It is hard to count the times with which we have been confronted by a client who advises us, while holding his contract with another party in hand: “This is not what we agreed to.” Nonetheless, when you ask the client to turn to the last page of the agreement, his or her signature is in plain sight. It is at this point that you realize that your client has actually signed a contract containing terms which the client claims are either incorrect or were never agreed upon. In some cases, the client and the other contracting party have actually been performing under the contract for several years. It is only when a dispute arises that both parties pull the dusty contract out of the filing cabinet and read it. Is the client stuck? The answer is maybe not.
The law permits certain contracts, entered into under certain circumstances, to be “reformed.” Reformation is an equitable remedy that allows one party to sue the other, on several different grounds, in the event that it turns out that there is a mistake in the parties’ contract in order to fix the contract consistent with the parties’ original intent. However, while the rules for reforming a contract through court proceedings are quite stringent, the requirements for reforming a contract can be met in a variety of circumstances. Here are a few examples.
1. Both Parties Made a Mistake.
People make mistakes. It is a fact of life. Sometimes, people make mistakes in connection with drafting and execution of contracts. Sometimes business owners draft contracts themselves and either fail to read them or do not fully understand the contracts they draft and sign. Often, the other party to the contract is similarly mistaken. This is mostly because the parties sign contracts without counsel or have counsel who do not understand the parties’ intentions. These types of contracts can often be reformed through court action.
Examples of these types of contracts are contracts for the sale of real property which may contain an improper legal description or terms which are otherwise inaccurate or unclear. Usually, the Court will only correct a mistake in the contract but will not rewrite the contract for the parties. Litigation is not a vehicle for a party to renegotiate the terms of the contract from scratch.
2. Reformation Only Works for Factual Mistakes.
Generally, the remedy of reformation only works for mistakes made regarding facts, not mistakes regarding the law. For example, if your client bought a piece of property believing that the zoning was slated “commercial” when, in fact, the zoning was residential, this is a legal mistake for which reformation would likely provide no remedy. However, in a circumstance involving the purchase of real property, when a party includes an inaccurate address for the sale of the property, this is most likely to be considered a factual mistake which could be reformed through a court proceeding. This is another reason why competent counsel should be engaged in connection with the negotiation, drafting and execution of the contract since counsel will know the law and lay people generally do not
3. Being Sloppy is not an Excuse.
The Courts generally frown upon individuals or companies who seek the reformation of contracts based solely upon their own mistakes. The law presumes that a person has done the necessary due diligence before entering into a contract and will, therefore, be subject to absorb any detriment resulting from an individual mistake. A court will not reform a contract in which there is an alleged mistake based solely upon one person’s negligence. One exception to that rule is if a party is able to show that the other contracting party engaged in certain “inequitable conduct.” That is just a fancy way of saying that, if you can show that the other person did something wrong – – e.g., lies to you or deceives you in some way – – there is a greater likelihood that the court will reform a contract based upon a unilateral mistake. In the absence of that, it is unlikely that the remedy of reformation will be granted.
4. Reformation of Trust Instruments.
Florida has a neat statute that allows the beneficiaries of a trust to seek reformation when they determine that the Trust does not express the true intentions of the person who created it. This is a recipe for litigation if I have ever heard one. When there are competing beneficiaries with respect to the terms of a trust, you can bet that this statute will be invoked on a regular basis in order to determine that the deceased person intended something different than what is on the trust instrument. The true intention of the trust’s creator can often be established through the testimony of his or her beneficiaries and friends who can testify, among other things, as to what the creator of the trust really wanted.
Mistakes in written contracts can sometimes be corrected through litigation. If the mistake is material, and has a negative economic impact on a party’s business, it is likely worth filing a lawsuit to have the court reform the contract to clear up the problem. The better practice, as always, is to make sure the contract is right at the time that you sign it.