Also known as: agreed exchanges of performances
Written by attorneys · grounded in primary & secondary sources — see below
The respective performances that the parties to a contract have undertaken to render to each other. A mistake has a material effect on the agreed exchange when it substantially alters the value or burden of those performances relative to what the parties reasonably expected at formation.
Riverside Development LLC hired Apex Constructors Corp. to build an office complex under a lump-sum contract. Both parties relied on a geotechnical report stating the soil was stable. When excavation revealed the report was wrong and deep foundations were required, Apex sought to avoid the contract. The court evaluated whether reformation or restitution could restore balance to the performances each side had agreed to exchange.
Sun Orbit contracted with Star Space for a vacuum test chamber that both sides believed would reach 10^-6 torr based on shared engineering drawings. After delivery the chamber proved incapable of meeting the specification. Sun Orbit sought rescission. The court examined whether enforcement would be unconscionable or whether Star Space had reason to know of the limitation before deciding if the mistake materially upset the agreed performances.
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Pioneer Insurance agreed to buy long-term care policies from Harbor Insurance after both relied on a joint actuarial report showing normal claim rates. Later recalculation showed the data overstated policy ages and understated risk. Harbor argued that partial restitution or indemnity could correct the imbalance. The court considered those possible remedies when deciding whether the mistake materially affected the agreed exchange of performances.
Alcoa contracted to supply aluminum to Essex Group at a fixed price tied to an index that failed to account for sharp increases in energy costs. When actual production costs far exceeded the index, Alcoa sought relief. The court assessed whether the unforeseen cost surge had so altered the value of the performances each party had agreed to exchange that rescission or reformation was warranted.
A court looks beyond raw cost differences and considers whether reformation, restitution, or other relief could restore a roughly equivalent exchange. If such remedies can adequately offset the imbalance, the mistake may not be material enough to allow avoidance.
Supporting sources
Even if a mistake is mutual and material, the adversely affected party cannot avoid the contract if it bears the risk under § 154. Risk is allocated by express agreement, conscious assumption despite limited knowledge, or reasonable judicial assignment based on the circumstances.
Supporting sources
Yes, provided the mistake concerns a basic assumption, materially alters the exchange adversely to the mistaken party, and the party does not bear the risk. Avoidance is also available if enforcement would be unconscionable or the other party had reason to know of the mistake.
Supporting sources
No. A fixed price allocates ordinary cost risks but does not automatically shift the risk of a latent shared factual error that materially changes the agreed exchange. The court still examines whether the parties expressly or reasonably allocated that specific risk.
Supporting sources
…parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 296. (2) In determining whether this mistake has a material…