Short Video: Contract Defenses for Lack of Mutual Assent: Mistake, Misunderstanding and Misrepresentation
Palpable Unilateral Mistake:
Mistake in Transcription:
Mistakes in Transmission:
There are five categories of mistake that may invalidate a contract. They are:
- mutual mistake,
- unilateral mistake,
- mistake in transcription,
- misunderstanding, and
- mistake in transmission.
A mutual mistake is a mistaken assumption, which both parties make, as to the conditions surrounding the contract. What this means is that, where the parties enter into a contract and both parties have the same mistaken assumption concerning a fact regarding the contract, the contract is voidable by the party that is harmed by the mistake (so long as that party did not bear the risk that the assumption was wrong.) For example:
The DairyGen Corp. has recently created a genetically modified cow, which they name Elsie, which gives ten times more milk that an ordinary cow. The MooJuice Dairy Co. contacts DairyGen about buying Elsie. On April 1st, DairyGen and MooJuice sign a contract stating that DairyGen will sell Elsie to MooJuice for $50,000. What neither party knows is that Elsie has died during the night. In this case, the contract is voidable by MooJuice because both parties were mistaken as to a basic assumption on which the contract was negotiated (that Elsie was alive), the mistake is material to the contract and MooJuice did not bear the risk that the assumption was mistaken.
If, however, the adversely affected party has assumed the risk that the assumption is mistaken, they will not be able to void the contract. For example:
The DairyGen Corp. has recently created a genetically modified cow that gives ten times more milk that an ordinary cow. The MooJuice Dairy Co. contacts DairyGen about buying the cow. On April 1st, DairyGen and MooJuice begin negotiating over the price of the cow. DairyGen informs MooJuice that the cow has been very sick and may not be able to produce milk anymore. MooJuice believes that the cow can produce milk without a problem and does not examine the cow before signing the contract. It turns out that the cow, in fact, can no longer give milk. In this case, MooJuice will not be able to claim mutual mistake because they knew that there was an element of doubt concerning the cow’s milk-giving capabilities and, therefore, assumed the risk that their assumptions that the cow could give milk were mistaken.
Please note that, while mutual mistakes in assumption will make a contract voidable, a mistake in judgment or prediction will not. For example:
The DairyGen Corp. has recently created a genetically modified cow, named Elsie, which gives ten times more milk that an ordinary cow. MooJuice offers to buy Elsie for $50,000 and DairyGen accepts. Later, MooJuice finds out that the market value for a genetically modified cow is only $30,000. This will not make the contract voidable because MooJuice’s mistake here is one of judging the cow’s market value. It is not a mistaken assumption of fact.
A unilateral mistake is a mechanical error of calculation or perception concerning a basic assumption on which the contract is formed. For example:
The Boston Red Sox and Ramon Garcia orally negotiate a contract where Garcia will play for the Red Sox and the Red Sox will pay him $15,000. During the negotiation, Garcia thought he heard the Red Sox say $50,000. This is a unilateral mistake.
The general rule involving unilateral mistakes is that, if the non-mistaken party either knew or should have known of the other party’s mistake, the mistake is a “palpable unilateral mistake” which makes the contract voidable by the mistaken party. For example:
The Pentagon is accepting bids from ship building companies to build a new aircraft carrier. Ten different companies submit bids. Nine of those bids range in price from $140 million to $150 million. The tenth bid, belonging to Seven Seas Shipbuilding Inc., comes in at $43 million. The Pentagon quickly signs Seven Seas to the contract. The next day, Seven Seas reviews its bid submission and discovers some calculating errors that resulted in their bid being $43 million when it should have been $136 million. In this case, the contract will be voidable by Seven Seas. The fact that there was a $97 million difference between Seven Seas’ bid and the next lowest bid should have been a clear indication to the Pentagon that Seven Seas had made a mistake somewhere. Therefore, the Pentagon either knew or should have known that Seven Seas made a mistake. That being the case, the mistake was a palpable unilateral mistake and Seven Seas can void the contract. See
M.F. Kemper Construction Co. v. City of Los Angeles, 37 Cal.2d 696 (1951).
Please note that palpable unilateral mistakes will only make a contract voidable if the mistake is a mechanical error (ex: mistakes in calculation or perception). Mistakes in judgment as to the value or quality of an object will not make the contract voidable. For example:
George is the owner and manager of Babe’s Baseball Memorabilia. Mickey is rummaging through his attic one day when he finds a baseball bat signed by Ted Williams. Mickey, who is not a sports fan, has no idea who Ted Williams is but he remembers that there is a baseball memorabilia shop a few blocks away that buys things with signatures on them. Mickey brings the bat to George who offers Mickey $200 for it. Mickey gladly contracts with George to sell the bat for $200. A few weeks later, Mickey is telling Roger, an avid sports fan, about the bat and Roger informs Mickey that the bat was worth $5,000. Unfortunately for Mickey, the contract he made with George is enforceable because Mickey’s mistake was not a palpable unilateral mistake. It was simply a mistake in judgment as to the value of the bat.
If the non-mistaken party either did not know, or had no reason to know, of the other party’s mistake, there is a binding contract. In this case, if the mistaken party discovers the mistake and refuses to perform, the non-mistaken party is entitled to damages.
Several modern cases, however, have determined that if the mistaken party notifies the other party of the mistake before the non-mistaken party relies on the mistake, the mistaken party can rescind the contract.
Mistake in transcription
A mistake in transcription is where the parties make an oral contract which they then put down in writing but, because of some clerical mistake, the writing does not accurately reflect the oral agreement.
In this case, the affected party can have the contract reformed. In other words, the injured party can have the contract changed by the court so that it accurately reflects the oral agreement. See
Misunderstanding is where an expression is susceptible to two separate but equally reasonable meanings and each party, unbeknownst to the other party, attributes a different meaning to the expression. In this situation, the contract will be considered unenforceable. For example:
The London Tea Company and Boston Brew, Inc., enter into a contract in which London Tea agrees to sell ten thousand pounds of tea to Boston Brew for $5 per pound. The parties agree that the tea will be shipped to Boston on the S.S. Titanic. On October 1st, the S.S. Titanic pulls into Boston Harbor but there is no tea in the cargo for Boston Brew. Boston Brew sues London Tea. Meanwhile, on December 1st, another S.S. Titanic pulls into Boston Harbor, this time loaded with tea for Boston Brew. During the trial, Boston Brew testifies that they had no idea that the second S.S. Titanic existed and that, when they made the contract with London Tea, they assumed that the shipment was coming on October 1st. London Tea testifies that they had no idea that the first S.S. Titanic existed and they assumed that when they made the contract, they were going to ship the tea on the Titanic arriving in Boston on December 1st. In this case, no contract has been established because each party had a reasonable interpretation of the expression at issue. See
Raffles v. Wichelhaus, 159 Eng.Rep. 375 (1864).
However, where one interpretation is more reasonable that the other, a contract will be formed using the more reasonable interpretation of the expression. For example:
The Boston Red Sox offer Ramon Garcia $500,000 to play for them for one season which runs from April 1st to October 1st. Garcia accepts the offer. On September 1st, one month before the end of the season, Garcia goes to the team and says, “Please let me know if you plan on signing me for next season because, if you are not, I have to start looking for another team to play with.” The team answers Garcia by saying “don’t worry Ramon. You’re ok.” Garcia thanks the Red Sox and leaves the meeting. Garcia is under the impression that their discussion is an agreement on a new contract. The Red Sox do not believe that there is an agreement on a new contract. In this case, the court would probably find that there is an agreement on a new contract because Garcia’s interpretation of the conversation is more reasonable than the team’s interpretation. See
Embry v. Hargadine – McKittrick Dry Goods Co., 105 S.W. 777 (Mo. 1907).
Mistakes in Transmission
The final kind of mistake involves mistakes in transmission by an intermediary.
This usually comes up where the parties to a contract negotiation use a third party, like an interpreter or a typist, to transmit messages back and forth and the third party makes a mistake in the communication.
As in cases of unilateral mistake, if the non-mistaken party knew or should have known about the mistake, the resulting contract will be voidable by the mistaken party. For example:
The Squeeze Me Juice Co. offers to buy five thousand bushels of oranges per month from Sunshine Orange Groves for 50 cents per bushel. Squeeze Me uses Eastern Union Communications Co. to convey the offer but Eastern Union accidentally writes $5 per bushel as the offer instead of 50 cents per bushel. Sunshine receives the offer and, knowing that the market value of oranges is only 50 cents per bushel, immediately accepts Squeeze Me’s offer. In this case, a contract will not be formed because Sunshine should have known that the discrepancy between Squeeze Me’s offer and the actual market price of oranges was a mistake. See
Germain Fruit Company v. Western Union, 137 Cal. 598 (1902).
Where the non-mistaken party either does not know, or should not have known, of the mistake, most jurisdictions hold that a contract is formed based on the terms written down by the third party. See