Guest Post, Jeff Lipshaw, That’s a Hell of a Mistake!
Guest post from Jeff Lipshaw (Left)
The other day, one of my former students sent me a clip from the Massachusetts Lawyers Weekly with his note, “That’s a hell of mistake.” Within the last couple weeks, a U.S. District here in Boston had issued a slip opinion in a contract case (diversity jurisdiction; substantive Massachusetts law), holding that a former executive got the benefit of a scrivener’s error that changed the payout in his severance agreement from $680,000 to almost $11 million. Yes, folks, you read that correctly.
I like teaching Sherwood v. Walker, in part because I like talking about cows who are in a family way and because I used to live in Plymouth, Michigan where there is a historical marker commemorating Rose 2d of Aberlone. But it is one of those cases you teach largely for contrast with modern law, and I’ve never really liked the modern cases I use to contrast with it (even if I’m obliged to teach about the Pickleses and Messerlys and the ooze coming up from their property (below) in Adrian, Michigan). Hence, I thought this might be a nice recent case to refresh my syllabus for next semester on mistake, and I set about looking at it.
What a mess it turns out to be! I will use it, but not so much for the doctrine as for an idea that I’ve pitched for as long as I’ve been in academia. The conceit of contract doctrine is that it is a coherent set of rules that models the reality of legal binding transactions. But at its core, contract law doctrine (if not all doctrine) is a model of reality, not reality itself, in the same way that the mathematics of a planet’s orbit is an explanatory model of the physical reality of the orbit. The difference is that legal models are normative, not necessarily descriptive. Within the model, legal theories are instrumental uses of modus ponens logic, but antecedents and consequences are connected with a “should”: if p, then [should] qpq.” So, if we are to be (business) lawyers operating in the reality of the business world rather than a rarified and abstract legal model of it, we should be aware of those circumstances in which, per Holmes, the life of the law is not logic, but experience.
Here is a synopsis. A Chinese tech company has a U.S. subsidiary. The subsidiary hires a senior executive on a fixed term three-year contract. Along the way, the parent company’s founder in China, wants the executive fired. Negotiations for the separation ensue, in English and in Mandarin, but the contract is in English, drafted by the subsidiary’s outside lawyers in Virginia. Drafts get circulated internally, but it’s clear that the executive, at the very least, is going to get the balance of his salary for the remainder of the three-year contract: “The Company agrees to make severance payments to you in the form of continuation of your base salary in effect on the Separation Date for sixteen (16) months.” That total would have been $680,000.
Then things go terribly wrong (internally). The outside lawyer changes the draft to this: “[T]he Company agrees to make monthly severance payments to you in the amount of $ _____ for sixteen (16) months.” The in-house lawyer gets the drafts and types into the blank “$680,000”, creating a putative obligation of $10,880,000. The executive gets the contract, sees the amount, signs it, and for four months gets paid on the basis of the original (and correct) total, not $680,000 per month. After four months, the subsidiary wants him dismissed and proposes a lump sum payout. The executive says, “Ok, then cut me a check for $10,880,000 less what you’ve already paid.”
Not surprisingly, litigation ensues in federal court. Subsidiary seeks and gets, by way of summary judgment, on the undisputed facts, that the correct total amount is $680,000 not $10,800,000, and reforms the contract. Executive appeals to the 1st Circuit, which holds that there were genuine issues of material fact on the questions of both mutual and unilateral mistake, and remands it for trial.
A different federal district judge hears the case without a jury, concluding (1) that she can’t reform the contract because there never was a prior agreement to reform it to; and (2) that the facts demonstrate both mutual and unilateral mistake under §§152 and 153 of the Restatement (Second) of Contracts, but (3) the company bore the risk of the mistake! Nevertheless, the district judge must have had some inkling that the logic had gone awry because, before entering judgment, she asks the parties to brief the question whether she really has to enforce the contract as written or is there some way, in her equitable powers, to avoid this.
My intuition was that, indeed, something has gone terribly awry. And I start to piece together the source of the problem, which turns out to go back to some underlying imprecision in the Massachusetts doctrine, accepted by the 1st Circuit in its opinion, and then brought home in the counter-intuitive conclusions of the District Court.
R2K §151 says a mistake is a belief not in accord with the facts. R2K §152 says that a mistake of both parties as to a basic assumption on which the contract was made allows the mistaken party to avoid it unless that party bore the risk of the mistake under R2K §154. R2K §153 says that a party’s unilateral mistake as to a basic assumption on which the contract was made allows that party to avoid it but only if the result of enforcing the contract would be unconscionable, or the other party knew of the mistake, unless the mistaken party bore the risk under R2K §154. And the only relevant provision of §154 is (c) which allows the court to allocate the risk on the ground that it is reasonable to do so in the circumstances.
My intuition is that none of this applies to a scrivener’s error. The sense of both §152 and §153 is that there is some extrinsic fact out in the world that was a basic assumption to the transaction, and somehow the contract did not reflect that. And it’s entirely possible, say, when there is undiscovered petroleum under a parcel of land, that the selling party bears the risk of not having known that fact. But a scrivener’s error isn’t that kind of mistake. Rather, we had some idea of what the deal was to be, and there was a slip ‘twixt the cup and the lip.
And voila, if you look at R2K §155, which is the provision that deals with both parties making a mistake as to the written document so that it doesn’t embody what they agreed to, (1) the court can reform the contract to reflect the agreement, and (2) there is no provision for having assumed the risk of the mistake!
Hence, the district judge made two errors. She can take full credit for the first one. She misread the comments to R2K §155 in holding that there was no agreement to which the contract could be reformed, largely because the mistake was internal to the company.
For the rule stated in this Section to be invoked, therefore, there must have been some agreement between the parties prior to the writing. The prior agreement need not, however, be complete and certain enough to be a contract. Compare § 1 with § 3; see § 33. If the parties reach agreement as to only part of a prospective bargain, and if they are later mistaken in their attempt to put in writing this agreement together with such other terms as will make a contract, reformation is still an appropriate remedy. The agreement must, of course, be certain enough to permit a court to frame relief in terms of reformation.
Looking at this from the outside, it seems to me absolutely clear that the parties understood enough about the deal, whether or not it was “complete and certain enough to be a contract” that $680,000 was a total and not a monthly amount.
The second error has its roots in the Massachusetts doctrine that the 1st Circuit imported into the case. That error was to base the scrivener’s error mistake in §§152 and 153 to begin with, which allowed the district court then to assess whether there was an assumption of risk. Indeed, her opinion is effusive on the extent to which there was both mutual mistake and unilateral mistake. The executive obviously knew that the written contract had an error, sat on it for four months, and came up with a lame explanation for not saying anything. Hence, she concluded that the facts showed mistake.
But then she made the fatal (at least I hope not!) error of determining under R2K §154 (as §§152 and 153 would permit) that the company bore the risk of the mistake because it had lots of good lawyers, and they should have spotted the problem!
I remember, when I was a puppy lawyer, partners telling me to go research “because there has to be a case on that….” Usually there wasn’t, but that didn’t stop me from trying. But I’m still pretty good at this, and it took me all of fifteen minutes on Westlaw to find Thomas v. Del Biaggio, 527 B.R. 33 (N.D. Cal. 2014), in which the federal district court laid out precisely the logic of my intuition: mistakes in scriveners’ execution of contracts are fundamentally different than mistakes of extrinsic facts that go to basic assumptions on which the contract is made. For that reason, there is no cross-reference to assumption of risk of the mistake!
In short, the minute that the district court found there to be a mistake that was a scrivener’s error, the case should have been over. Because it was clear that the parties did understand that much of the agreement to have been a total $680,000 payout (not $680,000 a month for sixteen months), it should have been reformed due to the mistake. The entire discussion of risk assumption never should have gotten into the opinion. And the judge knew that the logic had taken this to an outlandish place. Thus, her request to the parties in so many words: “please brief the question whether I really have to do what my misplaced logic has caused me to do?”
I hope the last chapter in this story is yet to come. Perhaps it will because there’s enough at stake to take this back to the 1st Circuit and let it clean up the mess. Or perhaps not, because the parties will settle on some amount between $680,000 and $10,880,000. Nevertheless, here’s the moral of the story. If you are a physicist and your mathematical model gives you the result that the orbit of Jupiter is a loop-de-loop that goes past Venus, then out to Neptune, and then back to somewhere near Mars, you might want to question the model rather than the orbit. If you are a lawyer or a judge, perhaps you should do the same thing.
The opinions are: Dahua Technology USA Inc. v. Zhang, 988 F.3d 531 (1st Cir. 2021) and Dahua Technology USA Inc. v. Zhang, Civ. Action No. 1:18-cv-11147-IT, Findings of Fact and Conclusions of Law (Oct. 21, 2022).