Also known as: mistakes in basic assumptions · fundamental mistake · mistake of fact
Written by attorneys — see sources below.
A mutual error by contracting parties about a fact that constitutes a basic assumption on which the agreement rests. The mistake must materially affect the agreed exchange of performances. The adversely affected party must not bear the risk of the mistake under the circumstances.
Maya Malik confronts an intruder she believes is unlawfully entering her home. She uses force to repel the person. The intruder turns out to hold a privilege to enter based on a court order that Maya did not cause or know about. Because Maya's mistake about the basic assumption of unlawful entry was reasonable and not her fault, she retains the privilege to defend herself.
Michelle Murphy executes a will leaving her donor-advised account at Helping Hands to a charity. Both she and her attorney believed only one account existed. Clear and convincing evidence later shows she maintained a second account under a different email and always treated both as a single charitable resource. The court reforms the will to include the second account to match her actual intention.
Ming Ma creates a trust that inadvertently omits a parcel of land both she and her attorney assumed was already included. Clear and convincing evidence establishes that the omission resulted from a mistake of fact about the trust's coverage. The court reforms the trust terms to add the parcel and conform to Ma's proven intention.
Malcolm McKinley sells what both parties believe is a fertile breeding cow to Meredith Maxwell for a high price. After the sale, the cow is discovered to be barren. The mutual mistake about the cow's reproductive capacity was a basic assumption of the bargain and materially alters the exchange, so Maxwell may rescind.
In May 1886, T. C. Sherwood, a banker living in Plymouth in Wayne County, Michigan, sought to purchase cattle from Hiram Walker & Sons. The defendants resided in Detroit, conducted business at Walkerville, Ontario, and maintained a farm at Greenfield in Wayne County where they kept blooded polled Angus cattle that they believed were barren. On May 5, 1886, Sherwood visited the Greenfield farm after the defendants informed him they had a few head there that were probably barren and would not breed. A few days later Sherwood negotiated with one of the defendants for the purchase of the cow known as Rose 2d of Aberlone. On May 15, 1886, the parties reached final agreement by telephone that Sherwood would pay five and one-half cents per pound live weight less fifty pounds shrinkage. That same day the defendants sent Sherwood a letter confirming the sale and enclosing an order directing George Graham to deliver the cow at King’s cattle-yard, send a halter, and have her weighed. On May 19, 1886, Sherwood wrote Graham that he would collect the cow the following morning and instructed that she not be watered. On May 20 the defendants learned from Graham that the cow appeared to be with calf, telegraphed Sherwood that they could not sell her, and instructed Graham not to deliver. On May 21 Sherwood presented the order and letter to Graham, who refused delivery; Sherwood then tendered eighty dollars to Hiram Walker, who refused both the money and the cow. Sherwood commenced a replevin action in justice’s court and obtained judgment. The defendants appealed to the circuit court of Wayne County, where a jury returned a verdict for the plaintiff. After securing possession under the writ, Sherwood caused the cow to be weighed at 1,420 pounds at a location other than King’s cattle-yard. The cow gave birth to a calf in October 1886. At the time of the transaction both parties believed the cow was barren; she had cost the defendants $850 and, if capable of breeding, would have been worth between $750 and $1,000.
Momentum Capital and Mercury Industries enter a long-term supply contract with a price escalation clause both believed would track actual production costs. Unexpected market shifts cause the formula to produce prices far from the parties' shared expectation. The mutual mistake about the formula's performance as a basic assumption allows reformation or rescission of the pricing term.
In 1966 Essex Group, Inc., a manufacturer of electrical wire products, decided to expand its aluminum wire production and began negotiations with Aluminum Company of America (ALCOA) for a long-term supply of aluminum. By December 26, 1967, the parties entered into the Molten Metal Agreement under which Essex would supply alumina to ALCOA, which would smelt it into molten aluminum at its Warrick, Indiana facility for Essex to pick up. The agreement was to run until the end of 1983, with Essex having an option to extend it to 1988. Essex also entered into a separate Alumina Purchase Agreement with Alcoa of Australia Proprietary Ltd. for the supply of alumina. The price under the Molten Metal Agreement was calculated using a formula with three components. A demand charge was indexed to the Engineering News Record Construction Cost Index. A non-labor production cost component was indexed to the Wholesale Price Index-Industrial Commodities (WPI-IC). A labor production cost component was indexed to ALCOA's average hourly labor costs at Warrick. The initial price was fifteen cents per pound, subject to an overall cap at sixty-five percent of a specified market price for aluminum. ALCOA consulted economist Alan Greenspan in developing the indexing system, and both parties examined the historical performance of the indices before agreeing to them. The parties also executed a Side Letter Agreement addressing concerns under the Robinson-Patman Act, providing that if the agreement were construed as a sale of goods, either party could terminate it. From 1968 through the early 1970s, the price formula produced returns to ALCOA within the expected range of one to seven cents per pound net. Beginning in 1973, following actions by OPEC to increase oil prices and unanticipated pollution control costs, ALCOA's electricity costs at Warrick rose much more rapidly than the WPI-IC. As a result, ALCOA began incurring substantial out-of-pocket losses on the contract, projected to exceed sixty million dollars over the remaining term if unchanged. In June 1979, ALCOA notified Essex that it would reduce deliveries by fifteen percent, and Essex disputed ALCOA's authority to do so under the contract terms. On July 21, 1975, representatives of ALCOA and Essex, including Krome George and Paul O'Malley, met and discussed possible revision of the pricing formula, but the parties dispute whether an oral agreement to modify the contract was reached. In 1977 and 1978, electrical generating plant failures and a coal strike caused interruptions in ALCOA's smelting operations, leading to reduced deliveries to Essex that ALCOA attributed to causes beyond its control. ALCOA filed this action in the United States District Court for the Western District of Pennsylvania seeking reformation of the contract, a declaratory judgment regarding an alleged oral modification and termination rights, while Essex counterclaimed for damages and specific enforcement of the original delivery obligations. The case proceeded to a non-jury trial on liability issues, during which evidence was presented including tables showing the divergence between the WPI-IC and ALCOA's actual non-labor costs, testimony from company officials, and records of contract negotiations and performance. Jurisdiction is based on diversity of citizenship with the amount in controversy exceeding the jurisdictional threshold, and the parties agreed that Indiana law governs the contract.
Three elements are required. Both parties must be mistaken about a fact that constitutes a basic assumption of the bargain. The mistake must have a material effect on the agreed exchange. The party seeking avoidance must not bear the risk of the mistake.
A mistake about the authenticity or fundamental quality of the subject matter qualifies as a mistake in basic assumptions. A later change in market value or an erroneous prediction about future conditions does not.
…time the contract is made, but must have been known to one or both of the parties. Where there is no warranty, there can be no mistake of fact when no such fact exists, or, if in existence, neither party knew of it, or could know of it; and that is precisely this case. If the owner of a Hambletonian horse had speeded him, and was…
…parties with respect to the use of the WPI have been completely and totally frustrated, that both ALCOA and Essex made a mutual mistake of fact
…instance. I think, however, that it was originally a mistake. What principally weighs with me in thinking that Lord Coke made a mistake of fact
…As to mistake, the amended complaint fails to disclose any facts which would suggest that consent had been obtained through a
…Palpable and Impalpable Mistake in Construction Contracts [1931] 16 Minn.L.Rev. 137, 143-147.) Rescission may be had for
Yes. When one party knows the other is mistaken about a basic assumption and silence violates good faith and fair dealing, nondisclosure equates to a misrepresentation that permits avoidance.
No. A writing alone does not shift the risk. Risk allocation requires an express agreement, conscious assumption of uncertainty, or circumstances making it reasonable to place the risk on that party.
Reformation is available when clear and convincing evidence shows that a mistake of fact or law affected specific terms and reveals the donor's true intention, even if the document is unambiguous.