R2d § 20
Effect of Misunderstanding
(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached by the other. (2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if (a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or (b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.
Professor's notes
Elements: (1) no manifestation of mutual assent if the parties attach materially different meanings AND (a) neither knows or has reason to know of the other's meaning, OR (b) each knows or has reason to know of the other's; (2) the meaning of one party prevails if that party did not know of the difference and the other did.
Raffles v. Wichelhaus (Peerless) operationalizes 20(1)(a): two ships, same name, neither party at fault: no contract.
Common misunderstanding: students label this "ambiguity." It is not. Ambiguity (Frigaliment) asks which meaning wins; misunderstanding asks whether any contract formed at all. The two doctrines occupy different rungs of the formation/interpretation ladder.
Cases that operationalize this rule
Text
R2d § 20. Effect of Misunderstanding.
(1) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and
(a) neither party knows or has reason to know the meaning attached by the other; or
(b) each party knows or each party has reason to know the meaning attached by the other.
(2) The manifestations of the parties are operative in accordance with the meaning attached to them by one of the parties if
(a) that party does not know of any different meaning attached by the other, and the other knows the meaning attached by the first party; or
(b) that party has no reason to know of any different meaning attached by the other, and the other has reason to know the meaning attached by the first party.