 Chi-Kent L.Rev. 123 (1969) (Part I); 47 Chi-Kent L.Rev. 1 (1970) (Part II); Roberts, The Case of the Unwary Home Buyer: The Housing Merchant Did It, 52 Cornell L.Q. 835 (1967); Comment, Buyer's Remedies in the Sale of Real Property in California, 53 Calif.L.Rev. 1062 (1965); Note, Implied Warranties in the Sale of New Houses, 27 Md.L.Rev. 299 (1967). Today, it appears that a majority of the states imply some form of warranty in the purchase of a new home by a first purchaser from a buildervendor. See, e. g., Annot., 25 A.L.R.3d 383, supra, for a collection of the cases. See also M. Friedman, Contracts and Conveyances of Real Property 30-35 (3d ed. 1975) (hereinafter cited as Friedman).


During the course of this litigation, and subsequent to the oral arguments of this case in the Court of Appeals, this Court decided the case of Hartley v. Ballou, 286 N.C. 51, 209 S.E.2d 776 (1974). In that case, this Court, in an opinion by Chief Justice Bobbitt, approved the "relaxation of the rule of caveat emptor" in respect of defects of which the purchaser of a recently completed or partially completed dwelling was unaware and could not discover by a reasonable inspection, and substituted therefore, for the first time in this State, an implied warranty defined as follows:


"[I]n every contract for the sale of a recently completed dwelling, and in every contract for the sale of a dwelling then under construction, the vendor, if he be in the business of building such dwellings, shall be held to impliedly warrant to the initial vendee that, at the time of the passing of the deed or the taking of possession by the initial vendee (whichever first occurs), the dwelling, together with all its fixtures, is sufficiently free from major structural defects, and is constructed in a workmanlike manner, so as to meet the standard of workmanlike quality then prevailing at the time and place of construction; and that this implied warranty in the contract of sale survives the passing of the deed or the taking of possession by the initial vendee." Id. at 62, 209 S.E.2d at 783. At the same time, Hartley made it clear that such implied warranty falls short of "an absolute guarantee." "An implied warranty cannot be held to extend to defects which are visible or should be visible to a reasonable man . . . ." Id. at 61, 209 S.E.2d at 782. As to what constitutes a "reasonable inspection" under diverse factual situations, see, e. g., Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972); Douglas v. W. C. Mallison & Son, 265 N.C. 362, 144 S.E.2d 138 (1965); Insurance Co. v. Don Allen Chevrolet Co., 253 N.C. 243, 116 S.E.2d 780 (1960); Driver v. Snow, 245 N.C. 223, 95 S.E.2d 519 (1956). Cf. G.S. § 25-2-316(3)(b).


We believe that many of the mutual mistake cases discussed supra were in fact embryo implied warranty cases. For example in Davey v. Brownson, supra, the purchaser obtained rescission because of termites on the ground of mutual mistake. Although the court denied its decision was based on implied warranty, it is difficult to understand the application of the mutual mistake doctrine. See also Blythe v. Coney, supra. See generally Friedman, supra, at 30-37. In this context, Hartley could easily be classified as a mutual mistake case, i. e., both parties assumed that the basement wall was sufficiently free from structural defects so as to prevent any water leakage. But, in Hartley we recognized the implied warranty as a limited exception to the general rule of caveat emptor; if we had elected to totally abolish the doctrine, then perhaps application of the mutual mistake theory [111] would have been appropriate. Hartley is not an abrogation of the doctrine of caveat emptor; on the contrary it is only a well-reasoned exception.


Concededly, this is not the Hartley fact situation. Hartley involved a buildervendor of new homes and a consumervendee. Nonetheless, we believe that Hartley provides the legal precedent for deciding this case. The basic and underlying principle of Hartley is a recognition that in some situations the rigid common law maxim of caveat emptor is inequitable. We believe this is one of those situations. As a result, we hold that where a grantor conveys land subject to restrictive covenants that limit its use to the construction of a single-family dwelling, and, due to subsequent disclosures, both unknown to and not reasonably discoverable by the grantee before or at the time of conveyance, the property cannot be used by the grantee, or by any subsequent grantees through mesne conveyances, for the specific purpose to which its use is limited by the restrictive covenants, the grantor breaches an implied warranty arising out of said restrictive covenants.


Defendant contends that if plaintiff is permitted to rescind, then any contract or conveyance can be set aside under a set of circumstances rendering the land no longer attractive to a purchaser. If we applied the mutual mistake doctrine, then there might be some merit to this argument. But, under the rule we have announced, a purchaser is bound by patent defects or by facts a reasonable investigation would normally disclose. In the instant case, it is clear that a reasonable inspection by the grantee either before or at the time of conveyance would not have disclosed that the property could not support a septic tank or on-site sewage disposal system.


Therefore, under the facts of this case, we hold that defendant grantors have breached the implied warranty, as set out above, and that plaintiff, by timely notice of the defect, once it was discovered, is entitled to full restitution of the purchase price; provided that she execute and deliver a deed reconveying the subject lot to defendants. The judgment of the Court of Appeals, as modified herein, is thus affirmed.


Modified and affirmed.


SHARP, C. J., and LAKE and MOORE, JJ., concur in result.