Chapter 5

MISTAKE

ChapterScope

This chapter deals with situations in which a contract exists and a party attempts to rescind it because one or both parties acted on a mistaken belief about an existing fact. The chapter discusses two categories of mistake: mutual (made by both parties) and unilateral (made by one party).

• Mutual mistake: Where both parties have acted on the same mistaken belief (“mutual mistake”), the party seeking rescission must show three things:
  • Basic assumption: that the mistake concerns a “basic assumption” on which the contract was made.
  • Material effect: that the mistake had a major effect on the fairness of the deal.
  • Allocation of risk: that the risk of this type of mistake was not allocated to the party who is trying to rescind. An allocation of risk can occur either by intent of the parties, or by the court's own decision about what is reasonable. (Example: The seller of a parcel of realty bears the risk that valuable minerals will later be discovered on it, because it's commonly understood that the seller bears this risk.)

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