1. George Mason School of Law
Contracts II
Mistake
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F.H. Buckley

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

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

4. 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

5. 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

6. 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

7. 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?

8. 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.

9. Assumption of risk and Least-Cost Risk Avoiders
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

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

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

12. 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?)

13. 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

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

15. Kinds of Mistakes
Misunderstandings and Mistakes

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

17. 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

18. 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.

19. 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?

20. 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

21. Misunderstandings
Raffles v. Wichelhaus at 694
Peerless I
Peerless II

22. Misunderstandings Raffles v. Wichelhaus
Was there any way to enforce this?

23. Misunderstandings and Care
(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

24. 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.

25. 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
A misunderstanding?

26. 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.

27. 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

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

29. Error as to Substance: Sherwood v. Walker at 694

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

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

32. Another Hiram Walker product
Canadian Club

36. 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.

37. Sherwood v. Walker
What is a “basic assumption” in ?

38. 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

39. 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”

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

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

42. 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?

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

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

45. 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

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

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

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

49. Qu. Backus v. MacLaury p. 709
No mistake: Buyer realized the calf might be sterile and took the risk 49

50. 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. 50

51. “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?

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

53. 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.

54. 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

55. 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

56. 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

57. 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

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

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

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

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

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

63. 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?

64. 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”

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

66. 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

67. 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

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

69. Duty to Investigate Jeselsohn p. 709-10
“An examination of the records in the registry of deeds would not have disclosed the mistake” 69

70. Duty to Investigate
Jeselsohn
Held: mutual mistake 70

71. Unilateral Clerical Mistakes
Elsinore at 708 71

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’) 72

73. Unilateral Clerical Mistakes
Elsinore
Does it matter that the error was only $3K on a $90K bid
Does it matter that the bidder notified the school board the next day?

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

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

76. What is a “basic assumption”?
Substance of the thing vs. quality or accident
A barren cow is substantially a different creature than a breeding one

77. 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.

78. Alcoa 710
What was the deal?

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

80. Mutual Mistake: Alcoa
How was the pricing arrived at?

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

82. 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

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

84. What happened to oil prices in the 1970s?

85. Mutual Mistake: Alcoa
What did Alcoa expect as profits per pound of aluminum converted?

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

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

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

89. 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?

90. 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?

91. 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

92. Mutual Mistake: Alcoa
What was the mutual mistake, if any?

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

94. Mutual Mistake: Alcoa What was the mutual mistake, if any?
Would the wholesale price index serve as a proxy for non-labor costs?

95. 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?

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

97. 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?

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

99. 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”

100. 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?

101. 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”

102. 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

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

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

105. Mutual Mistake: Alcoa What kind of a remedy?
Reformation: how was the new price to be arrived at?
Is something like this what the parties really wanted all along?

106. Mutual Mistake: Alcoa What kind of a remedy?
Reformation: how was the new price to be arrived at?
Is something like this what the parties really wanted all along?
The practice of foreign countries at 723

107. How many contracts do you think were affected by the oil crisis?

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

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

110. 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?

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

112. When is a mistake a mistake
Why is this in the Federal Circuit?

113. When is a mistake a mistake
What was the “mistake”?

114. 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?

115. 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

116. When is a mistake a mistake
What was the “mistake”?
That the health hazard was much greater than had been thought
A mistake is a mistaken belief about an existing fact: Alcoa, Restatement § 151
But there is no mistaken belief about a fact whose existence was not known.

117. When is a mistake a mistake
What was the “mistake”?
That the health hazard was much greater than had been thought
Is this a sensible distinction, in terms of risk allocation?
Which looks more like a mistake as to a basic assumption?

118. When is a mistake a mistake
What was the “mistake”?
Did the court get it right, in any event?

119. 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”