George Mason School of Law

*George Mason School of Law

Contracts II

MistakeThis file may be downloaded only by registered students in my class, and may not be shared by them

F.H. [email protected]

Regret Contingencies

I dont the way this turned outWhat are the possibilities?*


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


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


So the choice is between breach and excuseWhen should the event give rise to liability by one of the partiesSee last day on least-cost risk-bearing*

Force Majeure ClauseA 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 ContingenciesForce majeure clauseWhy no least cost risk avoiders here?*

Regret ContingenciesForce majeure clauseWhy no least cost risk avoiders here?No one can efficiently reduce the riskNo one is better able to evaluate risk (unlike Stees?)Risk not diversifiable*

Kinds of MistakesMisunderstandings and Mistakes

Which party is mistaken?

About what are they mistaken?*

Kinds of MistakesMisunderstandings 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 andneither party knows or has reason to know the meaning attached by the other; oreach party knows or each party has reason to know the meaning attached by the other.*

Kinds of MistakesMisunderstandings and MistakesMisunderstanding: The event can be seen as something which goes to whether there was mutual assent as to any agreement*

Kinds of MistakesMisunderstandings and MistakesMisunderstanding: The event can be seen as something which goes to whether there was mutual assent as to any agreementMistake: There was assent to an agreement but the event puts an end to it. *

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

Kinds of MistakesMisunderstandings and MistakesMisunderstanding: The world is as we think it is, but we have not agreedMistake: The world is not as we think it is*

Misunderstandings

Raffles v. Wichelhaus at 694

*Peerless IPeerless II

Misunderstandings

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

*

Misunderstandings

What if both had meant the same ship?

*

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

*

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 andneither 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.*

Misunderstanding

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.*

Misunderstandings

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

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 errorsFitness for purposeFraud through concealment*

Mutual and Unilateral Mistake*

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.*

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 youve bought Rose 3d*

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 youve bought Rose 3dMutual mistakes as misunderstandings*

Restatement 20. Misunderstandings

(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations andneither party knows or has reason to know the meaning attached by the other; oreach party knows or each party has reason to know the meaning attached by the other.*

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*


Again, an information-forcing rule*

Mutual Mistake: Restatement 152


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 substanceEssence vs. mere quality

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

Error as to Substance:Sherwood v. Walker at 712*Hiram Walker

T.C. Sherwood

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

Another Hiram Walker product*Hiram Walker Canadian Club

Aberlone, Rose ofBy 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 accidentA 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 accidentError in substantibus: the whole substance of the agreement or the very nature of the thing

Sherwood v. Walker*Barren CowSo what is Roses essence:cowness or barren cownessFertile Cow

Mutual Mistake

Restatement 152: Has a material effect on the agreed exchangeComment c: resulting imbalance is so severe that he cannot fairly be required to carry it outIs 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*Barren CowAssumption of risk: Should this have been a matter of breach?Fertile Cow

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

Sherwood v. Walker*Barren CowThe dissent: if either party had superior knowledge certainly the defendants had such advantageFertile 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

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.

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?

Unilateral Mistake: Class A: Unconscionability


Unilateral Mistake: Class B: Nondisclosure


Anderson v. OMeara 699*Seller sells submarine trenching equipment

Anderson v. OMeara*Buyer thinks hesbuying a Sweep Dredge

Anderson v. OMeara*

The District Court found a mutual mistake. Why did the Circuit Court disagree?

Anderson v. OMeara*

Was there a unilateral mistake?And of what type, in my classification?

Anderson v. OMeara*

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. OMeara*

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 sellers knowledge must be clear and unequivocal

Anderson v. OMeara*

Was there a unilateral mistake?And of what type, in my classification?Class A: unconscionability needed

Anderson v. OMeara*

Was there a unilateral mistake?And of what type, in my classification?Class A: unconscionability neededAbsence of diligence by the buyers a factor to be considered

Anderson v. OMeara*

Was there a unilateral mistake?And of what type, in my classification?Class A: unconscionability neededAbsence of diligence by the buyers a factor to be consideredBuyer as least-cost risk avoider

Duty to Investigate*

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


Jeselsohn p. 709-10


Jeselsohn Held: mutual mistakeThe buyer could not have discovered the error by consulting the registry of deeds

Unilateral Clerical Mistakes*

Elsinore at 709


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)


Elsinore Does it matter that the error was only $3K on a $90K bidDoes it matter that the bidder notified the school board the next day?

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

Irmen v. Wrzesinski*

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. 706Can an as is clause oust the doctrine of mistake by virtue of an assumption of risk under Restatement 154?

*

As is clauses

Messerly Note that the court rejected the error in substantibus analysis of Hiram Walker*

As is clauses

Messerly Note that the court rejected the error in substantibus analysis of Hiram WalkerThe modern trend: focus on the agreed exchange of performances*

*George Mason School of Law

Contracts II

MistakeThis file may be downloaded only by registered students in my class, and may not be shared by them

F.H. [email protected]

The two elements of mutual mistakeRestatement 152


Basic Assumption: Errors as to substance in Sherwood v. Walker*Barren CowSo what is Roses essence:cowness or barren cownessFertile Cow

Mutual Mistake: Alcoa 710

Is anything left of errors as to substance?

What was the deal?*

Mutual Mistake: Alcoa

What was the deal? Alcoa to convert alumina (aluminum oxide) for Essex

EssexAlcoa*AluminaAluminum


How was the pricing arrived at?*


How was the pricing arrived at?*You cant lose, Alcoa. Believe me!


How was the pricing arrived at?*Essex gets a price cap of 65% of aluminum market pricesLabor costs to vary with average costs at an Alcoa plantNon-Labor costs to vary with wholesale price index


What happened to non-labor costs?*

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


What did Alcoa expect as profits per pound of aluminum converted?*


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


Why did Essex want the supply of aluminum?

*


Why did Essex want the supply of aluminumAnd what did it end up doing with the aluminum it bought?

*


Why did Essex want the supply of aluminumAnd what did it end up doing with the aluminum it bought?Was this prohibited by the contract?

*


Why did Essex want the supply of aluminumAnd 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?

*


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

*


What was the mutual mistake, if any?*


What was the mutual mistake, if any?Was this an error in substantibus, as in Hiram Walker?*


What was the mutual mistake, if any?Would the wholesale price index serve as a proxy for non-labor costs?*


Restatement 151: A mistake is a belief that is not in accord with the factsWas this an error of fact or a prediction about future events?*


What there an assumption of risk?How does the court distinguish Leasco at 714?*


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?*


Did Alcoa assume the risk?Who drafted the contract?*


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*


Did Alcoa assume the risk?Essex put in a price cap on Alcoas services, so why didnt Alcoa put in a cost cap?

*


Did Alcoa assume the risk?Essex put in a price cap on Alcoas services, so why didnt Alcoa put in a cost cap?They must have thought the risk too remote

*

Mutual Mistake: AlcoaWhat do you make of the finding that, were it necessary, the court would find that the contract was unconscionablewindfall profits at 717*


What kind of a remedy?Why wasnt rescission ordered?*


What kind of a remedy?Reformation: Restatement 155How was the new price to be arrived at?*


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?*


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*

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

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 factsI 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

Why is this in the Federal Circuit?*


What was the 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?*


What was the mistake?That the health hazard was much greater than had been thoughtRestatement 151, comment b: Mistakes of fact include mistakes of law*


What was the mistake?That the health hazard was much greater than had been thoughtA mistake is a mistaken belief about an existing fact: Alcoa, Restatement 151But there is no mistaken belief about a fact whose existence was not known.*


What was the mistake?That the health hazard was much greater than had been thoughtIs this a sensible distinction, in terms of risk allocation?Which looks more like a mistake as to a basic assumption?*


What was the mistake?Did the court get it right, in any event?*


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

**

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