Restat 2d of Contracts, § 20

• Restatement of the Law, Second, Contracts
• Chapter 3- Formation of Contracts -- Mutual Assent
• Topic 2- Manifestation of Assent in General
• § 20 Effect of Misunderstanding

(1)  There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and

(a)  neither party knows or has reason to know the meaning attached by the other; or

(b)  each party knows or each party has reason to know the meaning attached by the other.
(2)  The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if

(a)  that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or

(b)  that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.

Comment:

a.  Scope.  Subsection (1) states the implications of the rule of § 19(2) as to the meaning of "manifestation of mutual assent" in cases of mistake in the expression of assent. The subject-matter of this Section is more fully treated in Chapter 9 on the scope of contractual obligations. Rules are stated here only for two-party transactions; multi-party transactions are more complex, but are governed by the same principles. As to the meaning of "reason to know," see Comment b to § 19.

b.  The need for interpretation.  The meaning given to words or other conduct depends to a varying extent on the context and on the prior experience of the parties. Almost never are all the connotations of a bargain exactly identical for both parties; it is enough that there is a core of common meaning sufficient to determine their performances with reasonable certainty or to give a reasonably certain basis for an appropriate legal remedy. See § 33. But material differences of meaning are a standard cause of contract disputes, and the decision of such disputes necessarily requires interpretation of the language and other conduct of the parties in the light of the circumstances.

c.  Interpretation and agreement.  There is a problem of interpretation in determining whether a contract has been made as well as in determining what obligations a contract imposes. Where one party makes a precise and detailed offer and the other accepts it, or where both parties sign the same written agreement, there may be an "integrated" agreement (see § 209) and the problem is then one of interpreting the offer or written agreement. In other cases agreement may be found in a jumble of letters, telegrams, acts and spoken words. In either type of case, the parties may have different understandings, intentions and meanings. Even though the parties manifest mutual assent to the same words of agreement, there may be no contract because of a material difference of understanding as to the terms of the exchange. Where there is no integration, the parties may also differ as to whether there was an offer of any kind, or whether there was an acceptance. Rules of interpretation governing various situations are stated in Chapter 9 on the scope of contractual obligations; those rules are applicable in the determination of what each party "knows or has reason to know."

d.  Error in expression.  The basic principle governing material misunderstanding is stated in Subsection (1): no contract is formed if neither party is at fault or if both parties are equally at fault. Subsection (2) deals with cases where both parties are not equally at fault. If one party knows the other's meaning and manifests assent intending to insist on a different meaning, he may be guilty of misrepresentation. Whether or not there is such misrepresentation as would give the other party a power of avoidance, there is a contract under Subsection (2) (a), and the mere negligence of the other party is immaterial. See § 166 as to reformation of a written contract in such a case. Under Subsection (2) (b) a party may be bound by a merely negligent manifestation of assent, if the other party is not negligent. The question whether such a contract is voidable for mistake is dealt with in §§ 151-58.

Illustrations:

1. A offers to sell B goods shipped from Bombay ex steamer "Peerless". B accepts. There are two steamers of the name "Peerless", sailing from Bombay at materially different times. If both parties intend the same Peerless, there is a contract, and it is immaterial whether they know or have reason to know that two ships are named Peerless.

2. The facts being otherwise as stated in Illustration 1, A means Peerless No. 1 and B means Peerless No. 2. If neither A nor B knows or has reason to know that they mean different ships, or if they both know or if they both have reason to know, there is no contract.

3. The facts being otherwise as stated in Illustration 1, A knows that B means Peerless No. 2 and B does not know that there are two ships named Peerless. There is a contract for the sale of the goods from Peerless No. 2, and it is immaterial whether B has reason to know that A means Peerless No. 1. If A makes the contract with the undisclosed intention of not performing it, it is voidable by B for misrepresentation (see §§ 159-64). Conversely, if B knows that A means Peerless No. 1 and A does not know that there are two ships named Peerless, there is a contract for the sale of the goods from Peerless No. 1, and it is immaterial whether A has reason to know that B means Peerless No. 2,but the contract may be voidable by A for misrepresentation.

4. The facts being otherwise as stated in Illustration 1, neither party knows that there are two ships Peerless. A has reason to know that B means Peerless No. 2 and B has no reason to know that A means Peerless No. 1. There is a contract for the sale of goods from Peerless No. 2. In the converse case, where B has reason to know and A does not, there is a contract for sale from Peerless No. 1. In either case the question whether the contract is voidable for mistake is governed by the rules stated in §§ 151-58.

5. A says to B, "I offer to sell you my horse for $ 100." B, knowing that A intends to offer to sell his cow for that price, not his horse, and that the word "horse" is a slip of the tongue, replies, "I accept." The price is a fair one for either the horse or the cow. There is a contract for the sale of the cow and not of the horse. If B makes the contract with the undisclosed intention of not performing it, it is voidable by A for misrepresentation. See §§ 159-64.

This Section is based on former § 71. See 1 Williston, Contracts §§ 94-95 (3d ed. 1957); 1 Corbin, Contracts § 104 (1963 & Supp. 1980), 3 id. § 599 (1960 & Supp. 1980); Palmer, The Effect of Misunderstanding on Contract Formation and Reformation Under the Restatement of Contracts Second, 65 Mich. L. Rev 33 (1966); Young, Equivocation in the Making of Agreements, 64 Colum. L. Rev. 619 (1964). Compare former § 71.

Comments b and c.  See 3 Corbin, Contracts §§ 532-39 (1960 & Supp. 1980). It is important to distinguish between the common problem of interpretation of key terms of a contract and the much less common question whether a material difference of understanding has prevented the manifestation of mutual assent necessary to create a contract at all. Compare Iowa-Des Moines Nat'l Bank v. Insurance Co. of North America, 459 F.2d 650 (8th Cir. 1972), with Oswald v. Allen, 417 F.2d 43 (2d Cir. 1969). See also 3 Corbin § 599 (1960 & Supp. 1980).

Comment d.  Illustrations 1-4 are based on Illustration 1 to former § 71; that Illustration is based on Raffles v. Wichelhaus, 2 Hurl. & C. 906, 159 Eng. Rep. 375 (Ex. 1864); see also Kyle v. Kavanagh, 103 Mass. 356 (1869). Because the Raffles report is notoriously cryptic, the extent of its holding, which appears to be closest to Illustration 2, has been much debated. Some of the commentaries may be found in Holmes, The Common Law 242 (1881, Howe ed. 1963); Holmes, The Theory of Legal Interpretation, 12 Harv. L. Rev. 417 (1899); 1 Williston, Contracts § 95 at 346 n.3 (3d ed. 1957); 3 Corbin, Contracts § 599 (1960 & Supp. 1980); Young, Equivocation in the Making of Agreements, 64 Colum. L. Rev. 619 (1964); Gilmore, The Death of Contract 35-44 (1974). Many other authorities relating to the subject matter of this Section are cited in the Young article.

There has been much debate over the extent of the circumstances in which a mutual misunderstanding should prevent the formation of a contract. Some of the circumstances proposed are: only when the name of a particular thing is misunderstood, Holmes, supra, 12 Harv. L. Rev. at 418-19; "roughly speaking," when the misunderstanding has its source "in the ambivalence or 'double meaning' [as opposed to the inherent vagueness] of an expression," Young, supra, 64 Colum. L. Rev. at 646; and whenever the misunderstood term is "vital enough to justify upsetting the entire arrangement," Palmer, supra, 65 Mich. L. Rev. at 57 n.77 (semble). See also Gilmore, supra, 123 n.99. While Young's distinction between ambiguity (or equivocation) and vagueness has been criticized as much too sharp by Palmer, and his reading of Raffles as too narrow by Gilmore, it is submitted that it states a workable rule, especially if read in light of Young's own disclaimers of a bright line between equivocation and vagueness. If a term is so vague that the court cannot interpret it, the court should decide enforceability as an issue of the requirement of reasonable certainty in contracts. See Comment b to this Section and §§ 33 and 34; cf. Palmer, supra, at 57-58. A contract should be held nonexistent under this Section only when the misunderstanding goes to conflicting and irreconcilable meanings of a material term that could have either but not both meanings. In National By-Prods., Inc. v. United States, 405 F.2d 1256 (Ct. Cl. 1969), the issue was whether a document signed by one party, when read together with a separate agreement and oral negotiations, had created an additional contract by the United States to construct a levee on the right bank of a creek which later flooded. The Court of Claims, in finding no additional contract, cited the Tentative Drafts of both this Section and § 2, but appears to have decided the question on the ground of lack of certainty.

Illustration 5 is based upon Illustration 2 former § 71. The Comment in former § 71 concluded that there was no contract for either the cow or the horse; the conclusion here is based upon Subsection (2), which holds B to his knowledge that A means the cow. This rule is criticized by Palmer, supra, 65 Mich. L. Rev. at 47-56. If the price is excessive for the cow, the court may refuse to enforce the contract against B on grounds analogous to those applicable in a suit for reformation. See Comment a to § 166.

ALR Annotations:

Variance between offer and acceptance in regard to title as affecting consummation of contract for sale of real property. 16 A.L.R.3d 1424.
Admissibility of oral evidence to show that a writing was a sham agreement not intended to create legal relations. 71 A.L.R.2d 382.

Digest System Key Numbers:

Contracts 93