Bilateral Mistake in Contracts: Key Facts & Examples

Key Takeaways

• A bilateral mistake occurs when both parties to a contract are mistaken about a fundamental aspect of the agreement.
• Courts may void a contract due to a bilateral mistake if the mistake materially affects the agreement and neither party assumed the risk.
• There are two main types: mistake of fact and mistake of law, each with further subdivisions.
• Subject matter mistakes and impossibility of performance are common grounds for rescission.
• Courts assess the materiality of the mistake and whether it frustrated the purpose of the contract.
• Multiple case law precedents illustrate real-world examples where bilateral mistakes led to contract rescission or reformation.

A bilateral mistake example includes instances when both parties to a contract are mistaken or misinformed as to the specific terms. Bilateral mistakes, in comparison to unilateral mistakes, involve both parties of the contract. A unilateral mistake involves just one party to the contract acting under false misconceptions.

What Is a Bilateral Contract?

Contracts are used in both business and personal situations. The concepts of bilateral and unilateral are actually common in an everyday setting and knowing the difference between the two can assist with legal and personal relationships. 

Most contracts are considered bilateral, meaning that the agreement includes at least two parties. The majority of contracts include bilateral agreements. Everyday examples of bilateral agreements include:

• Completing a transaction at the store
• Purchasing a meal at your favorite restaurant
• Receiving medical services from your physician
• Paying your phone bill each month

In each of these situations, you are completing an action in return for another action. In most cases, the agreement involves payment in the form of money in return for a product or service. However, this is not always the case with bilateral agreements.

In order to take a bilateral agreement to court, you must provide the following components:

• Proof that the contract ever existed
• Proof the contract or terms were broken
• Evidence that you suffered a loss
• Evidence that the other party is responsible for the loss

Bilateral Mistake Errors

A bilateral mistake is defined as an error that involves both parties of the contract having an understanding that is not what the contract terms actually state.

There are two types of possible contract mistakes including a mistake of law and a mistake of fact.

Mistake of Law

A bilateral mistake of law occurs when both parties are misinformed about the contract terms. There are two types of mistakes of law that can occur:

• Mistake of home law: A bilateral mistake of home law occurs when both parties are not aware of the home laws in which they operate in. Mistake of home laws is not excusable by law because it is expected that a person doing business in their home state should be aware of the laws there.
• Mistake of foreign law: A bilateral mistake of foreign law occurs when both parties are misinformed as to the specific laws of a state that they are not residents of. This is common when doing business across state or country borders. This type of mistake is more likely to be void because a person cannot know all of the laws outside of their own home state.

Mistake of Fact

A bilateral mistake of fact occurs when both parties are misinformed as to the facts or terms laid out in the contract. There are two types of mistakes of facts that can occur:

• Bilateral mistake: Both parties are misinformed as to the contracts meaning and terms. Bilateral mistakes are also sometimes referred to as mutual or common mistakes. Bilateral mistakes can involve the contracts terms or the ability to perform them. Bilateral mistakes are often voidable in court.
• Unilateral mistake: A unilateral mistake means that just one party is misinformed as to the terms or meaning of the contract. It can be much harder to void a contract that is based on a unilateral mistake.

Types of Bilateral Mistakes

Bilateral mistakes can include two different types of mistakes:

• Subject matter mistakes: Both parties are misinformed about the overall subject matter of the contract. This often leads to a void of the contract. Subject matter mistakes can include title, quantity, quality, price, and identity mistakes.
• Possibility of performance mistakes: Both parties are mistaken as to the ability of performance capability. This will usually lead to a voided contract since it is impossible for at least one party to complete the terms of the contract. Impossibility of performance can be due to either physical or legal reasons.

Legal Consequences of a Bilateral Mistake

When a bilateral mistake is identified, courts typically consider whether the mistake goes to a basic assumption underlying the contract. If so, and if the mistake has a material effect on the agreed exchange, the contract may be deemed voidable. However, the party seeking to avoid the contract must prove that they did not assume the risk of the mistake.

Key consequences include:

• Rescission: The contract may be canceled entirely, returning the parties to their pre-contractual positions.
• Reformation: If appropriate, the court may allow the contract to be rewritten to reflect the parties' original understanding.
• No remedy: If the court finds one party assumed the risk, or the mistake was not material, the contract will likely stand.

Courts analyze bilateral mistakes under Restatement (Second) of Contracts §152, which outlines the conditions under which a mutual mistake can render a contract voidable.

Bilateral Mistake Examples

There are many different types of contracts that can involve bilateral mistakes. A bilateral mistake can occur when one party becomes unexpectedly ill, when an expected product inventory does not make it to its intended location, or when parties are misinformed as to legal ownership of a property or item.

Tips to Prevent Bilateral Mistakes in Contracts

To avoid costly legal disputes over bilateral mistakes, consider the following practices:

• Clarify key terms: Ensure all definitions are precise and agreed upon.
• Use warranties and representations: These limit ambiguity by setting expectations.
• Incorporate risk allocation clauses: State clearly which party bears the risk of unknowns.
• Perform due diligence: Conduct investigations to verify all material facts before entering into a contract.
• Consult legal counsel: A lawyer can help identify potential areas of confusion and mitigate risk.

These preventive steps can help ensure contracts reflect both parties’ true intentions and reduce the likelihood of a bilateral mistake.

How Courts Determine If a Bilateral Mistake Is Grounds for Rescission

Courts will typically evaluate the following criteria:

1. Existence of a mutual misunderstanding: Did both parties misunderstand the same fact or term?
2. Material effect on the exchange: Did the mistake impact the essence of what was being exchanged?
3. Risk allocation: Did one party assume the risk of the mistake (e.g., via contract language or industry practice)?
4. Good faith conduct: Was there any indication of deception or bad faith?
5. Possibility of contract reformation: Can the error be corrected rather than canceling the contract?

If all these factors support the claim, a court may allow the contract to be rescinded or rewritten.

Distinguishing Bilateral Mistakes from Other Errors

It’s essential to differentiate a bilateral mistake from other types of contractual errors:

Understanding these distinctions helps determine when a bilateral mistake can lead to legal remedies.

Notable Case Law on Bilateral Mistakes

Understanding bilateral mistake through case law helps clarify how courts treat these issues:

• Sherwood v. Walker (1887): A famous case involving the sale of a cow believed to be barren. Both parties mistakenly believed the cow could not breed, but it turned out she was fertile. The court ruled this was a bilateral mistake about a material fact, making the contract voidable.
• Beachcomber Coins, Inc. v. Boskett (1979): Involved the sale of a rare coin believed by both buyer and seller to be genuine. It turned out to be counterfeit. The court voided the contract due to mutual mistake of fact.
• Estate of Nelson v. Rice (2006): A painting thought to have little value was later found to be a lost masterpiece. The seller bore the risk of mistake due to inadequate investigation, so the contract was not voided.

These cases show that courts often evaluate:

• The materiality of the mistaken belief,
• The assumption of risk, and
• Whether enforcement of the contract would result in unjust enrichment.

Frequently Asked Questions

1. What is the difference between a bilateral mistake and a unilateral mistake?
   A bilateral mistake involves both parties being mistaken about a material fact, while a unilateral mistake involves only one party. Courts are more likely to void a contract due to a bilateral mistake.
2. Can a contract be enforced if both parties were mistaken?
   It depends. If the bilateral mistake is material and neither party assumed the risk, the contract may be rescinded.
3. What are common examples of bilateral mistakes?
   Examples include both parties misunderstanding the ownership of a good, the authenticity of a product, or the feasibility of fulfilling the contract terms.
4. How can I avoid making a bilateral mistake in a contract?
   Clearly define terms, perform due diligence, allocate risks in writing, and consult legal counsel during drafting and negotiation.
5. Is a mistake about the value of a product considered a bilateral mistake?
   No. Mistakes about value are generally not considered material and typically don't justify rescinding a contract unless they stem from a mistake of fact about the underlying product.

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