Key Takeaways

  • A bilateral mistake occurs when both parties to a contract share a mistaken belief about a fundamental fact, making the agreement potentially void or voidable.
  • It differs from a unilateral mistake, where only one party is mistaken; bilateral mistakes usually affect the validity, enforceability, or performance of the contract.
  • Types of bilateral mistakes include errors about the subject matter, identity, quantity, quality, title, price, or possibility of performance.
  • Courts often examine whether the mistake was material (essential to the agreement) and whether it affected the mutual intent of the parties.
  • Remedies for bilateral mistakes may include rescission, reformation, restitution, or renegotiation of the contract.
  • Understanding exceptions and real-world examples can help parties anticipate legal consequences and avoid disputes.

A bilateral mistake is often known as a mutual legal mistake. It occurs when both parties are falsely operating on information that is inaccurate. Bilateral mistakes can be problematic because both parties have a misunderstanding of the contract and its terms. When each party is not aware of the specific terms of the contract, it can be difficult and even impossible to fulfill the requirements of the contract.

Types of Legal Mistakes

There are two types of potential mistakes that can be involved in legal contracts.

  • Mistake of law
  • Mistake of fact

Mistake of Law

A mistake of law occurs when both parties are mistaken on the legal implications of a contract based on their current location, either at home or on foreign lands. There are also two different types of mistake of laws that can occur within a contract:

  • Mistake of home law: This occurs when each party is mistaken in terms of the laws of where they currently live. In a mistake of home law, the contract terms must be met and legal consequences are likely. A mistake of home law will usually not hold up in court because it is under the assumption that each party should be knowledgeable of the specific laws of where they reside.
  • Mistake of foreign law: This occurs when each party is mistaken of foreign laws. Although the contract terms must be met, it is possible that the contract could be forgiven in Indian courts. The idea is that parties cannot realistically know every single law in foreign areas.

Mistake of Fact

A mistake of fact occurs when one, or both parties, believe they understand the facts of the contract, yet at least one party is acting under false information. These mistakes of fact can either be bilateral or unilateral.

  • Bilateral mistake of fact: When both parties are misinformed as to the specific terms of the contract. This is often referred to as mutual or common mistakes. A bilateral mistake can usually be voided by both parties of the contract because both parties are acting under false information.
  • Unilateral mistake of fact: When only one party is mistaken on the terms of the contract. A unilateral mistake of fact is often not reason enough to set aside a contract, but it can result in a voidable contract. Whether or not it is voided will depend on the specific type of mistake and whether the other party agrees to void it.

Legal Consequences of a Bilateral Mistake

When a bilateral mistake occurs, the core of the contract may be undermined because both parties never had a true "meeting of the minds." In most legal systems, a contract formed under a mutual error concerning an essential fact is considered void ab initio — meaning it is treated as though it never existed. However, the outcome depends on the nature and impact of the mistake:

  • Void Contract: If the mistake relates to the very subject matter or an essential fact (e.g., the object does not exist), the contract is typically void.
  • Voidable Contract: If the mistake affects a secondary or collateral term but not the core agreement, courts may allow the contract to be voided at the request of either party.
  • No Relief: If the mistake is about a non-material fact or results from negligence (e.g., failure to read the contract), courts may still enforce the agreement.

The doctrine aims to protect fairness while preventing parties from escaping obligations due to trivial misunderstandings. Courts will usually ask: Would the parties have agreed to the contract had they known the true facts? If not, the contract likely cannot stand.

Types of Bilateral Mistakes

There are two types of bilateral mistakes that can occur: subject matter mistakes and a possibility of performance mistakes.

Subject matter mistakes occur when both parties make a mistake regarding the subject matter of the contract. This will generally lead to a contract that is voided. Common mistake types include the following:

  • Existence of subject matter: This occurs when both parties agree to terms that no longer exist. This could come from a lack of shipping, loss of inventory, or any other cause that limits the existence of the specific contract terms.
  • Mistake of identity: This occurs when each party has different subject matter identity expectations. 
  • Mistake of quantity: This occurs when each party is mistaken as to the quantity involved in a specific contract term. 
  • Mistake of quality: This occurs when each party has different expectations of the quality of a product.
  • Mistake of title: This occurs when one party falsely expects the other to have ownership in order to complete the terms of the agreement. 
  • Mistake of price: This occurs when each party is mistaken as to the price of the subject matter.

A possibility of performance mistake occurs when one party is mistaken as to the capability of the other to complete specific terms of the contract. This type of contract is voided based on the inability to complete the tasks. Possibility of performance mistakes can arise from an inability to complete contract terms based on either legal or physical reasons.

Common Examples and Case Illustrations

Real-world examples help clarify how bilateral mistakes are treated in practice:

  • Non-existent Subject Matter: If both parties agree to sell a painting believed to exist but later discover it was destroyed before the contract, the agreement is void.
  • Mistake of Identity: If one party agrees to buy a product believing it to be a specific model while the seller believes they are selling another, there is no true agreement.
  • Quantity or Quality Errors: Suppose both parties misunderstand the number of units to be delivered or the product’s quality specifications. This may justify rescission or reformation.
  • Legal Impossibility: A contract for an activity later discovered to be illegal or impossible due to existing law is unenforceable.

These scenarios illustrate that mutual misunderstanding must relate to a fundamental assumption for a bilateral mistake to invalidate a contract.

Remedies and Legal Solutions

When a bilateral mistake is proven, several remedies are available depending on the situation:

  • Rescission: The most common remedy — the contract is canceled, and both parties return to their pre-contract positions.
  • Reformation: The court modifies the contract to reflect the original intent if the mistake is clerical or drafting-related.
  • Restitution: Parties may recover any benefits conferred under the invalid agreement.
  • Renegotiation: Sometimes, parties choose to amend and re-sign the agreement with corrected terms to maintain the relationship.

Courts prefer equitable solutions, ensuring that neither party gains an unfair advantage due to a shared misunderstanding.

Unilateral Exceptions

It is always possible that there are exceptions involved with unilateral mistakes. These are a few of the most common types of exceptions:

  • Mistake of identity: If the mistake is one-sided in terms of identity, the contract can be voided.
  • Nature of contract mistake: If just one party is mistaken as to the nature of the contract, then the contract is eligible to be voided.

Preventing Bilateral Mistakes in Contracts

Preventing a bilateral mistake is often easier — and far less costly — than litigating one. Best practices include:

  • Detailed Due Diligence: Verify all facts, terms, and legal requirements before signing.
  • Clear and Precise Drafting: Ambiguous language can lead to misunderstandings; clarity minimizes risk.
  • Use of Representations and Warranties: Contract clauses can allocate risk if certain facts turn out to be false.
  • Legal Review: Consulting an attorney ensures that terms accurately reflect the parties’ intentions and comply with relevant laws.

By implementing these precautions, businesses can reduce the likelihood of disputes rooted in bilateral mistakes.

Frequently Asked Questions

  1. Is a bilateral mistake enough to void a contract?
    Yes, if the mistake concerns a fundamental fact essential to the agreement, the contract is usually void or voidable.
  2. How is a bilateral mistake different from a unilateral mistake?
    A bilateral mistake involves both parties being wrong about a key fact, while a unilateral mistake involves only one party’s misunderstanding.
  3. What remedies are available for a bilateral mistake?
    Common remedies include rescission, reformation, restitution, or renegotiation of the contract.
  4. Can parties still enforce a contract with a bilateral mistake?
    Only if the mistake is about a non-essential fact or if the court finds that enforcement would not be unjust.
  5. How can businesses avoid bilateral mistakes?
    Through due diligence, clear drafting, representations and warranties, and legal review before signing any agreement.

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