“Law of ‘Mistake’ in Contractual Performance”

Executive Summary

Any attorney attempting to work in contract law knows that mistakes are sometimes made. Unfortunately, mistakes can spell disaster for your clients and the other parties to a contract, so it is imperative that contract law mistakes be avoided as much as possible.

The most devastating form of mistake in contract law is a mistake of law. This occurs when the attorneys involved do not understand what the law actually means. This can be a simple misinterpretation of when a corporation is eligible for depreciation on new equipment or as complex as trying to define environmental law for the owners of a new landfill. Regardless of the complexity of the law, this is the single most important thing an attorney can get right in a contract. If the law is misapplied, a mistake of law is almost always enough to completely invalidate a contract.

A secondary form of mistake is called a mistake of fact. In a criminal case, a mistake of fact can be the difference between conviction and a not guilty verdict. In contract law, mistakes of fact are the most common types of mistakes. They are usually defined as either unilateral or mutual, depending on if they were applied to and approved by one side or both. Unilateral errors in contracts will usually result in a penalty to the person who drew up the contract if the contract is ever disputed.

 A mutual mistake occurs when both parties to a contract believe something to be a fact that isn’t.  In a classic case from Michigan, Sherwood v. Walker, all the parties involved in the contract mistakenly believed a cow to be barren and set a price for the cow based on that mutual mistake. The contract was nullified when the cow turned up pregnant. A similar type of mistake is called a common mistake.

This is the British description for the same basic problem as a mutual mistake. British law has held that a common mistake can only be grounds for nullifying a contract when the mistake changes fundamentally the nature of the agreement. By the British test, Sherwood v. Walker would have been acommon mistake that reflected a serious fundmantal change in the terms of the agreement.

Another important form of mistake of fact is a mistake of identity. In the simplest terms, this could be identifying the party to the contract as John Smith Jr. when the party is actually John Smith III, but usually it is much more complex. Mistakes of identity occur when the person writing the contract is either not clear enough on who the specific parties to the contract are.  The most common mistakes of identity occur when a subsidiary of a major corporation is the actual party to the contract and not the corporation itself or when those penning the contract are not careful to identify a corporation with its legal name as opposed to a common usage name.

Mistakes of fact can be something simply like the misspelling of a name or something much more complex like an error in the computation of a scientific formula.  Regardless of the size of the mistake, it can be grounds for a contract dispute. In these disputes, the courts usually look unfavorably at the party that wrote the contract.

Over the year, several cases involving contract law have set precedence regarding how cases will be handled. In the Michigan case of Sherwood v. Walker, the Michigan Supreme Court rules that understandings between the parties which were part of the negotiation process but not part of the final contract may be considered if they bear sufficient weight to affect the contract dispute.

It is obvious from the review of law regarding contract disputes and contract law, that it is imperative that lawyers get the facts right and understand all the applicable parts of the law when writing a contract.  Mistakes in the drafting of the contract can lead to major disputes.

Common mistakes made in contracts include not specifying the terms of the contract, not specifying who has jurisdiction over any disputes and not planning for dispute resolution. It is therefore very important that anyone involved in writing contracts double check their facts and ask questions until they are completely clear on the issues at hand. The more clearly a contract explains the conditions under which it operates, the less likely it is to end in a contract dispute. Mistakes of law are times when the law is misapplied to a situation. For example, if the writer of a contract misinterprets how the law applies to a specific situation, it is considered a mistake of law. Other mistakes in contract law, including failure to adequately identify all the parties involved, failure to adequately describe the contract’s length and failure to include contract termination procedures are generally considered mistakes of fact and have less egregious effects when a contract is disputed.

Mistakes of identity, common mistakes, mutual mistakes and unilaternal mistakes may not be enough to nullify a contract in and of themselves, unless the mistake changes the provisions of the contract fundamentally.

Regardless of their nature, mistakes made in contract law can have an extreme negative impact on all aspects of the contract, but most importantly, when disputes arise because of mistakes made in contract law, the courts have consistently held against those who wrote the contract. Therefore, it is imperative in writing contracts that mistakes not be made as they will negatively impact the client for which the contract is being written.

Research Findings

In order to accurately discuss the impact of mistakes on contractual law, one must first understand the types of mistakes that can be made and their varying degree of importance when contract disputes arise.  Researchers indicate that these types of problem most often arise when the contract is being developed by laymen instead of by professionals (Davis 2007).  There are two major types of mistakes that can be made in any legal document. One is devastating to a contract dispute almost always and the other can be.

Mistakes of law

Mistakes of law are mistakes which are made because someone incorrectly interpreted the law. These are the biggest mistakes that can be made in contract law, because they almost always result in a finding against the person who wrote the contract, or who hired the lawyer who wrote the contract.  A mistake of law can as simple as specifying in the contract what court will have jurisdiction over the matter and incorrectly choosing a state court over a federal court or vice versa.  Or, a mistake f law can be on a grandiose scale, such as incorrectly interpreting the impact that an environmental statute will have on a proposal to build a new landfill.

A mistake of law in a contract can be no big deal if the contract is never disputed. Problems arising from mistakes made in the contract only become an issue when the contract is disputed. If both parties execute the contract in the manner anticipated and the contract is never disputed, the question of mistakes becomes moot. However, since no entities, no matter how closely tied, can rely on contracts being handled without dispute, it is imperative that the party drawing up the contract be certain that they have a complete understanding of how the law applies in the situation and that  the knowledge is reflect in the wording of the contract.

One common mistake of law in contracts is the inclusion of a penalty for contract termination  While including specific language regarding contract termination is a very good idea, penalties must clearly reflect actual damages caused by the breach of contract; punitive damages clauses are not permissible in contract law (Davis 2007).  When dealing with very large contracts, this issue can be very complex. A company may claim losses due to efforts put into a failed contract and may try to recoup some of those losses through pre-arrangement with a damages clause in the contract, but it cannot seek to punish its failed contractual partner with the damages clause.

Mistakes of Fact

The second type of mistake often found in contract law is mistake of fact.  These are usually much more insubstantial errors in contract law. In defense law, mistakes of fact can break a case. Common mistakes of law can be incorrectly identifying the proper corporate name or one of the parties to the contract or mistakenly believing that someone has the authority to act on behalf of a corporation when they do not.

Other types of common mistakes of fact could be as simple as misspelling a person’s or a company’s name, using the improper title or making simple addition mistakes in figuring the value of a contract. Most of these types of errors are minor and should the contract come into dispute because of them, the inclination of the court system has been to try to identify the original intent of those involved in the contract dispute and rule as closely to that original intent as possible (“Mistakes of Fact” 2007).

However, even within that framework, mistakes can be sub classified into two different categories, unilateral and mutual.  These mistakes, along with common mistakes and mistakes of identity, have a different legal test for determining if they invalidate a contracr.

Unilateral mistakes

 Again, the type of mistake can influence judicial action if the contract is disputed. Unilateral mistakes occur when only one party of the lawsuit is privy to the mistake. In contract law, this can often mean that one party misunderstands the terms of the contract.

For example, a contract for work for hire might state that the artist/employee retains all rights to their work. If the other party, the buyer, does not understand the implications of this, it would be considered a unilateral mistake. If the artist/seller were attempting to exploit the buyer’s lack of knowledge, then the contract could be overturned for this type of mistake. If the artist were acting in good faith and thought the other party understood the terms of the contract, a unilateral mistake would not be sufficient to overturn he contract.

Mutual mistake and Common mistake

 Mutual mistakes are those endorsed by and equally the responsibility of both parties.  These occur when both parties believe something to be a fact that later turns out to be untrue. In British practice this is called a common mistake. In Sherwood v. Walker the common mistake was that both parties believed the cow to be barren. When she became with calf, the contract was voided because the erroneous belief had significantly altered the value of the cow and the substance of the contract. The Supreme Court in Michigan ruled that the mutual mistake was enough to invalidate the contract.

Another example of a mutual or common mistake would be a contract between a shipping service and a customer to import certain household goods into another country. If both parties believed the shipment to be legal, and in the end the items could not be imported, the contract would likely be nullified as the legality of the shipments substantially changed the agreement.

Mistake of Identity

A mistake of identity occurs in one of two ways. One, a contract writer fails to obtain adequate information regarding the actual identity of one of the parties and misidentifies the aprty in the contract language either through a misspelling or use of a common name  rather than legal name. these types of mistakes generally have little effect on the nature of the contract and in the event of a dispute, so long as both parties knew who they were dealing with, the contract is considered valid. The more insidious and potentially dangerous form of a mistake of identity occurs when one party believes the other party in the negotiation to be something or someone they are not.

For example, if a person chose to approach an author about purchasing their novel and represented themselves as an agent of a major film production company, but in fact had no affiliation with that company, there would be said to be a mistake of identity. The author might agree to sell their work believing that they had contracted for a major motion picture only to later discover that they had actually sold their work to a brokerage or agent. In these cases, the court would rule based on the affect that the false identity had on the substance of the contract.

Other types of mistakes

There are several types of common mistakes made in contract law writing and most of them are avoidable.  Perhaps the most common type of mistake in contractual law is failing to identify properly all the parties to the contract. (Davis 2007)  This can be particularly tricky because sometimes people are used to dealing with a person as an individual and find that in terms of the contract, they need to list the person under their corporate identification.

Or, a company may have a name by which it is commonly known which is different from the legal name that should be included in the contract. For example, a bottling company in Marion, Illinois, is known to local residents as Marion Pepsi, but the official corporate title is Pepsi Mid-America.  Referring to it as Marion Pepsi would be a mistake of fact.

Another common mistake in contract law is failing to properly define the terms of the contract. This may seen redundant, especially when companies have done business together for long periods of time, but many contract dispute could be avoided if those making the contract had simply included specific language regarding who pays the shipping costs, what the delivery time frame will be, and what happens in the event of a change in economic conditions related to the contract. (Davis 2007)

Contracts also often fail to discuss the specific terms under which a contract ends. This can be particularly important in relationships with suppliers.  If the contract does not specify, for example, how many widgets will be supplied at a specific price or the time frame during which these widgets will be supplied, a contract dispute could arise on either side. The buyer could potentially demand that widgets be made available at that price in perpetuity or could argue that they agreed simply on a price for widgets if any were to be purchased. The supplier might argue that the contract price covers only 10 widgets and only if they are purchased within three weeks of the contract signing.

Another common mistake in contract writing is the failure to identify how disputes will be resolved (Davis 2007).  Related mistakes are failing to specify who pays attorneys’ fees in the event of a dispute and what law has jurisdiction.  This comes up when parties to the contracts are from different states or different countries. It is very important to note which laws take precedence.

In short, most of the mistakes made in contract law are due to oversight and assumption. People assume that things will work the way they have always worked and fail to spell that out in the contract; people overlook details like when the contract will be applicable and it then never applies.

One early case of contract law which reached the Michigan Supreme Court illustrates very clearly the need to define every aspect of the interaction covered by the contract. In the case of Sherwood v. Walker, Walker attempted to purchase a cow that everyone believed to be barren for use as beef. After the sale agreement, but before the cow was delivered, it was determined that she was with calf and therefore much more valuable as a breeder. The owners attempted to terminate the sale agreement by failing to deliver the cow. They argued that she was a substantially different “thing” at that point and should be exempted from the previous sale agreement. (Sherwood v. Walker 1887).

Though this is an ancient case, the lesson learned from it is still the same. The items being discussed in the contract must be spelled out specifically. The court ruled initially that Walker was entitled to the cow and that was overturned on appeal, largely due to the fact that both parties testified that they believe the cow to be barren. The court rules that discovering her fertility changed the basic facts of the contract and nullified it. They sent the case back to the lower court for a new trial (Sherwood v. Walker 1887).

There are dozens of other cases that echo these principals of contract law and others which attempt to determine when a mistake can invalidate a contract and when parties to a contract are held to the contract regardless of mistakes. These types of questions are particularly common in the building industry when mistakes in a bid, which is a form do contract, sometimes cost the bidder thousands of dollars (Construction Law 2004).

Conclusions

It is absolutely imperative that when writing a contract, lawyers are precise and accurate in their language and understanding of the subject. Simple mistakes can cost parties thousands or even millions of dollars because of a later contract dispute. In the case of Sherwood v. Walker the potential costs to both parties were huge. Had Walker won the contract dispute, he would have received a cow worth more than ten times as much for a mere $80 and, since she was pregnant at the time, would also have received her calf for no extra investment at all. The sellers would have lost a prime breeding cow and her calf for the price of a cow being sent to the dinner table.

The case ended up in a courtroom, costing both parties untold amounts in legal fees and ruined what might have otherwise been a long-term business relationship because both thought they should benefit from the unexpected fertility of the cow. If the contract for sale had been written up more specifically and had outlined the conditions under which the contract was terminated, it would have saved both parties much time and aggravation.

It is therefore imperative that the attorneys drafting contracts understand all assumptions that clients are operating under and note any common or mutual mistakes in the language of the contract. Attorneys must also guard against attempts by one party to take advantage of the other through the exploitation of unilateral mistakes and mistakes of identity.

Furthermore, it is important that attorneys are very familiar with the rule of law regarding the contract under discussion. If an attorney misapplies the law in writing a contract, it is almost guaranteed that his client will suffer for the error. Therefore, it is essential that lawyers understand how the law applies and clarify all the details of a contract. Recommendations

It might seem obvious, but the answer to mistakes in contract law is often as simple as proofreading a document, asking questions, specifying everything. and double-checking all facts.

Proofread

Most minor mistakes in contract law could be avoided if the lawyer preparing the contract or his staff took the time to proofread the document. This is particularly important if a standard contract is used from year to year. Simple mistakes like incorrectly labeled dates and misspelled names could be detected in this phase and prevent errors from occurring which might impact the usefulness of the contract.

Ask Questions

It is often human nature to assume that we know things that we don’t. For a contract attorney to do her job well, she must be willing to ask questions. She should verify the names, titles and spellings of all parties before beginning to write the contract. She should provide a step by step analysis of the contract, specifying when the contract begins and when it ends and then clarifying what steps will be taken along the way. A good attorney will even ask parties to clarify when they say that it will be completed “like we always do it”.

As a matter of formality, attorneys should verify before negotiating a contract that the parties involved are appropriate representatives for their companies. For example, if the president of the company is the only one authorized to enter contracts, negotiating with anyone else, even a vice president, may be a waste of time.

Attorneys should have parties verify their identities, titles and the names of their corporations at the contract signing so as to avoid mistakes in identification.

The attorney should ask as many questions as necessary to be able to identify the items being discussed as clearly and accurately as possible. That way, if the contract is invalidated by a pregnant cow, no one has any questions about it.

Specify Everything

If the agreement is null and void if the cow becomes pregnant, say so. If the contract changes in the event of national emergency or natural disaster, say so. If the laws of Canada will apply to one portion of the document and American laws will apply to another, be very specific in outlining the provisions of the contract.

In short, the lawyer should make absolutely no assumptions regarding the contract. Even if the parties have worked together forever, there should be specific language regarding how disputes are to be resolved and what laws apply.

Double Check Everything

Even if the last contract written between these two parties was yesterday, double check everything. Ask if either company has been sold or changed their name, verify all calculations and then double check them again.

The key to successfully writing contracts is to assure that all the details are correct. Attorneys should do this themselves and then have a staff member double check the work as two sets of eyes are always better than one.

References

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Sharp, F. C. “The Ethics of Breach of Contract” International Journal of Ethics > Vol. 45, No. 1 (Oct., 1934), pp. 27-53 < http://www.jstor.org.ezproxy.uow.edu.au:2048/view/1526422x/di994708/99p0633u/0?currentResult=1526422x%2bdi994708%2b99p0633u%2b0%2c1EAEFE0E&searchUrl=http%3A%2F%2Fwww.jstor.org%2Fsearch%2FBasicResults%3Fhp%3D25%26si%3D1%26gw%3Djtx%26jtxsi%3D1%26jcpsi%3D1%26artsi%3D1%26Query%3DMistake%2Band%2BMisrepresentation%253A%2BA%2BStudy%2Bin%2BContractual%2BPrinciples%26wc%3Don>, July 29, 2007.

Sherwood v. Walker, Supreme Court of Michigan, 1887, 66 Mich. 568,  33 N.W. 919, <http://www.law.pitt.edu/madison/contracts/supplement/sherwood_v_walker.htm>, July 30, 2007.