Contract Law-Mistake Question

The common contract mistakes are:

1. Res extincta – a contract will be void at common law if the subject matter of the agreement is, in fact, non-existent.

2. Res sua – where a person makes a contract to purchase that which, in fact, belongs to him, the contract is void.

3. Mistake as to quality – a mistake as to the quality of the subject matter of a contract has been confined to very narrow limits. A mistake will not affect assent unless it is the mistake of both parties, and is as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.

 

Basic Model of Nondisclosure

            The basic nondisclosure issue can be illustrated with two examples involving yard sales transactions. In the first, a party studies older audio equipment that is still favored by audiophiles. She then makes a Saturday morning tour of yard sales looking for specific models of audio equipment. She buys the components for yard prices and resells at much higher prices. The profit is a return to the investment made in learning about stereo equipment. If disclosure were required, the likelihood that the information will be gathered decrease, and the chances that valued stereo equipment will find its way to a landfill or to someone who does not appreciate its quality increases. Put slightly more technical terms, the system promotes allocative efficiency in that components are more likely to find their way to people who value them the most. In effect, the research has resulted in a market correction. The seller of the equipment will, of course, claim that a mistake has occurred, but the social cost of responding to that claim is that various resources will remain misallocated. An example of this type of reasoning in Neill v. Shamburg in which one co-tenant purchased the rights to land another co-tenant. The land had undergone limited development and included one marginally productive oil well. Wells on neighboring lad were found to be significantly productive. The buying con-tenant knew this and instructed those who had contact with the selling co-tenant not to reveal the information to her. In ruling that the buyer had no obligation to disclose, the court noted that the defendant had invested substantial sums and reasoned that they do not find in the acts of Shamburg, under the circumstances, anything more than a positive intention and effort to reap the benefit for his enterprise, by keeping knowledge of its results to himself.

            In the second example, the yard sale shopper knows very little about stereos, Just before going shopping, however, he stops at a friend’s house where the friend has music playing. The friend says, “I just bought that 1972 Nakamichi 890 tube receiver for only 0 on ebay”. A few minutes  later, while looking for fishing equipment, the shopper spots the same receiver at a yard sale for and buys it. Under deliberate/casual distinction, the buyer would have disclosed this information to the seller. This has no impact on the gathering of information in the future because it was acquired without the sort of effort for which one expects to be compensated. Fundamental mistake is rare: it is hard to convince a court that consent was so flawed by mistake that the contract is void. There was once a case 10 in which life insurance was obtained by A by getting his friend’s body examined for the required medical rather than his own which, in the event, proved to be on its last legs; but cases like that do not come up very often. A corollary of the strictness of the law about mistakes is that the insured cannot get out of an insurance contract because of an uninduced mistake about its terms. Normally the insurer is entitled to assume that the insured read the policy and, if the insured did not understand it, sought advice.

 

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