In order to get any work done, construction contracts must be enforceable. Businesses must be held accountable and required to uphold their end of the bargain. At the same time, when a serious mistake is made in the contract, there must be some flexibility to correct it. For this reason, courts have the power to void or alter contracts through the use of the doctrine of mistake.
“Experience is simply the name we give our mistakes.” – Oscar Wilde
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Contractual mistake doctrine
Mistakes happen all the time, but when a mistake finds its way into a contract, it can have some serious and costly implications. We’re not talking about one side being careless or a simple miscalculation. Rather, the mistakes we’re talking about are pretty foundational to the contract – and they can include mistakes regarding price, facts, or values. Courts have divided contractual mistakes into two classes depending on whether one or both parties are mistaken: mutual mistakes, and unilateral mistakes.
What is a mutual mistake?
A mutual mistake is a defense that can be used by either party to argue that the contract is invalid. To successfully allege mutual mistake, the mistake must occur at the time of contracting. It’s roughly defined as “when a mistake of both parties at the time the contract was made, as to a basic assumption on which the agreement was made has a material effect on performance.” Unless of course, the adversely affected party has agreed to bear the risk of mistake.
There’s rarely a straightforward application of the doctrine of mutual mistake in the construction industry. Courts and the Board of Contract Appeals do have the authority to reform contracts based on mutual mistake, yet they are hesitant to apply it in the context of construction contracts given the other avenues of recovery that are available.
This doctrine is, however, the underlying rationale for some differing site conditions claims. But, when a differing site conditions claim isn’t available, the mutual mistake doctrine might provide relief when there’s a mutual mistake as to the condition of the property that’s being improved. Still, in these situations, a better course of recovery might be through a force majeure or impossibility of performance claim.
Mutual mistake elements
First, the mistake must go against a basic assumption of the contract. Meaning, that the mistaken fact is the primary reason that the parties entered into the agreement in the first place.
Next, the mistake should also have a material effect on contract performance. Further, it should significantly alter the obligations under the contract terms, to the point where it’s almost an entirely different agreement.
Lastly, the affected party must not have born the risk of mistake. This can happen if a party knew there was a strong probability of mistake at the time the contract was signed but still executed the agreement despite the risk or limited field of knowledge concerning the mistaken fact.
What is a unilateral mistake?
Unilateral mistakes are more common. These occur when one party is mistaken about a material fact about an assumption in the contract that which performance. Unilateral mistakes usually arise when bidding on government construction projects.
Contractors may make a unilateral mistake when they submit their bid on a project. Sometimes, these mistakes are so egregious that the customer should have stepped in to point it out to the contractor. If the customer fails to step in, a contractor could be entitled to reform the contract – even after the contract has already been awarded.
Unilateral mistake elements
The elements to prove a unilateral mistake are the same as mutual mistake, but with one significant difference. There’s an additional requirement. With a unilateral mistake, if the other (non-mistaken) party knew or should have known of the mistaken fact, then the contract may be tossed out altogether. This helps avoid situations where one party gets taken advantage of due to an imbalance of power.
Remedies for mistakes made when contracting
Sometimes the mistake only requires a minor modification to “rebalance” the power under a construction contract. This remedy is known as reformation. When a reformation is appropriate, contract terms will be modified to reflect the parties’ original understanding.
In other, more severe circumstances, the court may determine that the contract should be completely canceled. This is called a “rescission” of the contract, and all parties are restored to their previous position, as if the agreement was never made. For unilateral mistakes, this is only available if the non-mistaken party knew or should have known about the mistake.
A Better option
Talk it out!
Instead of overreacting or even trying to take advantage of what’s obviously mistake, it’s always a good idea to just pick up the phone first. Often, merely talking to the other party and discussing the possibilities is the quickest, simplest, (and most importantly) cheapest option. Mistakes happen.
Establishing open channels of communication is an effective way to build trust and resolve any mistakes or issues before they become full-blown disputes. Plus, most people are reasonable! Beyond that, though, cooperation like this is essential to attaining the level of transparency required to reach a Construction Payment Utopia.