George Mason School of Law

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

2. Regret Contingencies • I don’t 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 • Alleges a Breach by the other party • Alleges an excuse • Condition precedent, mistake, frustration

5. 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

6. 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.

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

8. 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

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

10. Kinds of Mistakes • Misunderstandings and Mistakes

11. 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.

12. 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.

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

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.

15. 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?

16. 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

17. Misunderstandings • Raffles v. Wichelhaus at 694 Peerless I Peerless II

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

19. Misunderstandings • What if both had meant the same ship?

20. 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

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

22. 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 • (b) each party knows or each party has reason to know the meaning attached by the other.

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

24. 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.

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

26. 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

27. Mutual and Unilateral Mistake

28. 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.

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

30. 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

31. 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.

32. 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

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

34. 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.

35. 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

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

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

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

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

40. Another Hiram Walker product Hiram Walker Canadian Club

44. 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.

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

46. 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

47. 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”

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

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

50. 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?