A situation in which the parties' manifestations of assent appear to agree but they attach different meanings to a term. No contract forms on that term if neither party knows or has reason to know of the meaning attached by the other.
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How its tested
Common Examples
6
Deed Acceptance After Closing Dispute
Melissa Mills sold property to Marco Marquez under a contract requiring the seller to repair the roof before closing. At closing Melissa delivered a deed silent on repairs, and Marco accepted it without objection. After closing Marco discovered the roof remained unrepaired and sued for breach of the contract term. The court held that merger discharged the repair promise because the parties' conduct showed no mutual understanding that the obligation would survive the deed.
Unrepresented Party Role Confusion
Maria Morales, an unrepresented seller, met with attorney Ming Ma who represented the buyer in a land deal. Maria believed Ming was neutral and would protect her interests during negotiations. Ming realized the misunderstanding but continued without correction and gave Maria advice on price. The disciplinary authority found that Ming violated the duty to correct the misunderstanding about his role.
Michael Miller advertised on firm letterhead that he was a certified trial specialist. State regulators claimed the statement would mislead the public about the certifying body's status. Miller showed that the certification was from a recognized national board and added a clarifying disclaimer. The Court held the truthful statement with disclaimer was protected speech and did not create actionable misunderstanding.
Collateral Promise After Deed Delivery
Madison Meyers sold land to Matrix Technologies under a contract that included a promise to build a boundary fence after closing. The deed contained no mention of the fence. After closing Matrix demanded performance of the fence promise. The court examined the parties' intent and held the independent promise survived merger because it was collateral to the conveyance and not intended to merge.
Employment Contract Termination Understanding
Millennium Media terminated Marco Marquez after he reported coworker misconduct. The employment agreement was silent on at-will status, and internal documents showed each side attached a different meaning to the termination clause. Because neither party knew of the other's divergent understanding, the court found no enforceable contract term on that point and allowed the claim to proceed.
Foley v. Interactive Data Corp.47 Cal. 3d 654, 254 Cal. Rptr. 211, 765 P.2d 373
Interactive Data Corporation hired John Foley in June 1976 as an assistant product manager at a starting salary of $18,500. As a condition of employment Foley signed a confidential and proprietary information agreement. The company's president told Foley that if he performed his job well he would have a long and rewarding employment with the firm.
Over the next six years and nine months Foley received steady salary increases, promotions, bonuses, awards, and superior performance evaluations, rising to branch manager of the Los Angeles office with an annual salary of $56,164 plus a merit bonus. In January 1983 Foley learned that his new supervisor, Robert Kuhne, was under investigation by the FBI for embezzlement from his former employer, Bank of America. Foley reported the information to Vice President Richard Earnest because he was worried about working for Kuhne in a supervisory position.
Earnest told Foley not to discuss rumors and to forget what he had heard. In early March 1983 Kuhne informed Foley that the company had decided to replace him for performance reasons and offered a transfer to another division. Foley was later told he could continue as branch manager if he agreed to a performance plan, but when Kuhne met with him the next day Kuhne instead gave Foley the choice of resigning or being fired. Foley was discharged on March 13, 1983.
Foley filed suit against Interactive Data Corporation alleging three causes of action: tortious discharge in violation of public policy, breach of an implied-in-fact contract to terminate only for good cause, and tortious breach of the implied covenant of good faith and fair dealing. The superior court sustained the company's demurrer without leave to amend and dismissed the action. The Court of Appeal affirmed the judgment. The Supreme Court granted review.
Michael Miller and Maria Morales signed an IVF consent form that each read differently regarding disposition of preembryos upon divorce. Internal notes confirmed neither knew the other's intended meaning at signing. The court held that the misunderstanding on a material term prevented formation of an enforceable agreement on that issue.
A.Z. v. B.Z.431 Mass. 150, 725 N.E.2d 1051 (2000)
A.Z. and B.Z. married in 1977. For the first two years they resided in Virginia, where both served in the armed forces. They underwent fertility testing after difficulties conceiving. The wife suffered an ectopic pregnancy that resulted in miscarriage and removal of her left fallopian tube.
In 1980 the couple moved to Maryland for a year of additional fertility treatment that produced no pregnancy. The wife transferred to Massachusetts in 1988 while the husband remained in Maryland for schooling. He joined her in Massachusetts in 1991. After arriving in Massachusetts the wife began IVF treatments at a clinic.
The couple first attempted a GIFT procedure on November 6, 1988, which produced another ectopic pregnancy and removal of the wife's remaining fallopian tube. They then pursued IVF from 1988 through 1991. Each time before egg retrieval the couple signed a clinic consent form. They executed seven such forms in total, the last in August 1991. On every form the wife wrote that the preembryos should be returned to her for implantation should the couple separate. The husband usually signed the forms while blank and before the wife completed the disposition language. The 1991 treatment produced twin daughters born in 1992, and two vials of preembryos were frozen for possible later use.
In spring 1995, before the couple separated, the wife thawed one vial and had a preembryo implanted without informing the husband. He learned of the procedure from an insurance notice. Relations deteriorated, the wife obtained a protective order against the husband, the couple separated, and the husband filed for divorce. At the time of divorce one vial containing four frozen preembryos remained in storage. The husband moved for a permanent injunction prohibiting the wife from using the preembryos.
The Probate and Family Court bifurcated the preembryos issue from the divorce action and held a hearing at which both parties were represented by counsel. The probate judge found the consent form unenforceable because of changed circumstances since 1991 and balanced the parties' interests, granting the husband a permanent injunction. The Supreme Judicial Court transferred the case on its own motion. On February 8, 2000, it issued an order affirming the Probate and Family Court judgment, with this opinion to follow.
When does a misunderstanding prevent contract formation?
No contract forms on a term if the parties attach different meanings to it and neither knows nor has reason to know of the meaning attached by the other. The Restatement treats this as a failure of mutual assent on that term.
How does misunderstanding differ from mutual mistake?
Misunderstanding occurs when parties attach different meanings to language at formation. Mutual mistake occurs when both parties share the same erroneous belief about an existing fact. The former defeats assent. The latter may make the contract voidable.
Does a merger clause eliminate claims based on misunderstanding?
A merger clause does not bar claims grounded in fraud or mutual mistake. Courts examine the parties' intent and the nature of the promise to decide whether an independent understanding survives the deed.
What must a lawyer do when an unrepresented person misunderstands the lawyer's role?
The lawyer must make reasonable efforts to correct the misunderstanding. The lawyer may not give legal advice to the unrepresented person if the interests conflict.
Can a lawyer advertise a certification without creating misunderstanding?
A truthful statement of certification by a recognized body is protected commercial speech. The state may require clarifying disclaimers to prevent misunderstanding about the certifying organization's status.
501 U.S. 663 (1991)
…contractually binding because these promises are usually given clandestinely and orally, hence they are often vague, subject to misunderstanding, and a fertile breeding ground for lawsuits. See Ruzicka v. Conde Nast Publications, Inc. , 733 F.Supp. 1289, 1300-01 (D.Minn.1990) (a promise not to make a source identifiable found too…