This research paper is for a business law course focused on contract law. The paper is a general research on liquidated damages and mutual and unilateral mistakes in contract law.
Mistakes in Contract law and Liquidated Damages
Eisenberg (2018) describes a contract as an agreement existing between two or more parties, and it intends to be legally binding while also being supported by consideration. Any good contract should have all the three important elements of an offer and acceptance, consideration, and the intent to develop legal relations for it to be considered a proper contract under the law. Moreover, Eisenberg (2018) adds that a contract has to be clearly understood by all the participating parties with evidence informing of a signature being used as proof of a contract’s existence. This discussion aims to discuss the different types of’ mistakes in a contract, their effects, and remedies. Moreover, it will also discuss different aspects of liquidated damages.
A Mistake in Contract Law
In contract law, mistakes are a legal concept, and they refer to erroneous beliefs held by both or one of the parties to a given contract, especially when the agreement was made. Mistakes can arise due to different ways, including mistakes based on the nature or subject matter of a transaction, mistakes based on contract terms, and mistakes based on a person’s identity to which a given contact has been entered into. According to Eisenberg (2018), contract law mistakes shouldn’t be confused with a misrepresentation. Eisenberg (2018) describes misrepresentation as a false statement made by a single party to another either innocently or out of negligence, and indices other parries to enter into given the contract. An actionable misrepresentation often renders a given contract voidable, a factor that gives the parties aggrieved a right to rescind a specific contract or the court having to set it aside. However, Eisenberg (2018) explains that a mistake can make a given contract voidable or void. Void contracts refer to those that have been declared null, meaning that they lack legal effect, and no obligations or rights can be obtained from such contracts.
Types of ‘Mistake Contracts’
The English establish three types of mistakes in contracts: common mistake, mutual mistake, and unilateral mistake.
A common mistake happens when both parties commit the same mistake. In other words, it occurs in situations where the parties to a given contract operate under misguided belief or shared misapprehension regarding a matter of existing law or fact (Eisenberg, 2018). Mistakes that affect the foundation of a specific contract have the potential to make it void. Eisenberg (2018) explains that the court has to have contended that the mistake is fundamental to the extent that the performance under such a contract is impossible or the performance is different from what the parties had anticipated. Eisenberg (2018) adds that where the subject-matter to a given contract becomes non-existent, such a contract is void. For example, a contract involving the sale of goods that have already perished. A contract is not void for mistake when it is about the quality of a given subject matter. It is unlikely to make performance fundamentally unique to what is originally agreed.
Mutual Mistake Contract
According to Arvind (2019), a mutual mistake occurs when the parties to a given contract are at cross-purposes. This implies that under such circumstances, a misunderstanding existing between parties that have entered into a contract. Mutual mistakes affect a given contract’s validity if a mistake is fundamental to the extent of nullifying consent. In situations where a mistake affects a given contract’s foundation, such a contract is considered void. Arvind (2019) explains that the court often tries to apply objective tests to establish whether a mutual mistake contract can be revived or saved. In other words, the court tries to consider what a reasonable individual is likely to have understood a contract to mean. As such, Arvind (2019) adds that when both parties to the contract agree that the conduct and words implied that only one possible understanding or interpretation of the contract existed or was agreed upon, such a contract is considered to be still valid. However, in situations where a reasonable person doesn’t determine the contract’s exact meaning, Arvind (2019) explains that such a contract is considered void for mistake.
Unilateral Mistake Contract
Eisenberg (2018) explains that a unilateral mistake occurs when the only party to a given contract makes an error. Such errors include mistakes related to terms of a given contract or mistakes relating to a person’s identity with who a contract has been entered into. While only a single party gas to be mistaken regarding the terms of a given contract, other parties should know the mistake to invalidate such a contract. Under such circumstances, the court often applies a subject test based on the mistaken party’s point of view or intention when entering a given contract. Arvind (2019) explains that mistakes to identity are often induced by fraud where a party intentionally gives the wrong identity during a contract agreement. Under such circumstances, such a contract becomes void.
The Effects of a ‘Mistake Contract’
Eisenberg (2018) explains that a contract can only be rendered void by mistakes operating based on negative consent. In other words, a void mistake contract has to be distinguishable from the voidable one. A void contract has no legal relationship that exists between parties, and it has no legal effects. In other words, the contract is assumed to be void from the beginning, which implies that it is considered not to have been made in the first place (Eisenberg, 2018). Based on this understanding, no party can sue another for the contract, while any property transferred or payments made under the contract can be recovered given that no party is entitled to what they have received. Eisenberg (2018) explains that another alternative would be that should the contract be voidable, its validity would have existed right from the start, with obligations expected from it even though the mistake exists. Finally, a voidable contract comprises of those that a given party has an entitlement to rescind. Until a mistaken party rescinds a given contract, such a contract remains legally binding and legal.
Remedies for a ‘Mistake Contract’
When argued successfully, Arvind (2019) explains that a mistake can often result in an agreement being established either voidable or void by a court. In situations where a contract is established to be void, the court has the option of ordering restitution where appropriate. For example, recover any property transferred or monies paid by mistake (Arvind, 2019). Under circumstances where a given contract has been established to be voidable, a court has the option of exploring the following equitable remedies;
First, rescission is a viable option. Under such circumstances, Arvind (2019) explains that a contract is set aside to allow the parties to return to the initial position before their contract was established or made. Alternatively, specific performance can also be another remedy, and it involves the court compel a given party to undertake its contractual obligations. Finally, Arvind (2019) argues that rectification is another remedy that allows the court to correct a given error of expression, especially when given written documents don’t agree with what had been accorded orally.
Roger (2018) describes liquidated damages as the amount of money agreed upon by parties to a given contract at the time of signing. It establishes specific damages that should be recovered when one of the parties ends up breaching the contract. Roger (2018) adds that the agreed amount of money should reflect the best estimate for actual damages when the parties decided to sign the contract. Liquidated damages often apply to specific breaches; for example, Roger (2018) explains that they can be applied to the party that fails to complete specific tasks on time in the construction industry.
The Significance of Liquidated Damages
Ensuring that liquidated damage clauses are inserted in any contract provides numerous benefits, with the most significant predictability. According to Roger (2018), when setting Liquidated damages or a predetermined amount of money that is to be paid for any damages resulting from the breach of a given contract, both parties have an opportunity to negotiate and settle at an agreeable or reasonable amount. As such, when a contract breach occurs, such parties cannot feel hard done when a decision is made to institute liquidated damages because they were party to the agreement made.
Liquidated damages can also be seen as a cheap type of insurance against contractors in any business transaction. For example, Roger (2018) explains that when a contract breach occurs, the owner has a chance to calculate damages without having to struggle to prove actual damages. This helps with time and resources because the process of proving actual damages tends to be the length, costly, and complicated. On the other hand, the contractor also can analyze the risk levels involved and make the most appropriate schedule they think will help them complete their tasks in good time (Roger, 2018). Additionally, they are also able to limit the owner’s damage claims. Based on these factors, it is quite evident that liquidated damages are very significant to business processes.
Enforceability of Liquidated Damages
In the United States, most states have already put statutes that govern the use of liquidated damages clauses in contracts. Some of these statutes are very simple and general because they state that liquidated damages have to be reasonable under different circumstances, especially during a contract. In some other states, these statutes tend to be more specific because they require specific languages. Although liquidated damages appear to be perfect in practice, they can be quite challenging to enforce when taken to court.
Finally, according to (Roger 2018), liquidated damages offer more predictability and security to business contracts. Unfortunately, as previously discussed, sometimes it can be quite challenging to enforce these clauses because they are not guaranteed. As such, (Roger 2018) recommends that the most appropriate thing to do before agreeing to liquidated damages clauses is that individuals or organizations should first familiarize themselves with their specific state’s statutes dealing with liquidated damage clauses. Additionally, although liquidated damages clauses are helpful, their enforcement depends on a Judge’s mercy, which is quite unpredictable.
Arvind, T. (2019). 7. Interpreting the terms. Contract Law, 176-206. doi:10.1093/he/9780198829263.003.0007
Eisenberg, M. A. (2018). Introduction to mistake in contract law. Oxford Scholarship Online. doi:10.1093/oso/9780199731404.003.0039
Roger, H. (2018). 3 the legal effect of classification as a ‘Penalty’ or a valid liquidated damages clause. Liquidated Damages and Penalty Clauses. doi:10.1093/law/9780198785132.003.0003