CONTRACTS II OUTLINE
Professor Movsesian
Spring 2013
MISTAKE
Mistake: belief that is not in accord with the facts at the time the parties make a; underlying error about the facts (Restatement § 151 p. 489) (*this is not about language – the language used by the parties may be entirely clear)
· Equitable doctrine – a lot of court discretion is involved; a lot of intuition is used; has a lot to do with fairness
o This is a multi-factor inquiry that does not admit any bright line rules
· Makes a K voidable by one of the parties; serves as a basis for rescission (set aside or unmake a contract between the parties; cancellation)
· Divided into two categories – unilateral and bilateral mistakes
· This does not relate to future facts or events
o Hypo: Someone agrees to buy property in California. A natural disaster occurs and the property becomes uninhabitable. In this case, there is NO mistake because it relates to future facts. This is simply a case of bad prediction (this might be a case of changed circumstances).
· Mistake must be distinguished from a:
o Misunderstanding: matter of interpretation to determine whose interpretation controls (Peerless)
o Mistake in expression: problem with transmission (Western Union)
o Bad prediction
· Consequences of a mistake:
o Prevents the formation of a K (court will say there is no K, similar to what is done when there is a misunderstanding) –OR–
o It is determined that a K has been formed, but it is voidable by the party who made the mistake (mistaken party) can get a rescission (**this is the approach that is used in America and is done as a matter of equity/fairness)
§ Meant for fairness purposes
· Note: see existing impracticability
Unilateral Mistake
· One of the parties makes the mistake
· Restatement § 153: “Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake…and,
o The effect of the mistake is such that enforcement of the contract would be unconscionable, or (b) the other party had reason to know of the mistake or his fault caused the mistake”
· Requirements for rescission:
o 1) Mistake must be related to a basic assumption on which the K was made
o 2) Mistake has a material adverse effect on agreed exchange
o 3) Mistaken party does not bear the risk of the mistake
o 4) Other party had reason to know of the mistake, or other party’s fault caused the mistake.
§ Did non-mistaken party have reason to know of the mistake?
· Yes – mistaken party can avoid the K
· No – mistaken party cannot avoid the K **this is in cases where the mistake is extremely obvious**
§ Hypo: Contractor submits a bid to build a greenhouse for the government. Contractor’s bid is chosen because it is the lowest, but also very similar to the other bids. It is discovered that there is a mistake in the bid – contractor forgot to include the irrigation costs and the government is not aware of this error.
· Mistake is related – irrigation is important to a greenhouse
· Mistake will have an adverse effect
· Mistaken party did not bear any risk
· The government had no reason to know of this mistake. Therefore, there can be NO RESCISSION.
o 5) Culpable or bad faith mistake prevents avoidance/rescission
§ Avoidance/rescission will NOT be possible
§ Gross negligence that is extreme/outrageous suggests bad faith by the mistaken party; no use of ordinary care
§ Hypo: Contractor submits a low bid because they forget to include the cost of glass. The company calls to verify the bid and the contractor says that the bid is in order, without checking à this is an example of a bad faith mistake that would prevent rescission because the company did not bother to go back and check
§ Need to distinguish the different between a negligent mistake AND a bad faith mistake *need to examine the manner in which the mistake was made*
§ Boise Junior College District v. Mattefs Construction Co. (1969) – there was NO bad faith mistake in this case; there was simply a clerical error given the fast movement in the business (no culpable negligence) (Facts: Π was accepting bids for a government construction project which was estimated to cost $150,000. The Δ’s bid was for $141,048 and they put up a bid bond. Π entered into K with Δ, knowing that there was a clerical error because they forgot to include the price of glass. The court says the Δ is entitled to rescission.)
· 1) forgetting to include glass was a material mistake (14% of cost), 2) material adverse effect was that the Δ would have to pay more $, 3) mistaken party did not bear risk, 4) the other party has reason to know of the mistake
Mutual Mistake in Agreement
· Both parties make the same mistake
· Allows for rescission
· Restatement § 152: “(1) Where a mistake of both parties at the time of a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake.”
· Requirements for rescission (the adversely effected party needs to show):
o 1) mistake goes to a basic assumption on which the K was made
o 2) mistake has a material adverse effect on agreed exchange
o 3) mistaken party does not bear the risk of the mistake
§ Ex: allocation of risk in a K’s clause or conscious ignorance
§ If the seller bears the risk, he CANNOT get out of the K
· ONLY QUALITATIVE CHANGES SUPPORT RESCISSION
o A change in kind, substance, or character
§ Ex: barren cow versus fertile cow
o Quantitative (a change in degree) can be evidence of qualitative change
§ Ex: the cost difference between the cows reflects an underlying qualitative change
· Beachcomber Coins, Inc. v. Boskett (1979) – mutual mistake about the genuineness of the dime; result – the seller has to take back the dime; there was a basis for rescission (Facts: Π and Δ both believed the dime to be worth $500. After purchase, the Π found out that the coin was a counterfeit and sues the Δ. The court says the K is voidable.)
o 1) basic assumption that coin was worth $500, 2) the disparity in price was significant, 3) buyer did not bear the risk (neither side thought there was a risk because both thought that the coin was absolutely genuine)
§ Trade tradition: you can return coins that are NOT genuine; the seller always bears the risk in this industry (caveat vendator) à this will make more people comfortable b
e Π was forced to ship the laths as per the incorrect offer telegraphed by the Δ. Court says the Δ must bear the loss (difference between the price the goods were shipped for and the market value)
o Between sender and recipient à the seller bears the risk of the mistake because they choose the means of communication EXCEPT when the recipient knew or had reason to know that it was a mistake (when the recipient acted in bad faith)
§ HYPO: If sender did not choose the medium, maybe the recipient would bear the loss.
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PAROL EVIDENCE RULE
· Use this to determine what the words of a contract are
o Make sure that the K we are interpreting sets forth the parties’ agreement
o Once we know what the words of a K are, we can determine what the writing means by examining the circumstances and looking to what a reasonable person would think.
· Parol: verbal/oral à also extends to other evidence; written
· The parol evidence rules does not apply to evidence of a completely different transaction
· PAROL EVIDENCE IS ALWAYS ADMISSIBLE TO HELP INTERPRET A WRITING
o Cannot contradict, but can interpret
· Purpose of the Rule:
o Prevent people from contradicting or supplementing the writing with other evidence about the deal
o To prevent fraud
o Slippery human memory
§ A K action is likely to occur years after the K is signed
§ Over time, human nature is to remember things in a way that is to your advantage (even in good faith) – prevents people from mis-remembering
o Suspicion of juries
§ Normally, the person trying to vary the terms is the less economically advantages party; we fear juries will be sympathetic to these litigants (historical suspicion of juries)
o Efficiency – increase transaction costs, but decreases litigation costs
§ Creates incentives for people to be careful and put what they want in a K
o Protects parties’ reasonable expectations – security in the writing
§ Parties can rely on the written K and can be sure about the finality of the writing
§ Expect that everything has been merged into the final document – K is done and finished
§ Parties will be more comfortable about engaging in transactions
o Protect the writing that embodies a K
§ (contract is an abstraction; writing is the memorial of a K)
Parol Evidence Rule – Complete Integration
· A writing that the parties intend to be a final and complete version of their agreement (the complete integration is the K)
o One transaction between the parties (although the parties may also be involved in other separate transactions)
