Introduction:
Writing an agreement seems easy enough-until one actually does it. One reason contracts drafted by attorneys seem stilted and redundant is precisely because it is vital to craft language that will be possibly enforced by strangers a decade down the road who were not part of the negotiations and only have the words on the page to go by. What is “understood without saying it” by the parties may not be so understood by a judge and jury interpreting the agreement a decade after a party to the agreement has died.
That said, most agreements are informal affairs created by laypersons and the issue of vague wording, confusing wording, or errors on the part of a party as to the subject matter or intentions of the parties are common. One aspect involves the effect of a mistake by one or more of the parties as to an important fact inherent in the contract.
For many law schools the very first case the students confront in Contracts Class involves a mistake of fact in a construction contract. The subject matter was the grading of a hill top to make it level. The contractor was to be allowed to keep the soil obtained for use on another project and in exchange was going to grade the hilltop level to allow the building of a commercial building. But after half a day of excavation, the parties realized that there was bedrock only a foot underneath the soil. What was to cost the contractor a few thousand dollars and a day of grading was going to cost half a million dollars and two weeks. The court had to determine if the mutual mistake of the parties as to the composition of the soil allowed the contract to be voided.
And mistake is the topic of this article.
The Basic Law:
A mutual mistake occurs when the parties to a contract are both mistaken about the same material fact within their contract. They are at cross-purposes. There is a meeting of the minds, but the parties are mistaken. Hence the contract is voidable.
Mistake of Fact. This constitutes any mistaken belief other than a mistake of law. Examples include erroneous beliefs about the meaning of some term or about the identity of some person or location. There are two types of mistake of fact:
A unilateral mistake occurs when only one party is mistaken as to the subject matter or the terms contained in the contract agreement. This type of mistake is generally more common than other types of contract mistakes, such as a mutual mistake (an error that is shared by both parties).
If a unilateral mistake occurs during the negotiating, it could affect the outcome of the contract. It may be but is not always unfair if one party understands the contract while the other party does not.
The court is empowered to render various remedies:
- Rescission: Contract rescission is where the contract is completely cancelled and the parties restored to their position before the contract was entered into. Rescission is only available if the non-mistaken party knows or should have known about the unilateral mistake.
- Reformation: Contract reformation is where the written agreement is changed to reflect the parties’ original understanding. Reformation is granted only if one party was not aware that the writing does not conform to the actual agreement.
Note it is critical to determine whether the non-mistaken party is aware that the other party does not understand a term in the contract. If the non-mistaken party knows or should know that the other party has made a unilateral mistake, the result is usually contract rescission (cancellation). On the other hand, if the other party was not aware of the mistake, the contract can be reformed (rewritten).
Material versus Collateral Errors:
A mutual mistake occurs when the parties to a contract are both mistaken about the same material fact within their contract. Material means a fact central to the purpose of the contract. Collateral mistakes will not afford the right of rescission. A collateral mistake is one that 'does not go to the heart' of the contract.
Thus, for a mutual mistake to void the agreement, the fact the parties are mistaken about must be material. As an example, if you and I are in error about the weight of a piece of machinery thus the shipping cost increased by five percent, that is probably not a material error. But if you and I were unaware that the machine purchased cannot perform the function it was purchased to accomplish, that is likely to be a material error.
Fault for Mutual Mistake of Fact
A mistake of fact is a mistake that is not caused by the negligence of the party making the mistake that consists of his unawareness of a fact material to the contract. Ca. Civ. Code sec. 1577.
If only one of the parties is mistaken, that party will not be entitled to rescind, unless (1) the non-mistaken party had reason to know of the mistake and it was his fault which caused the mistake, or (2) the effect of the mistake is such that enforcement of the contract would be “unconscionable.” See, Larsen v. Johannes (1970) 7 Cal. App. 3d 491,503; Rest. 2d, Contracts §153(a).
As an example, consider the case of Donovan v. RRL Corp. (2001) 26 Cal. 4th 261. In that case a proof- reading error made by a newspaper resulted in the defendant car dealer advertising an automobile for sale for $12,000 below its usual sales price. The dealer refused to sell the automobile to the buyer at the advertised price. The California Supreme Court ruled that, although only the car dealer was mistaken as to the price – i.e, the mistake was “unilateral” — the price differential was so severe that it would be unfair (“unconscionable”) to require the car dealer to perform.
Mistake of Law:
Mutual Mistake of Law
A party may also rescind a contract for a “mistake of law.” A mutual mistake of law is a mistake which arises from a misunderstanding of the law by all parties. Ca. Civ. Code §1578(1). As an example, let us assume Party A who lives in Oregon sells marijuana to Party B in Texas where the sale is illegal but the sale was legal in Party’s A state. If both A and B entered into that contract with the understanding that sale of marijuana was legal in the state of sale, they would both be operating under a mutual mistake of law, and either could rescind the contract. Indeed, the contract would not be enforceable as a matter of public policy in Texas.
Unilateral Mistake of Law
If only one party is mistaken, the mistake is a “unilateral mistake” of law. One may rescind for a unilateral mistake of law only if the other party knows of, but does not correct, and takes advantage of or unfairly obtain the benefit of the rescinding party’s mistake of law. See Civ. Code §1578(2). As an example, if a husband and wife entered into a marital settlement agreement based on the life’s misapprehension of the law relating to her property rights, and the husband fails to rectify her misunderstanding, or caused that misunderstanding by his own misconduct, the wife is entitled to rescind the marital settlement agreement based on her unilateral mistake of law. See, e.g., Simmons v. Briggs (1924) 69 Cal. App. 447.
Conclusion:
It is important to differentiate between mistake of material fact or law and merely changing one’s mind as to whether one wants to enter into the contract. Once you execute the agreement you are usually bound to perform or must pay the other party’s damages. That is the freedom…and responsibility…to contract.
Buyer’s or seller’s remorse is not the same as mistake of fact or law. Nor are errors that are not central to the subject matter of the agreement sufficient to void or rescind the agreement. To rely on the doctrine of mistake one must demonstrate a degree of non-negligent error of material facts central to the core of the contract.
This is only appropriate given the tremendous power to enter into agreements that is allowed in the United States. The courts usually ardently support the freedom of the individual or business to enter into an agreement and only will void the agreement under unusual circumstances.