Light v. Chandler Improvement Co.
33 Ariz. 101, 57 A.L.R. 107, 261 P. 969 (1928)
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Rule of Law:
A principal is not liable for a real estate agent's unauthorized fraudulent misrepresentations regarding the quality or value of land unless the purchaser, upon discovering the fraud, offers to rescind the contract and the principal, after learning of the fraud, refuses the rescission.
Facts:
- Chandler Improvement Company listed twenty acres of land for sale with a real estate broker named Crenshaw.
- In 1919, G. P. Light and the Berrys were shown the land by Crenshaw.
- Crenshaw represented to the defendants that all the land was fertile, would produce good crops, and contained no 'slick' or 'tight' land.
- Relying on these representations, the defendants purchased the land, paying $1,500 cash and executing a mortgage for the remaining $4,500.
- From 1920 to 1924, the land failed to produce reasonable crops despite ordinary farming practices, as over half of it was 'tight land,' which is difficult to cultivate.
- In 1923 and 1924, Light asked Chandler Improvement Company to take the land back, stating the reason was that it was unproductive and they could not make the payments.
- Light expressly admitted that he never informed the company that their agent had made any false representations or that they were seeking to rescind due to fraud.
Procedural Posture:
- Chandler Improvement Company sued G. P. Light and the Berrys in the Superior Court of Maricopa County (trial court) to foreclose on a mortgage.
- The defendants filed an answer claiming fraud and seeking damages by way of recoupment.
- At trial, after the defendants presented their case, the plaintiff moved for an instructed verdict.
- The trial court granted the plaintiff's motion for an instructed verdict.
- The defendants' motion for a new trial was overruled by the trial court.
- The defendants appealed the judgment to the Supreme Court of Arizona.
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Issue:
Is a seller of land liable for the unauthorized, fraudulent representations of its real estate agent regarding the land's quality when the buyer fails to inform the seller of the fraud and offer to rescind the contract on that basis?
Opinions:
Majority - Lockwood, J.
No. A seller of land is not liable for an agent's unauthorized misrepresentations unless the seller ratifies the agent's actions by refusing to rescind the contract after being notified of the fraud. To hold a seller liable for recoupment, the buyer must prove that they offered to rescind the contract on the grounds of fraud and the seller refused. The court first determined that the defendants' claim for recoupment was not barred by the statute of limitations, as a defense arising from the same transaction survives as long as the primary cause of action exists. On the main issue, the court adopted the rule that a real estate broker authorized merely to find a purchaser cannot bind the principal with representations about the land's quality or value without express authority or the principal's knowledge. The court reasoned that holding an owner liable for any unauthorized statements made by one of potentially many brokers would 'open the door to fraud upon the owner.' However, a defrauded purchaser has a remedy: they may either sue the agent directly or offer to rescind the contract with the principal. If the principal, after being informed of the agent's fraud, refuses to rescind, the principal is deemed to have ratified the fraudulent statements and becomes liable. Since the defendants in this case never notified the plaintiff of the alleged fraud or offered rescission on that basis, the plaintiff never had the opportunity to ratify the agent's conduct, and therefore cannot be held liable for it.
Analysis:
This case establishes the 'ratification by refusal' doctrine in Arizona for principal liability in real estate transactions involving broker misrepresentation. It creates a clear procedural requirement for defrauded purchasers, obligating them to confront the principal with the agent's fraud and offer rescission to trigger the principal's liability. This rule protects innocent principals from liability for an agent's unauthorized acts while still providing a clear path for relief for the purchaser. The decision effectively prevents a buyer from retaining the property while seeking to reduce the purchase price based on an agent's fraud without first giving the innocent principal a chance to undo the entire transaction.
