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Contracts II
University of Alabama School of Law
Pfeffer, Robert

Contracts II

Pfeffer Spring 2011

Definitions

Mistake

a. Restatement (2nd) § 151 è “a belief that is not in accord with the facts”

The Bargain Relationship

I. Insufficient Agreement

a. Defective Formulation and Expression of Agreement

i. MISUNDERSTANDING è Certain “defects” in the process of either formulating or expressing an agreement justify withdrawal or avoidance w/o liability, even though that agreement otherwise satisfies the requisites for a K.

ii. Peerless RULE

1. Restatement (2nd) §20

a. There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings [of material terms] to their manifestations AND

i.

NO Contract è

Neither party knows or has reason to know the meaning attached by the other; OR

ii. Each party knows or each party has reason to know the meaning attached by the other.

b. The manifestations of the parties ARE operative in accordance w/the meaning attached to them by one of the parties IF

i.

Contract è

That party does not know of any meaning attached by the other, and the other knows the meaning attached by the first party; OR

ii. That party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

2. Translation of Restatement

a. Level of Knowledge

i. No reason to know (least blameworthy)

ii. Have reason to know

iii. Know (most blameworthy)

b. If both parties have = level of knowledge è NO K

c. If not, then è YES K

i. Use the understanding of party closest to “no reason to know” when enforcing the K

3. Three principles

a. Doctrine applies only when the parties have different understandings of their expression of agreement

b. Does NOT apply when one party’s understanding, b/c of that party’s fault, is less reasonable than the other party’s understanding (both parties must be reasonable and equally at fault to apply doctrine)

c. Parol evidence IS admissible to establish the facts necessary to apply the rule

iii. Williston è “where a phrase of K … is reasonably capable of different interpretations … there is no K”

iv. ALTERNATIVES

1. Expansive principles of K interpretation è wide range of context evidence to answer question of which party’s understanding is more reasonable

2. Restatement (2nd) §206 (method of last resort) è Use the understanding “which operates against the party who supplies the words or from whom a writing otherwise proceeds”

b. Indefinite Agreements

i. Ks are “avoided” rather than “disaffirmed”

1. In effect saying there was never sufficient detail for there to be a K to begin with

ii. Not a misunderstanding b/c you don’t know if they meant different things and neither party had a clue what they meant è AMBIGUITY

1. No reasonably objective basis for making a rational determination

2. Does not have to be mathematically precise è just need some reasonable framework

Avoidance of Contracts: Defects in the Bargaining Process

c. Mistakes

i. Mistakes In General

1. Restatement (2nd) § 151 è “a belief that is not in accord with the facts”

a. Cannot be a mere error of judgment (as opposed to a clerical or inadvertent error) b/c:

i. There would be no end

ii. People would be less careful in their judgments

b. Should not be an error regarding value (even though on one level, most of these cases are about value)

i. People should take care of themselves in a market economy

ii. Courts get around by emphasizing the nature of the thing (Rose 2d of Aberlone) or basic assumptions (income producing property in Lenawee)

2. Courts rarely void Ks b/c of mistake

a. Why? è Mistaken beliefs at issue here may not be the D’s fault

b. ù they often have high standards of materiality (e.g., up to 50% mistake in bid price held not material)

3. Henning è If parties use the same language but have materially different meanings, even in broad sense of using the word “mistake”, it doesn’t come under the doctrine of unilateral or mutual mistake è These are misunderstanding cases.

a. Must be mistaken about fact, not misunderstanding of meaning @ time of K

4. Void è K never existed

5. Always determine what the parties have mistaken

ii. Unilateral Mistake of Fact

1. Restatement (2nd) § 153 è “Where a mistake of one party at the time a K was made as to a [material fact] basic assumption on which he made the K has a material effect on the agreed exchange of performances that is adverse to him, the K IS voidable by him if he does NOT bear the risk of the mistake … , AND

a. The effect of the mistake is such that enforcement of the K would be unconscionable, OR

b. The other party had reason to know of the mistake OR his fault caused the mistake.**

c. [Note: There is an implied notice requirement]

2. ASSUMPTIONS

a. See section under mutual mistake.

3. BEARING THE RISK OF MISTAKE

a. See section under mutual mistake.

4. ALTERNATIVE THEORY** (Cf. § 153(b))

a. If the seller knew or should have known about the mistake it is arguable that she had no power to accept the offer at all in the first place ù there was no K to begin with.

i. Sizable discrepancy (“too good to be true”) may place the seller on notice that there is a material error in buyer’s offer

ii. Can’t apply rescission b/c status quo anti cannot be restored (labels have already been made)

iii. CAN argue seller should have known and ù no power to accept

5. ALTERNATIVE TEST (Very similar to § 153 and used in Boise v. Mattefs)

a. Elements:

i. Mistake is material

ii. Enforcement of K would be unconscionable

iii. Mistake did not result from violation of a positive legal duty or from culpable negligence

iv. Party to whom the bid is submitted will not be prejudiced except by the loss of his bargain

v. Prompt notice of the error is given

b. Ex è 14% error in bid due to clerical mistake is a unilateral mistake that rescinds the K where owner’s injury is to save only $1k rather than $9k. Boise, the contractor, had expected to spend 150k for the work. Boise’s bid was 141k (clerical mistake). Mateff ended up having to get another sub-K for $149k. All above factors were met, so K was rescindable. Only hardship facing ∏ was that he couldn’t benefit from Matef

on appeal

3. Conduct that conceals the facts;

a. Ex è Used car salesman who runs the odometer backwards

4. A failure to disclose the facts.

a. Ex è Homeowner knows of large crack but it is situated where a normal inspection wouldn’t reveal it and the seller fails to mention it.

b. DISCLOSURE RULE: A party need NOT disclose information UNLESS:

i. The party has made a previous assertion that she believed to be true but that later turns out to be untrue; OR

ii. The party knows that the other party is operating on a mistaken fact that is material to his decision to enter into the K (party knows that the other party would not enter into K if they knew the truth)

5. Opinion: Normally opinion is NOT misrepresentation UNLESS the hearer would be justified in assuming the truth of the facts necessary for the formation of the opinion and the speaker knows those facts are not true.

a. Ex è Roof inspector who views room from the ground and tells prospective buyer the roof is in sound condition when, in fact, it is not.

iii. Remedies

1. Depend on:

a. State of mind

i. Fraudulent misrepresentation è Maker knows that the assertion is not in accord with the facts, has no confidence in the statement, or has no basis for making the statement.

ii. Negligent misrepresentation è Maker believes she has a basis for making a statement but has, in fact, been careless in determining the facts underlying the statement.

iii. Innocent misrepresentation è Maker has every reason to believe the truthfulness of his statement but, in fact, he is incorrect.

1. Ex è Coin collector honestly believes and tells potential buyer a coin is from Denver when in fact it is a clever counterfeit.

b. Materiality

i. It would be likely to induce a reasonable person to enter into the K; OR

ii. The maker knows that it would be likely to induce the particular person to do so.

2. Available

a. Monetary Damages (Tort)

i. Fraud misrepresentation + reasonable reliance; OR

ii. Negligent misrepresentation + reasonable reliance (MINORITY)

iii. Innocent misrepresentation è Generally NOT liable

1. EXCEPTION: If constructive express warranty under UCC §2-313 è provides for damages even if innocent.

b. Contract Avoidance

i. Restatement (2nd) § 164 è K is avoidable IF the misrepresentation is:

1. Fraudulent OR material; AND

a. If material è right to seek avoidance even if innocent

i. Why? è Unjust to allow person who made misrepresentation to enjoy fruits of a bargain induced by such representations.

b. If not material è no right to seek avoidance unless fraudulent.