Plaintiffs agreed to buy defendants' home for $310,000. The contract required $5,000 down, $26,000 within five days afterwards, and the rest at closing a month later. The contract also provided that the buyer had a right to obtain a written report from a roofer before closing to ensure that it was waterproof and that the seller would pay for any necessary repairs. It also said that if a legal dispute arose, the "prevailing party" would be awarded all costs and reasonable fees.
Before plaintiffs made the additional deposit, plaintiff Mrs. Davis noticed some buckling and peeling in the plaster by a windows and that there were stains on some of the ceilings. Defendant Mr. Johnson told her that they were because of a problem with the window and because of a ceiling beam being moved but that neither were a problem any longer. The parties disagreed whether he also said that there had never been a problem with the roof or ceilings.
The plaintiffs then paid the remainder of their deposit and defendants vacated the house. Several days later, Mrs. Davis discovered water "gushing" in from around the window frame, ceiling, light fixtures, glass doors, and stove. Two roofers hired by defendants' broker said they could fix the problem and make the roof waterproof for $1000. Three roofers hired by plaintiffs said the roof was inherently defective, that any repairs would be temporary and the roof was slipping, and that only a new roof for $15,000 could be watertight.
Plaintiffs sued for breach of contract, fraud, and misrepresentation and sought rescission and return of their deposit. Defendants counterclaimed seeking the deposit as liquidated damages.