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How Does Mutual Mistake Lead to Revocation of a Contract?

by | Jun 29, 2016 | Business Law

In reference to contract law, the “mutual mistake” is a defense that can be raised by individuals who wish to avoid their contractual obligations. This type of defense claims that both parties involved in the contract based their agreement to the terms on a mistaken assumption or false information. In the mutual assumption defense, a party claims that having entered into the contract with inaccurate assumptions in place makes the contract is void.

Contract law recognizes a mistaken assumption as a fact that parties involved in the contract believed or assumed to be true at the time they entered the contract. Due to various circumstances, the fact assumed to be true is not true or is no longer true and due to the change in facts supporting the contract, the terms cannot be performed as originally intended. An example of mistaken assumption is two parties agreeing to contractual terms for a project to install a well to supply a town with water only to later discover that bedrock prevents exploratory digging or drilling.

In some cases, mutual mistakes or mistaken assumptions are strong enough that they can result in the revoking of a contract. When attempting to determine if mutual mistake applies to a case, the court will consider a number of factors:

  1. The “mutual” mistake must be one that was recognized as a primary reason for entering into the contract in the first place.
  2. The mistake must result in significant change to the existing contract – to the point that it could be argued that it is an entirely different contract once necessary changes are considered.
  3. Parties who knowingly assume the risk of the “mistake” cannot use the Mutual Mistake defense later. Knowing of a strong likelihood that the mistake could occur at the time the contract was signed negates the potential of using it as a reason to dissolve contractual liability. Parties can assume the risk of the mistake by acting despite obvious risks posed by the environment (i.e. construction in a region known for heavy flooding means you can expect delays due to flood), signing a contract with limited knowledge (i.e. contracting to construct a habitat for the gorillas at the local zoo with no previous experience and later finding out that the material used to construct the habitat does not stand up to use by the gorillas), the Court determines that you assume the risk of mistake after looking into what is deemed “reasonable.”

If you have concerns regarding a Mutual Mistake defense or revoking a contract, please get in touch with one of the experienced southern California business and contract law attorneys at The Law Office of the Law Office of Ernesto Aldover as soon as possible. We can assist you in looking over the abstract legal factors and determine reasonable assumptions of risk.