What Is Contract Reformation?

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 What Is A Contract?

In order to fully understand contract reformation, one must understand all of the elements necessary to form a valid contract. In short, a contract is an agreement between two or more parties that outlines their promise to sell/purchase goods or perform services. Although some contracts can be oral, it is generally recommended that all terms of any contract be documented in writing.

Putting contracts in writing decreases the potential for future disputes regarding what each party agreed to do. Further, if a contract is in writing and a dispute arises in which one party alleges that the other has failed to fulfill their obligation under the contract, the other party may sue for a breach of the written contract.

In order for a contract to be valid, it must contain all of the legal requirements for a valid contract. Although different states may have different rules regarding what makes a contract valid in that state, typically a legal contract should contain all of the following elements:

  • Offer and Acceptance: In order to be valid, one party to the contract needs to make an offer to the other party, and the other party needs to accept that offer. Further, both the offer and acceptance must be done in such a way that is clear;
  • Assent: Next, both parties must mutually assent to the terms of the contract. Once again the contract and parties should be clear as to the terms, words, and definitions that are used in the contract; and
  • Consideration: Finally, both parties must exchange something of value. For example, if one party is providing services, the other party would exchange monetary payment for those services.

As mentioned above, some contracts must be in writing in order for them to be considered legal. Examples of contracts that must be in writing include, but are not limited to, contracts for the sale of real property and contracts for the sale of goods that are worth over a certain amount (generally $500). The legal term for the rule that contracts must be in writing is often referred to as the “statute of frauds.”

What Is A Mistake Of Fact In Contract Law?

In contract law, a mistake of fact occurs when one or both parties involved in making a contract are mistaken about a term that is essential to the central meaning of the contract. For example, if the contract was for the purchase of “cars,” but one party believed it to be collectible toy cars, while the other party believed it to be actual driveable full size cars, that would be a clear mistake of fact. Once again, it is important for a contract to be clear regarding the terms of the contract.

A mistake of fact can often result in the contract being voided altogether. It is important to note that a mistake of fact is different from a mistake of law. A mistake of law occurs when one party is confused regarding the fulfillment of a contract law, whereas a mistake of fact is regarding the terms or definitions contained in the contract.

There are generally two different categories of mistakes of facts: mutual mistakes, and unilateral mistakes. Mutual mistakes occur when all parties involved in the contract are mistaken about the same term, whereas a unilateral mistake occurs when only one party to the contract is mistaken about an essential contract term. Depending on the specific facts and circumstances, these different types of mistakes can result in different consequences regarding the performance of the contract.

For mutual mistakes, the party that is seeking to avoid their duties and obligation under the contract will often raise the legal defense of mutual mistake. The legal defense of mutual mistake states that if both parties to the contract relied on a mistaken assumption when entering the contract, the contract may be voided. The legal defense exists to protect the parties to the contract, as they both are unable to perform the contract as they both originally intended.

Continuing the above example of selling “cars,” the seller of the collectible toy cars will likely be unable to fulfill a purchase order for driveable vehicles, and the purchaser of the”cars” will be unable to utilize the cars for the purpose they believed would occur.

Other ways that a contract may be voided is if both parties had a mistaken assumption at the time of the contract. A mistaken assumption is a fact that both parties believed to be true at the time that the contract was executed. Due to the mistaken assumption, the facts regarding the execution of the contract are no longer true. As a result, one or both parties may not be able to perform the contract as they originally intended.

For example, if there was a contract for digging a hole in the back of someone’s yard for a swimming pool, but it was discovered later that slightly below the ground was solid rock that made it impossible to dig in that location, then the contract may be voided due to the mistaken assumption.

Unilateral mistakes are mistaken beliefs that are held by only one of the parties, and are not shared by the other party to the contract. In short, unilateral mistakes occur when only one of the parties misinterprets an essential term that is contained in the contract. Generally speaking, unilateral mistakes are much more common than other kinds of contract mistakes, because only one party has to be mistaken as to an essential term of the contract.

The thought behind voiding a contract due to a unilateral mistake is because only one party holds a mistaken belief, the other party has an unfair advantage in the bargaining power that they hold during the contract formation stage. The most common unilateral mistakes involve a party wrongly assuming the definition of a phrase or word that is essential in the parties’ contract.

Continuing the above example of the sale of “cars,” one party may incorrectly believe that the word “cars” refers to collectible toy cars, when in fact the term refers to actually drivable vehicles. If only one party holds this mistaken belief, but the other party is clear on the meaning of “cars,” it could result in a dispute of the terms of the contract.

What Is Contract Reformation?

Contract reformation is a legal remedy that allows the parties to rewrite the terms of a previously executed contract according to the intention of their original understanding. Contract reformation often arises as a legal remedy in cases involving mistake of fact or misrepresentation. In such contract dispute cases, the judge may choose to issue contract reformation as a remedy.

It is important to note that in order for contract reformation to be available as a legal remedy, the contract must have been valid to begin with. Therefore, contract reformation is not available in cases involving contracts with illegal terms.

How Can I Avoid Mistakes in a Contract?

As mentioned above, contract reformation usually only becomes necessary if there is a mistake as to the meaning of an essential term of the contract, or if there is a mistake within the contract that fails to allow one or both parties to fulfill their obligations under the contract. For example, if a contract was executed in 2022 for the sale of goods, but the delivery date in the contract is for a date or time in 2021, then contract reformation may be a good legal remedy to fix the issues of the contract.

As can be seen, it is important that each party to the contract read the terms of the contract carefully, as well as ensure that they are all on the same page regarding the interpretation of all terms and definitions contained in the contract. The assistance of an attorney in the contract drafting process can be a great help in preventing mistakes of facts and future legal disputes involving the interpretation or performance of a contract.

Is Contract Reformation the Same as Contract Rescission?

In short, no. Although contract rescission is another type of legal remedy for mistakes of facts, contract rescission cancels out the entire contract. This is different from contract reformation, as contract reformation keeps the original contract, but allows the parties to change a specific portion of the contract.

Contract rescission outright cancels the whole contract, and the parties can either walk away from the contract, or choose to redraft the contract altogether. Contract rescission is often reserved for contract disputes involving the contract being valid, such as lack of capacity to form the contract, fraud, etc.

Do I Need A Lawyer For Help With Contract Reformation?

As can be seen, there are numerous ways in which mistakes may occur in the formation of a contract. Thus, if you are facing any legal issues involving mistakes of fact in a contract, it is in your best interests to consult with an experienced contract lawyer.

An experienced contract attorney can determine whether or not contract reformation is the most appropriate legal remedy for your contract dispute, as well as what your legal rights and options are according to your state’s specific contract laws.

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