Legal Regulation of Contracts

1. Legal Regulation of Contracts
   1. Misrepresentation and Mistake of Fact
      1. Generally
         1. A mistake is a belief that is not in accord with the facts. Restatement 2d §151.
         2. Mutual Mistake – Where a mistake of both parties at the time a 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. Restatement 2d §152.
            1. Look out for limited information! If the parties recognize their limited information and proceed anyway, K will be enforced.
         3. Unilateral Mistake – 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 
            1. The effect of the mistake is such that enforcement of the K would be unconscionable, or
            2. The other party had reason to know of the mistake or his fault caused the mistake.
            3. Restatement 2d §153.
         4. A party bears the risk of a mistake when 
            1. The risk is allocated to him by agreement of the parties, or
            2. 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
            3. The risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
            4. Restatement 2d §154.
      2. Reformation
         1. A court may reform the contract if parties orally agree to a deal and then mistakenly draft a document that incorrectly reflects the terms of the deal. 
         2. A party’s negligence does not prevent him from obtaining relief, even if he didn’t read the contract. 
         3. Parol Evidence may be allowed.
         4. For more, refer back to the remedy of Reformation, above
      3. Weintraub v. Krobatsch
         1. Facts: The house buying cockroach case. The court reversed the appellate court’s decision because appellants were entitled to a trial on the issue of whether there was fraudulent concealment or nondisclosure justifying their rescission.
         2. Take away: 
            1. In order to allow a trial judge to find deliberate concealment or nondisclosure:
               1. Information must be material
               2. Defects must be unknown or unobservable to the buyer
         3. “Silence may be fraudulent and that relief may be granted to one contractual party where the other suppresses facts which he, under the circumstances, is bound in conscience and duty to disclose to the other party, and in respect to which he cannot, innocently, be silent.”
      4. Lenawee County Board of Health v. Messerly
         1. Facts: Δ sold land to Π on which a 3 unit apartment stood. After the sale, the county condemned the property as it had a defective sewer system. Δ sued to rescind the sale on the basis of mutual mistake. Both parties were blameless as neither new of the sewer defect. The sales K contained an “as is” provision allocating risk to the buyer.
         2. Contractual mistake: “a belief that is not in accord with the facts” Rst. 2d, Sec. 151. 
            1. The erroneous belief of one or both of the parties must relate to a fact in existence at the time the contract is executed. 
            2. “Mutual” or “bilateral” mistakes v. “Unilateral” mistakes (courts tend to be more generous with the former).
            3. Only mistakes that go “to a basic assumption on which the contract was made and have a material effect on the agreed exchange of performances” are germane. 
         3. Prof. points out, for the instant case, Rst. 2d, 152 (red book 239): “When Mistake of Both Parties Makes a Contract Voidable.” Remember, from 152, “the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in sec. 154.”
            1. Sec. 154 (red book 240): “When a Party Bears the Risk of a Mistake.” A party bears the risk of a mistake when 
               1. the risk is allocated to him by agreement of the parties, or
               2. 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
               3. the risk is allocated to him by the court on the ground that is reasonable in the circumstances to do so.
            2. In the instant case, court finds that the Pickles bear the risk.
         4. Held: The parties had a mutual mistake of fact, but this case does not warrant rescission. Rescission is not available to relieve a party who has assumed the risk of loss in connection with the mistake.
         5. In the cited Barren Cow case, Sherwood v. Walker, 66 Mich. 568 (1887), the parties agreed to the sale and purchase of a cow which was thought to be barren, but which was, in reality, with calf, showing it to have a much greater value. The court permitted the rescission as the state of the cow was the substance of the agreement. “The thing sold and bought had in fact no existence.” Sherwood is distinguished from Messerly because the very thing being sold was different in Sherwood, as opposed to the value of the thing being sold being different in Messerly.
      5. Lanci v. Metropolitan Insurance Co.
         1. Facts: Π agreed to settle an accident claim with Δ, his insurer, for $15k. After which, he finds that his policy allowed him $250k. Π argued that he had settled under a mistaken belief that $15k was all he was entitled.
         2. Rule: A release is binding on the parties thereto, unless executed under fraud, duress or mutual mistake
            1. HOWEVER, irrespective of actual fraud, if the other party KNOWS OR HAS REASON TO KNOW of the unilateral mistake, and the mistake, as well as the actual intent of the parties is clearly shown, relief will be granted to the same extent as a mutual mistake
            2. Rst. 2d, Sec. 153: provides a contract is voidable due to unilateral mistake under some circumstances
               1. Prof asks what is the main difference b/w mutual and unilateral mistake, in terms of what the court has to find? When both parties were mistaken, we had a mistake as to a basic assumption, it had a material effect, and as long as the party adversely affected by the mistake wasn’t the party to bear the risk of the mistake under section 154, the contract was voidable. But with a unilateral mistake, in addition to one party being mistaken, the court has to find that (a) enforcement would be unconscionable, or that (b) the other party had reason to know of the mistake or his fault caused the mistake. 
            3. In the instant case, MI knew or should have known that L accepted the terms of the settlement offer under the mistaken belief that it was the limit of his coverage.
            4. L is entitled to void the contract, trial court did not err in denying M’s petition to enforce the settlement agreement
         3. Held: This was a unilateral mistake under §153. The performance was adverse to him, the mistake was such that enforcement would be unconscionable, and Δ had reason to know of the mistake.