A $4.6 Million Dollar Mistake!!! Trying to Void a Contract Due to Unilateral Mistake

A community association’s board of directors is often comprised of lay people who volunteer their precious free time for the needs of their association. At times, a board of directors or single director may make a poor decision, like entering into a dis-favorable contract based upon a mistake. While the contract may be otherwise valid, where a mistake is one that can be proven to be based upon unilateral mistake, the association might be able to void the contract. That said, doing so is an expensive, uphill battle.

Avoidance of a contract based upon unilateral mistake was recently discussed in the case of Thomas DePrince v. Starboard Cruise Services, Inc. decided by Florida’s Third District Court of Appeal on January 17, 2018. In this case, during a cruise, Thomas DePrince visited an onboard jewelry shop owned and operated by Starboard Cruise Services, Inc. (“Starboard”). DePrince expressed interest in purchasing a 15 to 20 carat loose diamond of particular color and clarity. Because the onboard shop did not have a diamond of this size, the shop’s manager contacted an onshore supplier for availability and pricing. The onshore supplier responded by e-mail providing that two diamonds meeting DePrince’s specifications were available, one 20.64 carat diamond for $235,000 and one 20.73 carat diamond for $245,000.

DePrince was advised by his expert gemologist sister that the diamonds should cost millions, not thousands, of dollars. She advised DePrince not to buy either diamond. Nevertheless, DePrince purchased the 20.64 carat diamond, paying Starboard’s quoted $235,000 price. Starboard later learned that the price it quoted to DePrince was the per-carat price for the diamond rather than the total price, which should have been $4,850,400. Starboard informed DePrince of the error and, on its own, reversed the charges on DePrince’s credit card to refund all monies paid. As a result, DePrince then sued Starboard, alleging claims for breach of contract, specific performance, and conversion.

The trial court found in Starboard’s favor based on its own defense of unilateral mistake using the “four-prong test” required to establish unilateral mistake. Under this test, an otherwise valid contract will be rescinded where the party seeking to avoid the contract has shown that:

1. the mistake was induced by the party seeking to benefit from the mistake;
2. there is no negligence or lack of due care on the part of the party seeking to avoid the contract;
3. denial of release from the contract would be inequitable; and
4. the position of the person benefiting from the mistake has not changed to the point where rescinding the contract would be unjust.

Here, the party seeking to avoid the contract is Starboard, and the party benefitting from the mistake is DePrince. With reference to prong 1 and prong 2, respectively, the trial court instructed the jury that the inducement could be satisfied by an omission on the part of DePrince and that there may be “some degree of negligence on the part of Starboard” so long as “there was no inexcusable lack of due care under the circumstances on its part.” Based upon these instructions, the jury found that Starboard should be released from the contract. DePrince was not pleased.

DePrince appealed the trial court’s decision to Florida’s Third District Court of Appeal. On appeal, the Court discussed DePrince’s duty to disclose to Starboard that it was making a mistake as to the price of the diamond. In a general commercial transaction, there is no duty to disclose facts that the other party could discover on its own with some due diligence. However, once a party begins to disclose certain facts, the whole truth must be disclosed. Therefore, “inducement” requires some type of action and cannot stand on an “omission.” Interestingly, because DePrince had no duty to disclose what he knew about the price of the diamond and did not trigger such duty by discussing any known facts about the price, the Court found that DePrince did not induce Starboard into making the mistake.

As to the application of prong 2, regarding negligence or lack of due care, it is clear from the four-prong test that there can be no negligence or lack of due care on the part of Starboard in order to satisfy this prong. However, the jury instruction allowed for some negligence on the part of Starboard in contravention of the established four-prong test.

As the satisfaction of prong 1 and prong 2 is a factual matter, the appellate Court determined that these findings are a matter best determined by the trial court and remanded the case for further proceedings with adjusted jury instructions (in plain English, the term “remand” means “sent”).

So, in the event your association makes a mistake and by entering into a dis-favorable contract, it is possible for an association to void that contract based upon unilateral mistake where the facts satisfy the four-prong test discussed above. However, doing so would require costly and time-consuming litigation with no guarantee of success whatsoever. Therefore, it is a far better practice for the board of directors to ask questions of their contractors and vendors to become well informed as to what they are getting into and have all association contracts reviewed by the association’s legal counsel to avoid the mistake in the first place.

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