10.3: Mistake

LEARNING OBJECTIVES

1. Distinguish between fraudulent misrepresentation and mistake in contract law.
2. Explain the difference between unilateral mistake and mutual mistake.
3. Identify the three requirements for proving mutual mistake under the Restatement (Second) of Contracts §152.
4. Understand how courts allocate the risk of mistake between the parties.
5. Recognize the remedies available when a contract is affected by mistake (rescission, reformation, restitution, or adjustment).

Mistake in Contract Law

In discussing fraud, we have considered how trickery by one party can make a contract void or voidable. But sometimes, neither party is being dishonest. Instead, both or one party may be operating under a mistaken belief about an important fact, leading them to think they have agreed to something when they really have not. A mistake is defined by the Restatement (Second) of Contracts, Section 151 as “a belief about a fact that is not in accord with the truth.”

Scenario: The Art Dealer and the Painting

Consider this situation: A wealthy collector purchases what he believes to be an authentic Renaissance painting from a reputable art dealer for $2 million. Both the buyer and the dealer genuinely believe the artwork is original. Later, the buyer sells the painting to a third party, who proudly takes it to an international art show in Italy. Experts there discover that the painting is not authentic at all, but a skilled reproduction.

This discovery highlights a mistake—not fraud. Neither the dealer nor the original buyer intentionally misrepresented the painting. Instead, both shared the same mistaken belief about its authenticity. This kind of error raises the issue of whether the contract can or should be enforced when the underlying assumption is false.

Mistake by One Party: Unilateral Mistake

When only one party is mistaken about a material fact, it is known as a unilateral mistake.

General Rule:
Ordinarily, a contract is not voidable merely because one party made a mistake about the subject matter. For example, a buyer cannot avoid a contract simply because they later decide the truck they purchased isn’t powerful enough, or the dress they bought doesn’t fit.

Exceptions:
Relief may be granted when:

• The non-mistaken party knows or should have known about the other’s mistake but seeks to take advantage of it.
• The mistake was caused by clerical or mathematical error that would make enforcement unconscionable.
• Drafting errors in written contracts may be corrected through reformation, so that the document matches the parties’ true intent (Sikora v. Vanderploeg, 212 S.W.3d 277 (Tenn. Ct. App. 2006)).

Example:
A contractor forgets to include insulation costs in a bid. Normally, this negligence would not void the contract. But if enforcing the mistake would cause severe hardship, and the other party knew or should have known of the error, courts may allow correction.

Mistake by Both Parties: Mutual Mistake

When both parties are mistaken about a material fact at the time of contracting, the error may make the contract voidable.

Restatement (Second) of Contracts, Section 152 sets out three requirements:

1. Basic Assumption – The mistake relates to a fundamental assumption on which the contract was made.
   • Sherwood v. Walker (1887) – “The barren cow case.” Both buyer and seller believed a cow was infertile. When discovered to be pregnant, the court ruled that fertility was a basic assumption.
2. Material Effect – The mistake must have a material effect on the agreed exchange.
   • In Sherwood, forcing the seller to perform would have meant giving up far more value than expected, and the buyer would have received a windfall.
3. Risk Allocation – The party seeking relief must not bear the risk of the mistake.
   • If a party contracts “with conscious ignorance”—knowing they don’t know the truth but going ahead anyway—they bear the risk.

Allocating the Risk of Mistake

Courts carefully examine whether the party seeking relief assumed the risk of mistake. Risk may be allocated in three primary ways:

1. By Agreement – The contract itself may place the risk on one party.
   • Example: An “as is” clause in the sale of a house shifts the risk of undisclosed defects to the buyer. If the buyer later finds termites, they generally cannot void the contract because they assumed the risk.
2. By Conscious Ignorance – A party may bear the risk if they knew they didn’t know an important fact but proceeded anyway.
   • Example: An antique dealer sells a painting for $100 without verifying its authenticity. If it later turns out to be a lost El Greco worth $1 million, the dealer cannot void the sale—they knowingly took the risk.
3. By the Court – Courts may allocate risk to the party best positioned to avoid it.
   • Example: In the art dealer scenario, if the buyer could have easily requested a certificate of authenticity but failed to do so, a court may find that the buyer bore the risk of mistake. Conversely, if the dealer, as a professional, was better positioned to verify authenticity, the risk may fall on them.

Applying These Rules to the Art Scenario

• If both the dealer and the buyer genuinely believed the Renaissance painting was authentic, this may be a mutual mistake because authenticity was a basic assumption of the contract. The fact that the painting was a reproduction significantly changes the value exchanged, satisfying the “material effect” requirement. Unless the buyer assumed the risk (e.g., by agreeing to buy it “as is” without authentication), the buyer may rescind the contract.
• If only the buyer was mistaken (say the dealer knew or suspected the painting was not authentic), the case would shift from “mistake” to fraudulent misrepresentation, because the dealer had knowledge.

Remedies for Mistake

When a contract is affected by unilateral or mutual mistake, courts may provide several remedies:

1. Rescission (Cancellation)
   • The most common remedy. The contract is set aside, and the parties are returned to their pre-contract positions.
   • Example: In the art scenario, the original buyer could seek rescission against the dealer once the painting is revealed to be a forgery.
2. Reformation (Correction of the Contract)
   • Available when the mistake is in the written expression of the agreement (e.g., drafting or clerical errors). The court reforms the document to reflect the true intent of the parties.
   • Example: A contract mistakenly lists delivery of “100 chairs” when both parties agreed on “10 chairs.” A court may correct it.
3. Restitution
   • Ensures that any benefits conferred under the mistaken contract are returned to prevent unjust enrichment.
   • Example: If Jack paid Ralph $2 million for the fake painting, restitution would require Ralph to refund the money.
4. Partial Enforcement or Adjustment
   • In some cases, courts may enforce the contract with adjusted terms to reflect the reality of the situation.
   • Example: If a mutual mistake involved a minor error in quantity or price, the court might adjust the terms instead of voiding the entire contract.

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KEY TAKEAWAY

Mistake differs from fraud because there is no intentional deception. A unilateral mistake rarely voids a contract unless the other party knew of the error or enforcement would be unconscionable. A mutual mistake can make a contract voidable if it involves a basic assumption, materially alters the exchange, and the party seeking relief did not assume the risk. Courts may provide remedies—rescission, reformation, restitution, or adjusted enforcement—to restore fairness when faulty assumptions mislead one or both parties.

EXERCISES

1. Why is relief usually not granted for unilateral mistakes? When is relief granted for them?
2. If there is a mutual mistake, what does the party seeking relief have to show to avoid the contract?