Eliker v. Chief Industries, Inc.

• Decision Date: 23 April 1993
• Docket Number: No. S-90-564,S-90-564
• Citation: 243 Neb. 275,498 N.W.2d 564
• Parties: John O. ELIKER and Donna J. Eliker, Husband and Wife, Appellees, v. CHIEF INDUSTRIES, INC., Appellant.
• Court: Nebraska Supreme Court

Page 564

498 N.W.2d 564

243 Neb. 275

John O. ELIKER and Donna J. Eliker, Husband and Wife, Appellees, v. CHIEF INDUSTRIES, INC., Appellant.

No. S-90-564.

Supreme Court of Nebraska.

April 23, 1993.

Syllabus by the Court

1. Actions: Contracts: Rescission: Equity. An action to rescind a written instrument is an equity action.

2. Equity: Appeal and Error. On appeal from the district court to an appellate court, an equity case is tried as to factual issues de novo on the record, requiring the appellate court to reach a conclusion independent of the findings of the trial court. However, when credible evidence conflicts, the appellate court may give weight to the fact that the trial court observed the witnesses and accepted one version of the facts over another.

3. Contracts: Rescission. Grounds for cancellation or rescission of a contract include, inter alia, fraud, duress, unilateral or mutual mistake, and inadequacy of consideration, which may arise from nonperformance of the agreement.

4. Contracts: Consideration: Breach of Contract: Rescission: Equity. Although failure of consideration is not generally considered a sufficient ground for equitable cancellation of a contract, a ground for equitable cancellation may arise from a breach of contract which is so substantial and fundamental as to defeat the object of the parties in entering into the contract.

5. Construction Contracts: Words and Phrases. Substantial performance of a building contract exists where all of the essentials necessary for the full accomplishment of the purposes of the contract have been performed with such approximation to complete performance that the owner obtains substantially what is called for by the contract.

6. Construction Contracts: Breach of Contract: Rescission. Rescission is the proper remedy where a breach of contract is so substantial and fundamental as to defeat the object of the parties in making the agreement, so that it leaves the property bargained for uninhabitable for all practical purposes.

Douglas L. Kluender, of Healey Wieland Law Firm, Lincoln, for appellant.

No appearance for appellees.

HASTINGS, C.J., and BOSLAUGH, WHITE, CAPORALE, SHANAHAN, FAHRNBRUCH, and LANPHIER, JJ.

HASTINGS, Chief Justice.

John O. and Donna J. Eliker brought this action to obtain rescission of a home construction contract entered into with Chief Industries, Inc. The district court found that the plaintiffs were entitled to rescission of the contract, together with repayment of sums which they had expended on the house, and relief from the existing mortgage. The court further ordered that upon rescission of the contract and the making of the required repayments, the defendant was entitled to a quitclaim deed to the property from the plaintiffs.

An action to rescind a written instrument is an equity action. Kracl v. Loseke, 236 Neb. 290, 461 N.W.2d 67 (1990); Christopher v. Evans, 219 Neb. 51, 361 N.W.2d 193 (1985).

On appeal from the district court to an appellate court, an equity case is tried as to factual issues de novo on the record, requiring the appellate court to reach a conclusion independent of the findings of the trial court. However, when credible evidence conflicts, the appellate court may give weight to the fact that the trial court observed the witnesses and accepted one version of the facts over another. Helvey v. Dawson Cty. Bd. of Equal., 242 Neb. 379, 495 N.W.2d 261 (1993); Dowd v. Board of Equal., 240 Neb. 437, 482 N.W.2d 583 (1992).

On February 15, 1984, the Elikers entered into a contract with Chief Industries for the purchase of a new home. The Elikers moved into the home on May 27, 1984, and immediately began to notice defects in material and workmanship. Apparent defects, inter alia, included a cracked driveway; drain tile which allowed water to drain into the garage; numerous exterior foundation cracks; an exterior wall which was bowed inward 1 to 2 inches; water seepage in the basement and garage; numerous severe cracks in the basement walls, including one which allowed daylight to show through; wooden center beams which extended through the concrete floor into the earth, as a potential source for termite infestation; doors which were out of alignment; drywall with extreme horizontal cracking and buckling; a large crack located in the center of the living room ceiling extending down the west wall of the house; and a living room floor which was separating into two halves, with the resulting two floor levels on different planes.

A registered land surveyor who surveyed the property testified that the foundation was not square, the house was not square, and the foundation was not level. Building contractor Lawrence Peterson testified that he had inspected the house and estimated that it would cost $23,477.25 to do the necessary repairs. A licensed real estate appraiser, Stanley Trampe, stated that his inspection of the property revealed it would be necessary to spend a minimum of $18,500 for repairs and that even after the repairs were accomplished the house would have limited marketability because of the inherent structural defects. Chief Industries' director of purchasing stated that the repairs that he believed were necessary could be done for less than $5,500 and would not include foundation repairs.

The district court found that the cost of repair, when added to the present value of the home, exceeded the value of the home after that repair and that the plaintiffs were entitled to rescission. Chief Industries asserts that the district court erred in holding that rescission was an appropriate remedy for a construction contract.

Chief Industries asserts that the proper remedy for breach of a construction contract may be found in the language of this court in Moss v. Speck, 209 Neb. 46, 48, 306 N.W.2d 156, 157 (1981):

[W]here defects in materials, construction, or workmanship are remediable without materially injuring or reconstructing any substantial portion of the building, the measure of damages is the cost of remedying the defects, but where the defects cannot be remedied without reconstruction of or material injury to a substantial portion of the building, the measure of damages is the difference between the value as constructed and the value if built according to the contract.

Chief Industries also contends that while rescission of a contract is allowable in certain circumstances, it is an extreme remedy available only where damages cannot be utilized to compensate the plaintiffs for their loss.

Grounds for cancellation or rescission of a contract include, inter alia, fraud, duress, unilateral or mutual mistake, and inadequacy of consideration, which may arise from nonperformance of the agreement. See 13 Am.Jur.2d Cancellation of Instruments § 23 (1964). Although failure of consideration is not generally considered a sufficient ground for equitable cancellation of a contract, a ground for equitable cancellation may arise from a breach of contract which is so substantial and fundamental as to defeat the object of the parties in entering into the contract. Id.

In Klapka v. Shrauger, 135 Neb. 354, 361, 281 N.W. 612, 616 (1938), this court discussed the general rule:

"It is not every breach of a contract or failure exactly to perform--certainly not every partial failure to perform--that entitles the other party to rescind. A breach which goes to only a part of the consideration, is incidental and subordinate to the main purpose of the contract, and may be compensated in damages does not warrant a rescission of the contract; the injured party is still bound to perform his part of the agreement, and his only remedy for the breach consists of the damages he has suffered therefrom. A rescission is not warranted by a mere breach of contract not so substantial and fundamental as to defeat the object of the parties in making the agreement."

(Emphasis supplied.)

Substantial performance of a building contract exists where all of the essentials necessary for the full accomplishment of the purposes of the contract have been performed with such approximation to complete performance that the owner obtains substantially what is called for by the contract. Jones v. Elliott, 172 Neb. 96, 108 N.W.2d 742 (1961). Such was not the case here.

The Iowa Court of Appeals, in Folkers v. Southwest Leasing, 431 N.W.2d 177, 181 (Iowa App.1988), quoting The Maytag Co. v. Alward, 253 Iowa 455, 112 N.W.2d 654 (1962), stated:

"There is no hard and fast rule on the subject of rescission, for the right usually depends on the circumstances of the particular case. It is permitted for failure of consideration, fraud in making the contract, for inability to perform it after it is made, for repudiation of the contract or an essential part thereof, and for such a breach as substantially defeats its purpose. It is not permitted for a slight, casual, or technical breach, but, as a general rule, only for such as are material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. Failure to perform in every respect is not essential, but a failure which leaves the subject of the contract substantially different from what was contracted for is sufficient."

Although Chief Industries asserts that the proper remedy for breach of a construction contract is damages rather than rescission, the existing case law does not preclude the application of an equitable remedy where a breach of the contract is so substantial that it defeats the object of the parties in entering into the agreement. Where damages are inadequate, or inordinately difficult to assess, the equitable remedy may apply. As stated in Moss v. Speck, 209 Neb. at 48, 306 N.W.2d at 157, in an action at law, damages may be measured by "the cost of remedying the defects" or by "the difference between the value as constructed and the value if built according to the contract." However, ...