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Using Contract Language to Avoid Litigation Over Claims of Mistake-in-Fact

Under California law, a contract can be defeated if a party can prove there was a mistake-in-fact. For a contract to be enforceable by California courts, there must be a “meeting of the minds” between and among the parties so that everyone understands and agrees what the various party obligations are. If no such complete agreement is reached, the contract fails (it was not truly formed) and the courts will not enforce the agreement. Essentially, in addition to good customer service, this legal concept is what underlies retail store policies with respect to merchandise returns and exchanges. Saying that “this dress is the wrong size” is essentially saying there was a mistake-in-fact.

In this article, we discuss use of contract language to limit the possibility of the other party arguing mistake-in-fact. Some contracts, like “as-is” contracts, are more vulnerable to a mistake-in-fact defense. As such, more care is needed when drafting the contract. A good San Diego corporate lawyer can help. A well-drafted contract can help avoid expensive litigation.

San Diego Business Law: Legal Principles With Respect to Mistake-in-Fact as a Defense

To succeed in a mistake-in-fact defense, the party asserting the defense must prove four legal elements:

  • A mistake was made with respect to some important aspect of the transaction
  • That the other contracting party knew that there was a mistake and used the mistake to take advantage of the party asserting the mistake
  • That the mistake was not the result of excessive carelessness by the partying asserting the mistake and
  • The party asserting the mistake would not have agreed to enter into the contract if they had known of the mistake

See Meyer v. Benko, 55 Cal.App.3d 937 (Cal. App. 2nd Dist. 1976); Cal. Civil Code, ยงยง1576-1577.

Continuing our dress-size example, obviously whether the dress fits is an important aspect of the transaction. The retail store might well defend against a claim of mistake-in-fact by challenging proof of elements #2 and #3. The store owner might say: “We did not know the dress would not fit and the customer should have tried on the dress before buying it. We have changing rooms.”

San Diego Business Law: Using Contract Language to Preempt Mistake-in-Fact Defense

The legal elements listed above and the example give guidance on how a well-drafted contract can preempt claims of mistake-in-fact.

First, a well-drafted sales contract should require the buyer to engage in due diligence and otherwise inspect the subject matter of the transaction. Furthermore, the provision requiring inspection should link that duty to inspect to a waiver of any claim for mistake-in-fact. Thus, if the party is required to investigate and inspect, that party will have difficulty proving lack of carelessness if litigation ensues. This is needed because the California case law equates “lack of carelessness” with “gross negligence.” See Architects & Contractors Estimating Service, Inc. v. Smith, 164 Cal.App.3d 1001 (Cal. App. 4th Dist. 1985).

Second, if the contract/transaction is vulnerable to a mistake-in-fact challenge, then waiver language should be inserted such as:

“WAIVER: BUYER hereby waives any right to claim mistake-in-fact with respect to this Agreement. BUYER agrees and acknowledges that BUYER is obligated to conduct due diligence and inspections.”

Third, it is wise to shorten the time period in which the other party can make a mistake-in-fact claim. Such a shortening should be reasonable for the given transaction.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to draft your contracts properly to avoid mistakes and preempt claims by the other party of mistake. With all business contracts, it is essential for all parties to do their due diligence. Contact Mr. Leonard by email or by calling (858) 483-9200.

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