Foster v. Cross
650 P.2d 406 (1982)
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Rule of Law:
A contract is voidable by a party who justifiably relies on a material misrepresentation from the other party's agent, even if the misrepresentation was innocent, and a boilerplate clause in the contract incorrectly identifying the agent's principal does not prevent this result.
Facts:
- In 1977, Michael Stephens, a contractor, engaged real estate broker Warren Sanders to find land suitable for residential development.
- Sanders located an 80-acre tract owned by Robert and Arlene Cross and began negotiations on behalf of Stephens.
- During negotiations, Sanders represented to Robert Cross that Stephens and his partner, Robert Milby, were financially strong and had substantial development experience.
- The Crosses agreed to sell the land under terms that involved them financing a significant portion of the purchase price, making the buyers' success crucial for full payment.
- Sanders prepared a purchase agreement on a preprinted form, signed by the parties, which contained a standard clause stating that the broker (Sanders) was the agent of the sellers (the Crosses).
- Prior to closing, Stephens' financial position deteriorated, leading to his bankruptcy, and both he and Milby assigned their interests in the contract to other parties, James Foster and Sharon Dale.
- The assignees, Foster and Dale, did not possess the development expertise that Sanders had represented the original buyers as having.
Procedural Posture:
- After the buyers' interests were assigned to James Foster and Sharon Dale, they tendered performance, which Robert and Arlene Cross refused.
- Sharon Dale subsequently assigned her interest to James Foster.
- James Foster filed a lawsuit against the Crosses in an Alaska trial court, seeking specific performance of the purchase agreement.
- The trial court found in favor of the Crosses, ruling that the contract was voidable due to material misrepresentations made by the buyers' agent.
- Foster, as the appellant, appealed the trial court's judgment to the Supreme Court of Alaska.
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Issue:
Does a real estate agent's material misrepresentation regarding a buyer's financial condition and development expertise render a purchase agreement voidable by the seller, even if the written agreement contains a clause stating the agent represents the seller and permits assignment of the contract?
Opinions:
Majority - Matthews, Justice.
Yes, a real estate agent's material misrepresentation regarding a buyer's qualifications renders a purchase agreement voidable by the seller. The court affirmed the trial court's finding that Sanders was, in fact, the agent of the buyers (Stephens and Milby), despite a contractual clause to the contrary. A recital of fact in an integrated agreement, such as an agency clause, can be proven untrue by extrinsic evidence of the parties' conduct. The court found that Sanders' false statements about the buyers' financial strength and development experience constituted material misrepresentations because the Crosses were financing the sale and their financial security was dependent on the project's success, which could be jeopardized by prior mechanics' liens in case of failure. The Crosses' reliance was justifiable, and the subsequent assignment to Foster did not cure the misrepresentation because Foster also lacked the represented development expertise. Therefore, the Crosses were entitled to void the contract.
Analysis:
This decision emphasizes that courts will look to the substance of a relationship over the form of a contract, particularly in determining agency. It confirms that a boilerplate agency clause in a preprinted contract is not dispositive and can be rebutted by evidence of the parties' actual conduct. The case also clarifies the concept of 'curing' a misrepresentation through assignment, establishing that the assignee must actually possess the specific qualities that were misrepresented in the assignor for the misrepresentation to become immaterial. This protects sellers in seller-financed transactions from being forced into a contract with a party who lacks the represented ability to perform successfully.
