Written by attorneys · grounded in primary & secondary sources — see below
A shared erroneous belief by both parties to a contract about a fact existing at the time of contracting. The belief must concern a basic assumption on which the contract rests and must materially affect the agreed exchange of performances. The adversely affected party may avoid the contract unless that party bore the risk of the mistake.
Sources & Authorities
How it applies
Common Examples
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Merger Exception After Closing
Matthew Martinez sold a warehouse to Magnolia Foods under a contract requiring removal of all tenant liens before closing. At closing Magnolia accepted a special warranty deed that omitted any lien-curing promise. After recording the deed Magnolia discovered unreleased liens and sued for breach of the contract term. Because the parties shared no mistaken belief about an existing fact at formation, the mutual-mistake exception to merger did not apply and the contract promise merged into the deed.
Collateral Promise Survives Merger
Monica Morgan contracted to buy a retail building from Monarch Pharmaceuticals. The written agreement contained a promise that Monarch would install fiber-optic lines after closing. The deed was silent on the fiber work. After closing Monarch refused to perform. The court examined the parties' intent and the independent nature of the post-closing installation and held that the mutual mistake doctrine preserved the promise as a collateral undertaking that did not merge into the deed.
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Cases
Common Law
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Dictionaries
Barren Cow Rescission
Marcus Mitchell agreed to sell a cow to Mohan Malhotra for beef price after both parties examined the animal and concluded it was infertile. The cow was in fact pregnant and worth far more as a breeder. When the pregnancy was discovered Mitchell sought to avoid the sale. The shared mistaken belief about the cow's fundamental reproductive capacity went to the substance of the bargain and permitted rescission for mutual mistake.
Sherwood v. Walker66 Mich. 568, 580, 33 N.W 919 (1887)
Conscious Ignorance Defense
An antiquities dealer purchased an artifact from a collector after both examined it and concluded it was genuine. Later tests revealed it was a forgery. The dealer sought rescission for mutual mistake. The court held that the dealer had assumed the risk because he knowingly relied on his own limited expertise rather than making further inquiry that due diligence would require.
Sherwood v. Walker66 Mich. 568, 580, 33 N.W 919 (1887)
Mistake Of Law Rescission
A seller and buyer included a leaseback right in a land-sale contract, both believing the clause was lawful. An undiscovered statute in fact invalidated such arrangements. When the statute came to light the adversely affected party sought rescission. The court treated the shared erroneous belief about the legality of the provision as a mistake of fact and permitted avoidance.
Sherwood v. Walker66 Mich. 568, 580, 33 N.W 919 (1887)
Pricing Formula Reformation
Aluminum Company of America contracted to supply aluminum to Essex Group under a long-term pricing formula tied to a wholesale price index. Both parties assumed the index would track Alcoa's actual costs. When electricity costs spiked dramatically the formula produced prices far below cost. The court found a mutual mistake about the suitability of the chosen index and reformed the price term rather than rescinding the entire contract.
Aluminum Company of America v. Essex Group, Inc.499 F. Supp. 53 (W.D. Pa. 1980)
Common questions
Frequently Asked
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What elements must be shown to avoid a contract for mutual mistake?+
The mistake must concern a fact existing at contracting. It must relate to a basic assumption on which the contract rests and must materially affect the exchange of performances. The adversely affected party must not have assumed the risk of the mistake under the applicable allocation rules.
Supporting sources
Does mutual mistake permit reformation instead of rescission?+
When the parties share a mistaken belief about an existing fact that affects a pricing or quantity term, courts may reform the contract to reflect the parties' original expectations rather than rescind the entire agreement.
Supporting sources
When does a party assume the risk of a mutual mistake?+
A party assumes the risk when the contract allocates that risk, when the party is aware of its limited knowledge yet proceeds anyway, or when the court assigns the risk because the party seeking relief is better positioned to bear it.
Supporting sources
How does mutual mistake interact with the merger doctrine in real-estate sales?+
Merger discharges contractual promises not restated in the deed, but the mutual-mistake exception preserves claims when both parties shared an erroneous belief about an existing fact at the time of contracting that affects the transaction.
Supporting sources
131 S. Ct. 1740 (2011)Conflict of Laws
…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…