DID WE THINK THERE WOULD NOT BE AN EPIDEMIC?
As COVID-19 continues to make it difficult for businesses to fully perform all of their contractual obligations, it is important to keep in mind legal doctrines that may ameliorate difficult situations where such performance is not possible. In previous articles, we have talked about force majeure, impossibility of performance, and commercial impracticability. In this article, we will consider one other doctrine that may give guidance in trying to determine a business’s contractual obligations in the current environment. That doctrine is mutual material mistake.
The doctrine of mutual material mistake can be used as a defense by one party to argue that a contract is no longer valid. Generally, to prevail on this defense, a party must prove three things. First, that there was in fact a mutual mistake; second, that it was material to the purpose of the contract; and third, the mistake was mutual, both parties had to have believed the same thing. A unilateral mistake, a mistaken assumption on the part of one party, will not invoke this defense.
The mistake has to go to the substance of the contract. A mistake about an extraneous fact or circumstance which does not go to the heart of the agreement would not qualify. The mistake has to relate an issue or fact that underlay the decision of both parties to enter into the agreement.
The mistake must also be material to the essential purpose of the contract. As this is a defense to the enforceability of the contract in total, the mistake must be of such a nature that it makes the original purpose of the agreement no longer achievable. This defense is designed to knock out the contract in total, not simply give rise to a claim for damages for imperfect performance.
If the parties have allocated certain risk items, including items upon which a claim of mutual mistake would be made, then the defense is not available. An example of this would be a force majeure provision that covered an event or circumstance even though the assumption at the time of entering into the contract was that it would not occur. If the parties have addressed the circumstance contractually, they will be bound by the terms of their agreement.
Given the unprecedent in nature of the current situation, it is obvious that businesses who wish to maintain good relationships with customers and vendors should try to be flexible in negotiating solutions that minimize the pain for everyone. But where that cannot be done, there are important contract defenses that should be considered in conjunction with any analysis regarding possible outcomes of any type of enforcement proceeding.