Mistake in Contract Law - Melvin A. Eisenberg - 2003.pdf

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California Law Review
Volume 91 | Issue 6
Article 3
12-31-2003
Mistake in Contract Law
Melvin A. Eisenberg
meisenberg@law.berkeley.edu
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http://scholarship.law.berkeley.edu/californialawreview
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Law Commons
Recommended Citation
Melvin A. Eisenberg,
Mistake in Contract Law,
91 Cal. L. Rev. 1573 (2003).
Available at: http://scholarship.law.berkeley.edu/californialawreview/vol91/iss6/3
Link to publisher version (DOI)
http://dx.doi.org/https://doi.org/10.15779/Z385M62
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Mistake in Contract Law
Melvin
A.
Eisenbergt
TABLE OF CONTENTS
Introduction
............................................................................................
1576
I. A Functional Analysis of M istake
...................................................
1578
A. Efficiency
..................................................................................
1578
B. Morality
....................................................................................
1579
C. Experience
.............................................
1580
II. Evaluative M istakes
........................................................................
1581
III. Mechanical Errors
...........................................................................
1584
A. Mistaken Payments
...................................................................
1587
1. The Paradigm Case
.............................................................
1588
2. Lack of Actual Knowledge by the Payee
...........................
1593
3. Reliance
..............................................................................
1593
4. Administrability
.................................................................
1596
B. Computational Errors
................................................................
1596
1. The Nonmistaken Party Knew of the Error
........................
1596
2. The Nonmistaken Party Had Reason to Know of
the E rror
.............................................................................
1598
3. The Nonmistaken Party Neither Knew Nor Had
Reason to Know of the Error
..............................................
1599
C. Other Recurring Cases and the Present Legal Framework
.......
1601
1. The Nonmistaken Party Knew Or Had Reason to
Know of the Error
..............................................................
1602
2. The Nonmistaken Party Neither Knew Nor Had
Reason to Know of the Error
..............................................
1605
IV. Mistranscriptions
.............................................................................
1610
V. Interpretive Mistakes
.......................................................................
1611
VI. Shared M istaken Factual Assumptions
...........................................
1620
A. The General Principle
...............................................................
1620
Copyright © 2003 California Law Review, Inc. California Law Review, Inc. (CLR) is a California
nonprofit corporation. CLR and the authors are solely responsible for the content of their publications.
t
Koret Professor of Law, School of Law, University of California, Berkeley (Boalt Hall).
I
thank Adam Badawi, Meir Dan-Cohen, Jesse Fried, Jim Gordley, Zohar Goshen, Kent Greenawalt,
Harris Hartz, Brett McDonnell, Ariel Porat, and Dan Rubinfeld for their extremely helpful comments,
and Angela Howe and Howard Tony Loo for their valuable research assistance.
1573
1574
CALIFORNIA LA WRE VIEW
[Vol. 91:1573
B. Four Limitations on the General Principle
................................
1629
1. The Adversely Affected Party Is Consciously Aware
of the Risk that the Assumption Is Mistaken or
Recklessly Disregards Facts that Put Him on Notice
of that Risk
.........................................................................
1630
2. The Risk that the Assumption Is Mistaken Is
Contractually Allocated to the Adversely Affected
Party
...............................................
16 32
3. One Contracting Party Is in a Position to Have
Clearly Superior Information About the Risk that the
A ssum ption Is M istaken
.....................................................
1636
4. W indfalls
............................................................................
1637
V II. C onclusion
......................................................................................
164 1
2003]
MISTAKE IN CONTRACT LA W
1575
Mistake in Contract Law
Melvin
A.
Eisenberg
The problems raisedby mistake have been a source ofpersistent diffi-
culty in contract law. In part this difficulty resultsfrom the complex nature
of the underlying issues: Intuitively, there seems to be a serious tension
between the concept that mistake may be a groundfor relief in contractual
transactionsand such basic ideas of contract law as risk-shifting, the secu-
rity of transactions,and rewards to knowledge, skill, and diligence. Much
of the difficulty, however, results from the use of legal categories and doc-
trinal rules that are not sufficiently based on a functional analysis. Tradi-
tionally, contract law has recognizedfour categories of mistake, each with
its own body of rules: mutual mistake, unilateralmistake, mistranscription,
and misunderstanding.Many of the rules that govern these categories turn
on elements that are either of limitedfunctional significance or are easy to
verbally manipulate. Even the names of the categoriesgenerallyfail to de-
scribe mistakes accordingto theirfunctional characteristics.
The purpose of this Article is to develop the legal rules that should
govern mistake in contract law on a functional basis. These rules are in-
tended to be normative rather than descriptive, but by and large they are
consistent with the results in existing cases and often explain the cases bet-
ter than existing doctrine does. I begin by developing the considerationsof
efficiency, social morality, and experience that bear most heavily informu-
lating the rules that should govern mistake in contract law. Next, these
considerations are brought to bear on various kinds of mistake that are
described on the basis of their character.Five types of mistake are consid-
ered. evaluative mistakes, mechanical errors, mistranscriptions,interpre-
tive mistakes, and shared mistaken factual assumptions. Evaluative
mistakes arise when an actor who was capable and well-informed at the
time he made a contract comes to believe that his choice to make the con-
tract was mistaken due to a change in either his preferences, his subjective
valuation of the performances due under the contract, or the objective or
market value of those performances. Mechanical errors are physical or
intellectual blunders that resultfrom transient errors in the mechanics of
an actor's physical or mental machinery. Mistranscriptions are a special
kind of mechanical error,in which the drafter of a written instrument that
is intended to transcribean oral contract mistakenly fails to transcribe the
1576
CALIFORNIA LA W REVIEW
[Vol.
91:1573
oral contract accurately. Interpretive mistakes are mistakes by one or both
contractingparties about the most reasonable meaning of an expression
the parties have employed, the meaning that the other party attaches to an
expression, or both. A mistaken factual assumption is a mistake about the
world that lies outside the mind of the party who holds the assumption.
Such an assumption is sharedif it is held by both parties,and unsharedif it
is held by only one party. In this Article, I considersharedmistaken factual
assumptions. In a companion article, Disclosure in Contract Law, I con-
sider unsharedmistakenfactual assumptions.
INTRODUCTION
Suppose that A and B enter into a contract that is either based on or
reflects some kind of mistake made by A, or by A and B jointly. After the
mistake is discovered, A claims that because of the mistake the contract
should either be unenforceable, if it has not been performed, or reversible,
if it has been.
The problems raised by claims of this kind have been a source of per-
sistent difficulty in contract law. In part this difficulty results from the
complex nature of the underlying issues: intuitively, there seems to be a
serious tension between the concept that a mistake may be a ground for
relief in contractual transactions and such basic ideas of contract law as
risk-shifting, the security of transactions, and rewards for knowledge, skill,
and diligence. Much of the difficulty, however, results from the use of le-
gal categories and doctrinal rules that are not sufficiently based on a func-
tional analysis. In this Article, I develop the legal rules that should govern
mistake in contract law. These rules are intended to be normative rather
than descriptive, but by and large they are consistent with the results in
existing cases and often explain the cases better than existing doctrine
does.
Traditionally, contract law has recognized four categories of mistake,
each with its own body of rules: mutual mistake, unilateral mistake, mis-
transcription, and misunderstanding. Many of the rules that govern these
categories turn on elements that are either of limited functional significance
or are easy to verbally manipulate. Even the names of the categories gener-
ally fail to describe mistakes according to their functional characteristics.
What is needed, therefore, is a functional analysis of the issues raised
by mistake. Such an analysis involves two steps.
The first step is to describe the types of mistake that are relevant in
contract law on the basis of their character. In this Article I consider five
different types of mistake: evaluative mistakes, mechanical errors, mis-
transcriptions, mistakes in interpretation, and shared mistaken factual as-
sumptions.

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