Private Equity

In Chapter 26 of Book XI of the City of God, a multi-book tome completed in 426 CE, Augustine of Hippo said, according to a translation by W.M. Green, that:

[I]f I am mistaken, I exist. For a man who does not exist can surely not be mistaken either, and if I am mistaken, therefore I exist. So, since I am if I am mistaken, how can I be mistaken in believing that I am when it is certain that if I am mistaken I am. Therefore, from the fact that, if I were indeed mistaken, I should have to exist to be mistaken, it follows that I am undoubtedly not mistaken in knowing that I am. It follows also that in saying that I know that I know, I am not mistaken.

I apparently lack the philosophical acumen necessary to fully appreciate this argument.  If it is impossible to be mistaken about your existence, how could being mistaken about your existence prove your existence?  But then I did not spend the 13 years it took to write the City of God contemplating this, and many other deep questions, like St. Augustine did.  But I did read a case decided on April 28, 2016, by the 11th Circuit Court of Appeals, Patterson v. CitiMortgage, Inc., concerning the doctrine of “unilateral mistake.” And regardless of the efficacy of self-doubts about your own existence proving that existence, it is in fact possible to be mistaken about the existence or terms of an agreement and for that mistake to thereby prove that no contract exists.

As a general rule, being mistaken about whether you contracted, or what you contracted for, does not mean that a contract does not exist based upon the terms of the written agreement you signed.  A party’s protestations that he or she did not understand the agreement, or believed it said something other than what it said, or that the words used in the agreement meant something other than what they are determined by a court to mean, will generally not be entertained by a court.  In other words, despite the common law courts’ frequent pronouncements that the purpose of contract construction is to discern the parties’ intent, the intent they are trying to discern is not the actual, subjective intent of the parties, but their objective intent as manifested by the words they used in the written agreement they signed.   Indeed, the U.S. Supreme Court affirmed this basic precept in the nineteenth century case of Upton v. Tribilcock, 91 U.S. 45, 50 (1875):

It will not do for a man to enter into a contract, and, when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained. If this were permitted, contracts would not be worth the paper on which they are written. But such is not the law. A contractor must stand by the words of his contract; and, if he will not read what he signs, he alone is responsible for his omission.

Like most general rules, however, there are exceptions.  A written agreement that, through scrivener’s error or mutual mistake, failed to reflect the parties’ true intentions can be reformed or rectified by a court to reflect the actual intentions of the parties, provided that there is clear extrinsic evidence of what those actual intentions were.  Even unilateral mistakes can be a basis for reformation, but the rule here is a little more exacting.  In order for a unilateral mistake by one party to be a basis for a reformation of an agreement, the mistaken party must not only prove its mistake, but also prove that the other party was aware of that mistaken belief and effectively took advantage of the other party’s mistake.

In this recent 11th Circuit case, CitiMortgage was negotiating to permit a “short sale,” by the owner to a third party buyer, of a house upon which it held a $550,000 mortgage that was in default.  The third party buyer made a series of escalating offers to CitiMortgage to purchase the house and thereby avoid the foreclosure.  After a final offer from the third party buyer of $444,000, which after closing costs and fees would have netted CitiMortgage $412,620, CitiMortgage apparently decided to accept the offer provided that certain of the fees were reduced so that the net to CitiMortgage would increase to $423,940.  In accepting the offer, CitiMortgage communicated that it was accepting the offer based upon its net proceeds not the gross price, but in the letter of acceptance CitiMortgage “mistakenly” stated the net amount they required as $113,968.45.  Oops!  The third party buyer said okay, and delivered the acceptance letter to the closing attorney at the title company.  The borrower and the third party buyer then revised the contract between themselves so that the net to CitiMortgage would equal $113,968.45. The closing thereafter occurred and CitiMortgage was wired that amount. It was only then that CitiMortgage realized its mistake, rejected the funds, and refused to release its lien.  CitiMortgage thereafter sought to go through with the foreclosure and the third party buyer and the borrower sought to enforce the “deal” as reflected in the “short sale” acceptance letter sent by CitiMortgage.

Applying Georgia law, the 11th Circuit said that this was clearly a unilateral, rather than mutual, mistake.  But here there was lots of evidence in the back and forth letters between the third party buyer and CitiMortgage that demonstrated that the amount set forth in the acceptance letter was a mistake and that the third party buyer took advantage of it; after all “rational persons and mortgage companies do not counteroffer for less—in this case nearly $300,000 less—than the latest and highest and still outstanding offer.”  In ruling in favor of CitiMortgage, the 11th Circuit court said:

It is true that Georgia courts will often refuse to save contracting parties from their own unilateral mistakes that could have been avoided through the exercise of due diligence.  But it is equally true, if not more so, that Georgia courts will not permit a party to take unfair advantage of an offer that contains an obvious unilateral mistake.

So unilateral mistake is only a basis for reformation where the unilaterally mistaken party manifested its mistaken belief to the other party (or it was manifestly obvious) and the other party did not correct that party’s mistaken belief.  But a unilateral mistake made by a party that is not made manifest to the other party will not be a basis for reformation because, absent knowledge of the mistaken belief, the other party is entitled to rely on the written agreement as manifesting the intentions of the otherwise mistaken party (i.e., to paraphrase St. Augustine, “for if I am mistaken about the terms of the contract and the other party is not, I am contracted, unless the other party knows I am mistaken, in which case I am not contracted.”).  But successful cases of reformation based on unilateral mistake are exceedingly rare—so endeavor not to be mistaken.