Reformation in Contract Law 101
Reformation is an important contract remedy with the primary aim of allowing the parties to a flawed contract to reform their agreement to reflect the true intent of the parties at the time the agreement was made. At its core , reformation is a remedy that allows the parties to rewrite their agreement to better fit the mutual understanding of the parties when the agreement was first formed. While reformation may not be needed too often in many corporate contexts, it can serve as an important safety valve to avoid unfair results based on the strict application of written contracts.
The Legal Basis for Reformation of a Contract
When examining the legal grounds for a contract reformation, Courts will generally find that the mistake, fraudulent or negligent misrepresentation was made in connection with the formation of the contract. In other words, the grounds to reform the contract must exist at the time of contract formation. For a contract to be reformed, courts will consider whether there have been both (1) an editing error and also (2) whether the parties intended the contract to be modified and/or reformed.
In terms of an editing error, when the agreements made by the parties writing the contract were not properly transcribed into the written version of the contract, the omission or error may be grounds to rectify the contract. Courts will require that the error be a typographical error or one with "clear meaning and import" as if the contract had been read out loud by the parties. Courts however require that the intent of the parties must be clearly established prior to allowing a reformation.
For example, if A agrees to deliver 100 widgets at $10 per widget and B knows that A made a mistake and instead wishes to insist upon delivery of 1000 widgets at $10 per widget, courts will not permit reformation as B knows that A made a mistake. However, if A and B negotiate a purchase price of $10 per widget and A meant to write 1000 widgets but inadvertently wrote 100 when drafting the contract, the court will permit a reformation of the contract by permit A to deliver 1000 widgets at $10 per widget. In this example, courts would find the typographical error to be obvious given the large difference in price.
If the misrepresentation made by the party seeking reformation is such that it is related to the value of the property or the subject of the sale and not a fact regarding which the parties have made promises, courts will allow a reformation. Courts will further allow reformation where a third party has made a material misrepresentation to try to avoid enforcement of a contract against the party that the third party deceived.
Whereas, courts generally will not allow a reformation of a contract if the party’s misrepresentation is one of non-disclosure or concealment of information. Courts will only permit correcting of contract where there is a material misrepresentation that is relevant to the substance of what the parties meant to bargain. Courts will not permit a reformation where bars to recovery such as statutes of fraud are applicable.
The Process of Reformation of a Contract
Once the decision has been made that reformation should be pursued, the next step is to file a lawsuit. Most reformation lawsuits are filed in the state court system, because in federal court the Federal Rules of Civil Procedure only allows for reformation in a "compulsory counterclaim," instead of a stand-alone federal lawsuit. A reformation lawsuit to request an equity reformation claim is generally filed as a complaint, usually as part of a broader complaint that also seeks other forms of relief, such as negative contracts to estop the potential enforcement of a contract against a party. The request for reformation in the complaint is usually separate from the request for such things as specific performance, money damages, or declaratory relief. In Florida, Plaintiffs would normally plead the "count" as "Count II – Count for Reformation," and would then make reference to the "Factual Allegations" section of the Complaint, making it clear that the allegations under all of the counts are "incorporated by reference into this Count" and the Court should be guided by all of those factual allegations, plus any additional allegations as needed in Count II. After making that reference, the Plaintiff would then essentially set forth, in paragraphs, what the evidence would be at a trial for reformation. There is no required format for a reformation count of a complaint, so it can simply be stated as, "Plaintiff, _____, seeks a reformation of the contract with a party named, at this time, as a defendant" with the possibility of a "reformation of the contract" being explained in the same paragraph. If the contracts is simple, the party can even "attach" a copy of the contract to the count in question, using the same "incorporation" language as described above. Flaws in a contract are not necessarily for the court to correct. In other words, some defect may be so fundamental or obvious that it is up to the parties to correct it themselves, and the courts should not spend their time examining, uncovering, and fixing those types of flaws. An example of this would be where the parties allegedly do not have a "meeting of the minds" as to a particular aspect of a contract. If the claim is essentially just that the parties did not have a meeting of the minds as to "X" and the actual terms of the contract are clear, then it would not be the business of the courts to reform the contract (in the absence of concealing factors). Instead, if the evidence shows that the parties did not really intend X, the courts are not going to intervene to address the parties flawed understanding of the contract terms.
How Reformation Differs From Rescission And Modification
The terms reformation, rescission, and modification all describe different legal remedies available to parties when there is some issue with the execution or terms of a contract. Reformation, though, has a narrower purpose than these other remedies. It is used to correct mistakes in a written contract or to provide a way to enforce an oral contract that cannot be enforced because of the statutes of frauds. It does not replace or abrogate the original contract. In fact, it is used to preserve the contract between the parties while allowing for the reformation of the contract to meet the original expectations of the parties. While rescission and modification may in some instances be alternatives to reformation, they are not the same. Rescission allows for the total abrogation of an entire contract as if it never existed. For example, after a contract has been executed, if one party refuses to fulfill his or her end of an agreement, the other party may pursue a remedy of rescission by bringing a breach of contract claim against the recalcitrant party to abrogate the contract. Modification, on the other hand, allows for a change of the contract after it has been executed, for instance, to correct a clerical error, for additional compensation, or for an extension of the time for performance. It essentially allows the parties to change the contract within the bounds of the contract itself, typically by agreement. For example, if two parties anticipate a delay in the performance of the contract, they may seek to modify the contract to extend the time frame for performance—the contract was not being broken, and hence, neither reformation nor rescission was necessary.
Successful Reformations: A Few Examples
The application of reformation in real cases can offer interesting insights into how courts interpret the legal concept of reformation and what limits they impose on its application. When a legal document does not correctly express the parties’ agreement, de reformado contractu, as the legal phrase translates to Latin, the court may intervene to correct this error after it has (following a review of the documentary record and taking account of the surrounding circumstances), attested that what the parties have agreed upon is adequately voiced in a written agreement, but that the textual rendition is so awry as to constitute a failure of expression.
In one famous case, that of (Rosenau v. City of New York 164 AD 477, 149 NYS 276), the court considered whether to allow for reformation of a two-part contract to purchase two lots from the City of New York. The proponent of reformation in that case had merely failed to pay the second installment in a timely manner, rather than, say, miscalculating the monthly payments due, but in exercising its discretion, the court found that after due consideration that late payment should not deprive the proponent of realizing the benefit of the contract in the way in which they had envisaged when they entered into it.
In (Falkowski v. Williams 147 AD 126 , 136 NYS 225), the court’s consideration of reformation took another form. The two parties had originally entered into a written agreement setting forth the price of a helper’s services in a shared business arrangement. Their actual arrangement, however, sought to disguise the fact that the helper was to be paid a higher amount for performing these duties, using the excess payment to cover other expenses. In spite of that higher figure representing the true intention of the parties, the court refused to allow for reformation in that case because the helper had already performed his duties. As such, "reformation would serve no useful purpose," the court held.
Finally, in (Fla-Rich Realty v. Manhattan Community Board No. 1, 287 AD 207, 737 NYS 2d 143), a contract between a landowner and the City of New York limited the City’s purchasing power in regard to the landowner’s land to a percentage of the landowner’s equity in the parcel in question. The City sought to apply that agreement to a second parcel of land that did not exist at the time of the original agreement without adjusting the maximum limit of 10% of the landowner’s equity, but the court would not allow that practice to continue. The court found that the doctrine of reformation could not "supply a factor to the agreement".
The Limitations And Disclaimers Of Reformation
While reformation constitutes the solution to a wide range of issues, such as mutual mistake, mistake coupled with fraud, unilateral mistake, and scrivener’s error, it is important to note that there are certain challenges and limitations a party seeking reformation might face. Some of these issues may arise at the outset of a case, where a defendant may seek to have the plaintiff’s case dismissed from the start based on the allegations of the complaint. A defense in this context is that of res judicata or claim preclusion, meaning relitigation of a claim between the parties is barred when the claim was brought and decided in a prior action. This issue may be considered by the court prior to answering the complaint, specifically in a motion to strike, and may be considered under the "four corners" of the complaint standard, meaning the complaint itself is dispositive on this issue. Thus, it is important for counsel to consider whether an action was previously brought involving similar claims and whether the issues were fully litigated before a court.
Another consideration is that of judicial estoppel, which is an equitable concept that prevents a party from asserting inconsistent positions in separate judicial proceedings, and aims to ensure the integrity of the judicial process. That is the standard under which a court will consider including a defendant’s position on judicial estoppel. A defendant may pursue a motion to dismiss on these grounds, and if this should not be a bar to a valid reformation action. An additional challenge might be a statute of limitations issue. While a five-year statute of limitations applies to actions based on unwritten contracts in California (Code Civ. Proc., §§ 312, 337), if the action is characterized as one for fraud then a three-year statute of limitations might apply (Code Civ. Proc., § 338). Generally similar claims survive on the same statute longer than others, so a mistake claim should survive statute of limitations when a fraud claim would not. In any case, absent other considerations, reformation is generally considered a claim that does not accrue until the time the judgment is entered. There are many different defenses available on the merits of the claim, but these often arise only after the court permits the plaintiff’s claim to proceed past the pleading stage.
Reformation In Business Contracts
When it comes to business contracts, reformation can have a significant impact in commercial settings. For example, say that two businesses enter into an agreement, but then later determine that an important part of the agreement is missing. If a court decides that the failure to include that important part was a result of mutual mistake by both parties, then the court may consider reformation in order to add it back in, because it would be contrary to the intent of the two businesses for the missing piece not to be in the contract. In other words, the court would seek to make the written contract conform to what the two businesses actually intended the contract to say.
However, there are many instances in which the court would not grant reformation, because although the error may have been a mutual mistake, or the result of a unilateral mistake that qualified for contract reformation under the law, the other party to the contract reasonably relied on the contract as it was written and would suffer a detriment if the court ordered reformation. For instance, if one business drafted an agreement stipulating a particular price, and the second business, upon reviewing the agreement, believed that the price was a fair one and began figuring their profit margin accordingly, the court might be disinclined to order reformation. Even if the court were to find that the price originally written into the contract was the result of a mistake, because the second business relied on the price, yet was unaware of the mistake, it might be inequitable to force them to live with an altered contract.
Reformation in Contract Law: In Conclusion
In the grand scheme of the legal system, reformation is one of many tools used to ensure fairness and justice. The law seeks to provide parties with the benefits of their bargains. When a contract is ambiguous, courts will likely attempt to ascertain the intent of the parties through parol evidence. Instead of rewriting contracts on these grounds, older decisions viewed ambiguity as a risk assumed by the parties in their contract. See, e.g., Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal.2d 38, 46-48 (Cal. 1968) . In recent times, however, courts have frequently decided that the presence of ambiguity in a contract should be resolved as a matter of law and that when this ambiguity cannot be resolved using parol evidence, the court must rewrite the term giving rise to the ambiguity. See, e.g., id. at 47, 48. Reformation is an important tool for courts to resolve ambiguities, resulting in greater certainty in contractual relationships. Reformation can also be a pathway to justice. Reformation provides courts with the ability to grant justice when the application of certain contract principles leads to injustice to one of the parties.