We all make mistakes. Often, there are no ramifications and the error in judgment can be resolved with an excuse or apology. In contract law, mistakes have a deeper meaning, and the results can be harsh. The law characterizes mistakes and places them into categories.
There are unilateral (one-sided) mistakes and mutual ones. There are bid mistakes, mistaken predictions (scheduling) and typographical errors in a contract’s terms and conditions. There are mistakes that are induced by deception, concealment or fraud. For every type, there are different legal remedies or no remedies at all.
Bid mistakes (unilateral)
“The most frequent fact pattern in which relief for unilateral mistake is sought involves a mistaken bid by a construction contractor,” according to Calamari and Perillo, “Contracts” (3rd ed.).
Hundreds of cases are the result of bid mistakes, but there are few rules to follow, which makes it difficult. With the federal government, a contractor may be allowed to reform a bid error, or withdraw the bid, and there are regulations giving some guidance on the procedures. With state or private contracts, the issues are murkier.
Case in point is Board of School Commissioners of the City of Indianapolis v. Bender, 72 N.E. 154 (1904). An ancient decision, but still good law.
In Bender, an advertisement for competitive bids was issued by the school board. Bids had to be supported by a bid bond. Bender put together its bid for the school addition, together with alternates and submitted it with a bond. Afterward, Bender claimed that the estimate was made in haste and that “there was not sufficient opportunity for verification of his [suppliers’] bids ... ” Actually, Bender had not added up all of his bid calculations.
In any event, the bids were opened, Bender was the lowest and his bid was accepted by the owner. The next day, before work began, Bender notified the owner “that because of said mistake and error he would not and could not accept or enter into a contract ... ” The owner sued, but lost.
The Indiana Court of Appeals laid out criteria for the cancellation of a contract based on unilateral mistake.
1a. The mistake is so fundamental that there was no “meeting of the minds” or
1b. An unconscionable advantage has been gained and
2.There was no gross negligence and
3.The parties can be placed back in their previous positions. (That is, 1a plus 2 plus 3 or 1b plus 2 plus 3.)
While the above is still good law, it should not be relied upon unless there is no alternative. A common expression is “a mistake of law is no excuse” or the variation, “ignorance of the law is no excuse.” The ignorance part still applies, but the mistake part seems to have evaporated.
There is a treatise known as the Restatement of Contracts. It is not “the law.” It is a series of rules and conclusions drafted by legal scholars and has proven to be influential in state and federal courts. The restatement rejects the precept that a mistake of law is not a defense.
Typically, the issue arises when a person or company pays money under a misunderstanding of law that the debt was due.
Mistakes in contract drafting
It is almost impossible to draft a perfect contract. There are spelling errors, conflicts between drawings and specifications, ambiguities and impenetrable language. Often, the contract’s terms and conditions attempt to address these problems. For example, “anything shown in the plans or specifications shall be considered as part of both.”
Again, the law divides these drafting errors into categories. One group is latent and patent mistakes. Latent is hidden or difficult to catch: for example, one drawing in a hundred made to a different scale. Patent is obvious or apparent, such as the specification for a motor which has not been manufactured for years. Patent mistakes are the contractor’s responsibility; latent mistakes will lead to a reinterpretation of the contract (the term for this is “reformation”).
Which is which is hard to predict, and the cases are all fact-based. In one case, the drawings contained a riser diagram depicting the location and operational characteristics of intercoms. However, there was no intercom specification. The specification writer made the mistake of omission, but the contractor did not catch the mistake. The error was found to be latent and the purchase and installation of the intercom was an extra.
There is also misrepresentation or fraud. For example, the owner might know of subsurface water conditions, but keeps this information from the excavator. Or the owner is aware of major drawing errors, but holds back these issues until future change orders are submitted, which is intentional non-disclosure.
Two remedies are available: (1) reform the contract—make it what it should have been; or (2) rescind the contract—set the contract aside and pay the contractor damages. Misrepresentation and fraud are not easy to prove.
Not all mistakes in the law lead to a predictable outcome. When your company confronts these issues, contact an experienced contracts attorney.