What is reformation in contract law?
Contract reformation is a type of “equitable remedy” — an important term we will explain below — where the court rewrites the agreement to reflect the true intention of the parties.
It often arises in cases involving a mistake of fact or misrepresentation in an agreement.
Contract reformation works as an alternative to legal remedies such as monetary damages being awarded to the party deemed injured.
How does contract reformation happen?
Contract reformation occurs when a contract fails to conform to the parties’ agreement because of the following:
Mutual mistake of the parties
Both parties have made a mistaken assumption while entering into the contract, rendering it unenforceable or invalid.
One party entered into the contract under a faulty assumption and the non-mistaken party wasn’t aware of the mistake (and therefore didn’t attempt to exploit it).
Here, contract reformation of a contract can serve as a remedy for both intentional misconduct by one or both parties, or unintentional misrepresentation.
Example: A real estate agreement erroneously conveys the property’s value as being more than what it truly is, either by mistake or to intentionally deceive the customer. In such a case, the buyer can sue for breach of contract.
However, if both parties approve contract reformation, the court then modifies the agreement to reflect the actual worth of the discussed property.
Note: Reformation can work only when the court has obvious, persuasive proof of both parties’ intent.
If a breach in contract happens, the court usually suggests the injured party to pick between a legal and equitable remedy.
The latter is often a sound choice if one party or both parties misinterpreted one or more of the contract terms or made an error in the agreement.
What does equitable remedy mean?
This type of remedy is usually granted when legal remedies (like monetary compensation) can’t adequately resolve the situation.
The most common types of equitable remedies are contract rescission, contract reformation, injunction and constructive trust.
What are other types of contract remedies?
Aside from contract reformation, there are several common remedies for breach of contracts.
The goal of each is to restore either one or both parties to the position they were in before using any of the remedy types — though the consequences for the breaching party are different.
Damages is the most popular type of contract remedy that is available in both:
- Breach of contract case;
- Tort case (tort cases happen when someone either intentionally or negligently causes injury to another person or their property).
There are two types of damages:
- Compensatory damages — used to reimburse the injured party for their losses;
- Punitive damages — used to punish the breaching party and prevent them from engaging in similar behavior in the future.
This remedy type may involve either returning money or a property that was transferred as part of the contract.
This may also be resolved by either returning money or property that was transferred as a part of the agreement.
What are the requirements to reform a contract?
Contract reformation can only happen when both parties agree on the cause of action. The following elements must be satisfied for a contract so it is eligible for reformation:
- A valid contract exists
- A valid reason for the contract to be rewritten exists (either error or misrepresentation on behalf of one or both or one parties)
- No other equitable defenses are available
What components of a contract may be reformed?
Only the part(s) of a written contract in dispute can be reformed. In case parties need to rewrite the entire agreement, they can rescind or withdraw the actual agreement as a whole.
Reformation concentrates on the basis of the dispute or conflict, such as:
- Term that caused a mistake
- Facts or the words that resulted in misrepresentation
Example: A breach of contract could happen if one party meant that the term “fabric” in a contract referred to Grade B textiles, but in reality it was referring to Grade A textiles. In that case the court may authorize both parties to rewrite the contract in a clearer way that reflects the term “fabric” correctly.
In more specific cases, the court may rewrite other sections of an agreement, like clauses affected by the mistake.
When is contract reformation unavailable?
Contract reformation isn’t available if it will damage any of the parties in the future.
Example: The supreme court won’t further the contract reformation process in a way that restricts the legal privileges of one or both parties. Likewise, courts won’t allow parties to rewrite a written agreement if it will lead to an agreement that is unfair or one-sided.
Reformation won’t act as a cure in a case when one or both parties are not amenable to a new contract. In this case legal remedies would likely come into play, and the injured party may receive a settlement, while the breaching party would be subject to fines.
What is the difference between rescission and reformation?
Rescission is a legal contract remedy that cancels the current contract with the goal of returning both parties to their positions before the contract’s existence.
Reformation is a legal contract remedy that rewrites the original contract with the goal of reflecting the parties’ true intent that is currently lacking in the agreement, usually due to a mistake or a misrepresentation.
How to avoid contract errors
Following these practices will help lessen the chances of your contracts ever needing reformation:
- Use templates to simplify and speed up the process without worrying about making mistakes;
- Get help from a law firm or an attorney who is familiar with your industry — have them draft the contract or review and revise the draft;
- Be aware of the potentially inaccurate terms, or terms or clauses that could be misunderstood by the other signing party — again, seeking legal advice is always a good idea.
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