Small mistakes can be costly when it comes to contracting

Dr. John Murray, Jr. -- Purchasing, 10/7/2004

Everybody makes mistakes. That is a given. Whether or not a court will grant relief if a party to a contract claims that a mistake was made is not a given, however. To get a better idea of how mistakes can be costly in contracting, consider the following situations based on cases in various courts.

Example 1. A company sees an advertisement for a used dredge priced at $50,000 and sends one of its employees, an expert on marine engines, to examine the dredge. The expert is pleased with the engines and recommends the purchase. The buyer signs a contract and the dredge is delivered. Only then does the buyer discover that the dredge will not perform shallow dredging operations and is, therefore, useless to the buyer who wants to cancel the deal.

Result: A court recently held that this was a unilateral mistake of subject matter because the seller did not represent that the dredge could perform shallow dredging operations. The buyer's expert never inquired about that capability. He was simply delighted with the marine engines. The court held that the buyer had purchased the dredge and was required to pay the $50,000 price.

Example 2. A general contractor (Johnson) submits a bid for a new school building at $4.3 million. The next lowest bid is $4.6 million and there are other bids ranging from $4.7 to $4.9 million. The school district accepts Johnson's bid but the day after his bid is accepted, Johnson discovers the bid inadvertently failed to include equipment when it hurried to complete the calculation of its bid to meet the bid deadline. If it had included the equipment, the bid would have been $4.6 million instead of $4.3 million. At $4.3 million, Johnson would earn no profit on the project.

Result: The court held that while Johnson had made the mistake, when this type of simple clerical error is immediately discovered, a court will grant relief to the mistaken party where it would turn the contract into a losing contract. Normally, where only one party makes a mistake (a "unilateral" mistake), that party must live with the mistake. In several cases involving a simple clerical error, courts have been willing to grant relief if the hardship on the mistaken party is significant.

Example 3. Take the same scenario, but suppose Johnson's bid is $2 million and the school district accepts it.

Result: In this situation, a court would find that Johnson was not bound to any contract on the principle that, where a party knows or should know that the other party is making a mistake, the knowing party may not "snap up" the offer. If the next lowest bid was $4.7 million, the district had to know that the builder was making a mistake. It cannot enforce a contract against Johnson in this situation.

Example 4. The purchasing manager for the Barnes Corporation learns that a famous painting by Henri Beson, "Daybreak," is owned by Clara Jordan. The Barnes Corporation wants to purchase "Daybreak" for its new corporate headquarters and in a letter to Jordan, an agent of Barnes offers to purchase the painting for $450,000. Jordan accepts the offer. When the painting is delivered and unveiled, however, the president of Barnes exclaims, "That's not the Beson 'Daybreak' that I know." In fact, there are two "Daybreak" paintings by Henri Beson, both owned by Clara Jordan. Neither the buyer nor the president was aware of this fact.

Result: This kind of mistake is often called the "latent ambiguity" misunderstanding. In this situation, if neither party is aware of the fact that there are two items of the same name, they are both equally innocent and there is no contract. If both parties knew there are two but neither mentioned this fact to the other, they are equally guilty and there is no contract. This situation, however, fits neither of these scenarios. Rather, one party (Jordan) knew there were two, while Barnes knew of only one. A court will find a contract for the painting intended by the innocent party.

Example 5. The Barnes Corporation wants to purchase two cylinders made by the North Corporation at a price of $300,000. Barnes has never done business with the North Corporation. A Barnes purchasing manager issues a purchase order, which is sent to North Ltd., which ships the cylinders. The purchasing manager then discovers that North Ltd. is a different supplier and the North Corporation would supply the cylinders for $275,000. North Ltd. is a U. K. Corporation that manufactures cylinders and was unaware of the North Corporation.

Result: This is a unilateral mistake of identity. If the party with whom a buyer is dealing is unaware that buyer is making a mistake, there is a contract with that party.

Example 6. A Barnes agent negotiates a contract for a tract of land on which Barnes intends to construct a building. The land, known as "Greenfield," is owned by George Miller. The price is $2 million. A lawyer prepares the contract, which is signed by Barnes and Miller. Neither pays any attention to the final document with all of the lawyer clauses before signing it but Barnes later discovers the document refers to the land as "Bluefield" which is the name of another tract of land owned by Miller of about the same size, but 10 miles away from Greenfield. When the Barnes buyer raises the matter with Miller, he states that the deal is for Bluefield.

Result: Courts are generally unwilling to rewrite the contract two parties have made. Where, however, the mistake is in the writing prepared by a third party (the old cases called it a "scrivener's error"), and it can be proven by clear and convincing evidence that the writing was mistaken and does not represent the true intention of the parties, a court will grant a remedy called "reformation" where the court reforms (rewrites) the contract to state the true intention of the parties.