Restat 2d of Contracts, § 154

• Restatement of the Law, Second, Contracts
• Chapter 6- Mistake
• § 154 When a Party Bears the Risk of a Mistake

A party bears the risk of a mistake when

(a)  the risk is allocated to him by agreement of the parties, or

(b)  he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

(c)  the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Comment:

a.  Rationale.  Absent provision to the contrary, a contracting party takes the risk of most supervening changes in circumstances, even though they upset basic assumptions and unexpectedly affect the agreed exchange of performances, unless there is such extreme hardship as will justify relief on the ground of impracticability of performance or frustration of purpose. A party also bears the risk of many mistakes as to existing circumstances even though they upset basic assumptions and unexpectedly affect the agreed exchange of performances. For example, it is commonly understood that the seller of farm land generally cannot avoid the contract of sale upon later discovery by both parties that the land contains valuable mineral deposits, even though the price was negotiated on the basic assumption that the land was suitable only for farming and the effect on the agreed exchange of performances is material. In such a case a court will ordinarily allocate the risk of the mistake to the seller, so that he is under a duty to perform regardless of the mistake. The rule stated in this Section determines whether a party bears the risk of a mistake for the purposes of both §§ 152 and 153. Stating these rules in terms of the allocation of risk avoids such artificial and specious distinctions as are sometimes drawn between "intrinsic" and "extrinsic" mistakes or between mistakes that go to the "identity" or "existence" of thesubject matter and those that go merely to its "attributes," "quality" or "value." Even though a mistaken party does not bear the risk of a mistake, he may be barred from avoidance if the mistake was the result of his failure to act in good faith and in accordance with reasonable standards of fair dealing. See § 157.

b.  Allocation by agreement.  The most obvious case of allocation of the risk of a mistake is one in which the parties themselves provide for it by their agreement. Just as a party may agree to perform in spite of impracticability or frustration that would otherwise justify his non-performance, he may also agree, by appropriate language or other manifestations, to perform in spite of mistake that would otherwise justify his avoidance. An insurer, for example, may expressly undertake the risk of loss of property covered as of a date already past. Whether the agreement places the risk on the mistaken party is a question to be answered under the rules generally applicable to the scope of contractual obligations, including those on interpretation, usage and unconscionability. See Chapter 9.

Illustration:

1. A contracts to sell and B to buy a tract of land. A and B both believe that A has good title, but neither has made a title search. The contract provides that A will convey only such title as he has, and A makes no representation with respect to title. In fact, A's title is defective. The contract is not voidable by B, because the risk of the mistake is allocated to B by agreement of the parties.

c.  Conscious ignorance.  Even though the mistaken party did not agree to bear the risk, he may have been aware when he made the contract that his knowledge with respect to the facts to which the mistake relates was limited. If he was not only so aware that his knowledge was limited but undertook to perform in the face of that awareness, he bears the risk of the mistake. It is sometimes said in such a situation that, in a sense, there was not mistake but "conscious ignorance."

Illustration:

2. The facts being otherwise as stated in Illustration 2 to § 152, A proposes to B during the negotiations the inclusion of a provision under which the adversely affected party can cancel the contract in the event of a material error in the surveyor's report, but B refuses to agree to such a provision. The contract is not voidable by A, because A bears the risk of the mistake.

d.  Risk allocated by the court.  In some instances it is reasonably clear that a party should bear the risk of a mistake for reasons other than those stated in Subparagraphs (a) and (b). In such instances, under the rule stated in Subparagraph (c), the court will allocate the risk to that party on the ground that it is reasonable to do so. A court will generally do this, for example, where the seller of farm land seeks to avoid the contract of sale on the ground that valuable mineral rights have newly been found. See Comment a.  In dealing with such issues, the court will consider the purposes of the parties and will have recourse to its own general knowledge of human behavior in bargain transactions, as it will in the analogous situation in which it is asked to supply a term under the rule stated in § 204. The rule stated in Subsection (c) is subject to contrary agreement and to usage (§ 221).

Illustrations:

3. The facts being otherwise as stated in Illustration 6 to § 152, C is not dead but is afflicted with an incurable fatal disease and cannot live more than a year. The contract is not voidable by A, because the court will allocate to A the risk of the mistake.

4. A, an owner of land, and B, a builder, make a contract under which B is to take from A's land, at a stated rate per cubic yard, all the gravel and earth necessary for the construction of a bridge, an amount estimated to be 114,000 cubic yards. A and B believe that all of the gravel and earth is above water level and can be removed by ordinary means, but in fact about one quarter of it is below water level, so that removal will require special equipment at an additional cost of about twenty percent. The contract is not voidable by B, because the court will allocate to B the risk of the mistake. Compare Illustration 5 to § 266.

5. A contracts with B to build a house on B's land. A and B believe that subsoil conditions are normal, but in fact some of the land must be drained at an expense that will leave A no profit under the contract. The contract is not voidable by A, because the court will allocate to A the risk of the mistake. Compare Illustration 8 to § 266.

6. The facts being otherwise as stated in Illustration 1 to § 153, the $ 50,000 error in A's bid is the result of A's mistaken estimate as to the amount of labor required to do the work. A cannot avoid the contract, because the court will allocate to A the risk of the mistake.

This Section is new. See 3 Corbin, Contracts §§ 598, 600, 605 (1960 & Supp. 1980); 13 Williston, Contracts §§ 1543A, 1559, 1560, 1566A, 1568, 1568A (3d ed. 1970); Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J. Leg. Stud. 1 (1978), reprinted in Kronman & Posner, The Economics of Contract Law 114 (1979); Rabin, A Proposed Black-Letter Rule Concerning Mistaken Assumptions in Bargain Transactions, 45 Tex. L. Rev. 1273 (1967); Patterson, The Apportionment of Business Risks Through Legal Devices, 24 Colum. L. Rev. 335, 355-57 (1924).

Comment b.  Illustration 1 is based on Illustration 7 to former § 502 and Talman v. Dixon, 253 N.C. 193, 116 S.E.2d 338 (1960); see Beecher v. Able, 575 F.2d 1010 (2d Cir. 1978); Flippin Materials Co. v. United States, 312 F.2d 408 (Ct. Cl. 1963); United States v. Hathaway, 242 F.2d 897 (9th Cir. 1957); cf. Raddue v. LeSage, 138 Cal. App.2d 852, 292 P.2d 522 (1956).

Comment c.  The facts in Illustration 2 are suggested by those in Illustration 2 to § 152, and the result is supported by Friedman v. Grevnin, 360 Mich. 193, 103 N.W.2d 336 (1960); Highway Prods. v. United States, 208 Ct. Cl. 926, 530 F.2d 911 (1976); cf. Wright and Pierce v. Wilmington, 290 F.2d 30 (1st Cir. 1961).

Comment d.  Illustration 3 is based on Aldrich v. Travelers Ins. Co., 317 Mass. 86, 56 N.E.2d 888 (1944); Woodworth v. Prudential Ins. Co., 258 A.D. 103, 15 N.Y.S.2d 541 (1939), aff'd mem., 282 N.Y. 704, 26 N.E.2d 820 (1940); cf. Backus v. MacLaury, 278 A.D. 504, 106 N.Y.S.2d 401 (1951); Wood v. Boynton, 64 Wis. 265, 25 N.W. 42 (1885). The facts in Illustration 4 are suggested by Illustration 5 to § 266 and by Mineral Park Land Co. v. Howard, 172 Cal. 289, 156 P. 458 (1916), and Edwards v. Trinity & B. V. Ry. Co., 54 Tex. Civ. App. 334, 118 S.W. 572 (1909), error ref.; cf. Flippin Materials Co. v. United States, 312 F.2d 408 (Ct. Cl. 1963). The facts in Illustration 5 are suggested by Illustration 8 to § 266 and by Rowe v. Town of Peabody, 207 Mass. 26, 93 N.E. 604 (1911), and Stees v. Leonard, 20 Minn. 494 (1874); see Illustration 8 to former § 502.

ALR Annotations:

Measure and elements of damages recoverable from vendor where there has been mistake as to amount of land conveyed. 94 A.L.R.3d 1091.

Digest System Key Numbers:

Contracts 93