Restatement §152, When Mistake of Both Parties Makes a Contract Voidable (Rules, p. 188)

1. Fact is a basic assumption on which the contract was made
1. If the assumption is just that it will make money, this usu. isn’t enough
2. Both parties must be mistaken
3. Must have been in existence at time K was made (otherwise, impracticability)
4. K is voidable by adversely affected party unless he bears risk under §154.
5. 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:

1. It is allocated to him by agreement
2. He knew at time of K that he had insufficient knowledge but acted anyway, OR
3. 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

1. The mistake would make the K unconscionable OR
1. Unconscionable: severe enough to create substantial loss
2. 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
• Loss of bonding capacity
• 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)

1. Party seeking discharge was not at fault
2. Non-occurrence of event was a basic assumption of K
1. NOT market downturn
2. NOT war
3. NOT natural disasters, esp. if it is reasonably foreseeable (e.g. hurricane in FL)
3. (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)

1. Purpose must be “principle purpose”
2. Frustration must be substantial
3. Party seeking discharge is not at fault
4. 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