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

1 George Mason School of Law Contracts II 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 the way this turned out…  What are the possibilities? 2

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

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 4

Regret Contingencies  So the choice is between breach and excuse  When should the event give rise to liability by one of the parties  See last day on least-cost risk-bearing 5

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. 6

Regret Contingencies  Force majeure clause Why no least cost risk avoiders here? 7

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 8

Kinds of Mistakes  Misunderstandings and Mistakes  Which party is mistaken?  About what are they mistaken? 9

Kinds of Mistakes  Misunderstandings and Mistakes 10

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 (a)neither party knows or has reason to know the meaning attached by the other; or (b)each party knows or each party has reason to know the meaning attached by the other. 11

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 13

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. 14

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? 15

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 16

Misunderstandings  Raffles v. Wichelhaus at 694 17 Peerless IPeerless II

Misunderstandings  Raffles v. Wichelhaus Was there any way to enforce this? 18

Misunderstandings  What if both had meant the same ship? 19

Misunderstandings  What if both had meant the same ship?  Illustration 1: There is a contract, and it is immaterial whether they know about the other ship 20

Misunderstandings  What if objectively it was clear that the contract referred to a particular ship, but one party is mistaken? 21

Misunderstandings  (1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a)neither party knows or has reason to know the meaning attached by the other; or (b)(b) each party knows or each party has reason to know the meaning attached by the other. 22

Misunderstanding  What if one party is mistaken and the other party knows of his mistake? 23

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. 24

Misunderstandings  Mutual and Unilateral Misunderstandings: What is the logic behind the distinction? 25

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 26

Mutual and Unilateral Mistake 27

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. 28

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 29

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  Mutual mistakes as misunderstandings 30

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 32

Unilateral Mistake: Restatement 153  Again, an information-forcing rule 33

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. 34

What is a basic assumption? 35  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? 36  An error as to substance Essence vs. mere quality

Error as to Substance: Sherwood v. Walker at 694 37

Error as to Substance: Sherwood v. Walker at 712 38 Hiram Walker T.C. Sherwood

Error as to Substance: Sherwood v. Walker at 694 39 Hiram Walker Rose

Another Hiram Walker product 40 Hiram Walker Canadian Club

Aberlone, Rose of By Brainerd Currie 44 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 45  What is a “basic assumption” in 152- 53?

Sherwood v. Walker 46  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 47  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 48 Barren Cow  So what is Rose’s essence: “cowness” or “barren cowness” Fertile Cow

Sherwood v. Walker 49 Barren Cow  So what is Rose’s essence: “cowness” or “barren cowness” 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? 50

Sherwood v. Walker 51  Did the mistake have a material effect on the exchange of performances? [(1420-50)*0.055 =] $75.35 vs. about $875

Sherwood v. Walker 52 Barren Cow  Assumption of risk: Should this have been a matter of breach? Fertile Cow

Sherwood v. Walker 53 Barren Cow  Assumption of risk: Was Walker in a position to know the condition of the cow? Fertile Cow

Sherwood v. Walker 54 Barren Cow  The dissent: if either party had superior knowledge … certainly the defendants had such advantage Fertile Cow

Qu. Backus v. MacLaury p. 709 55  What should the court hold?

Qu. Backus v. MacLaury p. 709 56  No mistake: Buyer realized the calf might be sterile and took the risk

Restatement 154: Assumption of Risk 57  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.

Restatement 154: Assumption of Risk 58  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?

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 59

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 60

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 61

Anderson v. O’Meara 699 62 Seller sells submarine trenching equipment

Anderson v. O’Meara 63 Buyer thinks he’s buying a Sweep Dredge

Anderson v. O’Meara 64  The District Court found a mutual mistake. Why did the Circuit Court disagree?

Anderson v. O’Meara 65  Was there a unilateral mistake? And of what type, in my classification?

Anderson v. O’Meara 66  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 67  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 68  Was there a unilateral mistake? And of what type, in my classification? Class A: unconscionability needed

Anderson v. O’Meara 69  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 70  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 71  Gartner p. 708 Did one person have a special duty to investigate?

Duty to Investigate 72  Jeselsohn p. 709-10

Duty to Investigate 73  Jeselsohn Held: mutual mistake  The buyer could not have discovered the error by consulting the registry of deeds

Unilateral Clerical Mistakes 74  Elsinore at 709

Unilateral Clerical Mistakes 75  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’)

Unilateral Clerical Mistakes 76  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?

Unilateral Mistakes: Irmen v. Wrzesinski at 705 77 $349 on E-Bay

Irmen v. Wrzesinski 78  Can the doctrine of unilateral mistake be a rule of economic inefficiency?  How is this case like Laidlaw v. Organ?

“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? 79

“As is” clauses  Messerly Note that the court rejected the error in substantibus analysis of Hiram Walker 80

“As is” clauses  Messerly Note that the court rejected the error in substantibus analysis of Hiram Walker The modern trend: focus on the “agreed exchange of performances” 81

82 George Mason School of Law Contracts II 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

The two elements of 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. 83

Basic Assumption: Errors as to substance in Sherwood v. Walker 84 Barren Cow  So what is Rose’s essence: “cowness” or “barren cowness” Fertile Cow

Mutual Mistake: Alcoa 710  Is anything left of errors as to substance?  What was the deal? 85

Mutual Mistake: Alcoa  What was the deal? Alcoa to convert alumina (aluminum oxide) for Essex EssexAlcoa 86 Alumina Aluminum

Mutual Mistake: Alcoa  How was the pricing arrived at? 87

Mutual Mistake: Alcoa  How was the pricing arrived at? 88 You can’t lose, Alcoa. Believe me!

Mutual Mistake: Alcoa  How was the pricing arrived at? 89 Essex gets a price cap of 65% of aluminum market prices Labor costs to vary with average costs at an Alcoa plant Non-Labor costs to vary with wholesale price index

Mutual Mistake: Alcoa  What happened to non-labor costs? 90

So what happened to oil prices in the 1970s? 91

Mutual Mistake: Alcoa  What did Alcoa expect as profits per pound of aluminum converted? 92

Mutual Mistake: Alcoa  What did Alcoa expect as profits per pound of aluminum converted?  And what was it getting in 1977 and 1978? 93

Mutual Mistake: Alcoa  Why did Essex want the supply of aluminum? 94

Mutual Mistake: Alcoa  Why did Essex want the supply of aluminum  And what did it end up doing with the aluminum it bought? 95

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? 96

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? 97

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 98

Mutual Mistake: Alcoa  What was the mutual mistake, if any? 99

Mutual Mistake: Alcoa  What was the mutual mistake, if any? Was this an error in substantibus, as in Hiram Walker? 100

Mutual Mistake: Alcoa  What was the mutual mistake, if any? Would the wholesale price index serve as a proxy for non-labor costs? 101

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? 102

Mutual Mistake: Alcoa  What there an assumption of risk? How does the court distinguish Leasco at 714? 103

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? 104

Mutual Mistake: Alcoa  Did Alcoa assume the risk? Who drafted the contract? 105

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” 106

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? 107

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” 108

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 717 109

Mutual Mistake: Alcoa  What kind of a remedy? Why wasn’t rescission ordered? 110

Mutual Mistake: Alcoa  What kind of a remedy? Reformation: Restatement § 155 How was the new price to be arrived at? 111

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? 112

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 723 113

How many contracts do you think were affected by the oil crisis? 114

Definition of Mistake:  Restatement 151. A mistake is a belief that is not in accord with the facts 115

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? 116

When is a mistake a mistake: Atlas 724 117 Atlas Corp. uranium “tailings” pile

When is a mistake a mistake  Why is this in the Federal Circuit? 118

When is a mistake a mistake  What was the “mistake”? 119

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? 120

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 121

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. 122

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? 123

When is a mistake a mistake  What was the “mistake”? Did the court get it right, in any event? 124

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” 125

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

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

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