Dodge has not fulfilled even its own interpretation of its contractual obligations because it has chosen not to, and it has engaged in dilatory tactics ever since it became clear that there may well be no solution to the environmental problems affecting the Phelps Dodge site. Thus, even were I to accept Phelps Dodge's own characterization of its obligation to the Postal Service, I would conclude that those obligations have been breached as well, and that the breach is sufficiently material to the bargain to warrant rescission.
B. Mutual Mistake Of Fact
Rescission is also appropriate on the alternative ground of a mutual mistake of fact. Mutual mistake supports a cause of action for reformation or rescission. See Matter of Gould v. Board of Education, 81 N.Y.2d 446, 453, 599 N.Y.S.2d 787, 791, 616 N.E.2d 142 (1993). The mistake must be so fundamental that it defeats the object of the contract. Callanan, 199 N.Y. at 284; Clanton v. Smith, 170 A.D.2d 643, 567 N.Y.S.2d 67 (2d Dep't), app. denied, 78 N.Y.2d 852, 573 N.Y.S.2d 466 (1991). In real property transactions, rescission for mutual mistake may generally be granted where the status quo is restorable. D'Antoni v. Goff, 52 A.D.2d 973, 383 N.Y.S.2d 117 (3d Dep't 1976); Copland v. Nathaniel, 164 Misc. 2d 507, 511, 624 N.Y.S.2d 514, 518 (Sup. Ct. Westchester Co. 1995). Especially where, as here, (1) a mistake produces a practical inability to perform a contract; (2) the resulting nonperformance is so substantial and fundamental as to defeat the parties' object in contracting; and (3) damages cannot be ascertained with reasonable certainty, rescission is the appropriate remedy. Callanan, 199 N.Y. at 284.
Phelps Dodge contends that the facts here cannot support a finding of a mutual mistake of fact because both parties were aware of the environmental contamination and of the uncertainties associated with remediation. It relies on cases that hold that the knowing assumption by a party of a certain risk precludes it from claiming mistake if the risk materializes. See Defendant's Post-Trial Proposed Findings of Fact and Conclusions of Law at 50-52. Those cases, however, do not preclude a finding of mutual mistake on the facts of this case. The contract here specifically allocated to Phelps Dodge the responsibility to remediate the property by excavation. When that specific obligation was assumed, neither party knew or could reasonably have been expected to anticipate that unacceptable levels of lead and cadmium would continue to be present even after the excavation reached the groundwater.
This is not a case in which the purchaser of real property executed a release of all claims arising out of the sale, see Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454 (9th Cir. 1986), or remained "consciously ignorant" of a discoverable environmental hazard. See Vandervort v. Higginbotham, 222 A.D.2d 831, 832, 634 N.Y.S.2d 800, 801 (3d Dep't 1995). Rather, the contract here allocated to the seller, Phelps Dodge, the responsibility to perform all work to comply with the RAP with reasonable diligence and continuity to completion. See Commander Oil Corp. v. Advance Food Service Equipment, 991 F.2d 49, 54 (2d Cir. 1993) (distinguishing Mardan, supra, by noting that the "broad indemnification language" in the Mardan contract "was not compromised by any specific language allocating environmental responsibility").
Konerko himself, the central witness for Phelps Dodge, testified about the mistakes of fact that went to the core of the agreement between the parties. When it assumed the remediation obligation, Phelps Dodge planned to dig out a two-foot depth of dry, contaminated soil over part of the property and to haul that soil away. The depth of the required excavation was unanticipated, as was the fact that the backhoes would reach the groundwater before extracting all the contaminated soil. Hitting the groundwater drastically altered the character of the remediation obligation. It not only made excavation more difficult (e.g., as the soil was removed, the muddy side walls would cave in and fill up the hole), but it implicated an array of virtually insoluble problems, including the pumping and treating of contaminated groundwater, the monitoring of the effects of tidal influences in the Newtown and Maspeth Creeks on the movement of contaminants off the site, and the prospect of long-term groundwater monitoring requirements. These and other concerns rendered the prospect of continued excavation, in the words of Konerko, "ludicrous." In the context of this case, the parties' mistaken belief that remediation by excavation was feasible is no different than a mistaken belief in the boundaries of the property itself. See Larsen v. Potter, 174 A.D.2d 801, 571 N.Y.S.2d 121 (3d Dep't 1991).
Under these circumstances, plaintiff may appropriately seek rescission of the conveyance, which places the parties back in the same position they were in prior to the contract for sale.
Phelps Dodge and the Postal Service were mutually mistaken as to the extent of contamination on the site, the amount of time it would take to remove it, the feasibility of (1) providing a buildable site to the Postal Service in 1987; (2) the feasibility of completing the RAP; and (3) completing the excavation under the RAP without encountering groundwater. Rescission is the appropriate remedy for these material mutual mistakes. Larsen v. Potter, 174 A.D.2d 801, 571 N.Y.S.2d 121 (3d Dep't 1991); D'Antoni v. Goff, 52 A.D.2d 973, 383 N.Y.S.2d 117 (3d Dep't 1976); Kel Kim Corp. v. Central Markets, Inc., 70 N.Y.2d 900, 524 N.Y.S.2d 384, 519 N.E.2d 295 (1987).
C. The Alleged Waiver Of The Right To Seek Rescission
Phelps Dodge claims that the Postal Service may not obtain rescission because it waited too long to seek it. The argument relies heavily on Judge Newman's decision in Gannett Co. v. Register Publishing Co., 428 F. Supp. 818, 824-26 (D. Conn. 1977), which describes a significant time limitation on an injured party's option to rescind a contract once the factual basis for doing so is discovered. However, the limitation at issue in Gannett applies to actions to rescind contracts induced by fraud, and Gannett explicitly distinguished actions for rescission based on other grounds, such as unreasonable delay in performance. Id. at 824 n.7 (citing Richard v. Credit Suisse, 242 N.Y. 346, 152 N.E. 110 (1926)).
Richard is one of two decisions written by Justice Cardozo for the New York Court of Appeals that establish this distinction. Two years before Richard, in Schenck v. State Line Telephone Co., 238 N.Y. 308, 144 N.E. 592 (1924), the court addressed an action to rescind a contract for the sale of real property on the ground that the plaintiff was fraudulently induced to sell the property. The plaintiff sought rescission 12 years after the sale. Although the court affirmed the Appellate Division's reversal of judgment on the pleadings in favor of the defendant, it reiterated that "rescission to be effective must be announced without unreasonable delay." 238 N.Y. at 313, 144 N.E. at 594.
Whereas the plaintiff in Schenck sought rescission for fraud, the plaintiffs in Richard sought rescission for nonperformance. In Richard, Justice Cardozo explained the difference. Rescission for fraud is based on the theory that there was never mutual assent. Such a claim must be asserted promptly upon discovery of the fraud (although exceptions will be made depending upon the effect of any lapse in time, see 242 N.Y. at 351) or the injured party will be deemed to have ratified the bargain. However, when rescission is sought based on nonperformance, there is no such absence of assent, and "notice may be given at any time within the period of the statute of limitations unless delay would be inequitable. Such inequity will result, for instance, if there is property to be returned, or if reliance upon apparent acquiescence will result in hardship or oppression." Id. (citations omitted). If, as occurred here, a defendant has promised performance within a reasonable time, the plaintiff is under no duty to rescind when it first discovers that performance has been unreasonably delayed. It might postpone its decision to seek rescission "until [its] patience was exhausted by aggravation of the wrong. . . Rescission is not barred because indulgence has been shown." Id. (citations omitted).
Thus, although Phelps Dodge relies on several cases that stress the requirement that actions seeking rescission must be initiated without unreasonable delay, those involving rescission for fraud are of little assistance to Phelps Dodge. See Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40 (2d Cir. 1991); Spyder Enterprises, Inc. v. Ward, 872 F. Supp. 8 (E.D.N.Y. 1995); Banque Arabe v. Maryland Nat. Bank, 850 F. Supp. 1199 (S.D.N.Y. 1994) aff'd, 57 F.3d 146 (2d Cir. 1995).
It is nevertheless true that a party seeking rescission for mistake or nonperformance may not unreasonably delay the making of such a claim. K.M.L. Laboratories, Ltd., 830 F. Supp. at 166. On the other hand, there is no requirement that the injured party commence legal proceedings immediately, and the law should not create an incentive to do so. Id. (citing Vista Co. v. Columbia Pictures Industries, Inc., 725 F. Supp. 1286, 1295 (S.D.N.Y. 1989)). In assessing the reasonableness of a delay, the focus should be on the justifications provided for it and on the inequities, if any, that it has produced. See Richard, 242 N.Y. at 351.
There was no unreasonable delay here. The Postal Service waited for Phelps Dodge to remediate the site. In 1989, when groundwater monitoring was proposed by Phelps Dodge, the Postal Service went along with the idea. In 1992, when the Focused Feasibility Study made it unmistakably clear that Phelps Dodge had repudiated its obligation to remediate by excavation, the Postal Service promptly brought this action. Although the government's "indulgence" (see Richard, 242 N.Y. at 352) might well be characterized as benign neglect of an extremely important real estate contract, it does not bar rescission because that remedy causes no inequity to Phelps Dodge. On December 30, 1986, it obligated itself to remove contaminants from the property. It was given ample time to perform that obligation, but it failed to do so. Indeed, it has obviously abandoned any intention of so doing. Now it must take back the property that is still laced with a number of contaminants. As Judge Weinstein observed in denying Phelps Dodge's motion to dismiss, it is "difficult to weep" for Phelps Dodge because it "put the stuff in the ground to begin with." There was no unreasonable delay by the Postal Service in seeking rescission, and there is no unfairness to Phelps Dodge in granting it.
D. Prejudgment Interest
Under New York law, "in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion." N.Y.C.P.L.R. § 5001(a). An action to rescind a contract is an action of an equitable nature. Matsushita Electric Corp. of America v. Gottlieb, 1991 U.S. Dist. LEXIS 10511, 90-CV-3010(CES), 1991 WL 152615, *8 (S.D.N.Y. Aug. 1, 1991) (citing Gregory v. Scorcia, 493 F. Supp. 984, 989 (S.D.N.Y. 1980)). Thus, the award of prejudgment interest to the Postal Service is within the discretion of this Court. See Spyder Enterprises, Inc. v. Ward, 872 F. Supp. 8 (E.D.N.Y. 1995).
In exercising this discretion, courts should consider the rationale underlying an award of prejudgment interest, i.e., that the plaintiff be compensated for being deprived of the use of its money. Woodling v. Garrett Corp., 813 F.2d 543, 561 (2d Cir. 1987). Public policy favors the award of interest in equity actions, and it should generally be awarded unless equitable principles or general consideration of fairness suggest otherwise. See generally J. Weinstein, H. Korn & A. Miller, New York Civil Practice P 5001.06 (1996).
The Postal Service paid $ 14,740,000 for the property on December 30, 1986. I conclude that it would be unfair to Phelps Dodge to award prejudgment interest from that date on the funds it must now return. The Postal Service waited passively, for nearly six years, for Phelps Dodge to fulfill its remediation obligation at the site, and during that period Phelps Dodge incurred significant costs. On balance, I conclude that interest should run from August 13, 1992, the date the Postal Service filed its complaint in this case seeking rescission. See Pearlstein v. Scudder & German, 346 F. Supp. 443, 454 (S.D.N.Y. 1972) (awarding prejudgment interest from the date the lawsuit was commenced because that was first date on which plaintiff clearly demanded rescission).
I conclude that the amount of interest should be the nine percent provided for by CPLR § 5004. This is not mandatory; courts have the discretion to adjust the amount of interest. See J. Weinstein et al., supra, P 5001.06 at 50-22 (where statutory rate is lower than market rate, courts have awarded higher rates); see also Septembertide Publishing, B.V. v. Stein And Day, Inc., 884 F.2d 675, 683-84 (2d Cir. 1989) (upholding a preverdict interest award of five percent); Arnold Herstand & Co., Inc. v. Gallery: Gertrude Stein, Inc., N.Y.L.J., January 21, 1993 at 25 (Sup. Ct. N.Y. Co.) ("As interest rates have been extremely low in the relevant period, a charge for the use of the money is meaningless"), rev'd on other grounds, 211 A.D.2d 77, 626 N.Y.S.2d 74 (1st Dep't 1995). Taking into account all of the circumstances in this case, including general considerations of fairness, I conclude that the equitable rate of interest is the 9 percent set forth in CPLR § 5004.
The Clerk is directed to enter judgment for the plaintiff. It shall rescind the Option and Contract dated August 13, 1986 and the December 30, 1986 Agreement and give judgment in favor of the United States Postal Service in the amount of $ 14,740,000, plus interest at the rate of nine percent per annum commencing on August 13, 1992.
UNITED STATES DISTRICT JUDGE
Dated: Brooklyn, New York
January 2, 1997