Also known as: mutual mistakes of fact · mutual mistake
Written by attorneys · grounded in primary & secondary sources — see below
A shared erroneous belief by both parties to a contract about a basic assumption on which the contract was made that 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.
Maria Morales sold land to Megan Moore under a contract requiring the seller to repair a barn before closing. The deed delivered at closing contained no repair covenant. After closing Megan discovered the barn unrepaired and sued for breach. Because both parties had shared the mistaken belief that the barn was already sound when they formed the contract, the mutual mistake exception prevented merger from discharging the claim.
Mason McCarthy sold acreage to Miguel Mendoza under a contract that included an independent promise to build a boundary fence after closing. The deed was silent on the fence. After closing Miguel sought enforcement of the fence obligation. The parties' shared mistaken assumption that the fence promise would remain enforceable as a separate undertaking allowed the claim to proceed despite merger.
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Melanie Morris contracted with Monica Morgan to supply aluminum under a long-term agreement using a wholesale price index to adjust non-labor costs. Both parties assumed the index would track actual costs. When electricity prices spiked and the index failed to reflect them, the shared mistaken assumption about the index's suitability permitted reformation of the price term rather than rescission.
Magnolia Foods conveyed property to Maxwell Manufacturing with an option that both parties believed complied with the Rule against Perpetuities. After execution they discovered the option violated the rule. The mutual mistake about the option's validity supported rescission of the underlying conveyance.
Millennium Media sold a cow to Mercury Industries believing the animal was infertile and suitable only for beef. Both parties priced the sale on that assumption. When the cow proved pregnant and far more valuable as a breeder, the shared mistake about the cow's fundamental reproductive capacity allowed the seller to avoid the contract.
Maria Morales and Megan Moore entered an arbitration agreement both believing it would be fully enforceable under federal law. After execution they learned a state statute rendered key provisions unenforceable. The mutual mistake about the agreement's legal validity permitted rescission of the arbitration clause.
Both parties must be mistaken about a fact that constitutes a basic assumption of the bargain. The mistake must have a material effect on the agreed exchange of performances. The party seeking avoidance must not bear the risk of the mistake.
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A party bears the risk when the contract allocates it, when the party is aware of limited knowledge yet treats the assumption as sufficient, or when the court reasonably allocates the risk to that party under the circumstances.
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Yes. A shared erroneous belief about an existing zoning restriction that prohibits the intended use is a mistake about a basic assumption that materially affects value and permits avoidance when the adversely affected party does not bear the risk.
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A mistake concerns an existing fact at the time of contracting. An erroneous prediction about how an index or market will perform later is a business judgment whose risk is assumed in the bargain and does not support avoidance.
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Yes. When both parties share a mistaken belief about the suitability of a pricing formula or the contents of a writing, a court may reform the contract to reflect the parties' original expectations instead of terminating the agreement.
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…unless a party successfully asserts a defense concerning the formation of the agreement to arbitrate, such as fraud, duress, or mutual mistake. See Prima Paint Corp. v. Flood & Conklin Mfg. Co. , 388 U. S. 395, 403–404 (1967) (interpreting §4 to permit federal courts to adjudicate claims of “fraud in the inducement of the…