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1

Parties shared erroneous FACTUAL belief at time of contracting

2

AND erroneous fact was a basic assumption of the K (i.e., K wouldn’t have been made if truth had been known)

3

AND party adversely affected by the mistake didn’t bear the RISK of the mistake

C

Who bears risk of mistake?

1

Party bears risk of mistake where ELTS:  (Rest § 154)

a

Risk is allocated to him by agr’t (“as is,” “I’ll sell as good title as I have”)

b

OR he is aware, at time K made, that he has only ltd knowledge w/ respect to relevant facts (“conscious ignorance”)

c

OR risk is r’bly allocated to him by ct

2

For sale of goods, may be based on language of sale (“For sale: President Clinton’s whitewater raft;” if it turns out not to be Clinton’s raft, seller’s lang interpreted as express warranty — risk on seller)

3

Other ways to find out where risk is allocated:

a

Price

b

Reason for transaction in light of what parties know about each others’ motives.  (Walker)

D

Misunderstanding as to JUDGMENT / PREDICTION does not void K

1

Ex: neither party knows whether rough stone is valuable, but other party sells it to you for $1.  Turns out to be a valuable diamond

E

Contract where both parties think goods are genuine, but they turn out to be counterfeit, fall into this category

1

Where parties are UNCERTAIN as to true value of item, this falls into the judgment / prediction category below: no rescission (unless bad faith, maybe)

F

Bad faith or unfair dealing by either party can render K voidable

1

If party knows/reason other party is mistaken about some fact, this could be fraud

2

Ex: buying airplane engines from party who thinks they’re scrap metal, while you know they’re very valuable.  (West Coast Airlines)

G

What if mutual shared assumption is IMPLICIT?

1

Will still be grounds for relief

2

Rationale: ask whether relief would be granted were implicit assumption EXPLICIT?  If so, then grant relief — implicit assumption is just as much a part of agr’t as explicit assumption

III

Unilateral mistake

A

This refers to a MECHANICAL error

B

See risk allocation stuff for mutual mistake

C

Exam approach:  (Elsinore) (see Rest § 153)

1

Other party knows/reason of error: rescission allowed w/ NO LIABILITY (PALPABLE v. IMPALPABLE ERROR)

2

Other party doesn’t know.  Then questions:

a

Has innocent party relied?

i

If not, then rescission probably allowed

ii

If so, then innocent party gets rel dams

3

Have to take into account opp cost when calculating rel dams, esp in bidding situation

4

Ex: innocent party accepts bid; mistaken party then rescinds.  In the meantime, innocent party has lost other parties’ bids

5

Suppose A bids $500k, B bids $600k.  Z accepts A’s bid.  A then rescinds b/c of mistake.  Now B’s bid has risen to $650k.  Rel dams = $650k - $600k = $50k.  Exp dams = $650k - $500k = $150k

a

BUT can innocent party recover expectation?

b

Old rule was that innocent party could get exp dams.  Emerging rule is that innocent party can’t get exp dams

D

HOWEVER, REFORMATION instead of rescission may be allowed for unilateral mistake where “eggs have already been scrambled.”  (Chernick — Post Office case)

IV

Mistake in transcription

29

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