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9. If the property owner refuses and sues the builder for breach of contract, which of the following will the court probably decide?
Claiming accurately that removal of enough granite to permit the construction as planned would cost him an additional $3 million and a probable net loss on the contract of $2 million, the builder refused to proceed with the work unless the property owner would promise to pay an additional $2.5 million for the completed building.
For an agreed price of $20 million, a builder specializing in large scale construction projects contracted with a property owner to design and build on the property owner's commercial plot a 15-story office building. As per a local statute due to the number of earthquakes in the area, the building's foundation required a minimum excavation of 25 feet. In excavating for the foundation and underground utilities, the builder encountered a massive layer of granite at a depth of 15 feet. When the contract was made, neither the property owner nor the builder was aware of the subsurface granite, for the presence of which neither party had hired a qualified expert to test.
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A disadvantaged party will not be able to avoid the contract if the risk of that mistake was and still is allocated to him. The risk can be re-allocated to the other party in three ways: (i) by agreement of the parties; (ii) when a party is aware at the time the contract is made that he has only limited knowledge with respect to the facts related to the mistake but treats his limited knowledge as sufficient; or (iii) the risk is allocated by the court as is reasonable under the circumstances.
C is correct. Generally, a contract may be rescinded due to a mistake of fact if the mistake relates to a fundamental assumption of the contract and has a material effect on the exchange. This holds true unless the court determines that the party asserting mistake should bear the risk of the mistake. Here, the builder is engaged in the business of excavation and had the opportunity to investigate the condition of the ground. He knew that he had to excavate at least 25 feet and failed to do any test inspections ahead of time. Therefore, the contractual duty will not be discharged for increased price and difficulty because the builder assumed the risk here that the ground included granite.
A is incorrect. Impracticality requires an extreme, unreasonable, and unanticipated difficulty or expense. Here, there is only a change in the degree of difficulty resulting in a 15% increase in expense, which is the type of risk that a fixed-price construction contract is intended to cover. His additional price increase and work did not render his performance impossible, and not extreme or unreasonable.
B is incorrect. This choice is factually and legally incorrect because a mutual mistake did not occur. A mutual mistake is a mistake by both parties to a contract concerning a basic assumption of fact on which the contract was based. Here, the builder assumed the risk that the ground included granite, and he cannot avoid the contract if the construction proves much more difficult than expected.
D is incorrect. The fact that the builder did not have actual notice of the existence of granite in the area does not alter the conclusion that the builder should bear the risk. He knew that he had to excavate at least 25 feet and failed to do any test inspections ahead of time.