OPINION
Appellant, City of Savage, appeals from a judgment voiding its contract with respondents, Formaneks, and excusing respondents from further performance because the agreement was unenforceable.
FACTS
Respondents, the Formaneks, have owned land in the City of Savagе since 1959. In 1980, the City of Savage (City) started planning an industrial development project (Project) that included twenty acres of land owned by the Formaneks. The Project area, along with much of the land along the Minnesota River in Savage, is under the authority of the Army Corps of Engineers. This meаns that any fill or development requires a permit from the
In late 1983, as part of the Project, an Environmental Assessment Worksheet (EAW) was sent to the Corps. The purpose of the EAW was to give notice to interested government agencies of the planned development of the Project аnd to indicate what environmental effect it would have. In January 1984, the City received notice from the Corps that the Project was authorized by the nationwide permit system. The City interpreted the Corps’ January 1984 response as granting a permit for the total project; both Phase I, the installation of sewer and road improvements, and Phase II, the actual industrial development. The Corps indicated later that only Phase I was permitted.
The Formaneks were aware of the potential negative effect of Corps discretionary authority on the ability оf landowners to develop their property. They made several contacts with the City engineer and representatives of the Corps to assure themselves that all permits for the Project were complete. Also, during the planning of the Project, the Corps was expanding its authority in another area of Savage, the Savage Fen, about a half-mile from the Project. This Fen area included the other Formanek property which was already under Corps’ discretionary authority. The Fen area had been determined a unique wetland plant community that was in need of special environmental protection. Both the Formaneks and the City believed that the Formaneks Project property was not a wetland and therefore not in need of any protection that would require Corps’ discretionary authority. The Formanеks and other City officials were assured by the City engineer in charge of the project that the expansion of discretionary authority concerning the Fen area did not affect the Project and that permitting for the Project was complete.
In order to pay for the Prоject, the City planned a combination of special assessments to the current landowners and tax increment financing. The tax increment financing was necessary because the cost of the improvements, approximately $3.4 million, would have made assessments prohibitivе. The tax increment financing was dependent on successful development that would result in an increased tax base and thereby provide the funds for paying the debt.
To assure that the special assessments would be paid, the City and the landowners entered into assessment agreеments. The agreements gave the City a lien in all assessed property. The Formaneks signed their agreement on April 24, 1984. The improvements in the Project area were started in the summer of 1984 and completed in early 1985.
On March 4, 1985, the City received notice that the Corps was taking discrеtionary authority of the Project. The designation of the Project within the Corps’ discretionary authority has effectively halted any development. The mayor admitted that the designation has left much of the land in an unusable condition. Five private landowners in the Project area have sought permits and been rejected. The only permit that has been approved was on land owned by the state that was being purchased by the City. The City has encouraged the private landowners to stop asking for permits on an individual basis and work with the City to come up with somе agreement with the Corps for development. The Formaneks have not found anyone interested in purchasing their property or developing it because of the permit requirement. The Formaneks have not sought a permit for their property because they have no development proposal to support it. The Formaneks made their first assessment
The City brought an action claiming breach of the assessment agreement-and sought to foreclose on the Formaneks’ property. The Formaneks counterclaimed saying that the agreement was unenforceable and that their payment of the assessment should be refunded to them with interest. The only issue litigated at trial was the enforceability of the assessment agreement. The trial court found the agreement void because both parties were mistaken as to a material fact concerning the agreement. The court also found that the For-maneks would have been excused from performance because of frustration of purpose. Because only the enforcеability of the agreement was litigated, the trial court left open the possibility that the City could bring a claim for any benefit that the improvements placed on the landowners’ property.
ISSUES
1. Did the trial court err in voiding the assessment agreement based on mutual mistake?
2. Did the trial court еrr in excusing the Formaneks’ duties under the assessment agreement?
3. Did the trial court err in denying the Formaneks’ request for attorney fees?
ANALYSIS
On appeal from a judgment, an appellate court reviews whether the evidence sustains the findings and whether the findings sustain the conclusions of law and judgmеnt.
Minnesota Power & Light Co. v. Carlton County,
Mutual Mistake
“If there is a mutual mistake concerning a material fact, parties to a contract may avoid the contract.”
Winter v. Skoglund,
Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a matеrial effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake * * *.
Id. (quoting Restatement (Second) of Contracts § 152(1) (1981)).
The court found that at the time the assessment agreement wаs signed, both parties believed 1) that the Project property did not contain wetlands, 2) that the Corps had no interest in the property and that all necessary permitting had occurred, 3) that these assumptions were basic to the agreement and 4) that neither party would have signеd the agreement had they known further permitting could be required. Based on these findings, the court concluded that these mistakes were mutual, concerned a basic assumption on which the agreement was made and had a material effect on the agreed exchange оf performance.
The City argues that the court’s voiding the contract and declaring the agreement unenforceable is not supported by the facts and is an error of law. The court’s findings of fact are reviewed under a clearly erroneous standard, Minn.R.Civ.P. 52.01; however, its conсlusions of law are not binding and are decided independently.
Dahlheimer v. City of Dayton,
The first error alleged by the City is that a contract cannot be avoided based on a mistake of law. The City says that the beliefs of the parties that no further permitting could be required is a mistake of law concerning the authority of the Corps. Further, the City asserts that the evidence does not support the court’s finding.
Whether a mistake is one of fact or law is not significant when applying the doctrine of mutual mistake.
Winter,
The City’s second argument is that the mistake cannot relate to a future happening. “The erroneous belief must relate to the facts as they exist at the time of the making of the contract.”
Creative Communications Consultants v. Gaylord,
Frustration of Purpose
Although performance under the agreement would be excused once the contract was void, the court went on to address the issue of frustration of purpose. Three conditions must be met for the defense of frustration of purpose to apply:
1. The party’s principal purpose in making the contract is frustrated;
2. without that party’s fault;
3. by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made. *
National Recruiters, Inc. v. Toro Co.,
The purpose that is frustrated must have been a principal purpose of the party claiming discharge. The principal purpose:
[M]ust be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense.
Restatement (Second) of Contracts § 265, comment a (1981). Here, both parties understood the principal purpose of the agreement was tо enable industrial development. The City was going to depend on tax increment financing to reduce the debt, and the success of the tax increment financing depended on successful development. The Formaneks would have little use for sewer and water on a parcеl of land they have held for 31 years if they could not sell or develop it.
The court found that the imposition of discretionary authority by the Corps over the Project had a negative effect on development and that the actions by the Corps deterred the Formaneks from selling or developing their Project property. The court received evidence that all five private landowners who applied have been denied permits. Based on these findings, the court concluded that the Formaneks’ purpose in entering the agreement had been frustrated.
The City argues that these findings fail to support sufficient frustration and that to show frustration of purpose the value of the contract must be totally or nearly totally destroyed. The City argues further that before the Formaneks can show sufficient frustration of purpose, they must have applied for and been denied a permit by the Corps.
[T]he frustration must be substantial. It is not enough that the transaction has become less profitable for the affected party * * *. The frustration must be so severe that it is not fairly to be regarded as within the risks * * * assumed under the contract.
Id.
Here, the Formaneks would have likely assumed market risks and normal risks connected with the development of property. However, they did not assume the risk
The City also argues that the frustration was caused by the Formaneks because they have not applied for and been denied a permit. However, the frustration was the unexpected action of the Corps requiring further permits. The Formaneks did not cause the Corps to assume discretionary authority over their Project property.
Finally,
[T]he non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. * * *
[T]he mеre fact that the event was foreseeable does not compel the conclusion that its non-occurrence was not such a basic assumption.
Id. at § 265, comment a. Here, both parties testified that they would not have entered the agreement if they had known the Corрs might require further permits. The non-occurrence of the Corps taking discretionary authority of the Project was a basic assumption on which the contract was made.
Attorney Fees
The awarding of costs, including attorney fees, is at the discretion of the trial court.
Peterson v. City of Elk River,
Affirmed.