Spring 2010
Contracts II
Sharfmann
Mistake
§ Mutual Mistake, Impracticability, Impossibility and Frustration of Purpose will excuse the performance
§ Remedy
· The court will rescind contract – and –
· Will put the parties into position as before contract – restitution
· Mistake about future projections is NOT a mistake.
Ø Mutual Mistake
§ A mistake in which each party misunderstands the other’s intent; a mistake that is shared and relied on by both parties to a contact
§ Mistake is a conscious misassumption of an existing fact, not a mistaken projection of future events
§ Occurs where one or both parties state clearly what they mean in the contract, but they make a mistake concerning one of the essential terms of the contract. –
· e.g. A offers to build B a house for 25,000, but A added up the subcontractors’ bids incorrectly (offer should be 30,000).
§ Mutual mistake involves condition that is already present at the time of contract
§ Requirements
· (1) Mistake must be mutual – both parties must be mistaken about the same circumstance
· (2) The mistake involves the term that is basic assumption to the contract – basic assumption on which the contract was made
· (3) Neither party assumed the risk of mistake at the time the contract was formed
¨ Party may assume the risk expressly in the language of the contract
¨ Court may imply the assumption of risk from the circumstances
¨ Trade Usage – the risk is usually assumed in the trade business
¨ Conscious Ignorance – a party knows that he does not know a basic fact but enters into contract anyway – this is an assumption of risk
¨ Knew that the assumption made was doubtful
· (4) The mistake has a material effect on the agreed-upon exchange
§ Unilateral Mistake – mistake by one party will excuse the party from performance only when:
· The enforcement of contract will be unconscionable – or –
· The other party had reason to know of the mistake or his fault caused the mistake
· Will allow recession if:
¨ Mistake is material
¨ Enforcement of a contract pursuant to terms of erroneous bid would be unconscionable
¨ Not gross negligence or deviation of legal (opposed to clerical or inadvertent)
¨ Prompt notice of the error was given
· Mistake in transmission
¨ Sender bears the risk of mistake because he choose the medium in which the message was sent
¨ Sender will have to honor the contract but may be able too recover against the intermediary for the damages
¨ The party that elects the means of communication to transmit an offer bears the risk of loss caused by errors in the communication, unless the receiver has reason to know of the error or the communicated offer was forged, in which case, the offeror may have an action against the sender for damages if the sender was negligent
– Generally, relief is allowed for clerical or mathematical mistakes, but refused if the mistake is the result of an error in judgment.
o However, in fairness to a bidder, a court should not determine whether a mistake is labeled a mistake of fact or a mistake of judgment solely on whether equitable relief is granted. Instead, a court must consider the facts surrounding the error in determine whether equitable relief is appropriate.
– One part’s negligent failure to discover facts as to which both parties are mistaken does not necessarily preclude rescission. However, failure to comply with “trade usage” or “custom of trade may bar rescission.
– A party is entitled to the equitable relief of rescission if it submitted a bid that contains a material clerical mistake.
– A party’s negligent failure to know or to discover facts as to which both parties are mistaken does not preclude rescission as a remedy
– Rescission is a proper remedy when the parties’ mutual mistake goes to the agreement’s substance or nature
– Definitions
o Culpable – guilty, blameworthy; involving the breach of duty
o Equitable – just; conformable to principles of justice and right. Existing in equity; available or sustainable by an action in equity, or under the rules and principles of equity
o Rescission – A party’s unilateral unmaking of a contract for a legally
1. Latent Ambiguity Mistakes – Mutual Misunderstanding
a. Three Situations
i. A latent ambiguity occurs where the expression of the parties’ agreement appears perfectly clear at the time the contract is formed, but because of subsequently discovered facts, the expression may be reasonably interpret in either of two ways. In this situation, the following possibilities are present
ii. Neither Party Aware of Ambiguity – no contract – If neither party was aware of the ambiguity at the time of contracting, there is no contra
on the party trying to claim reformation
èMistake has to be mutual, but the fact that one of the parties denies that a mistake as made does NOT prevent a finding of a mutual mistake
èEXCEPTION: Where the rights of third parties such as good faith purchasers for value will be unfairly affected, reformation may be withheld even if otherwise appropriate.
Parol Evidence Rule and Contract Interpretation
– Rules of Contract Interpretation
o Construed as a whole – contracts will be construed as a “whole”; specific clauses will be subordinated to the contract’s general intent
o Ordinary meaning of words –the courts will construe words according to their “ordinary” meaning unless it is clearly shown that they were meant to be used in a technical sense.
o Inconsistencies between provisions –if provisions appear to be inconsistent, written or typed provisions will prevail over printed provisions (which indicate a formed contract)
o Custom and usage –The courts will generally look to see what custom and usage is in the particular business and in the particular locale where the contract is either made or to be performed
o Preference to Construe Contract as Valid and Enforceable – It is important to note the courts generally will try to reach a determination that a contract is valid and enforceable. Hence, they will be inclined to construe provisions in such a fashion as to make them operative. Obviously, this general policy will not be carried so far as to intervene the intention of the parties.
o Ambiguities Construed Against Party Preparing Contract – Ambiguities in a contract are construed against the party preparing the contract, absence evidence of the intention of the parties. This is particularly true when there is no evidence of fraud, mutual mistake, duress, or knowledge by one party of unilateral mistake, and both parties are represented by counsel.
