Also known as: mutual mistake
Written by attorneys — see sources below.
A doctrine that renders a contract voidable when both parties share a mistaken belief about a basic assumption underlying the agreement that materially affects the exchange of performances. The adversely affected party may avoid the contract unless that party bears the risk of the mistake. The doctrine also supplies an exception to the merger rule in real property transactions and supports reformation of writings that fail to express the parties' true agreement.
Majestic Construction sold a parcel to Mirage Hotels under a contract requiring removal of debris and grant of a trail easement. At closing Mirage accepted a deed silent on those obligations. After discovering the shared assumption that the obligations would survive was incorrect, Mirage invoked mutual mistake to avoid merger and enforce the original promises.
Metro Bank contracted with Magnolia Foods to supply produce at a fixed price based on the shared belief that a key supplier contract remained in force. When both parties later learned the supplier contract had expired before signing, Magnolia refused performance. The mutual mistake about the basic assumption allowed Magnolia to avoid the agreement.
Maria Morales sold land to Miles Montgomery under a contract promising to build a boundary fence after closing. The deed contained no reference to the fence. Because both parties shared the mistaken belief that the fence promise would remain enforceable, the court treated the promise as collateral and permitted enforcement despite merger.
Mohan Malhotra and Michael Miller signed a purchase agreement that mistakenly listed a six-month earnings warranty instead of the intended seven-month period. Both parties overlooked the error at signing. The court reformed the writing to reflect the true agreement because the mutual mistake concerned the contents of the document.
Aluminum Company of America contracted with Essex Group using a price index both parties believed would track production costs. When the index failed to capture major cost increases, the shared mistaken assumption about the formula's suitability permitted the court to reform the price term rather than rescind the entire contract.
In 1966 Essex Group, Inc., a manufacturer of electrical wire products, decided to expand its aluminum wire production and began negotiations with Aluminum Company of America (ALCOA) for a long-term supply of aluminum. By December 26, 1967, the parties entered into the Molten Metal Agreement under which Essex would supply alumina to ALCOA, which would smelt it into molten aluminum at its Warrick, Indiana facility for Essex to pick up. The agreement was to run until the end of 1983, with Essex having an option to extend it to 1988. Essex also entered into a separate Alumina Purchase Agreement with Alcoa of Australia Proprietary Ltd. for the supply of alumina. The price under the Molten Metal Agreement was calculated using a formula with three components. A demand charge was indexed to the Engineering News Record Construction Cost Index. A non-labor production cost component was indexed to the Wholesale Price Index-Industrial Commodities (WPI-IC). A labor production cost component was indexed to ALCOA's average hourly labor costs at Warrick. The initial price was fifteen cents per pound, subject to an overall cap at sixty-five percent of a specified market price for aluminum. ALCOA consulted economist Alan Greenspan in developing the indexing system, and both parties examined the historical performance of the indices before agreeing to them. The parties also executed a Side Letter Agreement addressing concerns under the Robinson-Patman Act, providing that if the agreement were construed as a sale of goods, either party could terminate it. From 1968 through the early 1970s, the price formula produced returns to ALCOA within the expected range of one to seven cents per pound net. Beginning in 1973, following actions by OPEC to increase oil prices and unanticipated pollution control costs, ALCOA's electricity costs at Warrick rose much more rapidly than the WPI-IC. As a result, ALCOA began incurring substantial out-of-pocket losses on the contract, projected to exceed sixty million dollars over the remaining term if unchanged. In June 1979, ALCOA notified Essex that it would reduce deliveries by fifteen percent, and Essex disputed ALCOA's authority to do so under the contract terms. On July 21, 1975, representatives of ALCOA and Essex, including Krome George and Paul O'Malley, met and discussed possible revision of the pricing formula, but the parties dispute whether an oral agreement to modify the contract was reached. In 1977 and 1978, electrical generating plant failures and a coal strike caused interruptions in ALCOA's smelting operations, leading to reduced deliveries to Essex that ALCOA attributed to causes beyond its control. ALCOA filed this action in the United States District Court for the Western District of Pennsylvania seeking reformation of the contract, a declaratory judgment regarding an alleged oral modification and termination rights, while Essex counterclaimed for damages and specific enforcement of the original delivery obligations. The case proceeded to a non-jury trial on liability issues, during which evidence was presented including tables showing the divergence between the WPI-IC and ALCOA's actual non-labor costs, testimony from company officials, and records of contract negotiations and performance. Jurisdiction is based on diversity of citizenship with the amount in controversy exceeding the jurisdictional threshold, and the parties agreed that Indiana law governs the contract.
Walker sold a cow to Sherwood under the shared belief that the animal was infertile and suitable only for beef. After discovering the cow was pregnant, Walker avoided the contract. The mutual mistake went to the substance of the thing bargained for and rendered the agreement voidable.
In May 1886, T. C. Sherwood, a banker living in Plymouth in Wayne County, Michigan, sought to purchase cattle from Hiram Walker & Sons. The defendants resided in Detroit, conducted business at Walkerville, Ontario, and maintained a farm at Greenfield in Wayne County where they kept blooded polled Angus cattle that they believed were barren. On May 5, 1886, Sherwood visited the Greenfield farm after the defendants informed him they had a few head there that were probably barren and would not breed. A few days later Sherwood negotiated with one of the defendants for the purchase of the cow known as Rose 2d of Aberlone. On May 15, 1886, the parties reached final agreement by telephone that Sherwood would pay five and one-half cents per pound live weight less fifty pounds shrinkage. That same day the defendants sent Sherwood a letter confirming the sale and enclosing an order directing George Graham to deliver the cow at King’s cattle-yard, send a halter, and have her weighed. On May 19, 1886, Sherwood wrote Graham that he would collect the cow the following morning and instructed that she not be watered. On May 20 the defendants learned from Graham that the cow appeared to be with calf, telegraphed Sherwood that they could not sell her, and instructed Graham not to deliver. On May 21 Sherwood presented the order and letter to Graham, who refused delivery; Sherwood then tendered eighty dollars to Hiram Walker, who refused both the money and the cow. Sherwood commenced a replevin action in justice’s court and obtained judgment. The defendants appealed to the circuit court of Wayne County, where a jury returned a verdict for the plaintiff. After securing possession under the writ, Sherwood caused the cow to be weighed at 1,420 pounds at a location other than King’s cattle-yard. The cow gave birth to a calf in October 1886. At the time of the transaction both parties believed the cow was barren; she had cost the defendants $850 and, if capable of breeding, would have been worth between $750 and $1,000.
A contract is voidable when both parties share a mistaken belief about a basic assumption on which the contract was made and the mistake has a material effect on the agreed exchange of performances. The adversely affected party may avoid the contract unless that party bears the risk of the mistake.
Mutual mistake supplies an exception to merger. When the buyer accepts a deed at closing, contract promises generally merge into the deed and are discharged, but a shared mistaken belief that certain obligations would survive allows the buyer to enforce those promises after closing.
…between them for all purposes of use as there is between an ox and a cow that is capable of breeding and giving milk. If the mutual mistake had simply related to the fact whether she was with calf or not for one season, then it might have been a good sale; but the mistake affected the character of the animal for all time, and…
…After defining “mistake” as “a belief not in accord with the facts,” § 293, the Restatement declares: § 294. WHEN
…intended something else than the usual meaning which the law imposes upon them, he would still be held, unless there were some mutual mistake
…it attempted to accept the bid, and knowledge by one party that the other is acting under mistake is treated as equivalent to
…from the defendants that the ties were located in a place where there was imminent danger from fire. Third. That there was a mutual mistake of fact in regard to the dangerous location and the liability of the ties being destroyed by fire, or that there was a
The court may reform the writing to express the true agreement at the request of a party. Reformation is unavailable to the extent it would unfairly affect the rights of third parties such as good faith purchasers for value.
A party bears the risk when it is aware at the time of contracting that its knowledge is limited yet treats that knowledge as sufficient. Conscious ignorance of this kind prevents avoidance even if the mistake is mutual.
Yes. When both parties adopt a pricing formula under a shared erroneous assumption that it will track costs, and the formula later proves grossly inaccurate, a court may reform the price term to restore the parties' original expectations instead of terminating the contract.