Many contracts have mistakes. Minor grammar mistakes may not impact the contract. But major mistakes can alter how the contract is performed. If the parties cannot agree on a fix to the mistake, what can a party do?
Minnesota law allows a court to correct a contract mistake through a “reformation” claim in court. If a party proves the mistake, the judge can “reform” the contract so that it conforms to the parties' intent. This can save a party from breaching the “mistaken” contract.
This article looks at the legal requirements for reformation claims in Minnesota.
The Basics of “Reformation”
“Reformation” is a word that means to change, correct, or restore. In the legal context, “reformation” means to correct a mistake in a contract so that the contract reflects the parties' true intent.
Reformation is a civil claim brought in a lawsuit. With reformation, a judge formally orders a correction to the contract. The judge might add, delete, or re-word the language of the contract. Once corrected, the judge and the parties can then analyze whether a party has breached the contract. The “reformed” language of the contract is deemed to have always been a term of the contract, so the parties must have performed according to that reformed language.
Reformation claims usually arise when the parties to the contract (a) disagree on how the contract should be interpreted, (b) disagree on whether the contract contains a mistake, or (c) both. If the parties can cooperate, they can simply amend or modify the contract. But when they disagree, then one party usually starts a lawsuit.
Plaintiffs or defendants can bring reformation claims. Plaintiffs may raise it to confirm their understanding of the contract and to avoid a breach of contract. A plaintiff-bank might want to reform a legal description so that it can properly foreclose a mortgage. On the other hand, a defendant may raise a reformation claim to defend a breach-of-contract claim. If the defendant can get the judge to reform the contract, then the defendant may be able to show that she performed the contract.
Many types of contracts can be reformed, including:
- Commercial Contracts
- Real Estate Deeds
- Purchase Agreements
- Employment Agreements
- Loans, Mortgages, and Security Agreements
- Insurance Policies
- Most other contracts
The point is that if you cannot agree to a correction with the other party, and there is a potential breach of contract, then a reformation claim may be necessary.
Clauses in Contracts
Reformation is a general principle of contract law and may be viewed as a “default rule” that courts apply. Therefore, a clause that says “a court cannot reform this contract” will be disregarded.
However, parties can sometimes limit the risk of judicial intervention. A “severability clause” reduces the chance of a judge voiding the entire contract due to a mistake or similar issue. Here is a basic severability clause (note: do not use this without tailoring to your situation):
Severability: The invalidity of any clause in this Contract shall not impact the validity of any other clause. If any clause is deemed invalid by a Court, it shall be reformed in such a way as to allow said clause to be enforceable.
While a court may still apply the default rules and reform the contract, a severability clause could help persuade a judge to save the contract or a clause in it.
Legal Standard for “Reformation”
Reformation is considered an “equitable” remedy that courts use to avoid unfairness.
Reformation “is available when a party seeks to alter or amend language in a contract so that the contract reflects the parties' true intent when they entered into the contract.” SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 795 N.W.2d 855, 864 (Minn. 2011). Reformation is appropriate when:
(1) there was a valid agreement between the parties expressing their real intentions;
(2) the written instrument failed to express the real intentions of the parties; and
(3) this failure was due to a mutual mistake of the parties, or a unilateral mistake accompanied by fraud or inequitable conduct by the other party.
Id. at 865 (quotation omitted). The party must show “evidence which is clear and consistent, unequivocal and convincing.” Id. This is a higher burden than the burden in a normal civil case.
The purpose of reformation is not to create a new contract; rather, it is to bring the contract into conformity with the parties' intent. Jablonski v. Mut. Serv. Cas. Ins. Co., 408 N.W.2d 854, 857 (Minn. 1987).
“Reformation is generally allowed against the original parties to an instrument and those in privity with the original parties.” Manderfeld v. Krovitz, 539 N.W.2d 802, 805 (Minn. Ct. App. 1995), review denied (Minn. Jan. 25, 1996). Outside parties cannot generally reform contracts belonging to other persons. Nunnelee v. Schuna, 431 N.W.2d 144, 148 (Minn. Ct. App. 1988), review denied (Minn. Dec. 30, 1988).
While evidence outside a contract like this is usually barred by the “parol evidence rule” in court proceedings, evidence of a mistake is generally allowed. Aronovitch v. Levy, 238 Minn. 237, 246, 56 N.W.2d 570, 576 (1953).
Requirement of a Mistake
Reformation requires a party to show either a mutual mistake or a unilateral mistake.
Most successful reformation claims involve a mutual mistake.
A mutual mistake occurs when “both parties agree as to the [intended] content of the document but that somehow through a scrivener's error the document does not reflect that agreement.” Nichols v. Shelard Nat'l Bank, 294 N.W.2d 730, 734 (Minn. 1980). In other words, neither party spotted the error when the contract was drafted and signed. The parties agree on what was the contract was intended to say.
For example, the contract says that a person will sell the another person a “red” car. They both agree that they intended a “blue” car to be sold. The contract can be reformed to provide for a red car.
On the other hand, there is no mutual mistake when the parties had different intents for the contract language. As the Nichols court put it, “[w]hen both parties acted in good faith and neither misled the other, but nevertheless each party was mistaken and thought he was making a different contract from what the other party supposed he was making, reformation is not an appropriate remedy.” Id.
In the car example, assume that the contract provides for a “red” car, but the seller intended a “green” car while the buyer intended an “orange” car. The contract cannot be reformed from red to green (or red to orange) because the parties disagree about the original intent of the contract. If there is no agreement between the parties, the contract might be voidable.
A more limited set of reformation claims involve a “unilateral” mistake by one party, which is usually created or made worse by the other party. “Absent ambiguity, fraud or misrepresentation, a mistake of one of the parties alone as to the subject matter of the contract is not a ground for reformation.” Id.
For example, if a party used misrepresentation or fraud to induce the other person to sign the contract, the “victim” could void the contract. But if the person wants the contract to stand but with some correction, then a reformation claim would be the way to do it.
Regardless of the type of mistake, the plaintiff must plead the mistake with “particularity” in the complaint. See Minn. R. Civ. P. 9.02 (“In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.”). In other words, you need to be specific about the mistake and the facts proving the mistake.
Causes of Mistakes in Contracts
There can be any number of reasons why contracts have mistakes.
- The parties did not understand each other's intent or promises.
- The parties overlooked important details when negotiating the transaction.
- The parties relied on third persons who failed to competently support the deal.
- One or both parties were working off mistaken information.
- The parties gave bad information to the drafter of the contract.
- The parties did not closely review the contract before signing it.
- The lawyer or other drafter failed to properly incorporate the parties' information.
- The parties or the drafter failed to attach proper documents to the contract, such as riders, addenda, deeds, memoranda, specifications, or other documents.
- The circumstances changed between the time the deal was negotiated and ultimately signed.
- Other “sloppy” contracting practices.
- One or both parties misrepresented facts underlying the deal.
Contracts commonly have grammar mistakes and other small errors that do not impact the parties. To justify the time and cost of a reformation action, there should be a significant question or mistake that impacts the contract.
Since correction of these mistakes can materially change the parties' rights and obligations, parties must develop evidence to support their reformation claims. Often, this means having an attorney that can conduct “discovery” (i.e., depositions, interrogatories, and subpoenas).
Reformation in Various Contexts
Reformation comes up in many contexts and could be used to correct almost any type of contract.
Mortgage transactions are complicated and have many moving parts, any of which could cause a mistake in the loan documents. A common mistake involves an erroneous legal description. The parties may have an existing legal description with a problem; fail to re-type a proper description; or fail to include all of the lots or parcels that the bank wants to secure. Banks commonly reform mortgages as part of their effort to foreclose on property. Sometimes, they must reform documents after the foreclosure, such as the sheriff's certificate. Everson v. De Schepper, 195 N.W. 927, 927 (Minn. 1923); Mut. Life Ins. Co. v. Murphy, 114 N.W. 360, 361 (Minn. 1908).
Real Estate Deeds
Real estate transactions can be complicated and lead to mistakes in the deeds. Problems include mistaken legal descriptions, omission of grantors or grantees, failure to reflect easements or other encumbrances, or other problems. For example, “[a] deed creating by mistake a tenancy in common, where a joint tenancy was intended, will be reformed.” Magnuson v. Diekmann, 689 N.W.2d 272, 274 (Minn. Ct. App. 2004) (quotation omitted). Sometimes, the recorder's office catches a problem and rejects a deed that someone tries to record. In that case, the party corrects the problem and re-records the document. However, many problems are found when the next buyer closes on the property. While many of these issues can be resolved by having the parties sign a “corrective” deed, other situations may require a reformation action.
Commercial and Business Contracts
The default rules for reformation should generally apply to commercial contracts. Since businesses often have ongoing relationships, they may be in better position to agree on an amendment to the contract. If not, they can pursue a reformation claim in court or arbitration (if the contract has an arbitration clause).
The default rules for reformation apply to construction contracts. Sometimes, construction contracts leave flexibility for smaller details that will be determined later in the project. This can avoid mistakes in the contract. Also, note that many construction contracts provide for “change orders” to modify existing requirements of the project. This is a way to correct mistakes, but the parties will also have to address any changes in payment.
Employment contracts can be reformed like any other contract. The default reformation rules apply.
Reformation issues often come up with non-compete agreements. Some non-compete agreements are unreasonably long and wide in scope. “Because restrictive covenants are agreements in restraint of trade, they are enforced only to the extent reasonably necessary to protect a legitimate business interest.” Webb Publ'g Co. v. Fosshage, 426 N.W.2d 445, 450 (Minn. Ct. App. 1988). Under the “blue-pencil doctrine”, if the district court finds that a restrictive covenant is unreasonable as written, it may modify the covenant “to render it reasonable and enforceable.” Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. App. 1993). “While it is certainly within the power of the trial court to modify [a noncompete agreement], no cases say that a court must do so.” Klick v. Crosstown State Bank of Ham Lake, Inc., 372 N.W.2d 85, 88 (Minn. Ct. App. 1985).
Basically, if a court thinks the duration or scope of the non-compete is unreasonable, it can re-write the contract to make these provisions enforceable. In a way, this is reforming the contract without the need to show a mistake.
Leases may be reformed using the default reformation rules. See, e.g., Theisen's, Inc. v. Red Owl Stores, Inc.,309 Minn. 60, 65, 243 N.W.2d 145, 148 (1976) (reforming commercial lease due to issue with allocation of taxes).
Trusts may be reformed by a court under Minn. Stat. § 501C.0415, which states:
REFORMATION TO CORRECT MISTAKES.
The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence what the settlor's intention was and that the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.
Wills may be reformed by a court under Minn. Stat. § 524.2-805, which states:
REFORMATION TO CORRECT MISTAKES.
The court may reform the terms of a governing instrument, even if unambiguous, to conform the terms to the transferor's intention, if it is proved by clear and convincing evidence what the transferor's intention was and that the terms of the governing instrument were affected by a mistake of a fact or law, whether in expression or inducement.
Similarly, wills may suffer from ambiguities that allow a court to correct the will. For example:
To avoid declaring bequests void for uncertainty, courts began to consider evidence of the testator's intent with respect to so-called equivocations, often referred to as latent ambiguities, which involve instruments that describe a person or thing in terms equally applicable to more than one when the surrounding circumstances are taken into account.
In re Estate of Cole, 621 N.W.2d 816, 818 (Minn. Ct. App. 2001).
Insurance contracts can be reformed to correct mistakes. For example, “[w]here an agent has allegedly made a mistake in obtaining insurance, the insured's remedy is generally reformation of the contract.” Wood Goods Galore, Inc. v. Reinsurance Ass'n, 478 N.W.2d 205, 208 (Minn. Ct. App. 1991), review denied (Minn. Jan. 30, 1992). There is also a rule called the “reasonable expectations doctrine”, where the court can remedy an ambiguity or an extreme difference between the policy and what an insurance customer reasonably expects to get for coverage. Atwater Creamery Co. v. W. Nat. Mut. Ins. Co., 366 N.W.2d 271, 277 (Minn. 1985). This doctrine is more of an interpretive aid than reformation, but it can nonetheless be an important remedy for an insured.
Legal Remedies Related to Reformation
A person that has a problematic contract may have other options, including:
This is a practical option rather than a legal remedy, but it never hurts to speak with the other party and try to negotiate an amendment or modification to the contract. This is usually the simplest and cheapest fix to the problem.
Sometimes, a contract is unclear. This makes it hard for a party to determine its rights or perform the contract. A declaratory judgment is like an “advisory opinion” from a judge. See Minn. Stat. § 555.03 (“A contract may be construed either before or after there has been a breach thereof.”). A party tries to persuade the judge of a favorable interpretation of the contract. Once the judge interprets the contract, the parties can perform according to that interpretation. Usually, only bigger contracts will justify the time and effort needed to get a declaratory judgment.
For purposes of a declaratory judgment, Minn. Stat. § 555.02 states:
MAY HAVE INSTRUMENTS CONSTRUED.
Any person interested under a deed, will, written contract, or other writings constituting a contract, or whose rights, status, or other legal relations are affected by a statute, municipal ordinance, contract, or franchise may have determined any question of construction or validity arising under the instrument, statute, ordinance, contract, or franchise and obtain a declaration of rights, status, or other legal relations thereunder.
Sometimes, a judge can even issue “supplemental relief” to go along with the declaratory judgment when requested by a party. See Minn. Stat. § 555.08.
Rescission of Contract
“Rescission of contract” is another equitable remedy that a party often requests with reformation. While reformation corrects a mistake in the contract, rescission cancels the contract entirely.
A contract may be rescinded if “both parties were mistaken with respect to facts material to the agreement.” SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 795 N.W.2d 855, 861 (Minn. 2011) (quotation omitted). If the parties never had a “meeting of the minds” regarding essential elements of the contract, there is no “mutual asset” to support a contract. Minneapolis Cablesystems v. City of Minneapolis, 299 N.W.2d 121, 122 (Minn. 1980). The existence of a unilateral mistake “is not a basis for rescission unless there is ambiguity, fraud, [or] misrepresentation.” Speckel by Speckel v. Perkins, 364 N.W.2d 890, 893 (Minn. Ct. App. 1985). “A mistake relating merely to the attributes, quality, or value of the subject of a sale does not warrant rescission.” Costello v. Sykes, 143 Minn. 109, 111, 172 N.W. 907, 908 (1919).
With reformation, the parties agree on an issue but the contract fails to reflect that agreement. With rescission, the parties never agreed to an important term. Reforming the written contract is not enough. Without “mutual assent”, the contract should be rescinded rather than reformed.
Correcting Mistakes in Court Orders
To correct a court order rather than a contract, there are separate procedures. Various statutes and court rules give judges the power to correct mistakes made in prior orders.
For instance, a court can correct “clerical” mistakes under Minn. R. Civ. P. 60.01, which states:
Clerical mistakes in judgments, orders, or other parts of the record and errors therein arising from oversight or omission may be corrected by the court at any time upon its own initiative or on the motion of any party and after such notice, if any, as the court orders. During the pendency of an appeal, such mistakes may be so corrected with leave of the appellate court.
Likewise, a party can correct a substantive mistake (or other problem) in an order or judgment under Minn. R. Civ. P. 60.02, which states:
Mistakes; Inadvertence; Excusable Neglect; Newly Discovered Evidence; Fraud; etc.
On motion and upon such terms as are just, the court may relieve a party or the party's legal representatives from a final judgment (other than a marriage dissolution decree), order, or proceeding and may order a new trial or grant such other relief as may be just for the following reasons:
(a) Mistake, inadvertence, surprise, or excusable neglect;
Note that these rules are meant to correct mistakes by the court. If a party simply disagrees with the judge's ruling, then these rules will not provide relief to the party.
When land is erroneously described in a deed or mortgage, it can cause title defects to the land. For instance, the legal description could mistakenly describe a boundary to the property. If so, it could impact the neighboring land, easements, mortgages on the neighboring land, and other problems.
While the parties might be able to use a Corrective Deed if the parties are cooperative, further action might be required to address problems with third parties. If third parties are agreeable, they could exchange quit claim deeds to correct the boundary description. Or they could enter into an easement agreement or subordination agreement.
However, if there is a dispute, the owner of the land with the problematic legal description may have to get the document reformed or start a “quiet title action” (also called an “action to determine adverse claims”). The objective of a quiet title action is to get a court order ruling that the third parties have no interest in the land. Minn. Stat. § 559.01 states:
ACTION TO DETERMINE ADVERSE CLAIMS.
Any person in possession of real property personally or through the person's tenant, or any other person having or claiming title to vacant or unoccupied real property, may bring an action against another who claims an estate or interest therein, or a lien thereon, adverse to the person bringing the action, for the purpose of determining such adverse claim and the rights of the parties, respectively.
Whether the landowner gets a reformation order or a quiet title order, correcting the problem will make the land “marketable” for a potential sale.
Practical Tips for Reforming Contracts
- If you see a problem or mistake in the contract, act promptly to fix it. Waiting too long may create more problems, especially if both parties have performed the contract according to the mistaken term.
- Consider whether the contract, as written, can be interpreted to support your position. If not, then a court action may be necessary.
- Communicate with the other party to see if you can fix it without any court action.
- Keep any notes or emails that relate to the formation of the contract.
- Consider using a reformation or severability clause in the contract to control the risk of court reformation.
- If you must start a reformation action, plead the Complaint with “particularity.” That means developing the details needed to support the claim. The purpose is to avoid dismissal of the claim.
- In the reformation Complaint or an attachment to it, draft what you want the “reformed” contract to say. This will be starting point for other parties and the judge to analyze your claim. Be specific about what you want.
- Consider raising other legal claims or remedies that may give you extra or alternative relief.
- Consider whether any third parties are impacted by the mistake in the contract. If there is a mistaken legal description to land, then you may have to add other parties to get full relief in the case.
- Use discovery processes to develop evidence for your reformation claim. It may be necessary to take the deposition of the opposing party and ask him or her about the mistake. If the opposing party agrees that there was a mistake, then you have a strong chance of winning the reformation claim.
- Regardless of how you reach the end of the court action, make sure the judge's final order accurately reforms the contract to what the parties intended.
Reformation allows a party to correct a mistake or error in a contract. The correction can save a party from breaching the contract or save the party from an unfair contract.
Like any lawsuit, there may be risks to both parties. To avoid the cost and uncertainty of litigation, they should first try to negotiate a change to the contract. If there is no agreement, then one party will have to bring a reformation claim and litigate the issue.
If a court reforms the contract, then the parties must carefully comply with that “reformed” term as if the contract had always included it.
If you need legal advice or representation on a reformation claim or contract dispute, Contact Us for a free consultation. With offices in Shakopee (Scott County) and Litchfield (Meeker County), we serve clients throughout the Twin Cities and Greater Minnesota.