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Defenses to Contract Enforcement: Mistakes

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  • 0:06 Contract Mistakes
  • 2:33 Unilateral Mistake
  • 4:05 Mutual Mistake
  • 5:05 Mistake of Fact or of Law
  • 7:03 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

A valid and legally enforceable contract requires a meeting of the minds. Sometimes there isn't a meeting of the minds due to a mistake by one or both parties. This lesson explains the different types of contract mistakes, and the remedies available.

Mistake

In order to form a valid and legally enforceable contract, the parties must come to an agreement. This is also known as a 'meeting of the minds.' There are several reasons why the parties may not have had a meeting of the minds. The most common is a mistake. A contract mistake is an unintentional act, omission, or error made in the formation of a contract. When a mistake is made, one or both parties will enter the contract without a full understanding of the contract terms, obligations, or results.

There are several different types of mistakes that the parties might make. Sometimes a mistake is incidental, or trivial to the main parts of the contract. These mistakes won't usually affect the meeting of the minds or the formation of the contract. A court will usually try to fix the mistake, but the contract as a whole will remain valid and legally enforceable.

However, a material mistake will pertain to the most basic and significant goals of the contract. These mistakes will go to the very heart, or the basis, of the agreement. The courts treat material mistakes differently, depending on who made the mistake.

For example, let's say that you agree to buy my farm. I'm no longer able to keep it running and producing. We execute a contract. You're going to pay me $50,000, and I'm going to give you the title to my farm. After we execute our agreement, you have the farm appraised. Unfortunately, the farm only appraises for $10,000. We both thought it was worth much more. Is this a material mistake?

No. You might be surprised to learn that this is actually an incidental mistake. The value of the farm is based on a judgment or an opinion. Neither of us knew exactly what the farm was worth, and neither of us took the time to find out before we made our contract. We were both willing to take a chance. The main goal of the contract is for you to acquire a farm and for me to unload my farm. That goal isn't affected by our mistake. This is a valid and legally enforceable contract.

Unilateral Mistake

In our scenario, we were both mistaken as to the value of the farm. However, sometimes only one of the contracting parties makes a mistake. This is known as a unilateral mistake. A unilateral mistake is a one-sided mistake.

When only one party makes a mistake, the contract is usually still valid and legally enforceable. Generally, the courts won't allow a party to benefit from his or her own mistakes. A party that is ignorant as to the facts and circumstances of the contract, or careless when contracting, does so at his or her own risk.

There is, however, one exception. The contract can be rescinded, or canceled, if the other party knew or should have known about the contract mistake. This is known as a palpable unilateral mistake.

Let's look at our example again. Let's say that the farm has an oil well on it. The oil well is dry, and I know it. I know the farm is worth only $10,000 because I had it appraised last year when I decided to sell it. I decided to ask $50,000 for the farm, and I told you it includes an oil well. You make the mistake of assuming the farm is worth more because it includes a working oil well. This is a situation where you might be able to rescind the contract, because I knew about the mistake but I didn't tell you.

Mutual Mistake

Sometimes both contracting parties make a mistake. When both contracting parties make a material mistake, it's known as a mutual mistake. A mutual mistake is a two-sided mistake. A contract won't usually be legally enforceable when both parties make a mistake.

Let's say that you agree to purchase my farm. We execute our contract for $50,000. We both know that you're purchasing it in order to use it as a working farm. I've used it as a working farm in the past, and believe it's in working order. However, since I've last used it, the land has been condemned. Neither of us knew it at the time of the contract, but a local power plant accidentally contaminated the land and now the land can't be farmed. This is a mutual mistake and a material mistake. This contract is voidable, meaning it can be rescinded by either one of us.

Mistakes of Fact or of Law

Contract mistakes can also be categorized by subject matter. This means that the court will look at the nature of the mistaken matter. A mistake of fact occurs when a party believes that a condition or event exists when it does not. When a party makes a contract based on a mistaken belief about the facts, the court will usually modify the contract in order to clarify the facts and follow the parties' intent.

Let's take a moment to review our scenario. I'm selling you my farm. We both know that you're purchasing it in order to use it as a working farm. I've used it as a working farm in the past, and believe it's in working order. However, since I've last used it, the land has been condemned. Neither of us knew it at the time of the contract, but a local power plant accidentally contaminated the land and now the land can't be farmed. This is a mistake of fact. We thought it was a usable farm, but it's not.

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