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
1
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

4
Condition precedent, mistake, frustration
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
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.
12
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
Peerless I
17
Peerless 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 crosspurposes: 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 crosspurposes: I sell you Rose 2d and you
think you’ve bought Rose 3d
 Mutual mistakes as misunderstandings
30
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.
31
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?
 An error as to substance
 (More recently), an error which has a
material effect on the exchange value
of the contract
35
What is a basic assumption?
 An error as to substance
 Essence vs. mere quality
36
Error as to Substance:
Sherwood v. Walker at 694
37
Error as to Substance:
Sherwood v. Walker at 712
Hiram Walker
T.C. Sherwood
38
Error as to Substance:
Sherwood v. Walker at 694
Rose
Hiram Walker
39
Another Hiram Walker product
Hiram
Walker
Canadian
Club
40
41
42
43
Aberlone, Rose of
By 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.
44
Sherwood v. Walker
 What is a “basic assumption” in 15253?
45
Sherwood v. Walker
 What is a “basic assumption” in 15253?
 Substance of the thing vs. quality or
accident
 A barren cow is substantially a different
creature than a breeding one
46
Sherwood v. Walker
 What is a “basic assumption” in 15253?
 Substance of the thing vs. quality or
accident
 Error in substantibus: the “whole
substance of the agreement” or “the
very nature of the thing”
47
Sherwood v. Walker
 So what is Rose’s essence:
 “cowness” or “barren cowness”
Barren Cow
48
Fertile Cow
Sherwood v. Walker
 So what is Rose’s essence:
 “cowness” or “barren cowness”
Barren Cow
49
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
 Did the mistake have a material
effect on the exchange of
performances?
 [(1420-50)*0.055 =] $75.35 vs. about
$875
51
Sherwood v. Walker
 Assumption of risk: Should this have
been a matter of breach?
Barren Cow
52
Fertile Cow
Sherwood v. Walker
 Assumption of risk: Was Walker in a
position to know the condition of the
cow?
Barren Cow
53
Fertile Cow
Sherwood v. Walker
 The dissent: if either party had
superior knowledge … certainly the
defendants had such advantage
Barren Cow
54
Fertile Cow
Qu. Backus v. MacLaury p. 709
 What should the court hold?
55
Qu. Backus v. MacLaury p. 709
 No mistake: Buyer realized the calf
might be sterile and took the risk
56
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.
57
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?
58
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
Seller sells submarine trenching equipment
62
Anderson v. O’Meara
Buyer
thinks
he’s
buying a
Sweep
Dredge
63
Anderson v. O’Meara
 The District Court found a mutual
mistake. Why did the Circuit Court
disagree?
64
Anderson v. O’Meara
 Was there a unilateral mistake?
 And of what type, in my classification?
65
Anderson v. O’Meara
 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?
66
Anderson v. O’Meara
 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”
67
Anderson v. O’Meara
 Was there a unilateral mistake?
 And of what type, in my classification?
 Class A: unconscionability needed
68
Anderson v. O’Meara
 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
69
Anderson v. O’Meara
 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
70
Duty to Investigate
 Gartner p. 708
 Did one person have a special duty to
investigate?
71
Duty to Investigate
 Jeselsohn p. 709-10
72
Duty to Investigate
 Jeselsohn
 Held: mutual mistake
 The buyer could not have discovered the
error by consulting the registry of deeds
73
Unilateral Clerical Mistakes
 Elsinore at 709
74
Unilateral Clerical Mistakes
 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’)
75
Unilateral Clerical Mistakes
 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?
76
Unilateral Mistakes:
Irmen v. Wrzesinski at 705
$349 on E-Bay
77
Irmen v. Wrzesinski
 Can the doctrine of unilateral mistake
be a rule of economic inefficiency?
 How is this case like Laidlaw v.
Organ?
78
“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
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
82
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
 So what is Rose’s essence:
 “cowness” or “barren cowness”
Barren Cow
84
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
Alumina
Essex
Alcoa
Aluminum
86
Mutual Mistake: Alcoa
 How was the pricing arrived at?
87
Mutual Mistake: Alcoa
 How was the pricing arrived at?
You can’t lose,
Alcoa. Believe
me!
88
Mutual Mistake: Alcoa
 How was the pricing arrived at?
Labor costs to vary
with average costs
at an Alcoa plant
Non-Labor costs to vary
with wholesale price index
Essex gets a price cap of 65%
of aluminum market prices
89
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
Atlas Corp. uranium “tailings” pile
117
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