Mistake and Contract Formation
Is a mistaken belief enough to void a contract? Is there anything that a party with a mistaken belief can do to get out of a contract or reform its terms after signing? Is there a difference between a mistake of fact and a simple buyer’s remorse? Depending on the particular facts and circumstances, the doctrine of mistake may allow the parties to void or reform their contract.
The formation of a contract requires a “meeting of the minds.” But an otherwise binding contract can unravel if the parties both have a mistaken belief about a fact material to the transaction at the time of signing. The classic case studied by most first-year law students involved a contractor engaged by a property owner to level a hilltop. The parties agreed that the contractor could keep the soil removed from the hilltop for use in another project. However, on the first day of excavation, the contractor encountered bedrock just one foot beneath the surface. A job that the parties previously expected to take just a few days at the cost of only a few thousand dollars was suddenly projected to take two weeks and cost roughly half a million dollars to complete. The parties ended up in court over the issue of whether their contract could be voided because of their mutual mistaken belief regarding the depth of the bedrock. 
Mutual mistakes in contract formation occur when both parties are mistaken about the same material fact underlying their transaction. Although there is technically a meeting of the minds, the parties are at cross-purposes. In this circumstance, the contract may be voidable.
Unilateral mistakes happen when only one of the parties mistakenly understands the subject matter of the contract or its terms and conditions. Unilateral mistakes occur throughout the drafting of an agreement, and they can impact the agreement’s enforceability.
A party crying unilateral mistake may seek rescission of the contract, which is a request for the contract to be canceled, restoring all parties to their pre-contract positions. To prevail on a request for rescission, the mistaken party must show that the non-mistaken party either knew or should have known about the unilateral mistake.
A unilaterally mistaken party may also seek reformation of the contract. In this case, the mistaken party asks the court to change the agreement to reflect the parties’ original understanding. These requests will generally only be granted if one party was aware that the final contract did not conform to the parties’ actual understanding.
The key distinction between whether a contract may be rescinded or reformed based on a unilateral mistake is whether the non-mistaken party knew or should have known of the other party’s mistake. If the non-mistaken party knew of the mistake, then rescission is usually the appropriate remedy. If the non-mistaken party was not aware of the other party’s mistake, then reformation of the contract is more appropriate.
A full discussion of the doctrine of mistake and its application to the enforceability of a signed agreement is beyond the scope of this article. A number of factors can influence the viability of a contract in addition to one or both parties’ mistaken beliefs as to the facts underlying a contract or its terms and conditions. Each case is different, and no particular outcome can ever be predicted or guaranteed with certainty.
If you have questions or concerns about mistakes in contract formation, then you should contact an attorney licensed to practice in your jurisdiction. The different facts and circumstances in your case will determine your options.
Max Julian is a partner at Gertsburg Licata in the litigation practice group. He may be reached at (216) 573-6000 or at [email protected].
Gertsburg Licata is a full-service, strategic growth advisory firm focusing on business transactions and litigation, M&A, and executive talent solutions for start-up and middle-market enterprises. It is also the home of CoverMySix®, a unique, anti-litigation audit developed specifically for growing and middle-market companies.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction. If you have specific questions about your matter, please contact an attorney licensed to practice in your jurisdiction.
