George Mason School of Law Contracts II K. Mistake This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley fbuckley@gmu.edu

Regret Contingencies I don’t like the way this turned out… What are the possibilities?

Regret Contingencies An occurs: what are the possibilities? Both parties want out and write a termination agreement

Regret Contingencies An occurs: what are the possibilities? One party only wants out: Uses his clout to extract a modification agreement—subject to duress barriers

Regret Contingencies An occurs: what are the possibilities? One party only wants out: Uses his clout to extract a modification agreement Alleges a Breach by the other party

Regret Contingencies An occurs: what are the possibilities? One party only wants out: Uses his clout to extract a modification agreement Alleges a Breach by the other party Alleges an excuse Condition precedent, mistake, frustration

Regret Contingencies So the choice is between breach and excuse When should the event give rise to liability by one of the parties, and when not?

Force Majeure Clause A party is not liable for failure to perform the party's obligations if such failure is as a result of Acts of God (including fire, flood, earthquake, storm, hurricane or other natural disaster), war, invasion, act of foreign enemies, hostilities (regardless of whether war is declared), civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalization, government sanction, blockage, embargo, labor dispute, strike, lockout or interruption or failure of electricity or telephone service, or change in government regulations which makes performance of obligations under this contract impracticable.

Regret Contingencies Force majeure clause Why no least cost risk avoiders here?

Regret Contingencies Force majeure clause Why no least cost risk avoiders here? No one can efficiently reduce the risk

Regret Contingencies Force majeure clause Why no least cost risk avoiders here? No one can efficiently reduce the risk No one is better able to evaluate risk (unlike Stees?)

Regret Contingencies Force majeure clause Why no least cost risk avoiders here? No one can efficiently reduce the risk No one is better able to evaluate risk (unlike Stees) Risk not diversifiable

Kinds of Mistakes Misunderstandings and Mistakes Which party is mistaken? About what are they mistaken?

Kinds of Mistakes Misunderstandings and Mistakes

Restatement §20. Misunderstandings (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and neither party knows or has reason to know the meaning attached by the other; or each party knows or each party has reason to know the meaning attached by the other.

Restatement §20. Misunderstandings (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations

Kinds of Mistakes Misunderstandings and Mistakes Misunderstanding: The event can be seen as something which goes to whether there was mutual assent as to any agreement

Kinds of Mistakes Misunderstandings and Mistakes Misunderstanding: The event can be seen as something which goes to whether there was mutual assent as to any agreement Mistake: There was assent to an agreement but the event puts an end to it.

Kinds of Mistakes Misunderstandings and Mistakes Misunderstanding: The event can be seen as something which goes to whether there was mutual assent as to any agreement Mistake: There was assent to an agreement but the event puts an end to it. And the difference is?

Kinds of Mistakes Misunderstandings and Mistakes Misunderstanding: The world is as we think it is, but we have not agreed Mistake: The world is not as we think it is E.g., we bargain over a ship that has sunk

Misunderstandings Raffles v. Wichelhaus at 694 Peerless I Peerless II

Misunderstandings What if objectively it was clear that the contract referred to a particular ship, but one party is mistaken?

Misunderstandings (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and neither party knows or has reason to know the meaning attached by the other; or

Two kinds of Mutual Mistake Common Mistake: Both parties make the same mistake: Bargaining over a ship that has sunk “Mutual Mistake”: Parties at cross-purposes: I sell you Rose 2d and you think you’ve bought Rose 3d

What is a basic assumption: Restatement 152 Where a mistake of both parties at the time of 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.

What is a basic assumption? An error as to substance (More recently), an error which has a material effect on the exchange value of the contract

What is a basic assumption? An error as to substance Essence vs. mere quality

Error as to Substance: Sherwood v. Walker at 694

Error as to Substance: Sherwood v. Walker at 694 Hiram Walker T.C. Sherwood

Error as to Substance: Sherwood v. Walker at 694 Rose Hiram Walker

Another Hiram Walker product Canadian Club

Aberlone, Rose of By Brainerd Currie In many a hypothetical With characters alphabetical, In many a subtle and sly disguise There lurks the ghost of her sad brown eyes. That she will turn up in some set of facts is Almost as certain as death and taxes: For students of law must still atone For the shame of Rose of Aberlone.

Sherwood v. Walker What is a “basic assumption” in 152-53?

Sherwood v. Walker What is a “basic assumption” in 152-53? Substance of the thing vs. quality or accident A barren cow is substantially a different creature than a breeding one

Sherwood v. Walker What is a “basic assumption” in 152-53? Substance of the thing vs. quality or accident Error in substantibus: the “whole substance of the agreement” or “the very nature of the thing”

Sherwood v. Walker So what is Rose’s essence: “cowness” or “barren cowness” Barren Cow Fertile Cow

Sherwood v. Walker So what is Rose’s essence: “cowness” or “barren cowness” Barren Cow Fertile Cow

Mutual Mistake Restatement § 152: “Has a material effect on the agreed exchange” Comment c: resulting imbalance is so severe that he cannot fairly be required to carry it out Is that the case here?

Sherwood v. Walker Did the mistake have a material effect on the exchange of performances? [(1420-50)*0.055 =] $75.35 vs. about $875

Sherwood v. Walker Assumption of risk: Should this have been a matter of breach? Barren Cow Fertile Cow

Assumption of Risk Where one party is better able to reduce the risk or the harm Where one party is better able to value the loss Assuming risk aversion, where one party is wealthier than the other Assuming risk aversion, where one party is a better insurer because he can diversify the risk

Sherwood v. Walker Assumption of risk: Was Walker in a position to know the condition of the cow? Barren Cow Fertile Cow

Sherwood v. Walker The dissent: if either party had superior knowledge … certainly the defendants had such advantage Barren Cow Fertile Cow

Qu. Backus v. MacLaury p. 709 What should the court hold?

Qu. Backus v. MacLaury p. 709 No mistake: Buyer realized the calf might be sterile and took the risk 48

Restatement 154: Assumption of Risk A party bears the risk of mistake when the risk is allocated to him by agreement of the parties, or 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 the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. 49

Restatement 154: Assumption of Risk A party bears the risk of mistake when the risk is allocated to him by agreement of the parties, or 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 the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. Which way does this cut in Backus? 50

Mutual Mistake: Restatement 152 Where a mistake of both parties at the time of 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.

“As is” clauses Messerly at p. 706 Can an “as is” clause oust the doctrine of mistake by virtue of an assumption of risk under Restatement § 154?

Unilateral Errors What if one party is mistaken and the other party knows of his mistake?

Restatement §20(2) Unilateral Misunderstanding (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

Information-forcing rules Where the absence of information may impose costs, and one party can cure the problem more easily than another, legal rules may give the informed party the incentive to reveal the information: Unilateral errors Fitness for purpose Fraud through concealment

Unilateral Mistake: Restatement 153 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 under the rule stated in 154, and the effect of the mistake is such that enforcement of the contract would be unconscionable, or the other party had reason to know of the mistake or his fault caused the mistake

Unilateral Mistake: Class A: Unconscionability 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 under the rule stated in 154, and the effect of the mistake is such that enforcement of the contract would be unconscionable, or the other party had reason to know of the mistake or his fault caused the mistake

Unilateral Mistake: Class B: Nondisclosure 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 under the rule stated in 154, and the effect of the mistake is such that enforcement of the contract would be unconscionable, or the other party had reason to know of the mistake or his fault caused the mistake

Unilateral Mistake: Restatement 153 Again, an information-forcing rule

Anderson v. O’Meara 699 Seller sells submarine trenching equipment

Anderson v. O’Meara Buyer thinks he’s buying a Sweep Dredge

Anderson v. O’Meara The District Court found a mutual mistake. Why did the Circuit Court disagree?

Anderson v. O’Meara Was there a unilateral mistake? And of what type, in my classification?

Anderson v. O’Meara Was there a unilateral mistake? And of what type, in my classification? Class B? Did Seller have reason to know of the use buyer would put to the dredge?

Anderson v. O’Meara Was there a unilateral mistake? And of what type, in my classification? Class B? Did Seller have reason to know of the use buyer would put to the dredge? Evidence as to the seller’s knowledge must be “clear and unequivocal”

Anderson v. O’Meara Was there a unilateral mistake? And of what type, in my classification? Class A: unconscionability needed

Anderson v. O’Meara Was there a unilateral mistake? And of what type, in my classification? Class A: unconscionability needed Absence of diligence by the buyers a factor to be considered

Anderson v. O’Meara Was there a unilateral mistake? And of what type, in my classification? Class A: unconscionability needed Absence of diligence by the buyers a factor to be considered Buyer as least-cost risk avoider

Duty to Investigate Gartner p. 708 Did one person have a special duty to investigate?

Duty to Investigate Jeselsohn p. 709-10 “An examination of the records in the registry of deeds would not have disclosed the mistake” 70

Duty to Investigate Jeselsohn Held: mutual mistake 71

Unilateral Clerical Mistakes Elsinore at 708 72

Unilateral Clerical Mistakes Elsinore Does it matter that the error was only $3K on a $90K bid Restatement § 152, comment c (“an imbalance so severe that he cannot fairly be required to carry it out’) 73

Unilateral Mistakes: Irmen v. Wrzesinski at 705 $349 on E-Bay

Irmen v. Wrzesinski How is this case like Laidlaw v. Organ?

George Mason School of Law Contracts II K. Mistake This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley fbuckley@gmu.edu

What is a basic assumption: Restatement 152 Where a mistake of both parties at the time of 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.

The Modern Trend Where a mistake of both parties at the time of 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.

Alcoa 710 What was the deal?

Mutual Mistake: Alcoa What was the deal? Essex Alcoa Alcoa to convert alumina (aluminum oxide) for Essex Essex Alcoa Alumina Aluminum

Mutual Mistake: Alcoa How was the pricing arrived at?

Mutual Mistake: Alcoa How was the pricing arrived at? You can’t lose, Alcoa. Believe me!

Mutual Mistake: Alcoa How was the pricing arrived at? Labor costs to vary with average costs at an Alcoa plant Non-Labor costs to vary with wholesale price index Essex gets a price cap of 65% of aluminum market prices— but no ceiling for Alcoa

Mutual Mistake: Alcoa What happened to non-labor costs?

So what happened to oil prices in the 1970s?

Mutual Mistake: Alcoa What did Alcoa expect as profits per pound of aluminum converted? And what was it getting in 1977 and 1978?

Mutual Mistake: Alcoa Why did Essex want the supply of aluminum?

Mutual Mistake: Alcoa Why did Essex want the supply of aluminum And what did it end up doing with the aluminum it bought?

Mutual Mistake: Alcoa Why did Essex want the supply of aluminum And what did it end up doing with the aluminum it bought? Was this prohibited by the contract?

Mutual Mistake: Alcoa Why did Essex want the supply of aluminum And what did it end up doing with the aluminum it bought? Was this prohibited by the contract? What if this had been seen as a requirements contract under 2-306?

Mutual Mistake: Alcoa Why did Essex want the supply of aluminum And what did it end up doing with the aluminum it bought? Was this prohibited by the contract? Cf. quantities on p. 712

Mutual Mistake: Alcoa What was the mutual mistake, if any? Was this an error in substantibus, as in Hiram Walker?

Mutual Mistake: Alcoa Restatement § 151: A mistake is a belief that is not in accord with the facts Was this an error of fact or a prediction about future events?

Mutual Mistake: Alcoa What there an assumption of risk? How does the court distinguish Leasco at 714?

Mutual Mistake: Alcoa What there an assumption of risk? How does the court distinguish Leasco at 735? How is it that there is an assumption of risk where there is no price adjustment clause but no assumption of risk about price changes when there is a price adjustment clause?

Mutual Mistake: Alcoa Did Alcoa assume the risk? Who drafted the contract?

Mutual Mistake: Alcoa Did Alcoa assume the risk? Who drafted the contract? The contra proferentem maxim “once sounded as a clarion call to retrograde courts to pervert agreements if they could”

Mutual Mistake: Alcoa Did Alcoa assume the risk? Essex put in a price cap on Alcoa’s services, so why didn’t Alcoa put in a cost cap?

Mutual Mistake: Alcoa Did Alcoa assume the risk? Essex put in a price cap on Alcoa’s services, so why didn’t Alcoa put in a cost cap? “They must have thought the risk too remote”

Mutual Mistake: Alcoa What do you make of the finding that, were it necessary, the court would find that the contract was unconscionable “windfall profits” at 717

Mutual Mistake: Alcoa What kind of a remedy? Why wasn’t rescission ordered?

Mutual Mistake: Alcoa What kind of a remedy? Reformation: Restatement § 155 How was the new price to be arrived at?

Nick Taleb’s Black Swan effects: tiny probability, high magnitude

Definition of Mistake: Restatement 151. A mistake is a belief that is not in accord with the facts

Definition of Mistake Restatement 151. A mistake is a belief that is not in accord with the facts I agree to sell you a chemical. The chemical may be legally sold at the time the contract is made, but before delivery it is made illegal. Mistake?

When is a mistake a mistake: Atlas 724 Atlas Corp. uranium “tailings” pile

When is a mistake a mistake What was the “mistake”? That the health hazard was much greater than had been thought? That changes in the law mandate a costly clean-up?

When is a mistake a mistake What was the “mistake”? That the health hazard was much greater than had been thought Restatement § 151, comment b: Mistakes of fact include mistakes of law

When is a mistake a mistake Qu. Impracticability under Restatement 264 “performance is made impracticable by having to comply with a domestic or foreign governmental regulation or order”