Advertisement for Sale of Car Constitutes Offer, but Dealer May Rescind Contract on Basis of Unilateral Mistake About Price

In Donovan v. RRL Corporation (2001) 26 C.4th 261, 107 C.R.2d 807,27 P.3d 702, plaintiff read a newspaper ad that listed a specific used vehicle at what seemed to be a very good price. The next day, he went to defendant dealer, tested the vehicle, and stated that he would purchase it at the advertised price. However, defendant refused to sell at that price, claiming that, due to typographical and proofreading errors made by the newspaper, it was approximately $12,000 below the "real" sales price. Plaintiff sued for breach of contract, but lost in the trial court. The Court of Appeal reversed, holding that Veh.C. 11713.1(e), which requires a dealer to sell a vehicle at the advertised total price unless the time for purchasing at that price has elapsed, favors treating the advertisement as a valid offer. Held, judgment of the Court of Appeal reversed.

(a) Offer.

(1) The trial court's conclusion that defendant’s advertisement did not constitute an offer was based solely upon that court’s factual determination that the low price in the advertisement was the result of a good faith mistake. This was erroneous, because under the objective theory of mutual assent, mistake was relevant in determining whether there was a contract, not an offer. (26 C.4th 270.)

(2) Defendant contended that its advertisement did not constitute an offer, because the advertisement did not request the performance of a specific act that would conclude the bargain. Plaintiff, on the other hand, asserted that because a dealer is prohibited by Veh.C. 11713.1(e) from failing to sell a particular vehicle at the advertised price (see 3 Summary (9th), Sales, §320), an advertisement for a vehicle cannot be a mere invitation to negotiate, but must be deemed an offer that is accepted when a consumer tenders the advertised price. Plaintiff's position is correct. (26 C.4th 272.)

(3) Defendant contended that Veh.C. 11713.1(e) was not intended to modify the common law of contracts and thus should not be considered in determining whether a contract arose from defendant’s advertisement and plaintiff’s tender of the advertised price. Although defendant is correct in arguing that the statute does not reflect a legislative intent to supplant the common law governing contracts for the sale of motor vehicles by licensed dealers, the statute does govern the conduct of dealers and thus creates an objective expectation that dealers intend to sell vehicles at the advertised price. Thus, “consumer expectations arising from the statute are relevant in determining whether defendant’s advertisement constituted an offer pursuant to governing principles of contract law." (26 C.4th 275.)

(4) Noting that a written contract for the sale of an automobile by a dealer typically includes terms such as the form of payment, warranties, insurance, title registration, etc., defendant asserted that an advertisement for the sale of a vehicle does not constitute an offer, because consumers have reason to believe that the dealer does not intend to conclude the bargain until agreement on terms other than price is reached and until the contract is reduced to writing. This position is without merit. "Although dealers are required by statute to prepare a written contract when selling an automobile, and such a contract contains terms other than the price of the vehicle, we agree with plaintiff that a dealer’s advertisement specifying a price for a particular vehicle constitutes a sufficient manifestation of the dealer’s assent to give rise to a contract. . . . The price almost always is the most important term of the bargain, and the dealer’s intention to include other terms in a written contract does not preclude the existence of mutual assent sufficient to conclude a contract." (26 C.4th 276.)

(b) Statute of frauds. Under U.C.C. 2201(1) (see 1 Summary (9th), Contracts, §278), a contract for the sale of goods for $500 or more is not enforceable unless there is some writing signed by the party against whom enforcement is sought or by an authorized agent or broker. Under U.C.C. 1201(38), "signed" includes “any symbol executed or adopted by a party with present intention to authenticate a writing” (see 1 Summary (9th), Contracts, §280), and under the Comment to this section, "[a]uthentication may be printed, stamped, or written." (26 C.4th 277.) Here, defendant's printed name appeared in the advertisement. Where the advertisement is an offer, the offeror’s intent to authenticate his or her name as a signature can be established from the face of the advertisement. Thus, defendant’s printed name in the advertisement constituted a signature satisfying the statute of frauds. 26 C.4th 278.)

(c) Rescission.

(1) Citing Hedging Concepts v. First Alliance Mortg. Co. (1996) 41 C.A.4th 1410, 49 C.R.2d 191, the Court of Appeal relied on the principle that a unilateral misinterpretation of contractual terms, without knowledge by the other party at the time of contract, does not constitute a mistake under either C.C. 1577 (mistake of fact) or C.C. 1578 (mistake of law). Hedging Concepts involved a mistake of law. By contrast, defendant’s mistake here resulted from an unconscious ignorance that the ad set forth an incorrect price for the automobile, a mistake of fact. Thus, the foregoing principle in Hedging Concepts has no application to the present case. (26 C.4th 278.)

(2) The Restatement Second of Contracts (§153(a)) authorizes rescission for a unilateral mistake of fact where “the effect of the mistake is such that enforcement of the contract would be unconscionable.” This rule “is consistent with our previous decisions [and] we adopt the rule as California law." (26 C.4th 281.)

(3) Where the plaintiff, as here, has no reason to know of and does not cause the defendant’s unilateral mistake of fact, the defendant must establish the following facts to obtain rescission of the contract: (a) the defendant made a mistake regarding a basic assumption upon which the contract was made; (b) the mistake has a material effect upon the agreed exchange of performances that is adverse to the defendant; (c) the defendant does not bear the risk of the mistake; and (d) the effect of the mistake is such that enforcement of the contract would be unconscionable. (26 C.4th 282.)

(4) A significant error in the price term of a contract constitutes a mistake regarding a basic assumption upon which the contract is made, and such a mistake ordinarily has a material effect adverse to the mistaken party. In establishing a material mistake, the defendant must show that the resulting imbalance in the agreed exchange is so severe that it would be unfair to require the defendant to perform. Here, enforcing the contract with the mistaken price would require defendant to sell the vehicle to plaintiff for $12,000 less than the intended advertised price--an error amounting to 32% of the price defendant planned to set. Clearly, the exchange of performances would be substantially less desirable for defendant and more desirable for plaintiff, and plaintiff implicitly concedes that defendant’s mistake was "material." (26 C.4th 282.)

(5) In determining whether defendant should bear the risk of its mistake, it is necessary to determine whether it is reasonable under the circumstances to allocate to defendant the risk of the mistake in the advertisement. C.C. 1577, as well as prior California decisions, instructs that the risk of a mistake must be allocated to a party where the mistake results from that party’s neglect of a legal duty, but it is well established that ordinary negligence does not constitute neglect of a legal duty for this purpose (1 Summary (9th), Contracts, §375). Under Rest.2d, Contracts §157, rescission is unavailable only where the mistake results from a failure to act in good faith and in accordance with reasonable standards of fair dealing. To be consistent with California decisions holding that a careless, but significant, mistake is not a breach of a legal duty, this section means that a mistaken party’s failure to exercise due care does not necessarily bar rescission under the rule set forth in Rest.2d, Contracts §153 (authorizing rescission for unilateral mistake of fact where enforcement would be unconscionable). (26 C.4th 283.) Here, there is no allegation that defendant acted in bad faith. (26 C.4th 284.)

(6) Plaintiff contended that Veh.C. 11713.1(e) imposes upon automobile dealers an absolute obligation to sell a vehicle at the advertised price and therefore supplants the common law regarding rescission of contracts and eliminates the defense of mistake. However, this argument is inconsistent with Moorpark v. Moorpark Unified School Dist. (1991) 54 C.3d 921, 1 C.R.2d 896, 819 P.2d 854, 1 Summary (9th), Contracts, Supp., §133, which held that a statute supplying the parameters for the price term of a contract does not remove the contract-making process from the purview of the common law unless the Legislature intends to occupy the field. Veh.C. 11713.1(e) at most reflects an intent to supplement contract law by establishing a ceiling price for the sale of an advertised vehicle, not an intent to occupy the field. Therefore, the common law, including the law governing mistake, remains applicable. (26 C.4th 285.)

(7) The evidence showed that defendant's error was an honest mistake not intended to deceive the public, that proofreading by the newspaper was the direct cause of the mistake, that ads placed in other newspapers at the same time did not contain the same mistake, and that defendant had established procedures for notifying its sales staff and customers of errors. Defendant’s fault consisted of failing to review the advertising proof sheet, relying on the newspaper's advertising staff to do so. Although this omission might constitute negligence, it does not involve a breach of defendant’s duty of good faith and fair dealing that should preclude equitable relief for mistake. In these circumstances, it would not be reasonable to allocate the risk of the mistake to defendant. (26 C.4th 289.)

(d) Conclusion. "We conclude that a contract satisfying the statute of frauds arose from defendant’s advertisement and plaintiff’s tender of the advertised price, but that defendant’s unilateral mistake of fact provides a basis for rescinding the contract.” (26 C.4th 267.) Although Veh.C. 11713.1(e) justifies a reasonable expectation by consumers that a dealer’s advertisement constitutes an offer that can be accepted by paying the advertised price, the statute does not supplant governing common law principles authorizing rescission of a contract on the ground of mistake. “[R]escission is warranted here because the evidence establishes that defendant’s unilateral mistake of fact was made in good faith, defendant did not bear the risk of the mistake, and enforcement of the contract with the erroneous price would be unconscionable." (26 C.4th 267.)

Two dissenting justices argued that granting rescission was improper, because defendant, instead of seeking rescission, consistently argued that no contract was ever formed. (26 C.4th 294.)

Witkin References

On conditions for relief from unilateral mistake, see 1 Summary (9th), Contracts, §370.

On ad as invitation to make offer, see 1 Summary (9th), Contracts, §133.

On statute of frauds, see 1 Summary (9th), Contracts, §261 et seq.

On objective theory of mutual assent, see 1 Summary (9th), Contracts, §119 et seq.

On Veh.C. 11713.1, see 3 Summary (9th), Sales, §320.

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