What is the effect of a party’s mistake in contract formation?

In earlier posts we have gone over the basic elements needed to form a valid contract: offer, acceptance and consideration. But there can still be a situation in which the parties to a contract can satisfy the technical requirements to form an agreement and yet still end up with a contract that is voidable. One way that this can occur is when either or both sides make a mistake when entering into the agreement.

There are two basic categories of mistake in contract law: unilateral, and mutual. Which category the mistake falls into can have a significant impact on whether the agreement can be enforced against the party in error.

Unilateral mistake: If one party makes a mistake about the agreement that goes to a basic assumption on which the parties entered into the agreement and the non-mistaken party knew or should have known of that mistake, then the mistaken party may be able to void the contract. Note, however, that if the non-mistaken party had no way to reasonably know of the other party’s mistake, then that mistake can be held against the mistaken party (although in some situations the mistaken party can attempt to rescind the agreement if it notifies the non-mistaken party of the error before the non-mistaken party relies on the mistaken understanding).

Mutual mistake: If both parties to the contract make a mistake about the conditions of the agreement (that is, both are in error about an underlying assumption that relates to why they entered into the agreement), then the party that is harmed by the mistake can void the agreement as long as it did not assume the risk of the mistaken assumption.

On the other hand, if both parties make a mistake that relates to matters of judgment (as opposed to base assumptions), then that may not constitute grounds to void the agreement.

Note that this post is only an introduction to the topic of contract mistakes, and should not be taken as definitive or as legal advice in the state of Illinois or elsewhere. When a mistake concerning a business contract leads to the potential for your business to be harmed as a result, you should consult with a law firm experienced with commercial business transactions and contracts to help you to determine what your legal remedies may be.

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