A&T Siding, Inc. v. Capitol Specialty Ins. Corp.

32 October 8, 2015 No. 39
IN THE SUPREME COURT OF THE
STATE OF OREGON
A&T SIDING, INC.,
Plaintiff,
v.
CAPITOL SPECIALTY
INSURANCE CORPORATION,
Defendant.
(US District Court No. 12-35180; SC S062330)
En Banc
On certified question from the United States Court of
Appeals for the Ninth Circuit; certification order dated
May 27, 2014; certification accepted October 2, 2014; argued
and submitted April 1, 2015.
Gregory W. Byrne, Buckley Law PC, Lake Oswego, argued
the cause and filed the brief for plaintiff.
Brian C. Hickman, Gordon & Polscer, LLC, Portland,
argued the cause and filed the brief for defendant.
LANDAU, J.
Certified question answered.
Case Summary: Plaintiff in an action for damages obtained a stipulated
judgment in a settlement with defendant and then sought to garnish the amount
of the judgment from defendant’s liability insurer under ORS 18.352. The insurer
moved for summary judgment, arguing that, because the settlement agreement
included a covenant by plaintiff not to execute against defendant, defendant had
no covered liability within the terms of the defendant’s policy with the insurer.
The trial court granted the motion for summary judgment, and plaintiff chal-
lenged that decision, first in the Court of Appeals and then in the Supreme Court,
arguing that, contrary to the trial court’s view, the non-execution covenant in
the settlement agreement had not affected the insurer’s coverage obligations. In
the meantime, however, plaintiff and defendant had amended their settlement
agreement, modifying the non-execution covenant and including a provision that
required defendant to bring an action against the insurer in its own name but for
plaintiff’s benefit. Defendant filed the contemplated action against the insurer,
which was removed to federal district court. The insurer moved for summary
judgment, and the district court granted the motion, primarily on the theory that
the non-execution covenant in the original settlement agreement had released
defendant, and thus, also, the insurer, from liability, and that the amendments to
the non-execution covenant and settlement agreement could not undo that release
but only imposed a new, contractual obligation on defendant, which obligation
Cite as 358 Or 32 (2015) 33
was not covered by the liability policy issued by the insurer. Defendant appealed,
and the United States Court of Appeals for the Ninth Circuit certified a ques-
tion to the Supreme Court. Held: Theory of reformation, which was defendant’s
only theory for why the amendments to the settlement agreement would undo
the legal effect of the original settlement agreement, was not available when the
claimed mistake that purportedly justified reformation was only a mistake in
predicting how a court in the future would rule on the legal effect of what the
parties unquestionably had agreed to.
Certified question answered.
34 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
LANDAU, J.
This case is before us on a certified question of
Oregon law from the United States Court of Appeals for
the Ninth Circuit. A&T Siding, Inc. v. Capitol Specialty Ins.
Corp., 356 Or 399, 337 P3d 128 (2014) (accepting certified
question); ORS 28.200 to 28.255 (granting Oregon Supreme
Court authority to answer certified questions and describ-
ing procedure). The question arises out of a construction
contract dispute in which a homeowner’s association sued
a builder in state court for construction defects. The home-
owner’s association and the builder settled, and the settle-
ment included an unconditional release and covenant not to
execute against the builder. When the homeowner’s associ-
ation attempted to garnish the builder’s liability insurance
policy, however, the insurer claimed that it had no liability
because the settlement unconditionally released its insured
from any liability. The state trial court agreed, and the
builder appealed.
Meanwhile, in response to the state trial court’s
conclusion that the settlement agreement eliminated the
insurer’s liability, the homeowner’s association and the
builder amended their settlement agreement to eliminate
the unconditional release and covenant not to execute.
Then, pursuant to the new agreement, the builder initi-
ated this action—which we refer to as “the federal court
action” because it eventually was removed to federal court—
against its insurer. In the federal court action, the insurer
argued that the state court already had determined that,
given the terms of the original settlement, the builder could
not recover under its insurance policy and that the parties
lacked authority to create any new insurance coverage obli-
gation by amending their settlement agreement. The federal
district court agreed. On appeal, the Ninth Circuit certified
a question to us asking whether the homeowner’s association
and the builder could amend their settlement agreement in
such a way as to revive the liability of the builder’s insurer.
We accepted the certified question, but, to ensure
consistent application of the law in the pending state and
federal appeals, we asked the parties to address additional
issues concerning the legal basis for the amended settlement
Cite as 358 Or 32 (2015) 35
agreement and the legal effect of the amended settlement
agreement. We limit the scope of this opinion, however, to
the Ninth Circuit’s certified question. In brief, we conclude
that, although the parties possessed authority to amend the
terms of their settlement agreement, they could not do so in
a way that retroactively revived the liability that was elimi-
nated in their original agreement—at least not on the basis
of the legal theories that they have proposed.
I. BACKGROUND
The Brownstone Homes Condominium Association
discovered defects in the construction of its 26-building con-
dominium complex, including wood decay, flashing delami-
nation, and water penetration. In consequence, Brownstone
initiated a negligence action against the general contractor
who built the complex, as well as one of its subcontractors,
A&T Siding. Brownstone estimated that A&T’s share of
the cost of repair was approximately $2 million. A&T was
insured by Capitol Specialty Insurance Corporation and
Zurich Insurance.
Initially, both Capitol and Zurich undertook to defend
A&T in the action, but Capitol later withdrew its defense on
the ground that the damage for which Brownstone sought
recovery from A&T was not within the terms of A&T’s cov-
erage. Brownstone eventually settled with A&T and Zurich.
The settlement agreement included the following provisions
that are relevant to the certified questions before us. First,
A&T agreed to a $2 million stipulated judgment against
it and in favor of Brownstone, $900,000 of which would be
deemed satisfied by Zurich’s payment to Brownstone of that
amount on A&T’s behalf. Second, Brownstone covenanted
that “in no event will it execute upon or permit the execu-
tion of the stipulated judgment against A&T or its assets.”
Instead, the parties agreed that Brownstone would be enti-
tled “to seek recovery of the unexecuted portion of the judg-
ment against Capitol.” Third, A&T assigned to Brownstone
any claims arising out of the matter that A&T might have
against Capitol. Fourth, A&T promised that it would “rea-
sonably and in good faith cooperate with [Brownstone]” in
pursuing any assigned claims. Fifth, the parties mutually
agreed to release each other from “all past, present and
36 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
future claims” arising out of the dispute. Finally, the par-
ties declared that they did not intend to release any claims
against Capitol as A&T’s insurance carrier.
Brownstone then served a writ of garnishment on
Capitol under ORS 18.3521 for the unpaid portion of the stip-
ulated judgment—$1.1 million. Capitol rejected the garnish-
ment. Brownstone then applied to the Multnomah County
Circuit Court for an order requiring Capitol to appear for
a hearing on whether it was be liable for the $1.1 million.
See ORS 18.778; ORS 18.782 (process for obtaining order to
appear for hearing to determine whether garnishee should
be held liable). Capitol appeared and moved for summary
judgment, arguing that, because the settlement agreement
between Brownstone and A&T released A&T from any lia-
bility that might otherwise have been covered by the pol-
icy, under Stubblefield v. St. Paul Fire & Marine, 267 Or
397, 517 P2d 262 (1973), Capitol—whose liability is entirely
derivative of its insured’s—was likewise released from any
liability.
In Stubblefield, the plaintiff and the defendant in
a tort action entered into a settlement agreement that was
much like the one Brownstone and A&T executed in this
case: It included a stipulated money judgment against the
defendant, an assignment of the defendant’s rights against
his insurance company to the plaintiff, and the plaintiff’s
covenant not to execute against the defendant, but instead
to seek satisfaction of the judgment solely from the defen-
dant’s liability insurer. After the plaintiff initiated a breach
of contract action against the insurer under the assignment,
this court held that the plaintiff had acquired no enforce-
able claims or rights against the insurance company under
the assignment. This court reasoned that the defendant’s
insurance policy limited an insured’s coverage to sums that
the insured was “legally obligated” to pay as damages, and,
under the covenant not to execute that the plaintiff had
1
ORS 18.352 provides:
“Whenever a judgment debtor has a policy of insurance covering liability,
or indemnity for any injury or damage to person or property, which injury or
damage constituted the cause of action in which the judgment was rendered,
the amount covered by the policy of insurance shall be subject to attachment
upon the execution issued upon the judgment.”
Cite as 358 Or 32 (2015) 37
given in exchange for the defendant’s assignment of his
claims, the defendant had been excused from any legal obli-
gation to pay the judgment. 267 Or at 400-01.
In response to Capitol’s summary judgment motion,
A&T argued that, for various reasons, the Stubblefield rule
did not apply. The trial court disagreed, granted Capitol’s
summary judgment motion, and entered judgment against
Brownstone.
After judgment had been entered, Brownstone and
A&T executed an “addendum” to their settlement agree-
ment, which they believed would avoid the application of
Stubblefield. The addendum began by reciting that the
intent of the parties in entering into the original settlement
agreement had been “to provide [Brownstone] with the
right and capability to collect the $1.1 million unsatisfied
balance of the stipulated judgment from Capitol,” that the
trial court’s decision in the garnishment action had been
contrary to that intent, and that the addendum had been
executed “to further and more clearly express” the intent
of the parties in entering into the settlement agreement.
The addendum thereafter eliminated the original assign-
ment of A&T’s claims against Capitol and replaced it with
a requirement that A&T itself pursue any claims it might
have against Capitol under Brownstone’s direction and at
Brownstone’s expense. The addendum also replaced the
original unconditional covenant not to execute against A&T
with a narrower promise not to execute against A&T while
A&T’s action against Capitol was pending.2 The adden-
dum further declared that Brownstone would provide a full
satisfaction of the judgment against A&T upon payment
of any proceeds obtained in the action against Capitol to
Brownstone. Finally, the addendum replaced the original
2
In Lancaster v. Royal Ins. Co. of America, 302 Or 62, 66-67, 726 P2d 371
(1986), this court held that the Stubblefield rule applies only when the settle-
ment agreement “unambiguously” and “unconditionally” eliminates any liability
for which insurance coverage might otherwise be triggered. More recently, in
Terrain Tamers v. Insurance Marketing Corp., 210 Or App 534, 540-41,152 P3d
915 (2007), the Court of Appeals held that a covenant not to execute against
an insured defendant during the pendency of the plaintiff’s action against the
defendant’s insurer was not unconditional, and therefore did not implicate the
rule from Stubblefield. The addendum to the settlement agreement in this case
appears to have been designed with those holdings in mind.
38 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
unconditional release of “each and every other settling
party” with a release only of Zurich.
Brownstone said nothing to the trial court or to
the Court of Appeals about the execution of the addendum;
rather, it pursued the appeal as if the addendum did not
exist. Meanwhile, A&T initiated a separate state court
action against Capitol, as required under the addendum.
A&T alleged that Capitol was liable for $1.1 million of
the unpaid stipulated judgment against it under either of
two theories: breach of its fiduciary duty to defend A&T or
breach of its contractual duties to defend and to indemnify.
A&T also alleged claims for its defense costs and for punitive
damages. Capitol removed the action to the United States
District Court of Oregon, where it moved for summary judg-
ment on a variety of grounds, including that A&T’s claims
were barred by the state court’s decision in the garnishment
action and that, in any event, the insurance policy did not
cover the liability that A&T had “voluntarily assumed” in
the addendum. The federal district court granted Capitol’s
motion and dismissed A&T’s claims asserting that Capitol
was obligated to pay the remaining $1.1 million of the stip-
ulated judgment. The court rejected Capitol’s contention
that the state court action precluded A&T’s recovery of that
amount in federal court, but it agreed that Capitol’s policy
did not cover such liabilities, explaining:
“The [original] agreement clearly released A&T from any
liability for damage * * * caused by A&T’s provision and
installation of defective siding. [The trial court in the
garnishment proceeding] determined that, in light of the
agreement and release of A&T, Capitol had no obligation to
indemnify A&T or contribute to [Brownstone’s] damages.
Subsequently, A&T knowingly and willingly executed the
addendum and agreed to assume liability for its portion of
the [Brownstone’s] damages and to pursue its rights under
the policy on behalf of [Brownstone]. The execution of the
addendum created a new contractual obligation running
from A&T to [Brownstone]. The intentional assumption
of a liability created through a contract does not result in
physical injury or loss of use o[r] property damage and is
not tortious in nature. * * * [Therefore,] A&T’s liability to
[Brownstone] created by the Addendum is not ‘property
damage’ caused by an ‘occurrence’ and A&T has not met its
Cite as 358 Or 32 (2015) 39
burden of proving that its obligation to [Brownstone] cre-
ated by the Addendum is [a] covered loss under the terms
of the policy.”
In other words, having determined that the original settle-
ment agreement had unconditionally released A&T from
liability to Brownstone in damages, the district court con-
cluded (as had the circuit court in the earlier state proceed-
ing) that the liability to Brownstone described in the adden-
dum could only be a new contractual liability. In the district
court’s view, that contractual liability would not support any
claims against Capitol based on the insurance policy it had
issued to A&T for two reasons: (1) It does not fall within
the policy’s basic term of coverage—for sums the insured is
“legally obligated to pay as damages because of * * * property
damage”; and (2) it falls under an express exclusion in the
policy for liabilities assumed in a contract.
The district court also set out another reason, unre-
lated to the terms of the policy, for rejecting A&T’s indemni-
fication claims based on the addendum: It would not “enforce
an agreement entered into by the parties the express intent
of which is to circumvent the finality of a valid order, and
resulting judgment, that bar[s] the claim * * * sought to be
asserted,” because doing so would undermine the finality of
court actions.
A&T appealed. Before the Ninth Circuit, A&T argued
that the addendum had not created a new contractual
obligation running from A&T to Brownstone, but instead
sought merely to give effect to the parties’ original intent
that Capitol pay for the property damage A&T had caused.
It also argued that no Oregon authority precludes parties
to a settlement agreement from amending their agreement
after a court has issued a ruling based on that agreement.
Apparently unsure as to whether and how Oregon law per-
taining to the amendment of agreements would apply in
those circumstances, the Ninth Circuit certified the follow-
ing question of Oregon law to this court:
“The parties’ original settlement agreement, under which
Brownstone Homes Condominium Association released
A&T from liability and signed a covenant not to execute the
stipulated judgment against A&T, was construed pursuant
40 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
to Stubblefield * * * to also release A&T’s insurer, Capitol
Specialty Insurance Co. from liability. The parties to the
agreement assert that such a construction is contrary to
the parties’ intent. Under Oregon law, may the parties
amend their settlement agreement to reflect their original
intent, and thereby restore the insurer’s duty to provide
coverage for A&T’s resulting liability to the extent its pol-
icy provides coverage for the loss alleged by Brownstone?”
This court accepted the certified question. As we
have noted, in light of the pendency of the state court appeal
involving related issues, we reformulated the question to be
briefed by the parties to address additional matters. Allen v.
Hall, 328 Or 276, 278 n 1, 974 P2d 199 (1999) (“This court
reserves the authority to reformulate certified questions.”).
Nevertheless, we limit the scope of this opinion to the ques-
tion that the Ninth Circuit certified.
II. ANALYSIS
At the outset, we observe that no one contests the
right of Brownstone and A&T to negotiate an amendment
to the original settlement agreement. That original settle-
ment agreement—which included an assignment of rights
in exchange for, among other things, a covenant not to
execute—was a contract, the effect of which is determined
by application of ordinary contract principles. Lancaster v.
Royal Ins. Co. of America, 302 Or 62, 67, 726 P2d 371 (1986)
(“When an insured gives an injured party an assignment of
rights in exchange for a ‘covenant not to execute,’ the agree-
ments are a contract and their effect is determined by stan-
dard contract principles.”). Those ordinary contract princi-
ples include the right of parties to amend their contract by
mutual consent. Bennett v. Farmers Ins. Co., 332 Or 138,
148, 26 P3d 785 (2001) (“It is axiomatic that parties to a
contract may modify that contract by mutual assent.”).
The issue that the parties do contest is the extent to
which Brownstone and A&T could reform the original set-
tlement agreement, which would have the effect of undoing
the legal effect of the original agreement, as determined in
the prior litigation. Capitol contends that, in the original
settlement agreement, Brownstone released A&T from any
liability arising out of the Brownstone litigation and further
Cite as 358 Or 32 (2015) 41
unconditionally covenanted not to execute a judgment
against A&T for such liability. In Capitol’s view, the adden-
dum that Brownstone and A&T executed could not lawfully
undo that release and unconditional covenant in the absence
of rescission or reformation of the original agreement, nei-
ther of which, Capitol asserts, the parties did. According to
Capitol, any liability that A&T agreed to in the addendum
amounts to a new contractual obligation, one that is not cov-
ered under its policy with Capitol.
A&T does not dispute that a new contractual obli-
gation would not be covered under its policy with Capitol. It
also appears to acknowledge that it could not retroactively
undo the original settlement agreement except by rescis-
sion or by reformation; at least, it does not offer any alter-
native theories as to how that result might be achieved. It
expressly concedes that neither it nor Brownstone attempted
to rescind that agreement. And it further concedes that
neither of those parties attempted to obtain the remedy of
reformation from any court. Instead, A&T’s sole argument
appears to be that it and Brownstone, in effect, reformed the
original settlement agreement, even if they did so without
calling on the equitable authority of a court to effectuate
that remedy.
As A&T sees things, the original agreement contained
a “mistake of law,” in that the parties “misapprehended” the
legal effect of what they had agreed to. Specifically, A&T
argues, the parties did not intend to execute an uncondi-
tional release and covenant not to execute that would relieve
A&T—and, ultimately, Capitol—of any further liability. The
negotiated reformation, A&T contends, rendered the orig-
inal agreement void, so that any liability to which A&T
agreed under the later, reformed agreement was not a new
contractual liability, but instead related back to the under-
lying Brownstone litigation, which was covered by Capitol’s
policy.
Capitol rejoins that reformation was not available
to Brownstone and A&T because the equitable doctrine
requires the existence of an antecedent agreement to which
the original settlement could be reformed, and in this case
there is no evidence of such an antecedent agreement.
42 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
Moreover, Capitol argues, the fact that Brownstone and
A&T did not foresee the legal consequences of their orig-
inal agreement is not the sort of mistake that justifies
reformation.
We turn, then, to the question whether Brownstone
and A&T, in effect, reformed the original settlement agree-
ment by executing the addendum. Reformation, strictly
speaking, is an equitable remedy by which a court may
revise the written expression of an agreement to conform
to the intentions of the parties to it. See generally Dan B.
Dobbs, 2 Law of Remedies § 11.6(1) (2d ed 1993). Early
common-law courts hewed strictly to the form of an
instrument and offered no relief for such errors in reduc-
ing the terms of an agreement to writing. See William H.
Thomas, Jr., Comment, Reformation of Written Instruments
in Missouri, 37 Mo L Rev 54, 54-55 (1972). English equity
courts responded to the harshness of the common-law tra-
dition by adopting a doctrine of “rectification,” which autho-
rized a court to remedy drafting errors that failed to embody
the terms of the parties’ intended agreement. See George W.
Keeton, Rectification of Instruments for Mistake in England
14 NYU L Rev 319, 319 (1937). The English equity doctrine
was adopted by courts in this country, including Oregon.
See, e.g., De Tweede v. Barnett Estate, 160 Or 406, 413-15, 85
P2d 361 (1939) (discussing rectification doctrine).
Modern reformation doctrine provides that the judi-
cial remedy is
“available when the parties, having reached an agreement
and having then attempted to reduce it to writing, fail to
express it correctly in the writing. Their mistake is one as
to expression—one that relates to the content or effect of
the writing that is intended to express their agreement—
and the appropriate remedy is reformation of that writing
properly to reflect their agreement.”
Restatement (Second) of Contracts § 155 comment a (1981);
see also Richmond v. Ogden Street Ry. Co., 44 Or 48, 54,
74 P. 333 (1903) (where a written contract fails to express
the actual agreement of the parties as contemplated, “court
of equity will reform the writing so as to effectuate the
intentions of the parties”). In Oregon, a court will reform a
Cite as 358 Or 32 (2015) 43
written agreement if the party seeking that remedy estab-
lishes three things: (1) an antecedent agreement to which
the contract can be reformed; (2) a mutual mistake or, alter-
natively, a unilateral mistake by one party along with ineq-
uitable conduct by the other party; and (3) the party seeking
reformation was not grossly negligent. Jensen v. Miller, 280
Or 225, 228-29, 570 P2d 375 (1977). Those elements must
be proved by clear and convincing evidence. Ray v. Ricketts,
235 Or 243, 250, 383 P2d 52 (1963). In addition, insofar as
reformation is an equitable remedy, a court will not grant
a reformation when the result would be inequitable to an
innocent third party. See Crahane et al v. Swan, 212 Or 143,
149, 318 P2d 942 (1957) (equity will “not grant relief by the
way of reformation to the injury of innocent third persons
such as bona fide purchasers, lien holders and others who
without notice have acquired intervening or vested rights
and who cannot be placed in status quo”).
As we have noted, reformation is a judicial rem-
edy. As we have also noted, in this case, Brownstone and
A&T did not seek that remedy. Instead, they negotiated the
addendum on their own, without invoking the court’s equi-
table power. According to A&T, even though the parties did
not obtain the judicial remedy of reformation, they effected
their own private reformation by executing the addendum
to the original agreement. This court has not yet decided
whether parties may voluntarily reform an agreement with-
out the intervention or aid of the court. We need not decide
that question in this case, however, because, at all events,
the parties in this case did not satisfy the requirements for
reformation.
The first such requirement is the existence of an
antecedent agreement that was not adequately expressed in
the parties’ written contract. Jensen¸ 280 Or at 228. Because
reformation is used to revise the written contract so that
it conforms to the antecedent agreement, there can be no
reformation without such an antecedent agreement. Moyer
et ux v. Ramseyer et al, 226 Or 122, 134, 359 P2d 407 (1961).
In this case, A&T does not identify the nature of the anteced-
ent agreement to which it wanted its original written settle-
ment agreement reformed. The entirety of its argument in
44 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
its briefing as to that element of reformation consists of the
assertion that “there is an antecedent agreement (App. A).”
Appendix A of A&T’s brief is a copy of the original written
settlement agreement.
A&T apparently misapprehends the requirements
of reformation. The equitable doctrine applies when the par-
ties have reached a mutual understanding as to the mate-
rial terms of a contract, but that mutual understanding is
confounded by an error in the form of the written terms of
that contract. In this case, A&T makes no effort to identify
the terms of its agreement with Brownstone that were not
given proper form in the written settlement. It simply offers
the original settlement agreement and asserts that the par-
ties wanted that agreement, as drafted, to have different
legal consequences.
That leads to the second element of reformation,
namely, a mistake in the drafting of the agreement such
that it does not accurately express the parties’ actual agree-
ment. In Jensen, for example, this court upheld the refor-
mation of a deed—specifically, the deed’s description of a
boundary—based on the parties’ mutual mistake as to the
actual location of that boundary. 280 Or at 230. Similarly,
in Webb v. Culver, 265 Or 467, 470, 509 P2d 1173 (1973), the
court affirmed a judgment reforming a land sale contract,
based on the fact that the purchasers had been misled as to
the location of a boundary, which had not been accurately
described in the contract.
In this case, A&T argues that its original agree-
ment contained a mutual mistake of law, in the sense that
it and Brownstone did not anticipate the legal consequences
of the original settlement agreement as they drafted it. As
A&T explains, “Brownstone and A&T believed their origi-
nal agreement was legally sufficient to seek recovery from
Capitol.” That belief turned out to be incorrect, at least as
determined by the trial court in the state garnishment pro-
ceeding. In the words of the addendum to the settlement
agreement, “the trial court’s decision in favor of Capitol
[was] contrary to the settling parties’ intent.” Again, how-
ever, A&T misunderstands the nature of the requirements
of reformation.
Cite as 358 Or 32 (2015) 45
Oregon cases recognize a distinction between dif-
ferent types of mistakes of law that may occur in the draft-
ing of contracts. As this court explained in Richmond, 44 Or
at 56:
“There are * * * two well-defined classes of mistakes com-
mon to parties entering into contracts: (1) A mistake in
law as to the legal effect of the contract actually made by
them; and (2) a mistake in law in reducing to writing the
contract, whereby it does not carry out or effectuate the
intention of the parties. In the former the contract actu-
ally entered into will seldom, if ever, be relieved against
* * *. In the second class the mistake is not in the contract,
but terms are used or omitted which give the instrument a
legal effect not intended by the parties, and different from
the contract actually made; and here equity will always
grant relief, unless barred on some other ground.”
The distinction between the two categories of mis-
take can be hard to pin down, because both may involve a
mistake as to “legal effect” in some sense, as the foregoing
quotation illustrates. From the case law, however, the key
consideration is whether the mistake goes to the terms of
the written agreement itself. If it does, then reformation
is not available. See, e.g., Weatherford v. Weatherford et al,
199 Or 290, 301, 260 P2d 1097 (1953) (“ ‘[e]quity will not
ordinarily reform the contract merely because one or both
of the parties were mistaken as to its legal consequence’ ”)
(quoting Richmond, 44 Or at 54)); Smith et al v. Cram et al,
113 Or 313, 323, 230 P. 812 (1925) (“[I]f the agreement is as
the parties intended it should be, and the parties were sim-
ply mistaken as to the legal effect, the contract will not be
reformed.”).
On the other hand, a mistake of fact or a mistake of
law as to the effect of an underlying agreement may result
in the drafting of an agreement that does not accurately
express the substance of the parties’ agreement. In such
cases, the written agreement may be reformed to conform to
the terms that the parties actually agreed to. As the court
explained in Richmond, if,
“ ‘after making an agreement, in the process of reducing it
to a written form, the instrument, by means of a mistake of
law, fails to express the contract which the parties actually
46 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
entered into, equity will interfere, with appropriate relief,
either by way of defense to its enforcement, or by cancella-
tion, or by reformation to the same extent as if the failure
of the writing to express the real contract was caused by a
mistake of fact. In this instance there is no mistake as to the
legal import of the contract actually made, but the mistake
of law prevents the real contract from being embodied in the
written instrument.’ ”
44 Or at 55 (emphasis added) (quoting John Norton Pomeroy,
2 A Treatise on Equity Jurisprudence § 845 (2d ed 1892)).
Harris Pine Mills v. Davidson, 248 Or 528, 435 P2d
310 (1968), illustrates the distinction. In that case, the par-
ties executed a land sale contract that contained a reserva-
tion of rights to certain timber. Following the final payment
on the contract, the parties executed a deed to land, but the
deed failed to mention explicitly that the seller retained
the timber reservation. The successor to the seller initi-
ated an action to reform the deed, arguing that the parties
had intended that the seller retain the timber reservation.
This court agreed. The court began by noting that it was
clear that the parties intended that the deed preserve the
seller’s right to the timber. 248 Or at 534. It then observed
that, apparently, the parties were mistaken about the legal
effect of the reservation in the underlying land sale contract.
Citing Richmond, the court explained that such a mistake of
law—not as to the deed itself, but as to the underlying land
sale contract—caused a mistake in the drafting of the deed.
That mistake in drafting, the court concluded, justified ref-
ormation. Id. at 536.3
Our case law drawing a distinction between mis-
takes in drafting that fail to express the terms of an agree-
ment and mistakes as to legal effect is consistent with the
longstanding general rule in other jurisdictions. As the
Michigan Court of Appeals recently explained in Johnson
Family, Ltd., Partnership v. White Pine Wireless, LLC., 281
3
The court observed that the only other possible explanation was that the
drafter of the agreement, knowing that the seller never intended to part with the
timber, nevertheless drafted the deed to do just that. The court concluded that,
in either event, the deed had not been drafted to express the intentions of the
parties. Harris Pine Mills, 248 Or at 536-37.
Cite as 358 Or 32 (2015) 47
Mich. App. 364, 379-80, 761 NW2d 353 (2008), “mistakes of
law are divided into two classes: mistakes regarding the
legal effect of the contract actually made and mistakes in
reducing the instrument to writing. In the former, the con-
tract actually entered into will seldom, if ever, be relieved
against.”4
In this case, A&T’s own description of the transac-
tion places it squarely in the category of mistakes for which
the equitable remedy of reformation is not available. There
is no suggestion that Brownstone and A&T negotiated an
agreement that was not accurately or adequately described
in the terms of the original settlement. Rather, A&T asserts
only that the parties misunderstood the legal consequences
of the settlement agreement to which they agreed. As we
have noted, the underlying historical and equitable ratio-
nale for reformation is that parties should not be held hos-
tage to a mistake in drafting. In this case, there was no mis-
take in drafting, only a mistake in predicting how a court
at some time in the future would rule on the legal effect of
what the parties unquestionably agreed to. Equity, at least
as it is exercised under the doctrine of reformation, has no
role in remedying the parties’ mistaken prediction of court
decisions.
4
See also McGinley Corporation v. Lido Oil Co., 71 F2d 81, 82 (5th Cir 1934)
(“Mistake as to what courts may hold in the future on a pending appeal fur-
nishes no ground for setting aside or reforming a contract which at the time it
was entered into correctly expressed the intention of the parties to it.”); Rector
v. Collins, 46 Ark. 167, 175 (1885) (“Though the court will rectify an instrument
which fails through some mistake of the draftsman in point of law to carry out
the real agreement of the parties, it is not sufficient to create an equity for rec-
tification that there has been a mistake as to the legal construction, or the legal
consequences of an instrument.”); Bowles v. Miller, 96 Colo 145, 150, 40 P2d 243
(1935) (“A mistake as to the legal effect of the contract where the language used
is such as intended, is not available as a defense at law nor grounds for reforma-
tion.”); Calverly v. Harper, 40 Ill App 96, 98 (1890) (“If any mistake was made,
it was a misapprehension of the legal effect of the terms used, but for this no
reformation of a contract can be had.”); Good Milking Mach. Co. v. Galloway,
168 Iowa 550, 150 N.W. 710, 713 (1915) (“[E]quity will not reform a mistake of
law as to the legal effect of a contract actually made.”); Ingram Day Lumber Co.
v. Robertson, 129 Miss 365, 92 So 289, 291-92 (1922) (“[T]hat the parties may
have been mistaken as to its legal effect * * * is no ground for equitable relief.”);
Cardinal Partners, LLC, Desco Investment Co, LLC, 301 S.W.3d 104, 110 (Mo. Ct.
App. 2010) (“If an agreement is what the parties intended, equity will not inter-
fere because the parties did not intend its legal effect.”); Friedman v. Platzik, 57
NYS2d 215, 218 (1945) (“One who enters into a plain and unambiguous contract
cannot avoid his obligation by showing he erred in understanding its terms.”).
48 A&T Siding, Inc. v. Capitol Specialty Ins. Corp.
We conclude, then, that A&T’s theory of reforma-
tion does not justify treating the addendum as relating back
to the original settlement agreement. In so concluding, we
express no opinion about whether other theories not argued
by the parties—legal or equitable—might justify that
treatment.
Certified question answered.