CONTRACT LAW Offer
Treitel defines an offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree".[1] An offer is a statement of the terms on which the offeror is willing to be bound. It is the present contractual intent to be bound by a contract with definite and certain terms communicated to the offeree.
The "expression" referred to in the definition may take different forms, such as a letter, newspaper, fax, email and even conduct, as long as it communicates the basis on which the offeror is prepared to contract.
Whether two parties have an agreement or a valid offer is an issue which is determined by the court using the Objective test (Smith v. Hughes). Therefore the "intention" referred to in the definition is objectively judged by the courts. In the English case of Smith v. Hughes [2] the court emphasised that the important thing is not a party's real intentions but how a reasonable person would view the situation. This is due mainly to common sense as each party would not wish to breach his side of the contract if it would make him or her culpable to damages, it would especially be contrary to the principle of certainty and clarity in commercial contract and the topic of mistake and how it affects the contract. As a minimum requirement the conditions for an offer should include at least the following 4 conditions: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Without one of the minimum requirements of condition an offer of sale is not seen as a legal offer but rather seen as an advertisement.
Unilateral contract
The contract in Carlill v Carbolic Smoke Ball Co[3] was of a kind known as a unilateral contract, one in which the offeree accepts the offer by performing an act which indicates their agreement with the bargain. This can be something as simple as raising an eyebrow or wearing a certain color t-shirt. It can be contrasted with a bilateral contract, where there is an exchange of promises between two parties. In Australian Woollen Mills Pty Ltd v. The Commonwealth (1954), the High Court of Australia held that, for a unilateral contract to arise, the promise must be made "in return for" the doing of the act. The court distinguished between a unilateral contract and a
conditional gift. The case is generally seen to demonstrate the connection between the requirements of offer and
acceptance, consideration and intention to create legal relations. Invitations to treat
An invitation to treat is not an offer, but an indication of a person's willingness to negotiate a contract. In Harvey v. Facey[4], an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat. Similarly in Gibson v Manchester City Council[5] the words "may be prepared to sell" were held to be a notification of price and therefore not a distinct offer, though in another case concerning the same change of policy (Manchester City Council underwent a change of political control and stopped the sale of council houses to their tenants) Storer v. Manchester City Council[6], the court held that an agreement was completed by the tenant's signing and returning the agreement to purchase, as the language of the agreement had been sufficiently explicit and the signature on behalf of the council a mere formality to be completed.
The courts have tended to take a consistent approach to the identification of invitations to treat, as compared with offer and acceptance, in common transactions. The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer.[7]
The holding of a public auction will also usually be regarded as an invitation to treat. Auctions are, however, a special case generally. The rule is that the bidder is making an offer to buy and the auctioneer accepts this in whatever manner is customary, usually the fall of the hammer.[8] A bidder may withdraw his or her bid at any time before the fall of the hammer, but any bid in any event lapses as an offer on the making of a higher bid, so that if a higher bid is made, then withdrawn before the fall of the hammer, the auctioneer cannot then purport to accept the previous highest bid. If an auction is without reserve then whilst there is no contract of sale between the owner of the goods and the highest bidder (because the placing of goods in the auction is an invitation to treat) there is a collateral contract between the auctioneer and the highest bidder that the auction will be held without reserve (i.e., that the highest bid, however low, will be accepted).[9] The U.S. Uniform Commercial Code provides that in an auction without reserve the goods may not be withdrawn once they have been put up.[10]
Revocation of offer
An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror. If the offer was made to the entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract).
If the offer is one that leads to a unilateral contract, then unless there was an ancillary contract entered into that guaranteed that the main contract would not be withdrawn, the contract may be revoked at any time.
Acceptance
Test of acceptance
For the Acceptance, the essential requirement is that the parties had each from a subjective[citation needed] perspective engaged in conduct manifesting their assent. Under this meeting of the minds theory of contract, a party could resist a claim of breach by proving that he had not intended to be bound by the agreement, only if it appeared subjectively that he had so intended. This is unsatisfactory, as one party has no way to know another's undisclosed intentions. One party can only act upon what the other party reveals objectively to be his intent. Hence, an actual meeting of the minds is not required. Indeed, it has been argued that the "meeting of the minds" idea is entirely a modern error: 19th century judges spoke of "consensus ad idem" which modern teachers have wrongly translated as "meeting of minds" but actually means "agreement to the [same] thing".[11] The requirement of an objective perspective is important in cases where a party claims that an offer was not accepted and seeks to take advantage of the performance of the other party. Here, we can apply the test of whether a reasonable bystander (a "fly on the wall") would have perceived that the party has impliedly accepted the offer by conduct.
Rules of acceptance
Communication of acceptance
The acceptance must be communicated: see Powell v Lee (1908) 99 L.T. 284; Robophone Facilities Ltd v. Blank [1966] 3 All E.R. 128. Prior to acceptance, an offer may be withdrawn.
An exception exists in the case of unilateral contracts, in which the offeror makes an offer to the world which can be accepted by some act. A classic instance of this is the case of Carlill v. Carbolic Smoke Ball Co. [1892] 2 Q.B. 484 in which an offer was made to pay £100 to anyone who having bought the offeror's product and used it in accordance with the instructions nonetheless contracted influenza. The plaintiff did so and the court ordered payment of the £100. Her actions accepted the offer - there was no need to communicate acceptance. Typical cases of unilateral offers are advertisements of rewards (e.g., for the return of a lost dog). An offer can only be accepted by the offeree, that is, the person to whom the offer is made. An offeree is not usually bound if another person accepts the offer on his behalf without his authorisation, the exceptions to which are found in the law of agency, where an agent may have apparent or ostensible authority, or the usual authority of an agent in the particular market, even if the principal did not realise what the extent of this authority was, and someone on whose behalf an offer has been purportedly accepted it may also ratify the contract within a reasonable time, binding both parties: see agent (law).
It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance (called waiver of communication - which is generally implied in unilateral contracts): see also Re Selectmove Ltd [1994] BCC 349.
If the offer specifies a method of acceptance (such as by post or fax), acceptance must be by a method that is no less effective from the offeror's point of view than the method specified. The exact method prescribed may have to be used in some cases but probably only where the offeror has used very explicit words such as "by registered post, and by that method only": see Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd (1975) 119 Sol. Jo. 370.
However, acceptance may be inferred from conduct, see, e.g.: Brogden v. Metropolitan Railway Company (1877) 2 App. Cas. 666; Rust v. Abbey Life Assurance Co. Ltd [1979] 2 Lloyd's Rep. 334; Saint John Tugboat Co. v. Irving Refinery Ltd (1964) 46 DLR (2d) 1; Wettern Electric Ltd v. Welsh Development Agency [1983] Q.B. 796.
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Correspondence with offer
The "mirror image rule" states that if you are to accept an offer, you must accept an offer exactly, without modifications; if you change the offer in any way, this is a counter-offer that kills the original offer: Hyde v. Wrench (1840) 3 Beav 334. However, a mere request for information is not a counter-offer: Stevenson v. McLean (1880) 5 Q.B.D. 346. It may be possible to draft an enquiry such that it adds to the terms of the contract while keeping the original offer alive.
An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree, although not necessarily by the offeror: Dickinson v. Dodds (1876) 2 Ch.D. 463. If the offer was made to the entire world, such as in Carlill's case, the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an option (see also option contract).
Battle of the forms
Often when two companies deal with each other in the course of business, they will use standard form contracts. Often these terms conflict (e.g. both parties include a liability waiver in their form) and yet offer and acceptance are achieved forming a binding contract. The battle of the forms refers to the resulting legal dispute of these circumstances, wherein both parties recognize that an enforceable contract exists, however they are divided as to whose terms govern that contract.
Under English law, the question was raised in Butler Machine Tool Co Ltd v. Ex-Cell-O Corporation (England) Ltd [1979] WLR 401, as to which of the standard form contracts prevailed in the transaction. Lord Denning MR preferred the view that the documents were to be considered as a whole, and the important factor was finding the decisive document; on the other hand, Lawton and Bridge LJJ preferred traditional offer-acceptance analysis, and considered that the last counter-offer prior to the beginning of performance voided all preceding offers. The absence of any additional counter-offer or refusal by the other party is understood as an implied acceptance. In U.S. law, this principle is referred to as the last shot rule.
Under the Uniform Commercial Code (UCC) Sec. 2-207(1), A definite expression of acceptance or a written confirmation of an informal agreement may constitute a valid acceptance even if it states terms additional to or different from the offer or informal agreement. The additional or different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2). Between merchants, such terms become part of the contract unless:
a) the offer expressly limits acceptance to the terms of the offer, b) material alteration of the contract results,
c) notification of objection to the additional/different terms are given in a reasonable time after notice of them is received.
Material is defined as anything that may cause undue hardship/surprise, or is a significant element of the contract.
If there is no contract under 2-207(1), then under UCC Sec. 2-207(3), conduct by the parties that recognize there is a contract may be sufficient to establish a contract. The terms for this contract include only those that the parties agree on and the rest via gap fillers.
Postal acceptance rule Main article: Mailbox rule
As a rule of convenience, if the offer is accepted by post, the contract comes into existence at the moment that the acceptance was posted (Adams v. Lindsell (1818) 106 ER 250). This rule only applies when, impliedly or explicitly, the parties have in contemplation post as a means of acceptance. It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. The relevance of this early 19th century rule to modern conditions, when many quicker means of communication are available has been questioned, but the rule remains for the time being.
Knowledge of the offer
In Australian law, there is a requirement that an acceptance is made in reliance or pursuance of an offer: see R v. Clarke (1927) 40 C.L.R. 227.
Rejection, death or lapse of time
An offer can be terminated on the grounds of rejection on the part of the offeree, that is if the offeree does not accept the terms of the offer. Also upon making an offer,an offeror may include as a condition to the contract the duration in which the offer will be available.If the offeree fails to accept the offer within this specific period then the offer will be deemed as terminated.
Death of offeror
Generally death (or incapacity) of the offeror terminates the offer. This does not apply to option contracts.
The offer cannot be accepted if the offeree knows of the death of the offeror. In cases where the offeree accepts in ignorance of the death, the contract may still be valid, although this proposition depends on the nature of the offer. If the contract involves some characteristic personal to the offeror, the offer is destroyed by the death. Death of offeree
An offer is rendered invalid upon the death of the offeree: see Re Irvine. Counter Offers
If the offeree rejects the offer, the offer has been destroyed and cannot be accepted at a future time. A case illustrative of this is Hyde v. Wrench (1840) 49 E.R. 132, where in response to an offer to sell an estate at a certain price, the plaintiff made an offer to buy at a lower price. This offer was refused and subsequently, the plaintiffs sought to accept the initial offer. It was held that no contract was made as the initial offer did not exist at the time that the plaintiff tried to accept it, the offer having been terminated by the counter offer.
It should be noted that a mere inquiry (about terms of an offer) is not a counter offer and leaves the offer intact. The case Stevenson v. McLean (1880) 28 W.R. 916 is analogous to this situation.
Formation
A contract will be formed (assuming the other requirements are met) when the parties give objective manifestation of an intent to form the contract. Of course, the assent must be given to terms of the agreement. Usually this involves the making by one party of an offer to be bound upon certain terms, and the other parties' acceptance of the offer on the same terms.
Because offer and acceptance are necessarily intertwined, in California, offer and acceptance are analyzed together as sub elements of a single element, known either as consent of the parties or mutual assent.
2. Defenses against formation
A defendant who raises a defense of duress has actually done everything to constitute the actus reus of the crime and has the mens rea because he or she intended to do it in order to avoid some threatened or actual harm. Thus, some degree of culpability already attaches to the defendant for what was done. In criminal law, the defendant's motive for breaking the law is usually irrelevant although, if the reason for acting was a form of justification, this may reduce the sentence. The basis of the defense is that the duress actually overwhelmed the defendant's will and would also have overwhelmed the will of a person of ordinary courage (a hybrid test requiring both subjective evidence of the accused's state of mind, and an objective confirmation that the failure to resist the threats was reasonable), thus rendering the entire behavior involuntary. Thus, the liability should be reduced or discharged, making the defense one of exculpation.
The extent to which this defense should be allowed, if at all, is a matter of public policy. A state may say that no threat should force a person to deliberately break the law, particularly if this breach will cause significant loss or damage to a third person.[citation needed] Alternatively, a state may take the view that even though people may have
ordinary levels of courage, they may nevertheless be coerced into agreeing to break the law and this human weakness should have some recognition in the law.
A variant of duress involves hostage taking, where a person is forced to commit a criminal act under the threat, say, that their family member or close associate will be immediately killed should they refuse. This has been raised in some cases of ransom where a person commits theft or embezzlement under orders from a kidnapper in order to secure their family member's life and freedom.
Requirements
For duress to qualify as a defense, four requirements must be met:[1] 1. The threat must be of serious bodily harm or death
2. The threatened harm must be greater than the harm caused by the crime 3. The threat must be immediate and inescapable
4. The defendant must have become involved in the situation through no fault of his or her own A person may also raise a duress defense when force or violence is used to compel him to enter into a contract, or to discharge one
In contract law
Duress in the context of contract law is a common law defense, and if one is successful in proving that the contract is vitiated by duress, the contract may be rescinded, since it is then voidable.
Duress has been defined as a "threat of harm made to compel a person to do something against his or her will or judgment; esp., a wrongful threat made by one person to compel a manifestation of seeming assent by another person to a transaction without real volition". - Black's Law Dictionary (8th ed. 2004)
Duress in contract law falls into two broad categories:[3]
Physical duress, and
Economic duress
Physical duress
Duress to the person
Professor Ronald Griffin, Washburn University School of Law, Topeka, KS, puts physical duress simply: "Your money or your life." In Barton v. Armstrong [1976] AC 104, a decision of the Privy Council, Armstrong threatened to kill Barton if he did not sign a contract, which was set aside due to duress to the person. An innocent party wishing to set aside a contract for duress to the person need to prove only that the threat was made and that it was a reason for entry into the contract; the onus of proof then shifts to the other party to prove that the threat had no effect in causing the party to enter into the contract. Duress can be made also by social influence. Courts frown on this type of contract because there is really no manifestation of mutual assent "meeting of the minds" or agreement to the terms. Rather, when someone is threatened and agrees to act to avoid physical harm by the party making the offer, all you truly have is a mirror of the other party's manifestation of mutual assent not the manifestation of mutual assent by the party being forced or induced to assent to the terms of the contract.
Therefore, the meeting of the minds "in truth" does not exist. Since, there is no meeting of the minds there can be no contract.
Duress to goods
In such cases, one party refuses to release the goods belonging to the other party until the other party enters into a contract with them. For example, in Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298, the contract was set aside after Hawker Pacific's threats to withhold the helicopter from the plaintiff unless further payments were made for repairing a botched paint job.
Economic duress
A contract is voidable if the innocent party can prove that it had no other practical choice (as opposed to legal choice) but to agree to the contract.
The elements of economic duress
1. Wrongful or improper threat: No precise definition of what is wrongful or improper. Examples include: morally wrong, criminal, or tortuous conduct; one that is a threat to breach a contract "in bad faith" or threaten to withhold an admitted debt "in bad faith".
2. Lack of reasonable alternative (but to accept the other party's terms). If there is an available legal remedy, an available market substitute (in the form of funds, goods, or services), or any other sources of funds this element is not met.
3. The threat actually induces the making of the contract. This is a subjective standard, and takes into account the victim's age, their background (especially their education), relationship of the parties, and the ability to receive advice.
4. The other party caused the financial distress. The majority opinion is that the other party must have caused the distress, while the minority opinion allows them to merely take advantage of the distress.
Undue influence
Undue influence (as a term in jurisprudence) is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible
Undue influence in contract law
If undue influence is proved in a contract, in U.S. law, the contract is voidable by the innocent party, and the remedy is rescission. There are two categories to consider:
Presumed undue influence
Actual undue influence Presumed undue influence
First subgroup
In the first subgroup, the relationship falls in a class of relationships that as a matter of law will raise a presumption of undue influence. Such classes include:
Government/People Parent/child Guardian/ward Priest/member of parish Solicitor/client Doctor/patient
In such cases, the onus of proof lies on a doctor, say, to disprove undue influence on a patient. Second subgroup
The second subgroup covers relationships that do not fall into the first subgroup, but on the facts of case, there was an antecedent relationship between the parties that led to undue influence. The test is one of whether there was a relationship of such trust and confidence that it should give rise to such a presumption (see Johnson v. Buttress (1936) 56 CLR 113).
In Garcia v National Australia Bank (1998) 194 CLR 395, the High Court of Australia distinguished between cases of actual undue influence and situations where the transaction is set aside because the guarantor does not understand the nature of the transaction. Although there is no presumption of undue influence, a "lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet... did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her."
Actual undue influence
An innocent party may also seek to have a contract set aside for actual undue influence, where there is no presumption of undue influence, but there is evidence that the power was unbalanced at the time of the signing of the contract.
Undue influence in probate law
"Undue influence" is the most common ground for will contests and are often accompanied by a capacity challenge. In probate law, it is generally defined as a testator's loss of free agency regarding property disposition through contemporaneous psychological domination by an advisor which results in an excessive benefit to the advisor. It is important to note that "undue influence" is only an issue when the advisor is benefiting, not when advisor is getting a benefit for someone else; in that case it would be considered fraud. In litigation most jurisdictions place the burden of proving undue influence on the party challenging the will.
Illusory promise
In contract law, an illusory promise is one that courts will not enforce. This is in contrast with a contract, which is a promise that courts will enforce. A promise may be illusory for a number of reasons. In common law countries this usually results from failure or lack of consideration (see also consideration under English law). Illusory promises are so named because they merely hold the illusion of contract. For example, a promise of the form, "I will give you ten dollars if I feel like it," is purely illusory and will not be enforced as a contract.
It is a general principle of contract law that courts should err on the side of enforcing contracts.[citation needed] Parties entering into the arrangement presumably had the intention of forming an enforceable contract, and so courts generally attempt to follow this intention.[1]
A promise conditioned upon an event within the promisor's control is not illusory if the promisor also "impliedly promises to make reasonable effort to bring the event about or to use good faith and honest judgment in determining whether or not it has in fact occurred."[2]
Methods of finding potentially illusory contracts enforceable include: Implied-in-law "good faith" terms
Implied-in-fact terms Bargaining for a chance Contents
[hide]
1 Implied-in-law "good faith" terms 2 Implied-in-fact terms
3 Bargaining for a chance
4 Changes to a "contract" without notification
5 References
Implied-in-law "good faith" terms
Many contracts include "satisfaction clauses", in which a promisor can refuse to pay if he isn't subjectively satisfied with the promisee's performance. Strictly speaking, this is an illusory promise, since the promisor has no actual legal burden to pay if he chooses not to. However, courts will generally imply in law that the promisor must act in good faith and reject the deal only if he is genuinely dissatisfied. As another example, if a contract promises a promisee a certain percentage of the proceeds of a promisor's business activities, this is illusory, since the promisor doesn't have to do anything: any percentage of zero is zero. However, courts will imply that the promisor promised to use reasonable efforts to try to make money, and cite him for breach of contract if he does absolutely nothing.[3] The U.C.C. in contracts exclusive to both sides requires "best efforts" in such contracts. This is either read to be the same as a good faith effort, but is seen by some courts as a higher duty. Implied-in-fact terms
Judges will often infer terms into the contract that the parties did not explicitly cite. For instance, in the "satisfaction clause" case, judges might infer that the parties intended a "reasonableness test" - that the clause could be satisfied if a reasonable person would be satisfied by the promisee's performance, regardless of whether the promisor himself asserts he is satisfied. (This interpretation is often used in cases in which a performance can be objectively evaluated, such as with the construction of a warehouse; the implied-in-law interpretation above is preferred where satisfaction is more subjective, as with the painting of a portrait.)
Many judges[who?] would consider the "bargaining for a percentage of the proceeds" example above an enforceable contract, even without an implied-in-fact or implied-in-law good faith term. They would view the opportunity to enter into a business relationship to itself be acceptable consideration. Put differently, the mere possibility that the promisor would do business is a valuable product of the bargain even if he does not do anything. Of course, if the promisor entered into the relationship purely with the intent of fraudulently harming the promisee, he could be cited for fraud or bad faith principles that apply to all contracts.
Changes to a "contract" without notification Statute of frauds
The statute of frauds refers to the requirement that certain kinds of contracts be memorialized in a signed writing with sufficient content to evidence the contract.
Traditionally, the statute of frauds requires a signed writing in the following circumstances:
Contracts in consideration of marriage. This provision covers prenuptial agreements.
Contracts which cannot be performed within one year. However, contracts of indefinite duration do not fall under the statute of frauds regardless of how long the performance actually takes.
Contracts for the transfer of an interest in land. This applies not only to a contract to sell land but also to any other contract in which land or an interest in it is disposed, such as the grant of a mortgage or an easement.
Contracts by the executor of a will to pay a debt of the estate with his own money. Contracts for the sale of goods involving a purchase price of $500 or more.
Contracts in which one party becomes a surety (acts as guarantor) for another party's debt or other obligation.
This can be remembered by the mnemonic "MY LEGS": Marriage, one year, land, executor, goods, surety; or Marriage, one year, land, executor, guarantor, sale.
Contents [hide] 1 Terminology 2 Raising the defense 3 Uniform Commercial Code 4 England and Wales 5 Scotland 6 Exceptions 7 See also 8 References 9 External links
Terminology
The term statute of frauds comes from an Act of the Parliament of England (29 Chas. 2 c. 3) passed in 1677 (authored by Sir Leoline Jenkins and passed by the Cavalier Parliament), the title of which is An Act for Prevention of Frauds and Perjuries.[1] Many common law jurisdictions have made similar statutory provisions, while a number of civil law jurisdictions have equivalent legislation incorporated into their civil codes. The original English statute itself may still be in effect in a number of US states or Canadian provinces, depending on the constitutional or reception statute of English law, and any subsequent legislative developments.
Raising the defense
A defendant in a statute of frauds case who wishes to use the Statute as a defense must raise the Statute in a timely manner. The burden of proving that a written contract exists only comes into play when a Statute of Frauds defense is raised by the defendant. A defendant who admits the existence of the contract in his pleadings, under oath in a deposition or affidavit, or at trial, may not use the defense.
A statute of frauds defense may also be effected by a showing of part performance, upon showing of one of two different conditions. If the parties have taken action in reliance on the agreement, as in the case Riley v. Capital Airlines, Inc. the court held that part performance does not take an executory portion of contract out of the Statute of Frauds. Each performance constitutes a contract that falls outside the Statute of Frauds and was enforceable to the extent it is executed. But the unexecuted portion of the contract falls within the Statute of Frauds and is unenforceable. As a result, only the executed portion of the contract can be recovered, and the doctrine of part performance does not remove the contract from the statute. On the other hand, the court in Schwedes v. Romain held that partial performance and grounds for estoppel can make the contract effective. In an action for specific performance, an agreement to convey land must satisfy the Statute of Frauds. The Statute is satisfied if the contract to convey is evidenced by a writing or writings containing the essential terms of a purchase and sale agreement and signed by the party against whom the contract is to be enforced. If there is no written agreement, a court of equity can specifically enforce an oral agreement to convey only if the part performance doctrine is satisfied. In a majority of jurisdictions, part performance is proven when the purchaser pays the purchase price, has possession of the land, and makes improvements on the land, all with the permission of the seller. No jurisdiction is satisfied by payment of the purchase price alone.
Under common law, the Statute of Frauds also applies to contract modification - for example, suppose party A makes an oral agreement to lease a car from party B for 9 months. Immediately after taking possession party A decides that he really likes the car, and makes an oral offer to party B to extend the term of the lease by 6 months. Although neither agreement alone comes under the Statute of Frauds, the extension modifies the original contract to make it a 15-month lease, thereby bringing it under the Statute. In practice, this works in reverse as well - an agreement to reduce the lease from 15 months to 9 months would not require a writing. However, almost all jurisdictions have enacted statutes that require a writing in such situations. The Uniform Commercial Code abrogated this requirement for contract modification, discussed below.
Uniform Commercial Code
In the United States, contracts for the sale of goods where the price equals $500 or more (with the exception of professional merchants performing their normal business transactions, or any custom-made items designed for one specific buyer) fall under the statute of frauds under the Uniform Commercial Code (article 2, section 201).[2] The most recent revision of UCC § 2-201 increases the triggering point for the UCC Statute of Frauds to $5,000, but as of 2006 no U.S. state has adopted revised Section 201.
The application of the statute of frauds to dealings between merchants has been modified by provisions of the Uniform Commercial Code, which is a statute that has been enacted at least in part by every state (Louisiana has enacted all of the UCC except for Article 2, as it prefers to maintain its civil law tradition governing the sale of goods). Uniform Commercial Code § 1-206[3] sets out a "catch-all" statute of frauds for personal property not covered by any other specific law, stating that a contract for the sale of such property where the purchase price exceeds $500 is not enforceable unless memorialized by a signed writing. This section, however, is rarely invoked in litigation.
Interestingly, with respect to securities transactions, the Uniform Commercial Code (section 8-113) has abrogated the statute of frauds. The drafters of the most recent revision commented that "with the increasing use of electronic means of communication, the statute of frauds is unsuited to the realities of the securities business." England and Wales
The Statute of Frauds[4] (1677) was largely repealed in England and Wales by the Law Reform (Enforcement of
Contracts) Act 1954.
Section 4 now provides that contracts of guarantee (surety for another's debt) are unenforceable unless evidenced in writing. This requirement is subject to section 3 of the Mercantile Law Amendment Act 1856 which provides that the consideration for the guarantee need not appear in writing or by necessary inference from a written document.
Section 6 of the Statute of Frauds Amendment Act 1828[5] (commonly known as Lord Tenterden's Act[6]) was enacted to prevent section 4 of the 1677 Act being circumvented by bringing an action for the tort of deceit (the tort in Freeman v. Palsey).
Scotland
Section 6 of the Mercantile Law Amendment Act Scotland 1856 was derived from those parts of section 4 of the Statute of Frauds (1677) which relate to contracts of guarantee and from section 6 of the Statute of Frauds Amendment Act 1828.
It was repealed (see here) on 1 August 1995[7] by the Requirements of Writing (Scotland) Act 1995, sections 14(2) and Schedule 5 (with ss. 9(3)(5)(7), 13, 14(3)).
Exceptions
An agreement may be enforced even if it does not comply with the statute of frauds in the following situations: Merchant Confirmation Rule, under the UCC. If one merchant sends a writing sufficient to satisfy the statute of frauds to another merchant and the receiving merchant has reason to know of the contents of the sent confirmation and does not object to the confirmation within 10 days, the confirmation is good to satisfy the statute as to both parties.
Admission of the existence of a contract by the defendant under oath,
Part Performance of the contract. The agreement is enforceable up to the amount already paid, delivered, etc.
The goods were specially manufactured for the buyer and the seller either 1) began manufacturing them, or 2) entered into a third party contract for their manufacture, and the manufacturer cannot without undue burden sell the goods to another person in the seller's ordinary course of business-- for example, t-shirts with a baseball team logo or wall-to-wall carpeting for an odd-sized room.
Promissory Estoppel can be applied when the charging party detrimentally relies on the otherwise unenforceable contract.
Non est factum
Non est factum – Latin for "it is not [my] deed" – is a doctrine in contract law that allows a signing party to escape performance of the agreement. A claim of non est factum means that the signature on the contract was signed by mistake, without knowledge of its meaning, but was not done so negligently. A successful plea would make the contract void ab initio.
Non est factum is difficult to claim as it does not allow for negligence on the part of the signatory, i.e. failure to read a contract before signing it will not allow for non est factum, except in Canada using the precedent of Tilden Rent-A-Car Co. v. Clendenning. In a successful case, the fundamental basis of the signed contract must be completely different from what was intended. In Lloyds Bank v Waterhouse [1990] a father acted as a guarantor to his son's debt when purchasing a farm. The father was illiterate and signed the bank document under the belief that he was acting as the guarantor for the farm only, when the contract was actually for all the debt accumulated by the son. As he was illiterate, this was a mistake as to the document signed and the father was successful in claiming non est factum.
Another notable case on non est factum is Foster v Mackinnon (1869) LR 4 CP 704 where an elderly man signed a bill of exchange but was only shown the back of it. He was granted a new trial.[1]
3 . Contract interpretationParol evidence rule
The parol evidence rule is a substantive common law rule in contract cases that prevents a party to a written contract from presenting extrinsic evidence that contradicts or adds to the written terms of the contract that appears to be whole. The supporting rationale is that since the contracting parties have reduced their agreement to a single and final writing, the extrinsic evidence of past agreements or terms should not be considered when interpreting that writing, as the parties had decided to ultimately leave them out of the contract.
Overview
To take an example, Carl agrees in writing to sell Betty a car for $1,000. Betty argues that Carl told her that she would only need to pay Carl $800. The parol evidence rule would generally prevent Betty from testifying to this conversation because the testimony ($800) would directly contradict the written contract's terms ($1,000).
In order for the rule to be effective, the contract in question must first be a final integrated writing; it must, in the judgment of the court, be the final agreement between the parties (as opposed to a mere draft, for example). A final integrated agreement is either a partial or complete integration. If it contains some, but not all, of the terms as to which the parties have agreed then it is a partial integration. This means that the writing was a final agreement between the parties (and not mere preliminary negotiations) as to some terms, but not as to others. On the other hand, if the writing were to contain all of the terms as to which the parties agreed, then it would be a complete integration. One way to ensure that the contract will be found to be a final and complete integration is through the inclusion of a merger clause, which recites that the contract is, in fact, the whole agreement between the parties. However, many modern cases have found merger clauses to be only a rebuttable presumption.
The importance of the distinction between partial and complete integrations is relevant to what evidence is excluded under the parol evidence rule. For both complete and partial integrations, any evidence contradicting the writing is excluded under the parol evidence rule. However, for a partial integration, terms that supplement the writing are admissible. To put it mildly, this can be an extremely subtle (and subjective) distinction.
There are a number of exceptions to the parol evidence rule. Extrinsic evidence can always be admitted for the following purposes:
To aid in the interpretation of existing terms.
To show that in light of all the circumstances surrounding the making of the contract, the contract is actually ambiguous, thus necessitating the use of extrinsic evidence to determine its actual meaning (California law).[1]
To resolve an ambiguity in the contract.
To show that an unambiguous term in the contract is in fact a mistaken transcription of a prior valid agreement. Such a claim must be established by clear and convincing evidence, and not merely by the preponderance of the evidence.
To correct mistakes.
To show wrongful conduct such as misrepresentation, fraud, duress, unconscionability (276 N.E.2d 144, 147), or illegal purpose on the part of one or both parties.[2]
To show that consideration has not actually been paid. For example, if the contract states that A has paid B $1,000 in exchange for a painting, B can introduce evidence that A had never actually conveyed the $1,000.
To identify the parties, especially if the parties have changed names. To imply or incorporate a term of the contract.
To make changes in the contract after the original final contract has been agreed to. That is, oral statements can be admitted unless they are barred by a clause in the written contract.[2]
In order for evidence to fall within this rule, it must involve either (1) a written or oral communication made prior to execution of the written contract; or (2) an oral communication made contemporaneous with execution of the written contract. Evidence of a later communication will not be barred by this rule, as it is admissible to show a later modification of the contract (although it might be inadmissible for some other reason, such as the Statute of Frauds). Similarly, evidence of a collateral agreement - one that would naturally and normally be included in a separate writing - will not be barred. For example, if A contracts with B to paint B's house for $1,000, B can introduce extrinsic evidence to show that A also contracted to paint B's storage shed for $100. The agreement to paint the shed would logically be in a separate document from the agreement to paint the house.
Though its name suggests that it is a procedural evidence rule, the consensus of courts and commentators is that the parol evidence rule constitutes substantive contract law.
Additional information on the parol evidence rule may be found in Restatement 2d of Contracts § 213. Examples
The parol evidence rule is a common trap for consumers. For example:
Health club contracts. You enroll in a health club, and the salesperson tells you that the contract can be cancelled. You later decide you would like to cancel, but the written contract provides that it is non-cancellable. The oral promises of the salesperson are generally non-enforceable. However, the salesperson in misleading you into the terms of the contract constitutes a misrepresentation and you may seek to rescind the contract.
Auto sales agreements. You purchase a used car, and the salesperson tells you it is "good as new". But the contract provides that the sale is as is. Again, in most circumstances the written contract controls. However, this also constitutes misrepresentation.
Timeshares. While in certain jurisdictions, and in certain circumstances, a consumer may have a right of rescission, some people attend real estate sales presentations at which they may feel pressured into immediately signing binding contracts. Evidence that the contract was entered into under duress will not be precluded by the parol evidence rule.
Standard form contract
A standard form contract (sometimes referred to as an adhesion contract or boilerplate contract) is a contract between two parties that does not allow for negotiation, i.e. take it or leave it. It is often a contract that is entered into between unequal bargaining partners, such as when an individual customer is given a contract by the salesperson of a multinational corporation. The customer is in no position to renegotiate the standard terms of the contract and the company's representative usually does not have the authority to do so. While adhesion contracts, in and of themselves, are not illegal per se, there exists a very real possibility for unconscionability. Theoretical issues
There is much debate on a theoretical level whether, and to what extent, courts should enforce rules form contracts. On one hand, they undeniably fulfill an important role of promoting economic efficiency. Standard form contracting reduces transaction costs substantially by precluding the need for buyers and sellers of goods and services to negotiate the many details of a sale contract each time the product is sold. On the other hand, there is the potential for inefficient, and even unjust, terms to be accepted by signatories to these contracts. Such terms might be seen as unjust if they allow the seller to avoid all liability or unilaterally modify terms or terminate the contract.[1] These terms often come in the form of, but are not limited to, forum selection clauses and mandatory arbitration clauses, which can limit or foreclose a party's access to the courts; and also liquidated damages clauses, which set a limit to the amount that can be recovered or require a party to pay a specific amount. They might be inefficient if they place the risk of a negative outcome, such as defective manufacturing, on the buyer who is not in the best position to take precautions. There are a number of reasons why such terms might be accepted:[2] [3]
Standard form contracts are rarely read
Lengthy boilerplate terms are often in fine print and written in complicated legal language which often seems irrelevant. The prospect of a buyer finding any useful information from reading such terms is correspondingly low. Even if such information is discovered, the consumer is in no position to bargain as the contract is presented on a ―take it or leave it‖ basis. Coupled with the often large amount of time needed to read the terms, the expected payoff from reading the contract is low and few people would be expected to read it. Sometimes a standard form contract may literally be dispensed from a vending machine to drivers sitting in line to enter a parking garage (see photograph below), which means that stopping to read the contract risks provoking road rage.
Often the document being signed is not the full contract; the purchaser is told that the rest of the terms are in another location. This reduces the likelihood of the terms being read and in some situations, such as software license agreements, can only be read after they have been notionally accepted by purchasing the good and opening the box. These contracts are typically not enforced, since common law dictates that all terms of a contract must be disclosed before the contract is executed.
Boilerplate terms are not salient
The most important terms to purchasers of a good are generally the price and the quality, which are generally understood before the contract of adhesion is signed. Terms relating to events which have very small probabilities of occurring or which refer to particular statutes or legal rules do not seem important to the purchaser. This further lowers the chance of such terms being read and also means they are likely to be ignored even if they are read.
There may be social pressure to sign
Standard form contracts are signed at a point when the main details of the transaction have either been negotiated or explained. Social pressure to conclude the bargain at that point may come from a number of sources. The salesperson may imply that the purchaser is being unreasonable if they read or question the terms, saying that they are "just something the lawyers want us to do" or that they are wasting their time reading them. If the purchaser is at the front of a queue (for example at an airport car rental desk) there is additional pressure to sign quickly. Finally, if there has been negotiation over price or particular details, then concessions given by the salesperson may be seen as a gift which socially obliges the purchaser to respond by being co-operative and concluding the transaction.
Standard form contracts may exploit unequal power relations
If the good which is being sold using a contract of adhesion is one which is essential or very important for the purchaser to buy (such as a rental property or a needed medical item) then the purchaser might feel they have no choice but to accept the terms. This problem may be mitigated if there are many suppliers of the good who can potentially offer different terms (see below).
Some contend that in a competitive market, consumers have the ability to shop around for the supplier who offers them the most favorable terms and are consequently able to avoid injustice. However, in the case of credit cards (and other oligopolies), for example, the consumer while having the ability to shop around may still have access to only form contracts with like terms and no opportunity for negotiation. Also, as noted, many people do not read or understand the terms so there might be very little incentive for a firm to offer favorable conditions as they would gain only a small amount of business from doing so. Even if this is the case, it is argued by some that only a small percentage of buyers need to actively read standard form contracts for it to be worthwhile for firms to offer better terms if that group is able to influence a larger number of people by affecting the firm‘s reputation. Another factor which might mitigate the effects of competition on the content of contracts of adhesion is that, in practice, standard form contracts are usually drafted by lawyers instructed to construct them so as to minimize the firm‘s liability, not necessarily to implement managers' competitive decisions. Sometimes the contracts are written by an industry body and distributed to firms in that industry, increasing homogeneity of the contracts and reducing consumer's ability to shop around.
As a general rule, the common law treats standard form contracts as any other contract. Signature or some other objective manifestation of intent to be legally bound will bind the signor to the contract whether or not they read or understood the terms. The reality of standard form contracting, however, means that many common law jurisdictions have developed special rules with respect to them. In general, courts will interpret standard form contracts contra proferentem (literally 'against the proffering person') but specific treatment varies between jurisdictions.
United States Generally
Standard form contracts are generally enforceable in the United States. The Uniform Commercial Code which is followed in most American states has specific provisions relating to standard form contracts for the sale or lease of goods. Furthermore, standard form contracts will be subject to special scrutiny if they are found to be contracts of adhesion.
Contracts of adhesion
The concept of the contract of adhesion originated in French civil law, but did not enter American jurisprudence until the Harvard Law Review published an influential article by Edwin W. Patterson in 1919. It was subsequently adopted by the majority of American courts, especially after the Supreme Court of California endorsed adhesion analysis in 1962. See Steven v. Fidelity & Casualty Co., 58 Cal. 2d 862, 882 n.10 (1962) (explaining history of concept).[1]
For a contract to be treated as a contract of adhesion, it must be presented on a standard form on a "take it or leave it" basis, and give one party no ability to negotiate because of their unequal bargaining position. The special scrutiny given to contracts of adhesion can be performed in a number of ways:
If the term was outside of the reasonable expectations of the person who did not write the contract, and if the parties were contracting on an unequal basis, then it will not be enforceable. The reasonable expectation is assessed objectively, looking at the prominence of the term, the purpose of the term and the circumstances surrounding acceptance of the contract.
Section 211 of the American Law Institute's Restatement (Second) of Contracts, which has persuasive though non-binding force in courts, provides:
Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.
This is a subjective test focusing on the mind of the seller and has been adopted by only a few state courts. The doctrine of unconscionability is a fact-specific doctrine arising from equitable principles. Unconscionability in standard form contracts usually arises where there is an "absence of meaningful choice on the part of one party due to one-sided contract provisions, together with terms which are so oppressive that no reasonable person would make them and no fair and honest person would accept them." (Fanning v. Fritz's Pontiac-Cadillac-Buick Inc.)
Shrink wrap contracts
Courts in the United States have faced the issue of shrink wrap contracts in two ways. One line of cases follows ProCD v. Zeidenberg which held such contracts enforceable (eg. Brower v Gateway) and the other follows
Klocek v. Gateway, Inc, which found them unenforceable. These decisions are split on the question of consent, with the former holding that only objective manifestation of consent is required while the latter require at least the possibility of subjective consent.
Canada
In Canada, exclusion clauses in a standard form contract cannot be relied on where a seller knows or has reason to know a purchaser is mistaken as to its terms (Tilden Rent-A-Car Co. v. Clendenning).
Australia
Standard form contracts have generally received little special treatment under Australian common law. A 2003 New South Wales Court of Appeal case (Toll (FGCT) Pty Limited v Alphapharm Pty Limited) gave some support for the position that notice of exceptional terms is required for them to be incorporated. However the defendant successfully appealed to the High Court so currently there is no special treatment of standard form contracts in Australia.
Legislation
In recognition of the consumer protection issues which may arise, many governments have passed specific laws relating to standard form contracts. These are generally enacted on a state level as part of general consumer protection legislation and typically allow consumers to avoid clauses which are found to be unreasonable, though the specific provisions vary greatly. Some laws require notice to be given for these clauses to be effective, others prohibit unfair clauses altogether (eg. Victorian Fair Trading Act 1999).
Integration clause
In contract law, an integration clause, or merger clause (sometimes, particularly in the United Kingdom, referred to as an entire agreement clause) is a term in the language of the contract that declares it to be the complete and final agreement between the parties. It is often placed at or towards the end of the contract.
Effect
In the United States, the existence of such a term is normally not conclusive proof that no varied or additional conditions exist with respect to the performance of the contract beyond those that are in the writing but instead is simply evidence of that fact.
A contract that has such a clause may be deemed an integrated contract, and any previous negotiations in which the parties to the contract had considered different terms will be deemed superseded by the final writing. However, many modern cases have found merger clauses to be only a rebuttable presumption.
Sample clause
"This Agreement, along with any exhibits, appendices, addendums, schedules, and amendments hereto, encompasses the entire agreement of the parties, and supersedes all previous understandings and agreements between the parties, whether oral or written. The parties hereby acknowledge and represent, by affixing their hands and seals hereto, that said parties have not relied on any representation, assertion, guarantee, warranty,
collateral contract or other assurance, except those set out in this Agreement, made by or on behalf of any other party or any other person or entity whatsoever, prior to the execution of this Agreement. The parties hereby waive all rights and remedies, at law or in equity, arising or which may arise as the result of a party‘s reliance on such representation, assertion, guarantee, warranty, collateral contract or other assurance, provided that nothing herein contained shall be construed as a restriction or limitation of said party‘s right to remedies associated with the gross negligence, willful misconduct or fraud of any person or party taking place prior to, or contemporaneously with, the execution of this Agreement."
Contra proferentem
Contra proferentem is a rule of contractual interpretation which provides that an ambiguous term will be construed against the party that imposed its inclusion in the contract – or, more accurately, against (the interests of) the party who imposed it.[1] The interpretation will therefore favor the party that did not insist on its inclusion. The rule applies only if, and to the extent that, the clause was included at the unilateral insistence of one party without having been subject to negotiation by the counter-party. Additionally, the rule applies only if a court determines the term to be ambiguous, which often forms the substance of a contractual dispute.It translates from the Latin literally to mean "against (contra) the one bringing forth (the proferens)."
The reasoning behind this rule is to encourage the drafter of a contract to be as clear and explicit as possible and to take into account as many foreseeable situations as it can.
Additionally, the rule reflects the court's inherent dislike of standard-form take-it-or-leave-it contracts also known as contracts of adhesion (e.g., standard form insurance contracts for individual consumers, residential leases, etc.). The court perceives such contracts to be the product of bargaining between parties in unfair or uneven positions. To mitigate this perceived unfairness, legal systems apply the doctrine of contra proferentem; giving the benefit of any doubt in favour of the party upon whom the contract was foisted. Some courts when seeking a particular result will use contra proferentem to take a strict approach against insurers and other powerful contracting parties and go so far as to interpret terms of the contract in favor of the other party, even where the meaning of a term would appear clear and unambiguous on its face, although this application is disfavored. Contra proferentem also places the cost of losses on the party who was in the best position to avoid the harm. This is generally the person who drafted the contract. An example of this is the insurance contract mentioned above, which is a good example of an adhesion contract. There, the insurance company is the party completely in control of the terms of the contract and is generally in a better position to, for example, avoid contractual forfeiture. This is a longstanding principle: see, for example, California Civil Code §1654 (―In cases of uncertainty ... the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist"), which was enacted in 1872. Numerous other states have codified the rule as well.
The principle has also been codified in international instruments such as the UNIDROIT Principles and the Principles of European Contract Law.
4. Excuses for non-performance
Mistake · Misrepresentation
Frustration of purpose · Impossibility
Impracticability · Illegality
Unclean hands · Unconscionability Mistake (contract law)
In contract law a 'mistake' is an erroneous belief, 'at contracting', that certain facts are true. Mistake can be argued as a defence, and if raised successfully can lead to the agreement in question being found void ab initio or voidable, or alternatively an equitable remedy may be provided by the courts. Common law has identified three different types of mistake in contract: the 'unilateral mistake', the 'mutual mistake' and the 'common mistake'. It is important to note the distinction between the 'common mistake' and the 'mutual mistake'.
Unilateral mistakes
A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter contained in a contract. This kind of mistake is more common than other types of mistake. One must first distinguish between mechanical calculations and business error when looking at unilateral mistake. For mechanical calculations, a party may be able to set aside the contract on these grounds provided that the other party does not try to take advantage of the mistake, or 'snatch up' the offer (involving a bargain that one did not intend to make, betrayed by an error in arithmetic etc.). This will be seen by an objective standard, or if a reasonable person would be able to know that the mistake would not make sense to one of the parties. Unless one of the parties 'snatched up' the one-sided offer, courts will otherwise uphold the contract.
Conversely, when a party is guilty of an error in business judgment, there is no relief.
Leading British cases on unilateral mistake are Smith v Hughes[Case 1] and Hartog v Colin & Shields.[Case 2] There are situations, such as in the contracting and subcontracting contexts, where a subcontractor provides a bid that would not seem reasonable in the context of industry norms. Similar to Donovan v. RRL Corp.,[Case 3] if a person sees an advertisement and there is a mistake that a person reading the newspaper would believe to be a valid offer and there is sufficient reliance on the offer, then it is unlikely that a court will rescind the contract. In the case of Donovan, the error in the newspaper was not the fault of the car dealer. The mistake was made on the part of the newspaper company that printed the error. This would be more of an example of a mutual mistake. Both the buyer (Donovan) and seller (RRL Corp.) mistakenly believed that the advertisement was correct. As is discussed in the mutual mistake section on this page, most likely a court will excuse each of a duty to perform the contract. Mutual mistake theory will also discuss the factors that will determine the allocation of risk in the event of a mutual mistake. The test to determine the allocation of risk is as follows: A defendant should bear the risk of the mistake if: (i) the agreement allocated the risk to the defendant; (ii) the defendant was aware of having limited knowledge with respect to the facts to which the mistake related but treats his limited knowledge as sufficient; or (iii) the court finds that it is reasonable under the circumstances to allocate the risk to the defendant. Given the facts in Donovan, who is in the better position to bear the risk? The car dealer who provides the advertisement? Or the consumer? Many jurisdictions would claim that the car dealer has more knowledge in this regard than a consumer. A consumer, generally, will not be aware of errors in an advertisement nearly as often as a commercial seller of goods who is in the business of advertising their own products to the public at large. As any area of law, any doctrine has its exceptions. In Speckel v. Perkins,[Case 4] there was a unilateral mistake by one of the parties. However, the mistake should have been apparent to a reasonable person in the position of the party who did not make the mistake. The court determined that the offer of US$50000 was, on its face, clearly a mistake. The correct amount, as both parties were aware, was for US$15000. The question raises, at what point will the unilateral mistake become so apparent that it leaves unilateral mistake theory and enters into mutual mistake doctrine?
Mistake of identity
It is also possible for a contract to be void if there was a mistake in the identity of the contracting party. In the leading English case of Lewis v Avery[Case 5] Lord Denning held that the contract can be avoided only if the
plaintiff can show, that at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.
Shogun Finance Ltd v Hudson[Case 6] is now the leading UK case on mistake as to identity [2003] UKHL 62. In this case, the House of Lords stated there was a strong presumption the owner intends to contract with the person physically present before him and only in extreme cases would the presumption be rebutted.
Mutual mistake
A mutual mistake occurs when the parties to a contract are both mistaken about the same material fact within their contract. They are at cross-purposes. There is a meeting of the minds, but the parties are mistaken. Hence the contract is voidable. Collateral mistakes will not afford the right of rescission. A collateral mistake is one that 'does not go to the heart' of the contract. For a mutual mistake to be void, then the item the parties are mistaken about must be material (emphasis added). When there is a material mistake about a material aspect of the contract, the essential purpose of the contract, there is the question of the assumption of the risk. Who has the risk contractually? Who bears the risk by custom? Restatement (Second) Contracts Sec. 154 deals with this scenario.
This is easily confused with mutual assent cases such as Raffles v Wichelhaus.[Case 7]
In Raffles, there was an agreement to ship goods on a vessel named Peerless, but each party was referring to a different vessel. Therefore, each party had a different understanding that they did not communicate about when the goods would be shipped.
In this case, both parties believed there was a "meeting of the minds," but discovered that they were each mistaken about the other party's different meaning. This represents not a mutual mistake but a failure of mutual assent. In this situation, no contract has been formed, since mutual assent is required in the formation stage of contract.
Common mistake
A common mistake is where both parties hold the same mistaken belief of the facts.
The House of Lords case of Bell v Lever Brothers Ltd.[Case 8] established that common mistake can void a contract only if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.
Later in Solle v Butcher,[Case 9] Lord Denning added requirements for common mistake in equity, which loosened the requirements to show common mistake. However, since that time, the case has been heavily criticized in cases such as Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd.[Case 10]
Those categories of mistake in the United States exist as well, but it is often necessary to identify whether the error was a "decisional mistake," which is a mistake as a matter of law (faced with two known choices, making the wrong one), or an "ignorant mistake," unaware of the true state of affairs.
The difference is in the extent to which an innocent in the information chain, passing along or using or processing incorrect information, becomes liable. There is a principal that an entity or person cannot be made more liable merely by being in the information chain and passing along information taken in good faith in the belief that it was true, or at least without knowledge of the likelihood of falsity or inaccuracy.
