Restatement
§152, When Mistake of Both Parties Makes a Contract Voidable (Rules,
p. 188)
- Fact is a basic
assumption on which the contract was made
- If the assumption
is just that it will make money, this usu. isn’t enough
- Both parties must
be mistaken
- Must have been in
existence at time K was made (otherwise, impracticability)
- K is voidable by
adversely affected party unless he bears risk under §154.
- Determination as
to material effect considers any relief by way of reformation, restitution,
or otherwise.
Restatement
§154, When a Party Bears the Risk of a Mistake—How to Apportion Risk
Party bears risk of mistake
when:
- It is allocated
to him by agreement
- He knew at time
of K that he had insufficient knowledge but acted anyway, OR
- Court reasonably
allocates risk to him.
Remedy:
- If mutual mistake
amounts to just a written error, appropriate remedy is to reform K to
express parties’ actual intent
- Normally, recission
and restitution as appropriate
- Courts are inconsistent
in their outcomes with these cases
Allocation
of Risk by Agreement
LENAWEE
COUNTY BOARD OF HEALTH V. MESSERLY (P. 634)
Messerly’s sold land containing apartment building to the Pickleses,
intended to be investment property, and later discovered it was unfit
for human habitation due to sewage system installed by their predecessor
in title. Messerlys sued for foreclosure; Pickleses counter-sued for
rescission due to mutual mistake.
For the Messerlys. No rescission granted.
- Things seemed about
even so courts were looking for something that would tip the balance
one way or the other.
- Sherwood v.
Walker. Barren cow. Court found mutual mistake b/c different
in nature (not just value).
- Nature/Value distinction
no good any more – to intertwined
- Looks to Restatement
§152
- Material effect
on performance since lease was to be paid by property’s income
- Looks to Restatement
§154(a).
- Finds “as is”
clause sufficient to allocate risk to Pickleses by agreement.
UNILATERAL
MISTAKE
When one party is mistaken,
there is generally no defense to performance, save a few exceptions.
Restatement
§153, When Mistake of One Party Makes a Contract Voidable (Rules, p.
188)
Where a mistake goes to a
basic assumption and has a material effect on performance,
you can void if you do not bear the risk under §154 AND
- The mistake would
make the K unconscionable OR
- Unconscionable:
severe enough to create substantial loss
- The other part had
reason to know or caused the mistake
WIL-FRED’S,
INC. V. METROPOLITAN SANITARY DISTRICT (P. 643)
Contractor(P) submitted bid that was like way lower than next lowest
bid. Realized it was too low, subcontractor had made a $150,000 mistake
on a $200,000 bid. Tried to withdraw, but it couldn’t. Sub said it’d
be bankrupted if it had to perform. Contractor said it would suffer
substantial hardship. K is rescinded.
- Conditions of rescission
for unilateral mistake:
- Mistake relates
to material feature of contract
- Occurred notwithstanding
use of reasonable care
- Quick response to
mistake
- Unconscionable:
Grave consequences
- Other party can
be placed in status quo
- Court thinks city
should have known b/c of disparity of bids (as opposed to Drennan)
- Contract hadn’t
been formally awarded. School could have awarded K to next lowest bidder
- Due care and status
quo requirements not in the Restatement. They are risk assessment factors.
Court’s way of dealing with §154.
- Why did Wilfred
sue so fast instead of not performing on K and letting District sue
for breach?
- K hasn’t been
performed, so its easier for other party to be placed in status quo,
and the filing of the preliminary injunction held everything. This was
terrific lawyering. They got into court before district could dismiss
all other bidders.
IMPOSSIBILITY,
IMPRACTICABILITY, FRUSTRATION OF PURPOSE
Relate to changes made after
K is formed but before at least some part of performance is made. All
Qs of law.
Remedy:
- If you prevail,
your obligation under K is suspended. No obligation to perform. Pleader
is excused.
- The other party
is left without remedy, isn’t placed in situation it was in before
contract. No restitution.
Impossibility
Almost exclusively applied
to personal service Ks and sale of unique goods b/c everything else
has a substitute.
TAYLOR
V. CALDWELL (1863) (P. 653)
P rented music hall for performance. Hall burns down.
Court finds impossibility, b/c neither party at fault.
- Today, we could
ask D to pay for concert to be held at another concert hall. But maybe
every concert hall is unique?
Impracticability
& Frustration of Purpose
Restatement
§261, Discharge by Supervening Impracticability (Rules, p. 204)
- Party seeking discharge
was not at fault
- Non-occurrence of
event was a basic assumption of K
- NOT market downturn
- NOT war
- NOT natural disasters,
esp. if it is reasonably foreseeable (e.g. hurricane in FL)
- (unless language
or circumstances indicate the contrary).
Frustration of Purpose:
change in circumstances renders K meaningless by taking away primary
purpose of K. In order to plead this, you have to say that you have
no use for K anymore.
Restatement
§265, Discharge by Supervening Frustration (p. 205)
- Purpose must be
“principle purpose”
- Frustration must
be substantial
- Party seeking discharge
is not at fault
- Non-occurrence of
event was a basic assumption of K
UCC
§ 2-615: Excuse by Failure of Presupposed Conditions
Delay or non-delivery is not
breach if performance as agreed has been made impracticable by occurrence
of event upon which non-occurrence was a basic assumption of K.
Profitability
not principal purpose. KARL WENDT FARM EQUIPMENT CO. V. INTERNATIONAL
HARVESTER CO. (1991) (P. 655)
Dramatic downturn in farm equipment market caused D to sell assets,
making it unable to perform under dealer agreement with P. P sues for
breach. Impracticability is invalid defense.
- Impracticability
- Not without fault:
IH responded by selling assets
- Market shifts almost
never allow for impracticability b/c parties entering into K assume
market will move.
- Amount of financial
loss irrelevant.
- Frustration of Purpose
- Profitability is
not a principal purpose under §265.
- K defines purpose
as “establish a dealership”
- Would make Restatement
meaningless, since profitability could be seen as primary purpose of
every K
- Termination Provision
- Indicated how parties
intended to allocate loss and end agreement
- Reduction in Product
Lines
- Not intended by
parties as a way out of the K
Foreseeability
of occurrence. OPERA COMPANY OF BOSTON, INC. V. WOLF TRAP FOUNDATION
FOR THE PERFORMING ARTS (P. 664)
Contract whereby D was to supply lighting for P’s performance. Thunderstorm
causes power outage and D cancelled the performance.
D not liable.
- Scott: Disagrees
with ruling. Foreseeable that this could happen. Thunder storms common
in this area.
Substantial
Frustration of Purpose. MEL FRANK TOOL & SUPPLY, INC. V.
DI-CHEM CO. (P. 668) D leased building from P in which he stored
chemicals. City ordinance passed after K is formed that prevents DiChem
from storing hazardous chems in warehouses. D wants out of K.
K is enforceable.
- Frustration of
Purpose: Principal purpose not substantially frustrated.
- Property can still
be used as a warehouse for non-hazardous chemicals.
- Force Majeure
Clause: Clause excuses performance under certain circumstances (Acts
of God, Gov’t regulation, etc.) – applicable to performance Ks,
but not payment Ks
- Change in Law as
grounds to void
- Depends on foreseeability
of the change
- Can’t be collusive
modification
Requests for modification of
K post-formation but during or pre-performance.
Common Law:
modification isn’t enforceable w/o fresh consideration, but court
will look all over the place to find it.
R2,
§ 73, Performance of Legal Duty
Performance of legal duty owed
to promisor which is neither doubtful nor subject of honest dispute
is not consideration, but similar performance is consideration if it
differs materially from what was required by duty in way which reflects
more than pretense of bargain.
R2
§ 89, Modification of Executory Contract
(A contact in which some performance remains to be done by one or both
parties.)
Performance modifying duty
under K not fully performed on either side is binding
If modification is fair
and equitable in view of circumstances not anticipated by parties when
K was made, or
To extent provided by statute,
or
To extent that justice
requires enforcement in view of material change of position in reliance
on promise.
Where Modifications Are
not OK: No Consideration
ALASKA PACKERS v. DOMENICO
Ps contracted as seamen for D, but mid-performance, demanded more pay,
threatening to breach, saying equipment was not as promised.
Ps had pre-existing duty to work on ship and new K was not supported
by fresh consideration.
Employee Handbooks.
Some courts have held that modifications to employee handbooks, decreasing
employee rights, are unenforceable if not supported by fresh consideration.
- RINCK v. ASSOCIATION
OF RESERVE CITY BANKERS
Court held that Ds promise to keep Ps job post-merger was not enforceable
b/c it wasn’t supported by consideration.
Where Modifications are
OK
Unforeseen or Unanticipated
Circumstances. KING v. DULUTH
When party refuses to complete
his K b/c of some unforeseen and substantial difficulties in performance,
not known or anticipated by parties at outset, and opposite party promises
to pay extra for completion, that promise to pay is supported by valid
consideration.
Justifiable Reliance/Mutual
Rescission: Modifications may be enforced if modification induced
justifiable material change in position or reliance and injustice will
result if not enforced.
SCHWARTZREICH v. BAUMAN-BASCH
P was hired as coat designer at fixed wage for fixed time period, but
renegotiated for more money after being offered position at another
place. Later, P was let go and sued for increased wage.
Modification was result of mutual rescission, followed by new and valid
K.
- R2 holds that such
rationale is fictitious when rescission and new K occur simultaneously,
but court also could have said that it was enforceable b/c of change
in circumstances, learning of Ps real worth, and justifiable reliance
on new wage.
UCC Approach:
modifications are enforceable w/o consideration, w/ several exceptions
UCC
§ 1-103, Supplementary General Principles of Law Applicable
Common law valid if not displaced
by UCC
UCC
§ 2-209, Modification, Rescission, and Waiver: No new consideration
necessary
Reasoning: K modifications,
one sided or not, are an everyday affair.
Exceptions
Economic Duress.
KELSEY-HAYES v. GALTACO P sold K metal tire parts. Formed
K with set price in 1987, 1989 decided to discontinue manufacturing
that part. Agreed to keep manufacturing them for several months in exchange
for 30% price increase. Month later raised requirement to another 30%.
At some point, P stopped paying for castings, amt equivalent to price
increases. Modification was under duress.
- Later K supercedes
earlier K unless there is duress.
- Duress: manifestation
of assent is induced by an improper threat by another party that leaves
victim no reasonable alternative.
- K-H had no choice
but to accept modification.
- Couldn’t sue b/c
G would have stopped supplying.
Bad Faith:
Party may only seek modification in good faith when there are unforeseen
economic exigencies. Even here, it is bad faith to coerce one by wrongfully
threatening breach. (Wrongful if there is a good defense of K)
Statute of Frauds: Reliance
that modification will be put in writing.
BROOKSIDE FARMS v. MAMA
RIZZO’S, INC. (1995) (p. 695)
P sells D basil. There are some oral price modifications, even tho
both parties knew there was a no oral modifications clause in K—D
asks P to remove stems from basil, price is increased.
D said that they would change the written K, never did. P stopped payment
at some point. K enforceable despite no oral modifications statute.
- K falls within dispute
of statute of frauds, UCC § 2-201:
- K for sale of goods
for price of $500 or more is not enforceable by way of action or defense
unless there is some writing sufficient to indivate that K has been
made and signed by party against whom enforcement is sought.
- General rule: oral
modifications not enforceable
- EXCEPTIONS to written
requirement:
- When they do not
materially alter underlying obligations
- Where one party
reasonably relies on oral promise of another to reduce oral agreement
to writing
- Where payment has
been made and accepted (This is a TX law, though)
- There was also a
No Waiver clause that says that failure to demand full performance doesn’t
give rise to waiver
- However, even if
there is no waiver, K still falls within rules (and exceptions) of statute
of frauds