Reformation Contract Law: Correcting Errors in Agreements

Key Takeaways

• Reformation in contract law corrects written agreements to reflect the original intent of the parties when errors or misunderstandings occur.
• Grounds for reformation include mutual mistake, unilateral mistake with inequitable conduct, and fraud.
• Courts require clear and convincing evidence to grant reformation.
• Reformation is an equitable remedy and distinct from rescission, which voids the entire contract.
• It is commonly used in insurance policies, real estate transactions, and commercial agreements.
• Reformation aims to preserve valid contracts while eliminating unintended consequences from drafting errors.

Reformation in contract law is a legal remedy in which the court rewrites the contract to ensure both parties' true intentions are reflected. This is an alternative to equitable remedies, such as monetary damages. In a breach of contract case, the injured party often must choose between an equitable and legal remedy. The latter is often a good option if one or both parties misunderstood one or more of the contract terms or a mistake was made in the contract.

How Contract Reformation Works

If fraud has occurred, reformation can be used to correct the contract if an equitable remedy is called for. For example, if a real estate contract incorrectly states the value of the property to mislead the buyer, the buyer can sue for breach of contract. If both parties agree, the court can adjust the contract to reflect the property's true value.

If both parties are not amenable to a new contract, reformation would not work as a remedy. Instead, the buyer would likely receive compensation or the seller would be subject to penalties. The court may not impose a contract on a party who does not agree with its terms.

Reformation is used only when the court has clear, convincing evidence of intent on behalf of both parties. This strategy may only clarify, not change, the terms of the contract. If changes are made, each party must initial the revision. A rider can be created to correct the mistake or an entirely new version of the contract can be drafted. Courts often encourage parties to agree on reformation and will enforce the new contract if another dispute arises.

When Reformation Is an Appropriate Remedy

Reformation is appropriate when a written contract does not reflect the actual agreement made by the parties due to specific errors or misconduct. It is not a remedy for buyer's remorse or when the agreement is simply unfavorable to one party.

Typical scenarios where reformation applies include:

• Mutual Mistake: Both parties share the same mistaken belief about a fundamental term or fact in the contract.
• Unilateral Mistake Plus Inequitable Conduct: One party is mistaken, and the other party knew or should have known about the mistake and acted unfairly.
• Fraud or Misrepresentation: One party intentionally provides false information or conceals material facts, causing the written contract to misstate the true agreement.

Courts assess whether reformation would serve justice without unfairly disadvantaging the other party.

Contract Reformation Requirements

All elements must be satisfied for a contract to be eligible for reformation, including:

• A valid contract exists.
• A valid reason exists to rewrite the contract, typically either error or misrepresentation on behalf of one or both parties. Reformation will be granted for both purposeful and accidental misrepresentation as well as for bilateral error. However, if only one party made an error, the contract can be reformed only if the other party was unaware of the other.
• No defenses are available.

A contract cannot be reformed if doing so will cause future harm to either party or lead to an illegal or one-sided contract.

Burden of Proof in Reformation Cases

To succeed in a reformation claim, the plaintiff must meet a high evidentiary standard—typically "clear and convincing evidence." This standard is stricter than the "preponderance of the evidence" used in most civil cases. The party seeking reformation must demonstrate:

• The original agreement existed and was different from the written version.
• A specific mistake, misrepresentation, or inequitable conduct caused the discrepancy.
• Both parties had a common understanding that is not reflected in the document (in mutual mistake cases).

Courts are cautious in granting reformation and will not rewrite contracts unless these criteria are clearly met.

Other Types of Contract Remedies

If reformation is unavailable, the court could completely cancel the contract (rescission). This may be the remedy if one party makes a mistake of which the other party is aware. Sometimes, the injured party can opt for monetary damages depending on the facts of the case and the types of violation. However, if an entity takes this route, he or she cannot later request reformation or rescission.

Reformation vs. Rescission

Reformation and rescission are both equitable remedies but serve different purposes. Reformation corrects the written contract to align with the original intent of the parties, preserving the contractual relationship. Rescission, by contrast, cancels the contract entirely, returning both parties to their pre-contract positions.

Seeking Legal Assistance

Even for those familiar with legal agreements, contract remedies can be complicated and hard to understand. However, this is a powerful strategy through which courts can create a new agreement. This can have a major impact on the terms of the agreement, so it's important to seek the input of an experienced contract attorney. In addition, having a lawyer draft the original contract can prevent the need for later reformation.

Common Uses of Contract Reformation

Reformation is often used in specific industries and legal contexts where precision in documentation is critical. Common examples include:

• Insurance Contracts: Reformation may correct policy terms to reflect the agreed coverage.
• Real Estate Transactions: A deed or purchase agreement may be reformed to fix a legal description or reflect true ownership terms.
• Loan or Security Agreements: Reformation ensures that the documented loan terms align with the original financial arrangement.
• Commercial Contracts: Complex agreements involving multiple parties may require reformation if clerical errors or miscommunications occur.

Because reformation seeks to preserve valid contracts, courts typically favor this remedy when it avoids unjust enrichment or inequity.

When a Disagreement Exists

Parties often disagree about whether a mistake has occurred if the error benefits one party and disadvantages the other. The latter may bring a reformation lawsuit in combination with a breach of contract claim. This should be done as soon as possible once a mistake is discovered to avoid the defense of an unreasonable delay for reasons of prejudice (laches).

The party suing for reformation bears the burden of proof, which often requires the true intent of both parties in writing and/or other clear and convincing evidence. However, the party may succeed on the breach of contract claim independently if the agreement is found to be unclear by the court.

Limitations and Risks of Reformation

While reformation is a powerful equitable tool, it has limitations. Courts will not:

• Rewrite a contract to create a new agreement the parties never intended.
• Apply reformation when the party seeking relief was grossly negligent.
• Use reformation to fix vague or incomplete agreements lacking essential terms.

Risks include potential litigation over the sufficiency of evidence and increased legal costs. Moreover, if reformation affects third-party rights (e.g., in real estate involving subsequent purchasers), courts may decline to reform the contract to protect innocent parties.

Avoiding Contract Errors

Important contracts must be error-free. When creating a new contract from an old template, check the language carefully. Have an attorney who is familiar with your industry draft the contract or review and revise your initial draft. Be aware of grammar errors that can change the meaning of a contract.

How to Prevent the Need for Reformation

To minimize the likelihood of needing reformation, parties should:

• Use clear and precise language in all contract documents.
• Review drafts carefully and ensure all parties agree on terms before signing.
• Document communications and negotiations to establish mutual intent.
• Consult legal counsel for complex or high-value agreements.
• Include merger clauses that clarify the final written agreement represents the entire understanding.

Proactive drafting and thorough review are often the most effective ways to avoid costly disputes over contract interpretation or enforcement.

Frequently Asked Questions

1. What is reformation in contract law?
   Reformation is an equitable remedy that allows courts to modify a written contract to reflect the true intentions of the parties when the document contains errors due to mistake, fraud, or misrepresentation.
2. How does reformation differ from rescission?
   Reformation corrects the contract to match the original intent, while rescission cancels the contract altogether, returning the parties to their positions before the agreement.
3. What are the grounds for contract reformation?
   Common grounds include mutual mistake, unilateral mistake with inequitable conduct, and fraudulent misrepresentation.
4. What standard of proof is required for reformation?
   Clear and convincing evidence is typically required to prove that the written contract does not reflect the parties' actual agreement.
5. Can reformation affect third-party rights?
   Courts are generally reluctant to grant reformation if it would harm the rights of innocent third parties who relied on the original contract.

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