Background
Facts and decision
Comment
The freedom of parties to contract and contractual commitment are the cornerstones of the law of contract. The parties to a contract are bound by their own declarations of intent and commitment. Before engaging in a contract, the contracting parties must thoroughly familiarise themselves with all matters of significance to the contract. Thus, a contracting party is generally liable for its commitment, even if it was mistaken regarding a pre-condition of significance to the contract. Where a contracting party which has thoroughly familiarised itself with all matters of significance to a contract is nevertheless mistaken as to a pre-condition of significance, such mistake may damage the contract's validity if both:
- the type of pre-condition was essential to the agreement's conclusion; and
- the pre-condition's true meaning was acknowledged by the contractual counterparty.
This rule was stated in Supreme Court Decision 2012:1, which concerned whether a seller of real estate has an obligation to clean up polluted soil when doing so was a condition in the bill of sale.
Jukova Ltd sold a piece of manufacturing real estate to Nikro Ltd, a joint stock property company, through a bill of sale dated December 15 2000, for Fmk1.35 million (approximately €225,000). Before the sale, soil contamination was discovered in the land being sold. According to a condition in the bill of sale, Jukova was responsible for the removal of soil impurities in accordance with the land remediation plan complied by an engineer's office. The land remediation plan estimated the cost of remediation to be Fmk119,200 (approximately €20,000). After the sale had been concluded, the environmental authorities decided that the land remediation plan was unacceptable and required further clarification. The further clarification revealed a high level of soil contamination and a broader need for purification. The cost of remediation was revised to between €1.5 million and €4 million.
In its lawsuit against Jukova in the Tampere District Court, Nikro claimed that Jukova was obliged to take action to remediate the soil contamination entirely (ie, as required by the environmental authorities). Nikro argued that Jukova had pledged to clean up the soil based on the contract. Jukova countered that the parties had agreed that Jukova was responsible for cleaning up only to the extent estimated in the remediation plan. The district court ruled in favour of Nikro. Jukova appealed to the Turku Court of Appeal, but that court considered that there were no grounds to challenge the lower court's verdict.
Jukova was granted leave to appeal to the Supreme Court, where it claimed that the appeal court's decision should be overturned and the claims dismissed. The Supreme Court found that in the sales contract, Jukova had pledged to remove only the impurities that had been discovered before the conclusion of the deal. With expert help, Jukova had clarified the amount and expense of the clean-up before selling the property, indicating that these matters had been essential to the seller regarding the sale. Once the environmental authorities dismissed the remediation plan, the term in the sales contract obliging the seller to remediate the soil impurities became void in relation to the seller. The seller was under no obligation to undertake significantly larger and more expensive purifying actions. Jukova had acted carefully when preparing the sale.
Based on the sales contract and related accounts, the court concluded that the buyer was aware and understood that the seller pledged to clean up the soil only on the basis of an estimate. From the accounts attached to the sales contract, Nikro must have noticed how Jukova understood its obligation to remediate and the conditions and extent of remediation required. Thus, there was no justification to impose a more burdensome obligation to clean up. The Supreme Court vacated both lower court verdicts and discharged Jukova from its obligations to remediate the soil and to pay Nikro's legal expenses.
The validity of a contract is based on a consensus between the parties. In this case, the consensus regarding the obligation to remediate the soil contamination was essentially based on false conditions regarding the required actions and expenses. It was against the purpose of the parties, and therefore unjustifiable, to confirm the obligation to remediate the soil contamination. However, the Supreme Court took no position on the environmental liability; that issue shall be resolved by competent environmental authorities.
For further information on this topic please contact Jussi Ikonen or Arto Soisalo at Merilampi Attorneys Ltd by telephone (+358 9 686 481), fax (+358 9 6884 8484) or email ([email protected] or [email protected]). The Merilampi Attorneys website can be accessed at www.merilampi.com.