In Tennessee breach of contract cases, the defense of unilateral mistake falls in the category of legal defenses (and claims) that are fairly often asserted, but rarely successful. Nevertheless, for lawyers who handle breach of contract cases in Tennessee, this is a defense that, in some cases, can be outcome determinative.
Tennessee contract law recognizes two categories of mistakes as defenses to breach of contract claims: (1) Mutual mistakes; and (2) unilateral mistakes. The defense of mutual mistake applies when both parties are mistaken as to a fact material to the contract. The unilateral mistake defense applies when only the party invoking the defense was mistaken.
Both defenses, mutual mistake and unilateral mistake, apply only to mistakes about facts that existed at the time the parties’ contract was formed. In situations where facts arise after the formation of the contract that a party believes may excuse it from performance of its obligations, that party should look to the doctrines of impracticability and frustration of purpose, but not to mistake.
What does a party have to prove to establish unilateral mistake? In Tennessee, there appear to be two different standards for proving unilateral mistake. Several Tennessee cases state that, to prove unilateral mistake, a party invoking the defense must prove that, not only was it mistaken as to a material fact, but also, that its mistake was “coupled with or induced by the fraud or inequitable conduct of the other party.” See, J.D. McMillin, Jr. v. Great Southern Corp., 480 S.W.2d 152 (Tenn. Ct. App. 1972); Zion Hill Baptist Church v. Taylor (Tenn. Ct. App. 2004); and, Prestige Land Co. v. Brian Mullins Excavating Contractors, Inc. (Tenn. Ct. App. 2010).
At least one Tennessee published case, the Confrancesco case discussed below, however, applied a more user-friendly standard for the unilateral mistake defense. In that case, the court held that the unilateral mistake defense required only that the party invoking it prove, in addition to its mistaken belief about a material fact, that the other party “knew” or “had reason to know of” its mistake.
Let’s take a closer look at one of the rare Tennessee cases in which the defense of unilateral mistake was effective. In Cofrancesco Construction v. Superior Components, Inc. (Tenn. Ct. App. 1963), Contractor submitted a bid in the amount of $1,310 to Developer for wood decking. Contractor had completely goofed in transcribing the bid and meant to bid at least $4,000 higher. In fact, the cost to Contractor for the decking was $3,793.
Contractor discovered its mistake after the decking had been delivered, but before it had been installed by Developer. Contractor, which had an astute lawyer, immediately contacted Developer and informed it of Contractor’s mistake. Contractor notified Developer that it could keep the decking if it would pay the price Contractor meant to charge, or, if that was not suitable with Developer, it would pick up the decking.
Developer installed the decking and refused to pay the price Contractor had meant to charge. Contractor sued Developer for the $4,000 difference between the actual contract amount and the contract amount which Contractor would have charged but for its transcription error.
In the Confrancesco case, the court held that Contractor was entitled to use the defense of unilateral mistake to rescind the contract with the mistaken price. It then awarded Contractor a judgment for the $4,000 difference between the mistaken price and the intended price. In that case, the Developer against whom the unilateral mistake defense was used had not induced the mistake of Contractor by fraud or by any other means, yet the unilateral mistake defense carried the day for Contractor.
The contractor in the Prestige Land case made the very same mistake as the Contractor in the Confrancesco case—-it substantially underbid the contract at issue. Applying the different and more stringent standard discussed above, the court held that the contractor had not proven unilateral mistake. The facts of the Confrancesco case and the Prestige Land case are markedly different and the same result could have been reached in the Prestige Land case using the standard used in the Confrancesco case. Notably though, the expressed basis for the ruling in Prestige Land was that, even though the contractor in that case made a unilateral mistake, “there was no fraud” on the part of the developer in that case.