OOPS – I Made a Mistake

David Allen

Partner

Jaburg | Wilk Attorneys at Law

There is nothing at all unusual about making a mistake. Everyone makes them all the time. Some, or more likely most, are harmless and do not require any correction. Others are more serious and will pose a problem if not corrected. What if, for example, a lender innocently makes a mistake when preparing the deed of trust in describing the collateral being pledged by the borrower to secure the repayment of a loan? If, after the lender discovers the mistake, the lender asks the borrower to cooperate with “fixing” the mistake, and the borrower refuses to do so, what legal recourse does the lender have?

The legal action that is available to a party to a written agreement, such as a deed of trust, to “fix” a mistake, is a claim for “reformation.” Under certain circumstances a Court will “fix” a mistake to reflect the “true intentions” of the parties to the agreement. The legal grounds for doing so are if the mistake creates an “ambiguity” in the agreement, if the mistake was the result of a “mutual mistake” made by the contracting parties, or if the mistake was the result of a “unilateral mistake” of one party to the agreement, if there is fraud or inequitable conduct by the other party.

To determine whether an agreement is “ambiguous” the Court must make a determination as to whether the language in the agreement can be construed in more than one sense, or whether there are some extrinsic facts that create a latent ambiguity not apparent on the face of the agreement. Thus, in the deed of trust example, if the security is defined in one paragraph as being property A, but in another paragraph as being property B, there would be a clear ambiguity that would warrant reformation of the deed of trust to make it clear what security is being given. Or, if the security is defined in the deed of trust as being property A, and in another concurrently executed loan document, such as a security agreement, as being property A and B, then again, there would be an ambiguity that should be corrected by reformation of one of those documents.

In the absence of an ambiguity, the Courts will still reform an agreement to reflect the true intention of the parties if it finds that there has been a “mutual mistake.” A “mutual mistake” will be found to exist if the parties had a definite intention that is contrary to what is stated in the agreement. In the deed of trust example then, if both parties intended for the security to be both property A and property B, but the deed of trust mistakenly only lists property A, the Court will reform the deed of trust to correct the mistake. 

Alternatively, reformation can also be based upon the “unilateral mistake” of one party, if there is fraud or inequitable conduct by the other party. Inequitable conduct is said to exist when there is knowledge on the part of one party of the other party’s mistake, and that party remains silent. So, in the deed of trust example, if the lender makes a mistake by listing only property A as the security instead of both properties, and the borrower knows the mistake has been made and stays silent, the court can find that there has been a unilateral mistake that warrants reformation in order to correct it.