Misunderstanding, Mistake, & Excuse

Excuse -- Impracticability Today

Taylor v. Caldwell provided relief only where performance was impossible. The modern approach under the Restatement and UCC is more forgiving, and requires only impracticability. This change recognizes that there are situations in which events do not make performance absolutely impossible, yet they place so great a burden on the adversely affected party that fairness demands relief.

Restatement §151 - Mistake Defined

"A mistake is a belief that is not in accord with the facts."

Restatement §261 - Discharge by Supervening Impracticability

"Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which is a basic assumption on which the contract was made, his duty to render that performance is discharged, unless language or the circumstances indicate the contrary."

Restatement §265 - Discharge by Supervening Frustration

"Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate the contrary."

Restatement §152 - When Mistake of Both Parties Makes a Contract Voidable: (Mutual Mistake)

(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154....

Mutual Mistake - Focus

1. The mistake must be one of fact and shared by both parties 2. The mistake must relate to a basic assumption on which the contract was made Focus is on the parties' manifest motivation: Must be central for both parties to the contract (not a peripheral issue)—e.g., the parties would not have agreed to contract were it not for the mistake. 3. The mistake must have a material effect on the agreed exchange of performances Focuses on the actual impact of the mistake: Must have a significant effect on the benefits or burdens of the parties. Courts will look to the relief sought in making this determination 4. It must be unfair or otherwise inappropriate to allocate the risk of the mistake to the aggrieved party; e.g., the party seeking relief must not have borne the risk of the mistake Look to Restatement §154

Restatement §154 - When a Party Bears the Risk of a Mistake

A party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties, or [Sometimes risk allocation expressly stated in contract. E.g., contract for sale of property provides: "Purchaser has examined the property and agrees to accept same in its present condition."] (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or [Sometimes referred to as "conscious ignorance." Party bears the risk because knew there was a real possibility of mistake, but contracted anyway.] (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. [Court will consider the purposes of the parties and will have recourse to its own general knowledge of human behavior in bargain transactions, as well as usage of trade.]

When Misunderstanding Renders Contract Void:

Applies where interpretation can't resolve dispute. Parties said or wrote the same words but attached different meanings Neither party's meaning is more reasonable than the other under the circumstances Neither party knew of or is at fault for the other's misunderstanding Where these conditions are met, the court may find that there simply was no mutual assent, and the parties did not form a valid contract.

Example of subsequent change that usually does not make performance impracticable (always a fact-based determination):

Change in market conditions (no parties should expect the market to remain static) Too much uncertainty if we just let parties escape contracts that turn out to be disadvantageous.

Examples of subsequent events that may make a performance impracticable:

Death or incapacity of person necessary for performance (See Restatement §262) Destruction, deterioration or failure to come into existence of thing necessary for performance (See Restatement §263) Prevention by Governmental Regulation or Order (See Restatement §264)

Frustration of Purpose -- In Sum

Distinguished from Impracticability: Both parties may still be perfectly capable of performing. It's just that one party's performance becomes virtually worthless to the other party. See Krell (and distinguish Meadow Gold Dairies) Contemplation of Both Parties: Purpose that was frustrated must have been a principal purpose of the adversely affected party and must have been so understood by both parties. Substantial Frustration: Must be so severe that was not contemplated by parties. Usually means that the value of the other party's performance must be totally or nearly destroyed.

UCC §2-615 - Excuse by Failure of Presupposed Conditions

Except so far as a seller may have assumed a greater obligation... (a) Delay in delivery or non-delivery in whole or in part by a seller...is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid....

"Unless the Language or Circumstances indicate the Contrary"

Look to language of K and circumstances (usage of trade, course of dealing, etc.) to see if the risk was assigned. Parties often protect against uncertainty in their contracts by: Explicitly stating in the contract who will bear the loss for a foreseen risk. Assign responsibility for unforeseen risks in a force majeure ("chance occurrence") clause (one party bears risk of war, natural disaster, etc.).

Misunderstanding

Occurs where the parties attached different meanings to the terms of the agreement and the law is unable to resolve the question of which reading is more objectively reasonable.

Mistake

One or both parties enter into the contract with a false impression concerning the factual circumstances of the exchange at the time of contracting.

"Basic Assumption"

Similar to the element of mistake—but assumption is to future events At the time of contracting, the parties expressly or impliedly made assumptions about the future course of events, and those assumptions offered a central motivation of the parties in entering into the contract. The occurrence of this event was neither foreseen nor considered a reasonable likelihood by the parties at the time of contracting.

Unilateral Mistake Distinguished from Mutual Mistake

The adversely affected party must meet all the elements of mutual mistake (as applied to that party) and must show: (a) Enforcement would be unconscionable Since the courts are focused on the unconscionability of "enforcement," they will typically look for substantive unconscionability: They will balance the hardship of avoidance (on non-mistaken party) vs. hardship of enforcement (on mistaken party). OR.... (b) Other party had reason to know of the mistake or his fault caused the mistake If actually knew, then (if there was intent to deceive or bad faith) there may be grounds for establishing fraudulent non-disclosure (See Restatement §§161(b)). Other party sees disadvantaged party make or state the error as to a basic assumption—recognizes it as an error that should be corrected—and then rushes the other to close the deal before disadvantaged party has opportunity to discover the mistake. If other party had reason to know it was a mistake, then court may also grant relief. E.g., General contractor is familiar with services being offered by the Sub (the mistaken party) and General knows the Sub's quote is only 10% of what the market commands, then General probably had reason to know of the Sub's mistake. If the other party was at fault for the mistake

Mistake Application

The doctrine of mistake applies where both parties attach the same meaning to the terms of their agreement, but one or both parties are mistaken as to a then-existing fact at the time they enter the contract. Enlisting the doctrine of mistake, the complaining party alleges she would never have entered into the contract had she not been mistaken as to this fact. Under certain circumstances the court may grant relief. Courts typically divide mistake analysis into two categories: mutual mistake and unilateral mistake.

Restatement §153 Unilateral Mistake

The test for unilateral mistake (mistake by only one party) parallels the elements required for mutual mistake, but imposes some additional requirements [(a) and (b) below]: The mistake must relate to facts in existence at the time of the contract The mistake must relate to a basic assumption on which the mistaken party made the contract The mistake must have a material effect on the agreed exchange of performances that is adverse to the mistaken party The mistaken party must not have born the risk of mistake It must also be the case that either (a) the effect of the mistake is such that enforcement of the contract would be unconscionable or (b) the other party had reason to know of the mistake or his fault caused the mistake.

Frustration of Purpose Application

This doctrine applies to cases where performance has not become impracticable, but rather the principal purpose for entering into the contract has (without fault by either party) been defeated by an unexpected event—rendering the contract valueless to the aggrieved party. Impracticability = Performance impossible or overly burdensome Frustration of Purpose = Contract rendered pointless

Misunderstanding Application

To apply, neither party can know of (or be responsible for) the other party's misapprehension at the time of contracting. If one of the parties is aware of the misunderstanding or was responsible for it, then that party has to clear up the misunderstanding.

Excuse

Turns on changes in circumstances that arise after the parties enter into a contract. Changes in circumstances may make one party's performance impossible or highly impractical (excuse of impossibility or excuse of impracticability). Or circumstances may arise that eliminate a party's reason for entering into the contract to begin with (excuse of frustration of purpose).