Contracts - 11/13 - Unilateral Mistake, Reformation, Mutual Mistake

Lenawee County Board of health v. Messerly holding

1 - A contract may be rescinded because of a mutual misapprehension of the parties, but this remedy is granted only in the sound discretion of the court. 2 - A court need not grant rescission in every case in which the mutual mistake relates to a basic assumption and materially affects the agreed performance of the parties. 3 -In cases of mistake by two equally innocent parties, we are required, in the exercise of our equitable powers, to determine which blameless party should assume the loss resulting from the misapprehension they shared 4 - While there is no express assumption in the contract by either party of the risk of the property becoming uninhabitable, there was indeed some agreed allocation of the risk to the vendees by the incorporation of an "as is" clause into the contract 5 - Mutual mistake by contracting parties does not always justify rescission, but case-by-case analysis is required whereby rescission is indicated when mistaken belief relates to basic assumption of parties upon which contract is made, and materially affects agreed performances of parties

Material mistake

1 - In establishing a material mistake regarding a basic assumption of the contract, the defendant must show that the resulting imbalance in the agreed exchange is so severe that it would be unfair to require the defendant to perform. (Rest.2d Contracts, § 152, com. c, p. 388.) 2 - Ordinarily, a defendant can satisfy this requirement by showing that the exchange not only is less desirable for the defendant, but also is more advantageous to the other party.

Donovan v. RRL Corp. holding

1 - Rescission may be had for mistake of fact if the mistake is material to the contract and was not the result of neglect of a legal duty, if enforcement of the contract as made would be unconscionable, and if the other party can be placed in statu quo. 2 - Restatement Second of Contracts authorizes rescission for a unilateral mistake of fact where "the effect of the mistake is such that enforcement of the contract would be unconscionable. 3 - Where the plaintiff has no reason to know of and does not cause the defendant's unilateral mistake of fact, the defendant must establish the following facts to obtain rescission of the contract: (1) the defendant made a mistake regarding a basic assumption upon which the defendant made the contract; (2) the mistake has a material effect upon the agreed exchange of performances that is adverse to the defendant; (3) the defendant does not bear the risk of the mistake; and (4) the effect of the mistake is such that enforcement of the contract would be unconscionable. We shall consider each of these requirements below. 4 - In ascertaining whether rescission is warranted for a unilateral mistake of fact, substantive unconscionability often will constitute the determinative factor, because the oppression and surprise ordinarily results from the mistake—not from inequality in bargaining power. 5 - Accordingly, even though defendant is not the weaker party to the contract and its mistake did not result from unequal bargaining power, defendant was surprised by the mistake, and in these circumstances overly harsh or one-sided results are sufficient to establish unconscionability entitling defendant to rescission.

Travelers Ins. Co. v. Bailey holding

1 - Where, as here, an antecedent contract has been established by the requisite measure of proof, equity will act to bring the erroneous writing into conformity with the true agreement. 2 - where there has been established beyond a reasonable doubt a specific contractual agreement between parties, and a subsequent erroneous rendition of the terms of the agreement in a material particular, the party penalized by the error is entitled to reformation, if there has been no prejudicial change of position by the other party while ignorant of the mistake. 3 - If such change of position can equitably be taken into account and adjusted for in the decree, reformation may be possible even then.

Instances where rescission is less likely

1 - that the risk of a mistake must be allocated to a party where the mistake results from that party's neglect of a legal duty (a careless but significant mistake in the computation of the contract price as the type of error that sometimes will occur in the conduct of reasonable and cautious businesspersons, and such an error does not necessarily amount to neglect of legal duty that would bar equitable relief. ) 2 - Only where the mistake results from "a failure to act in good faith and in accordance with reasonable standards of fair dealing" is rescission unavailable

Unconscionable contract

An unconscionable contract ordinarily involves both a procedural and a substantive element: (1) oppression or surprise due to unequal bargaining power, and (2) overly harsh or one-sided results

Unilateral mistake

Mistake of fact is a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in An unconscious ignorance or forgetfulness of a fact past or present, material to the contract ...."

Reformation of contracts and negligence

Mistakes generally occur through some carelessness, and failure to discover a mistake may be in some degree negligent, but unless some prejudice to the other party's rights under **818 the true contract results, so as to make its enforcement inequitable, reformation will not be refused because of the presence of some negligence.

Negligence and rescission

The mere fact that a mistaken party could have avoided the mistake by the exercise of reasonable care does not preclude **718 ... avoidance ... [on the ground of mistake].

§ 155 When Mistake of Both Parties as to Written Expression Justifies Reformation

Where a writing that evidences or embodies an agreement in whole or in part fails to express the agreement because of a mistake of both parties as to the contents or effect of the writing, the court may at the request of a party reform the writing to express the agreement, except to the extent that rights of third parties such as good faith purchasers for value will be unfairly affected.