Contracts II Class 10: Mistake

Mutual Mistake

  • Definition: A mutual mistake occurs when both parties to a contract have a shared misunderstanding about a basic assumption on which the contract is based.

  • Relevant Law: Restatement (Second) of Contracts § 152

  • A mutual mistake renders a contract voidable by the adversely affected party unless that party bears the risk of the mistake (Rest.2d § 154).

  • Elements of Mutual Mistake:

  1. Both parties make a mistake of fact at contract formation.
  2. The mistake concerns a basic assumption of the contract.
  3. The mistake has a material effect on the agreed exchange of performances.
  4. Exception: The adversely affected party does not bear the risk of the mistake.
  • Example Case: Lenawee County Board of Health v. Messerly
  • Here, the court examined whether mutual mistakes concerned basic assumptions and their material effects on performance.

Elements of Mutual Mistake

  1. Mistake of Fact:
  • Definition: A misalignment between belief and reality at the time of contract formation (Rest.2d § 151).
  • Example: A Seller misrepresents the origin of an item (e.g., costume boots) leading to a contract formed under false premises.
  1. Basic Assumption:
  • Must identify assumptions motivating the contract. Market conditions or financial situations generally do not satisfy this requirement.
  • Example: In the boots case, the assumption concerning whether the boots belonged to John Wayne may constitute a basic assumption of the contract.
  1. Material Effect:
  • Defined as a severe imbalance in the exchange between the two parties. Evidence may include scenarios where one party significantly benefits more than expected while the other suffers.
  • Example: The buyer of the boots may receive significantly less value than anticipated, leading to a loss of interest due to discovering the wrong character ownership.

Risk Allocation Exception

  • A party bears the risk if:
  • The contract explicitly allocates the risk.
  • The party was aware or ignored the risk deliberately.
  • The court finds it reasonable to allocate risk to the party under the circumstances.

Unilateral Mistake

  • Definition: A unilateral mistake occurs when only one party is mistaken about a basic assumption in a contract.

  • Relevant Law: Restatement (Second) of Contracts § 153

  • Contract is voidable if the mistake adversely affects the mistaken party and they do not bear the risk.

  • The effect may render enforcement unconscionable or the other party knew or should have known of this mistake.

  • Rules for Unilateral Mistake:

  1. One party makes a mistake of fact concerning a basic assumption of the contract.
  2. The mistake materially affects the agreed exchange.
  3. Either:
    • A. Mistake’s effect is unconscionable.
    • B. The other party knew or should have known about this mistake.
  • Case Example: BMW Financial Services v. Deloach
  • The legal issues revolved around who bore the risk of the mistake and whether enforcing the contract would be unconscionable.

Unconscionability in Unilateral Mistake

  • Concept: Refers to situations where enforcing the contract would lead to unjust results due to the mistake.
  • The non-mistaken party's knowledge of the mistake can influence whether enforcement is deemed unconscionable.

Key Case Comparisons

  • Sherwood v. Walker:
  • Allowed rescission based on mutual mistake concerning the ability of a cow to breed (basic assumption).
  • A&M Land Dev. Co. v. Miller:
  • Differed in treating a mistake regarding character versus mere value distinction, affecting the court's decision on rescission.

Conclusion

  • Both mutual and unilateral mistakes are critical in contract law, leading to voidable agreements if the fundamental assumptions of the parties are flawed and certain criteria are met. Understanding these principles aids in navigating contract disputes effectively.