§7.3 - Reformation and Rescission

• Jurisdiction: Washington

§7.3 REFORMATION AND RESCISSION

This section discusses the remedies of reformation and rescission.

(1) General comparison

Reformation is a remedy that permits a court to modify a defective written instrument so that it conforms to a prior agreement of the parties for which there was mutual assent at the time of its making. Reformation may be granted in only two circumstances. The first, sometimes called mutual mistake, occurs when both parties to an agreement share an identical intention as to the terms of the agreement, but fail to accurately express it in writing. The second, sometimes called unilateral mistake plus fraud or inequitable conduct, occurs when one party is mistaken about a matter fundamental to the bargain, and the other party knows of the mistake, but through fraud or other inequitable conduct, conceals it from the mistaken party, and consequently, they fail to accurately express their agreement in writing.

Rescission, on the other hand, is a remedy that permits a court to void the obligations of a contract altogether. Although normally called rescission, it is usually granted in conjunction with restitution, so that the rights and benefits that were exchanged are returned, leaving both parties in the same position as if no contract had been made. Like reformation, rescission may be granted for mutual mistake, unilateral mistake plus fraud, or when the parties fail to come to mutual assent.

The facts giving rise to a claim of equitable relief for either reformation or rescission are similar and will be discussed in more detail below. Both require proof either of mutual mistake or of unilateral mistake by the party seeking relief and fraud or inequitable conduct by the other party. To prove either claim, parol evidence is admissible, and a very high burden of proof—clear, cogent, and convincing evidence—is imposed against the party seeking relief. The defenses that may be raised against either claim are similar. Finally, although the same factual basis gives rise, for the most part, to either a claim for reformation or rescission and the defenses available to each, some differences exist, and they too will be pointed out in this chapter. Because of these large areas of overlap, however, reformation and rescission will be discussed together, and the differences will be set out when they exist.

(2) Elements of claim

A party seeking equitable relief for mutual mistake or unilateral mistake plus fraud must prove the following elements to present a claim for equitable relief:

(1)	the parties to the contract came to a mutual understanding identical in all material respects, concerning the subject matter and terms of their agreement;
(2)	because of mutual mistake, or unilateral mistake by one party and fraud by the other, they failed to accurately express their agreement in writing;
(3)	the mistake relates to an essential element of the bargain between the parties;
(4)	the mistake occurred at the time the contract was formed;
(5)	the party seeking relief does not bear the risk of that type of mistake under the contract; and
(6)	the rights of any subsequent bona fide purchasers for value who took their interest without notice of the claim or defect, will not be materially and adversely affected by the relief granted.

Akers v. Sinclair, 37 Wn.2d 693, 226 P.2d 225 (1950).

(3) Mutual mistake

As mentioned above, a mutual mistake made by both parties to an agreement may provide a basis for equitable relief. When both parties have reached a definite and identical intention as to the terms of an agreement, and the agreement, as written, fails to express those terms, mutual mistake exists and equitable relief is proper. Moeller v. Schultz, 11 Wn.2d 416, 119 P.2d 660 (1941).

In cases seeking equitable relief, the standard of proof required to prove mutual mistake is clear, cogent, and compelling evidence. A mere preponderance of the evidence is insufficient. When any doubt exists, the claim must be decided against the party seeking relief. A denial of the mistake by one party alone, however, will not defeat a claim of relief, nor will the admission of conflicting evidence. The finder of fact, customarily the trial court in cases of equity, must consider all of the facts and circumstances surrounding the claim to determine the intention of the parties. Finally, parol evidence is not only permitted, but is generally required in actions seeking reformation or rescission. Without it, proof of the parties' intentions would be impossible because the writing, in itself, fails to correctly reflect the parties' intent. Akers, 37 Wn.2d 693.

(4) What constitutes mistake

Under certain circumstances, either mutual or unilateral mistake may afford equitable grounds for relief to a party to an otherwise binding contract. Not every mistake, however, gives rise to a right to relief. The kind and nature of the mistake is important, as is its timing and the action, or inaction, taken by the parties to the contract in connection with the mistake. As a starting point, we will consider what constitutes mistake within the context of equitable remedies like reformation and rescission.

Washington courts define mistake as a belief not in accord with the facts. Simonson v. Fendell, 101 Wn.2d 88, 675 P.2d 1218 (1984). This definition originates from Restatement (Second) of C ontracts §151 (1981) and is the one generally embraced by most courts and commentators. Any act or omission undertaken by one or both of the parties in reliance on this erroneous belief might then become the basis for an action, if other facts are also present.

At one time, equitable relief was unavailable in cases predicated on mistake of law rather than mistake of facts. Now, the effect of relevant law is generally considered to be part of the operative facts and may form the basis of mistake. Hendrickson v. Lyons, 121 Wash. 632, 209 P. 1095 (1922). For example, suppose that in a contract for the sale of land both buyer and seller believe, incorrectly, that the relevant zoning laws permit development of the land as a multifamily apartment project. If zoning is a basic premise of the contract, and risk of zoning noncompliance is not otherwise allocated to one of the parties under the contract, then this mistake may give rise to equitable relief.

The mistake must be material—that is, it must run to a matter fundamental to the basis of the bargain itself. Materiality is judged by whether the parties would have entered into the contract had they been aware of the mistake. Stahl v. Schwartz, 67 Wash. 25, 120 P. 856 (1912).

Furthermore, the mistake must relate to facts that are in existence at the time of making of the contract. Erroneous beliefs concerning future events or predictions are not the type of mistake for which a court will either reform or rescind a written agreement. Sometimes it is difficult to separate an error concerning an existing fact from a bad judgment or prediction concerning a future event. Two short illustrations distinguishing a mistake of existing fact from an incorrect prediction of a future event follow.

In the first example, we will assume that buyer and seller have entered into a contract for the purchase and sale of a business. Both agree that the purchase price is based on the average gross annual sales for the last three calendar years, calculated at $xxx per year, which they both believe to be true. If, however, the gross average annual sales over that same period was actually $yyy, then a mutual mistake occurred at the time of making of the contract that might permit equitable relief.

In the second example, we will change the facts somewhat so that the purchase price that buyer and seller set was based on a prediction of sales growth instead of a formula based on existing sales. In this example, both buyer and seller believe that current gross annual sales are $xxx, and this fact is true. Both buyer and seller also believe that, due to increasing demand, annual sales will grow by five percent per year for the next ten years. The parties agree to a purchase price based on this prediction. As it turns out, annual sales do not increase, but instead decrease because of lower than expected demand. This misjudgment is still a mistake, and a mutual one at that, but it will not permit equitable relief. This mistake is merely an erroneous prediction of a future event that neither buyer nor seller could know with certainty. Thus, it will not give rise to equitable relief.

In the context of a real property transaction gone awry, many of the cases involve a mistake concerning the description of the land that is the subject matter of the contract. Sometimes land is included by mistake, sometimes it is omitted, and at other times the description used is so vague or inexact that it cannot be located at all. See, e.g., Williams v. Fulton, 30 Wn.App. 173, 632 P.2d 920, review denied, 96 Wn.2d 1017 (1981). As later cases will show, this type of mistake may give rise to equitable relief.

For example, if at the time of contracting, seller believes it is selling, and buyer believes it is buying, a 20-acre tract called Blackacre, and instead, the parties include a description for the 20-acre tract called Whiteacre, mutual mistake exists that may provide the basis to reform the contract. Absent fraud, however, the mistaken belief must be identical between the parties. Seattle Prof'l Eng'g Emps.Ass'n v. Boeing Co., 139 Wn.2d 824, 832, 991 P.2d 1126, corrected, 1 P.3d 578 (2000).

If we change the facts somewhat and assume that seller believes that the 20-acre tract it is selling is Blackacre, and buyer believes the 20-acre tract it is buying is Whiteacre, then we face a different problem from mutual mistake. Here, there is no identical belief shared between the parties...