Defining Contract Reformation
Contract reformation is the legal procedure under which a court modifies an existing written contract to reflect the actual agreement of the parties. Generally speaking, a contract only can be reformed to correct mutual mistakes, unilateral mistakes, or to prevent fraud or misrepresentation. A unilateral mistake occurs where only one party has a mistaken understanding of one or more aspects of the contract. A mutual mistake occurs where both parties have a mistaken understanding of one of more aspects of the contract. Contract reformation cannot be used to correct a party’s intentional misrepresentation .
It is important to understand the distinction between reformation and rescission (cancellation of a contract) or amendment (modification of a contract). Reformation differs from rescission or amendment in that it serves to make a contract conform to the original intent of the parties. Courts award this type of unilateral or mutual mistake relief based upon inherent fairness. The goal is to have the final version of the contract expressed only in writing. Otherwise, the risk of perjury of either an original or amended version of the contract creates potential for justice to be in jeopardy.
Legal Foundations for Contract Reformation
The legal foundation required for contract reformation can be found in provisions of contract law. Normally, the justification for contract reformation will undermine the element of contract formation in the first instance. For example, a need for reformation may arise if a contract is based on mutual mistake, fraud, or duress.
A mutual mistake requires that the parties to a contract be mistaken about the same aspect of the contract, usually a material aspect. For instance, if both parties were mistaken about whether a contract contained an arbitration clause, it would likely be justified for a court to reform the contract to reflect the actual intention of the parties. Mistake will not usually be used to justify reformation of a contract when the parties are merely mistaken about the legal consequences of a contract.
Fraud refers to intentional misrepresentation, which can be grounds for contract reformation. Typical grounds for reformation based on fraud are if one party to a contract was coerced into signing it based on the fraudulent inducement of the other party.
Reformation commonly stems from duress. Duress is a legal concept that requires one party to a contract has threatened the life, safety, or well-being of another. When a party threatens such a substantial harm, any agreement will be considered involuntary and in need of reformation.
In any instance of reformation, you should consult with an experienced contract law attorney to help you understand your case. The circumstances surrounding the drafting of a contract can become destructive to establishing the true meaning of the contract.
Seeking Contract Reformation
A party seeking reformation of a contract must petition the Court to do so. The first step is the drafting and filing of a complaint, which, after it has been served on all parties, can be answered by a responsive pleading or answered and counterclaimed if the other party so chooses. Assuming there are no default hearings or other preliminary matters, the court will set a scheduling order and will likely conduct a case management conference. Depending upon the complexity of the matter, discovery may be undertaken. With many reformation cases, discovery takes one of two forms: first, a deposition of the party claiming a mistake to get more details about the circumstances surrounding the formation of the original contract, or second, a third-party subpoena to obtain documents. The extent or scope of the discovery depends upon the nature and anticipated defenses and/or counterclaims involved with the case.
Once discovery has been completed, the parties will exchange motions in limine, which are basically lists of what evidence they intend to use at trial and objections to evidence that they want excluded from the court’s decision. After the motion in limines have been exchanged, they will be presented to the court for review. Typically, the court will either grant or deny the motions in limine and exclude or allow certain evidence.
As with almost every case, before beginning the preparation for trial, it is worthwhile for the parties to determine if the case can be resolved by consent order or settlement during mediation. Considering the time and expense associated with a trial, parties will consider any binding ruling by a judge, especially when it can potentially affect each party’s rights outside of the context of the particular case. In reformation cases, settlement is especially likely in the face of a mutual interest in rectifying a potential injustice.
Assuming the case is not settled through mediation or some sort of consent order (this is rare), the parties will prepare the case for trial. As is often the case, cases can be delayed in their actual appearance on the Civil Motion Calendar. In order to have a case resolved sooner than later, aside from scheduling conflicts with the attorneys, parties will sometimes ask the court to allow them search judgment filings in order to determine if a particular judge is experienced with reformation matters. Once a judge is selected, then the parties can prepare for trial.
The process of reformation requires extensive documentary evidence to prove. The merits of the case are often won or lost based on the documents available to the court. For example, in a classic reformation case, the deciding factor is often the presence or absence of an unsigned prior agreement which supports the parties’ position regarding the specific terms agreed to or omitted. For instance, in a recent case seeking reformation, the parties argued about whether certain language was included in a written property settlement agreement, and often times the parties simply relied on their recollection. There was an earlier agreement present which was inadvertently left out of the final agreement. However, questions about how the parties came to prepare the earlier Agreement were also relevant. Another issue was the question of whether the attorney who drafted the document was clear in his testimony regarding whether the Attorney had a mere clerical mistake drafted the Agreement, or if he made a substantive mistake, should have known the Attorney’s original intent to include certain language, and then prepared the Agreement accordingly. Because of the volume of documents, several years prior to trial, the evidence relied upon by the parties was overwhelming. The outcome of the case ultimately hinged on just two documents that were considered by the Court, but were not argued by the parties. In this scenario, the documents which were used by the Court were not disclosed by either party prior to trial. In any event, the parties sought to declare the Agreement void as against public policy because, amongst other reasons, it was obtained through the use of misrepresentations. By engaging in this conduct, it was evident that all documents of all parties were now discoverable and could be reviewed by the Court.
Often in reformation cases, a party will admit to "parol evidence" being present, but will seek to have it excluded by law or by parol evidence doctrine. Ultimately, in those situations, the party will then argue that the Agreement is clear on its face, or that the Agreement is ambiguous. In such situations, a party may seek to have the Court admit parol evidence that confirms or negates what the terms of the final contract should be considering the two prior written agreements at issue.
Contract Reformation Scenarios
Consider a scenario in which a couple commissioned an architect to design a home. The couple presented the architect with a detailed set of written specifications, including a note indicating that the walls on the second floor would be higher than those on the first floor. In the final blueprints, however, the architect inadvertently omitted the specifications for the second-floor walls and instead indicated standard wall heights throughout the home. In this case, the couple would have a case for reformation. Not only was their intention clear, but the architect himself failed to uphold his end of the agreement when preparing the blueprints.
In another hypothetical situation, two companies sign a contract for the sale of 25 widgets at a price of $1,000 each. After both parties sign the contract, it is discovered that the price was supposed to be based on a per-item price of $10,000 each. Because this contract should have been worth $250,000, rather than $25,000, the buyer could be entitled to reformation.
Reformation is required in many more types of contracts than just real estate or commercial sales agreements. For example, in a medical malpractice case, a doctor might misdiagnose a patient’s illness after looking at the results of an X-ray. The patient sees a different doctor, who orders a new test, which reveals the correct diagnosis. Because the first doctor failed to correct his mistake, he could be partially liable for the new doctor’s misdiagnosis. But because he prescribed the incorrect medication, he could be liable for the damages. Because both doctors share some liability for the situation, reformation would be necessary to divide the liability proportionally.
In a final example, a homeowner hires a contractor to build a deck on their home. The two agree on the price and scope of work. However, once construction begins, the contractor realizes the cost will be much higher than he first thought that it would need to be in order to complete the work. So he stops doing any work until the homeowner pays him an amount that is more than the original contract. The homeowner could be entitled to reformation in order to force the contractor to live up to his end of the agreement at the price of the original contract.
Because contract law is so ubiquitous, reformation can occur in practically any contract situation. When an important detail was misrepresented inadvertently, the ability to reopen the contract through reformation can save the day in and out of court.
Limitations & Pitfalls
A party seeking reformation after the judge has already issued an order disposing of a case may run into a major problem if the judge does not have the power to go back and effectuate a reformation. A judge indeed has the power to reform a contract after entry of a judgment if the judgment is still interlocutory, such as where a judge reserves jurisdiction to perfect findings of fact and conclusions of law to clarify the judgment. If the judgment is final, and the trial court retains no jurisdiction to tackle the contract or to correct a mistake in an earlier judgment, then a motion for reformation should be directed to the appellate court in an appeal of the case itself or in a separate appeal from the final judgment.
In reformation, there must be evidence of libelous intent. In other words, a contract cannot be reformed unless proof of the parties’ actual intent to enter the deal can be shown. Merely showing that a mistake exists, even if the mistake is mutual and irreconcilable by itself , may not be enough on its own to transform the contract. The error must have occurred by the parties’ misunderstanding. Skillful litigators and attorneys may not often be able to present enough evidence to show a party had the intent to have one contract modified into another during the course of the litigation of the contract dispute.
Contract reformation can also be limited when a contract contains a provision forbidding modification unless the changes are made in writing. For instance, if a contract forbids modifications unless they are committed to writing and signed by the parties, then evidence of the separate agreement cannot carry a change supported only by verbal statements. Parol evidence also is inadmissible into evidence to demonstrate the existence of a parole agreement provided they are barred by a contract term. Parol evidence can be admissible in evidence, however, if the provision allowing modification by another contract is ambiguous or vague, leaving the question whether the contract should be conformed to the actual intent of the parties. The real intent behind the contract can be proven by parole evidence, as long as such reputation would not alter a written provision of the original contract.
Advantages of Contract Reformation
Several advantages exist in electing to reform an existing contract rather than seeking restitution.
For one, reformation preserves a business relationship. Often, the parties reformed the contract and foundationally operated under the reformed agreement for years prior to the misunderstanding or dispute arising. Further, a court ordering contract reformation may not equitably terminate the contract by denying its validity. Rather, the parties are bound by the reformed contract, and binding precedent limits the reaching of equitable restitution across a contracting party.
Also, courts that grant contract reformation do so to prevent unjust enrichment, fraud, or mistake. It is rare for a court to deny a legitimate contractual performance when the performance maintained the general intentions of the parties.
Last, contract reformation is cost-effective, which gives a struggling business the ability to contemporaneously initiate legal action while also pursuing its original agreement.
Ways to Prevent Contract Reformation
One effective way to prevent the need for contract reformation is through clear and thorough negotiation prior to execution. If the parties are able to communicate their true intent and understanding with respect to each of the terms of the contract, misconceptions and errors can be avoided. The process of negotiating and finalizing contracts necessarily includes drafting and review by counsel. Drafting and review drafts of contracts that are specific to the desired transaction and also comply with applicable laws can minimize the risks of ambiguities creating need for reformation after closing.
If after proper negotiation, there are still issues with respect to the intent of the parties after the agreement is executed, the parties may want to consider amending the contract prior to closing to clarify the terms. Alternatively , if lack of clarity in the contract would not be discovered until closing arises, the parties should execute a closing agenda and make sure that the intent of the parties is clear at closing with respect to any of the provisions in the contract that are ambiguous, incomplete or require revision. Both the agenda and any closing deliverables should be memorialized and distributed to all parties to the contract as well as any third parties who should be made aware of the contract. In addition to attending closing, individual vested interests such as officers or approved shareholders of the buyer and seller, should be asked to read the contract and ask questions prior to closing. When the same individuals who make the decisions on behalf of the parties enter into a contract, the opportunity for error becomes very limited.