Contract Law: Mistakes & Misunderstandings

• Valid contracts may be rendered unenforceable if there isn't a genuine "meeting of the minds."
• Lack of true or genuine assent can stem from mistake, misunderstanding, misrepresentation, or unconscionability.

Mistake

• Parties make assumptions about a deal's nature, benefits, and burdens when entering a contract.
• A mistaken party may seek to be excused from performance if those assumptions prove wrong.
• There are two categories of mistake: mistake in judgement as to quality or value and mistake of fact
• Mistakes in judgment as to quality or value do not allow a contract to be avoided.
• Mistakes of fact sometimes allow a contract to bed avoided.
• A mistake is an erroneous belief that is not in accord with the facts as they exist at the time of contract formation.
• A prediction of events that are expected to occur, poor or otherwise, is not a mistake.
• When parties impute different meanings to the same language, that is a misunderstanding.

Mistakes in Judgment

• Mistakes in judgment involve beliefs that some aspect of a transaction is worth more or less or is of higher or lower quality.
• Parties usually bear the risk of mistakes involving quality or value.
• A mistake involving quality or value will not result in contract avoidance.

Mistake of Fact

• Mistakes of fact involve beliefs that some aspect of the transaction is other than it actually is, but not related to quality or value.
• Mistakes of fact sometimes allow a party to avoid their contractual obligations.
• Mistakes of fact can be unilateral (only one party is mistaken) or bilateral (both parties are mistaken)

Unilateral Mistakes of Fact

• If only one party has made a mistake of fact, then the mistaken party can avoid the contract if: 1. The mistake was a basic assumption on which the contract was formed. 2. Requiring performance would be unconscionable. 3. There is no reliance by the non-mistaken party. OR 4. The non-mistaken party knows or should have known of the mistake.

Bilateral Mistakes of Fact

• When both parties are mistaken about some aspect of the transaction, the contract may be avoided if the adversely affected party can show: 1. The mistake involves a basic assumption of the contract, 2. The mistake has a material effect on the exchange, 3. The adversely affected party does not bear the risk of the mistake.
• A party generally bears the risk of a mistake if the risk is allocated by contract, they are aware that he has limited knowledge but treats this limited knowledge as sufficient, or the risk is allocated by the court because it is reasonable.

Misunderstanding

• Misunderstanding occurs when contracting parties attach different meanings to the same language, resulting in the failure of a contract for lack of genuine agreement.
• If one party knows the other attaches a different meaning to language, then that meaning will prevail.

Fraudulent Misrepresentation

• Fraud is a tort, a civil wrong, that results in liability for damages
• If fraud is perpetrated in connection with the formation of a contract, then the defrauded party can escape the contractual obligations
• Contract fraud has specific elements:
• Misrepresentation of some material fact where facts are distinguished from personal opinions
• The intent to decieve (scienter)
• Reliance on the misrepresentation where this reliance is reasonable.

Types of Misrepresentation

• Misrepresentation by conduct - typically concealment
• Misrepresentation of law - Does not allow for rescission unless the misrepresenting party is a lawyer or other professional
• Misrepresentation by silence - Ordinarily, there is no duty to disclose, but that can change in situations involving latent serious defects in a good, or fiduciary relationships

Adhesion Contracts & Unconscionability

• Courts may examine the fairness of a contract when it is formed between parties with unequal bargaining power.
• These agreements are often called adhesion contracts, usually written exclusively by one party and presented as a take-it-or-leave-it scenario.
• An aggrieved party must show that the parties had unequal bargaining power and the contract would be unconscionable to avoid enforcement of an adhesion contract
• In commercial situations, courts rarely find a contract unconscionable, regardless of company sizes.

Undue Influence

• Contracts can be overturned due to undue influence that negates genuineness of assent.
• Showing a special relationship between parties and evidence of improper persuasion of the weak by the strong is necessary to demonstrate undue influence.
• Undue influence occurs where party taken advantage of does not exercise free will when entering the contract.
• Undue influence can be a defense or basis of a restitution claim
• These claims are commonly associated with gift transfers, like wills.