Mistakes in contracts can have serious legal consequences. Mutual mistakes, where both parties share a misconception, can void agreements. Unilateral mistakes, affecting only one party, generally don't impact enforceability unless there's unfair exploitation or unconscionability.

Courts may void contracts for mutual mistakes of material fact that undermine the agreement's core purpose. Unilateral mistakes rarely void contracts, but exceptions exist for unfair advantage or unconscionable outcomes. Understanding these principles helps navigate complex contract scenarios and potential legal remedies.

Types of Mistakes and Their Legal Consequences

Types of contractual mistakes

• Mutual mistake occurs when both parties to the contract are mistaken about the same material fact and share the same misconception
  • Involves a fundamental misunderstanding by both parties about a key aspect of the contract (subject matter, terms, or performance)
  • Renders the contract void or voidable if the mistake is significant enough to undermine the basis of the agreement
  • Example: Both parties agree to the sale of a specific vintage car, but unbeknownst to them, the car was destroyed in a fire before the contract was formed
• Unilateral mistake happens when only one party to the contract is mistaken about a material fact, while the other party is either aware of the true facts or not mistaken
  • Occurs when one party has a false belief or misunderstanding about a critical aspect of the contract, but the other party does not share this mistake
  • Generally does not affect the enforceability of the contract, as the mistaken party is usually bound by the agreed-upon terms
  • Example: A buyer purchases a painting, believing it to be an original work by a famous artist, while the seller knows it is a high-quality reproduction

Consequences of mistakes on contracts

• Mutual mistake may result in the contract being void or voidable, depending on the nature and significance of the mistake
  • A void contract is not legally binding and cannot be enforced, as it lacks the essential elements of a valid agreement
  • A voidable contract is initially enforceable but can be canceled or rescinded by one or both parties due to the presence of a defect (mistake, fraud, duress, or undue influence)
  • Rescission allows the parties to treat the contract as if it never existed and return to their pre-contract positions, undoing any performance or exchanges made
• Unilateral mistake typically does not impact the enforceability of the contract, and the mistaken party is generally obligated to fulfill their contractual duties
  • Exceptions arise when the non-mistaken party knew or should have known of the mistake and unfairly exploited it, or when the mistake is so substantial that enforcing the contract would be unconscionable
  • In such cases, the court may rule the contract voidable and allow the mistaken party to rescind the agreement or seek other equitable remedies

Circumstances for voiding contracts

• A contract may be considered void when there is a mutual mistake of material fact that goes to the heart of the agreement and significantly alters the basis on which the parties entered into the contract

  • The mistake must be so fundamental that it undermines the core purpose or subject matter of the contract
  • Example: Two parties agree to the sale of a specific property, but later discover that the property never existed or was destroyed before the contract was made

• A mistake of law, where both parties are mistaken about the legal consequences of the contract, rarely renders a contract void, as parties are generally expected to understand the law

• A contract may be voidable in cases of unilateral mistake when:

  1. The non-mistaken party was aware of or contributed to the other party's mistake and took unfair advantage of it
  2. The mistake is so substantial that enforcing the contract would be unconscionable or lead to a grossly unfair result

• A mistake of identity, where one party is mistaken about the identity of the other party, and this identity is material to the contract, may also make the contract voidable

Application of mistake principles

• Scenario 1: A and B sign a contract for the sale of a rare book, both believing it to be a first edition. Later, they discover the book is a second edition with significantly less value.
  • This is a mutual mistake of material fact, as both parties were mistaken about the edition and value of the book
  • The contract may be rescinded since the mistake directly affects the basis of the agreement and the parties' willingness to enter into the contract
• Scenario 2: C offers to sell a used laptop to D for $500. D agrees, believing the laptop is in perfect working condition. However, C knows the laptop has a faulty motherboard and fails to disclose this information.
  • This is a unilateral mistake on D's part, as they are mistaken about the condition of the laptop, while C is aware of the defect
  • If D can demonstrate that C intentionally withheld information about the faulty motherboard to take advantage of D's mistake, the contract may be voidable
  • If the defect is so severe that the laptop is essentially useless, enforcing the contract could be considered unconscionable, and the court may allow D to rescind the agreement