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.)
• Unilateral mistake: Where only one party has acted on the mistaken belief (“unilateral mistake”), it is harder for her to get rescission than in the mutual-mistake situation.
  • Additional requirement: In addition to the three requirements discussed above for mutual mistake, the mistaken party must shown that either: (1) enforcement of the contract would be unconscionable; or (2) the other party had reason to know of the mistake or actually caused it.

I. NATURE OF MISTAKE GENERALLY

A. Difficulty of analysis: The Second Restatement defines “mistake” as “a belief that is not in accord with the facts.” Rest. 2d, § 151. “Mistakes,” so defined, can crop up in numerous contexts during the formation and performance of a contract. This chapter attempts to analyze some of the situations in which one or both parties holds “a belief that is not in accord with the facts,” and acts on that belief.

B. Confusion in case-law: The decisions in cases involving “mistake” are often confused, and many courts seem to make a visceral determination of what the just result is and then work backward, looking for a rationalization for this result.