Contractors may sometimes make mistakes due to erroneous assumptions during the formation of federal contracts. Such mistakes may include an inaccurate assessment of costs, level of effort, or scope of the contract. For certain such mistakes, contractors may be able to obtain relief if the government shares their mistaken belief during the formation of the contract. Federal Acquisition Regulation (FAR) § 14.407-4(a) permits the correction of such mistakes through contract modifications, provided the mistake is not discovered until after award and if other requirements of the section are met. To obtain recovery based on the theory of mutual mistake, the contractor must demonstrate that: (1) the government and the contractor were both mistaken in their belief regarding a fact, (2) that mistaken belief constituted a basic assumption underlying the contract, (3) the mistake had a material effect on the bargain struck by the parties, and (4) the contractor did not assume the risk of the mistake. If successful in proving these elements of mutual mistake, contractors may be able to obtain monetary relief or relief from their obligation of performance on the contract.
Mutuality of Belief
Contractors must show that both the government and the contractor made the same mistake regarding an underlying fact at the time of contract formation. To satisfy this requirement, both parties must have been mistaken in their understanding of a fact that later impacts the performance of the contract. Notably, the mutual belief requirement will not be satisfied if the government is aware of the fact but does not disclose it to the contractor. Such a situation may arise in the context of negotiated procurements where the government, as a contracting party, elects not to disclose certain facts to prospective contractors to obtain a favorable bargain. The contractor may eventually learn of the fact later during the performance phase of the contract. In such a scenario, while the contractor may be able to obtain recovery under an alternate theory such as superior knowledge, recovery under the mutual mistake theory is generally not viable.
Basic Assumption
Adjudicative forums may grant relief to contractors for mutual mistakes if both the government and the contractor were mistaken as to a basic underlying assumption of the contract. To qualify as a basic assumption, the fact regarding which the parties made the mutual mistake must be a significant part of negotiations during contract formation. Depending on the circumstances, contractors may find it challenging to prove that the fact at issue is a basic assumption because to qualify as such, the fact must typically already exist when the parties form their mutual belief. That is, the underlying assumption forming the mutual mistake cannot be about a future event or prediction such as fluctuation in prices of commodities or labor conditions. In other words, for the government and the contractor to hold a mutually mistaken assumption about an underlying fact – the fact must generally already exist at the time of contract formation.
Material Effect
To recover under the theory of mutual mistake, contractors must successfully demonstrate that the mutual mistake had a material effect on contract performance. Contractors may typically satisfy this element by showing the mistake’s impact on contract performance, either in terms of additional costs, delays, or both. Since the underlying fact must also be a significant point of negotiations during contract formation, contractors are generally able to demonstrate that the fact also had a material effect on performance.
Risk Assumption
The final element for successfully establishing mutual mistake requires contractors to demonstrate that they did not assume the performance risks at formation. Again, it can be challenging for contractors to prove that they did not assume the performance risks caused by the mutual mistake either implicitly or explicitly since contractors generally assume various performance risks during contract formation. Therefore, to successfully demonstrate a lack of risk assumption, contractors may need to show that the risks arising out of the mutual mistake were not directly related to performance on the contract.
Mutual mistakes may lead to undesirable outcomes for contractors during the performance phase of a contract. However, contractors may be able to recover for unintended consequences of mutual mistakes by successfully establishing these elements. Notably, to be compensable, the mutual mistake must have arisen during contract formation. While successful recovery under the mutual mistake theory will ultimately depend on the specific facts at issue, understanding this general framework can better equip contractors to identify, support, and litigate potential claims.
This Federal Contract Claims Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.
