Contracts II Class 10: Mistake

These flashcards cover key vocabulary terms related to mistakes in contract law, focusing on mutual and unilateral mistakes, their definitions, elements, and relevant case law.

What is the Analytic Framework for Mistake?

1. Both parties at contract formation make a mistake of fact.

2. About a basic assumption on which the contract was made

3. And the mistake has a material effect on the agreed exchange of performances.

Exception: Unless the affected party bears the risk of the mistake.

Element 1: What is a contractual mistake?

A belief at the time of contract formation not in accord with the facts. MISTAKE OF FACT

Element 2: What is a Basic Assumption?

Identy the assumption that motivated the parties to enter the contract. If the mistake is one of those assumptions, then this element is satisfied.

BUT per Rest. 2: Market conditions and teh financial situation of the parties are ordinarily not such assumptions and do no justify avoidance under the rules governing mistake.

What is Element 3: Material Effect

Material effect is shown by:

• A severe imbalance in teh agreed exchange that results in unfairness.

• Evidence of a material effect can be shown by:

  • One party receiving much more than expected (windfall) AND

  • The other party is receiving much less than expected.

What is the Risk Allocation Exception?

A party bears the risk of a mistake when:

1. the agreement allocates the risk to the party or

2. They are consciously ignorant of the risk or

3. The court allocates risk to them on the ground that it is reasonable in the circumstances to do so.

Unilateral Mistake

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.

1. The effect of the mistake is such that enforcement of the contract would be unconscionable or

2. The other party had reason to know of the mistake or his caused the mistake.

What are the element for a Unilateral Mistake?

1. One party at contract formation makes a mistake

2. About a basic assumption on which the contract was made

3. The mistake has a material effect on the agreed upon exchange of performances and either

4. (a) Mistake’s effect makes enforcement unconscionable or

   (b) Other party knew/ had reason to know of this mistake or his fault caused the mistake.

Exception: Mistake is not available as a defense for a party who bears the risk of the mistake.

What is the difference between Unconscionability and Should have Known About Mistake under the Unilateral Mistake Doctrine?

Substantive Unconscionability is often the determinative factor because the oppression and surprise results from the mistake not the inequal balancing power.

v.

Non-mistaken party should have known about mistake

Often referred to as palpable errors to describe their obviousness.

A Chipotle franchisee opens up a restaurant and leases the restaurant space for ten years at $600 per month. There is a mix up the first month of the lease, and so the franchisee asks his accountant to send a check for $1,200 the second month. Incorrectly believing the rent was always $1,200, the accountant continued to send checks for that amount for the entire first year of the lease. When the franchisee realizes the mistake, he demands credit for the excess payments from the landlord, who refuses.

In an action by the franchisee to recover the excess payments made, will he prevail?

Yes, if a court determined that it would be unconscionable for the landlord to keep the excess payments.

Correct. This question deals with “unilateral” mistake, and the elements of the doctrine are set forth in Restatement 2d § 153. Under that provision, the party seeking to avoid a contract under the doctrine of unilateral mistake must show:

• that he or she did not bear the risk of the mistake for any of the reasons set forth in Restatement 2d § 154 (which are set forth in the answer to Question 1 above) plus either:

• the effect of the mistake is such that enforcement against the mistaken party would be unconscionable or;

• the non-mistaken party either had reason to know of the mistake or caused the mistake.

Applied here, even though franchisee’s actions may be negligent, the elements of unilateral mistake are present. Franchisee did not expressly or impliedly assume the risk because he entered into the agreement for a stated rent ($600). In a similar case involving McDonald’s, the court provided that paying double the agreed amount of the lease for the entire term of a ten-year lease would be unconscionable, i.e., the franchisee would lose so much money on the deal that in good conscience a court could not force him to bear that loss. Restatement 2d § 153(a). Further, the landlord’s knowledge of the error would also be a reason, under Restatement 2d § 153(b), to allow the mistaken party to avoid the double payments using unilateral mistake. McDonald’s Corp. v. Moore, 237 F. Supp. 874 (W.D.S.C. 1965).