George Mason School of Law

1. George Mason School of Law Contracts II Mistake F.H. Buckley fbuckley@gmu.edu

2. Mistake and Impossibility • An regret contingency occurs: what are the possibilities?

3. Mistake and Impossibility • An regret contingency occurs: what are the possibilities? • Breach of contract • Condition precedent (subsequent), mistake, frustration

4. What are the possibilities? • So when should the event give rise to liability by one of the parties • See last day on least-cost risk-bearing

5. What are the possibilities? • So when should the event put an end to obligations under the contract, without any liability?

6. Catastrophic Events • 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. Catastrophic Events • 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 • Risk not diversifiable

8. Non-catastrophic events? • Vendor sells goods to Buyer for price $P • Vendor’s subjective valuation of the goods is $V, while that of buyer is $B

9. Non-catastrophic events? • Vendor sells goods to Buyer for price $P • Vendor’s subjective valuation of the goods is $V, while that of buyer is $B • Two states of the world are foreseen: High and Low

10. Non-catastrophic events? • Vendor sells goods to Buyer for price $P • Vendor’s subjective valuation of the goods is $V, while that of buyer is $B • Two states of the world are foreseen: High and Low • In the High world, it’s a good deal for both parties: • For the vendor P > VHigh • For the buyer BHigh > P

11. Non-catastrophic events? • Vendor sells goods to Buyer for price $P • Vendor’s subjective valuation of the goods is $V, while that of buyer is $B • Two states of the world are foreseen: High and Low • In the Low world, it’s a bad deal: • For the vendor P < VLow • For the buyer BLow < P

12. Non-catastrophic events? • Vendor sells goods to Buyer for price $P • Vendor’s subjective valuation of the goods is $V, while that of buyer is $B • Two states of the world are foreseen: High and Low • In the Low world, it’s a bad deal • So we’d expect that Low world events would be covered by a condition precedent

13. Non-catastrophic events? • Vendor sells goods to Buyer for price $P • Vendor’s subjective valuation of the goods is $V, while that of buyer is $B • Two states of the world are foreseen: High and Low • It’s also a bad deal if losses to losers (e.g. the buyer) exceed gains to winners (e.g. the vendor) • P – VLow (gain to Vendor) < P – BLow (loss to Buyer) • Or BLow > VLow

14. Express and Implied Excuses • Conditions precedent (subsequent) • Mistake • Impracticability, Impossibility, Frustration

15. Mistake and Impossibility Formation of Contract Time

16. Mistake and Impossibility Formation of Contract Mistake, Condition Precedent Time

17. Mistake and Impossibility Formation of Contract Impossibility, Frustration, Condition Subsequent Mistake, Condition Precedent Time

18. Mistake and ImpossibilityHow to tell them apart? Formation of Contract Impossibility, Frustration, Condition Subsequent Mistake Condition Precedent Time

19. Mistake and ImpossibilityHow to tell them apart? • A horse is sold for breeding purposes. Unknown to the parties, the horse is sterile. This is only discovered later. • Mistake or Frustration?

20. Mistake and ImpossibilityHow to tell them apart? • A supply contract bases prices on production costs, according to a cost index based on historical experience. Subsequently prices rise unexpectedly. • Mistake or Frustration?

21. What kind of an event voids a contract?

22. What kind of an event voids a contract? • Mistake as to the identity of the subject of the contract: • Raffles v. Wichelhaus (1864) Peerless I Peerless II

23. What kind of an event voids a contract? • Mistake as to the identity of the subject of the contract: • Was there any way to enforce this? • Restatement 20(1)(a), illustration 2

24. What kind of an event voids a contract? • Mistake as to the identity of the subject of the contract: • What if both had meant the same ship? • Illustration 1

25. What kind of an event voids a contract? • Mistake as to the identity of the subject of the contract: • What if objectively it was clear that the contract referred to a particular ship, but one party is mistaken? • 20(1)(a): “has reason to know”

26. What kind of an event voids a contract? • Mistake as to the identity of the subject of the contract: • What if both parties know of the other’s mistake? • 20(1)(b), Illustration 2

27. What kind of an event voids a contract? • Mistake as to the identity of the subject of the contract: • What if one party is mistaken and the other party knows of his mistake? • 20(2)(a)

28. What kind of an event voids a contract? • Mistake as to the identity of the subject of the contract: • What if one party is mistaken and the other party knows of his mistake? • 20(2)(a) • What’s the logic behind this?

29. What kind of an event voids a contract? • Restatement §20 • Mutual mistake • both parties mistaken: 20(1)(a)

30. What kind of an event voids a contract? • Restatement §20 • Mutual mistake • Unilateral mistake • Only one party mistaken: 20(2)

31. What kind of an event voids a contract? • Restatement §20 • Mutual mistake • Unilateral mistake • The anomalous case: 20(1)(b)

32. What kind of an event voids a contract? • What if there was no mistake as to the identity of the object of the contract referred to, but there was a mistake about its nature?

33. Mistakes as to the nature of goodsSherwood v. Walker Hiram Walker

34. Another Hiram Walker product Hiram Walker Canadian Club

35. Aberlone, Rose ofBy Brainerd Currie 'T is the middle of night before the exam, And there's nothing to eat but a cold bit of ham. A dismal specter haunts this wake-- The law of mutual mistake; … 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. Hiram Walker

37. George Mason School of Law Contracts II Mistake F.H. Buckley fbuckley@gmu.edu

38. Next day • Scott 795-818 • Scott 93-107

39. Self-enforcing agreements and regret contingencies Formation of Contract Time If no regret contingencies, an agreement is self-enforcing

40. Self-enforcing agreements and regret contingencies Formation of Contract Time If every regret contingency excused performance, what would be legal enforcement add?

41. A regret contingency occurs: what are the possibilities?

42. A regret contingency occurs: what are the possibilities? • Both parties want out, and write a termination agreement • Only one party wants out

43. A regret contingency occurs: One party wants out • One party expressly or impliedly takes the risk: Breach of contract • Restatement §§ 152, 153 (“unless he bears the risk of the mistake”)

44. A regret contingency occurs: One party wants out • One party expressly or impliedly takes the risk: Breach of contract • Restatement §§ 152, 153 (“unless he bears the risk of the mistake”) • Messerly at p. 725 • The presence of an “as is” clause

45. A regret contingency occurs: One party wants out • One party expressly or impliedly takes the risk: Breach of contract • Restatement §§ 152, 153 (“unless he bears the risk of the mistake”) • Restatement § 154 • Express allocation of risk • Assumes the risk as to limited knowledge • “reasonable” (least cost risk avoider?)

46. A regret contingency occurs: One party wants out • One party expressly or impliedly takes the risk: Breach of contract • Parties have provided for it as a condition precedent or subsequent

47. A regret contingency occurs: One party wants out • One party expressly or impliedly takes the risk: Breach of contract • Parties have provided for it as a condition precedent or subsequent • A gap-filling court voids the contract under doctrines of mistake, impossibility, frustration, etc. • Seen as implied conditions precedent, subsequent

48. Mutual Mistake • Restatement § 152 • Mistake of both as to a basic assumption • 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 • Parties did not agree that one would bear the risk

49. Unilateral Mistake • Restatement § 153 • Mistake of both as to a basic assumption • Has a material effect on the agreed exchange • Parties did not agree that one would bear the risk • Adds a further requirement: • Unconscionability or other party had reason to know of the mistake or his fault caused it

50. What is a “basic assumption” • Substance of the thing vs. quality or accident • Error in substantibus • Error going to “the root of the matter”