The Impact of a Mistake on the Validity of a Contract

Will the Contract Still Be Enforceable If Either Party Relies on a Mistake?

One of the requirements of a valid and enforceable contract is that there must be an agreement. That has commonly been construed to mean that there must be at least two parties. It also suggests that the parties must have a common understanding of the terms, rights and responsibilities set forth in the contract. What happens, though, when there’s a miscommunication or misunderstanding and one of the parties enters the contract based on that mistake? Can the contract be voided? What are the circumstances where that becomes possible?

Identifying the Type of Mistake

If one or more of the parties to a contract can show that they entered the agreement based on a false understanding, there are instances where the contract may be voided or reformed. When one of the parties alleges that a contract was based on a mistake, the first step is determining who was mistaken, as well as the type of mistake. The mistakes that may affect the validity or enforceability of a contract include:

• Mistakes of fact—This involves a false belief or understanding about a material fact. For example, suppose a party believes he has a genuine Rembrandt and enters into a contract to sell that painting as such. If it turns out to be a fake, the buyer may allege a mistake of fact.
• Mistakes of law—This occurs when an agreement is made based on a misreading or false understanding of the law. For example, if the parties agree to the sale of a quantity of “medical marijuana,” both believing the law now permits such a transaction, the agreement may be voided if it is determined that this specific transaction is still illegal.

In addition, mistakes are considered to be either unilateral (made by only one party) or mutual (made by both parties. As a general rule, a unilateral mistake does not make a contract void, as the doctrine of caveat emptor (let the buyer beware) supports the finding that both parties must use due diligence to understand the rights and responsibilities under a contract. However, if a party relied on a false assertion of fact that the other party knew or should have known was mistaken, the agreement may be voided. If both parties are mistaken with respect to the same fact (and it is a material element of the contract), the agreement may be voided.

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