Very few people in the construction industry saw the novel coronavirus coming or reaching pandemic stage at the time they entered into their contracts.  Now that we are in full pandemic mode, with layers of federal, county and city guidelines or requirements for worksite safety, how does not seeing the pandemic impact your contractual obligations? 

1.     Let’s Meet

Texas, like most other states, requires proof of certain elements for a legally binding contract to exist.  One of the elements required for contract formation is a meeting of the minds of the contracting parties. What is a “meeting of the minds?”  It is generally a mutual understanding and agreement about the subject matter and essential terms of the contract. That understanding is typically shown by written words of the contract, though there are situations when the parties’ statements and actions may be important, too. 

A meeting of the minds is premised on the parties making certain parallel assumptions about foreseeable conditions. But what about unforeseen conditions such as black swan events like the COVID-19 pandemic?  In such cases, mutual mistake may be a viable defense.  

2.    It’s a Mistake

Mutual mistake occurs when the parties have a common intent, but the contract does not accurately, clearly or at all reflect that intent due to mistake.  To prove mutual mistake, the party raising it must generally show that the parties harbored a mutual mistake of fact that materially affected the basis of the bargain.   If mutual mistake is proven, the contract may be voided. 

A “material affect” is one that involves the subject matter and the substance of a contract.  When determining the materiality of a mutual mistake, courts consider, among other factors, the circumstances of the bargain, the contract, the parties’ knowledge at the time of the contract, and the substance of negotiations.  Many of these factors turn on what was known or anticipated at the time the contract was entered into. 

3.    The Great Unknown

If a contract does not anticipate the risk of a pandemic such as the novel coronavirus or COVID-19, mutual mistake may provide a valuable defense.   The defense gains currency if the contract was entered into before the virus was identified or pandemic declared. In that instance, the virus and COVID-19 may qualify as unforeseen events resulting in a mutual mistake about the conditions of performance.  Under these circumstances, the contract may be voided and performance excused.  

If, however, the contract terms show that the parties anticipated a pandemic of sorts (not necessarily COVID-19), a finding of mutual mistake is less likely.  Those terms would likely undermine arguments about unforeseeability or mistake as to the conditions of performance.

Whether mutual mistake applies to any given contract and/or provides a legal defense to performing a contract is a fact-intensive inquiry.  In making this determination, legal counsel should be retained to review the contract and underlying circumstances.  

The attorneys at GS are here to assist you in steering through these challenging and rapidly changing times.  If you should have any questions, please do not hesitate to contact us at info@gstexlaw.com.

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