Defenses to enforceability - Mistake and misunderstanding

Learning Outcomes

After reading this article, you will be able to identify and apply the rules governing mistake and misunderstanding as defenses to contract enforceability. You will distinguish between mutual mistake, unilateral mistake, and misunderstanding, understand when these doctrines allow a contract to be voided or reformed, and recognize the MBE’s approach to these issues in exam scenarios.

MBE Syllabus

For the MBE, you are required to understand when a contract may be unenforceable due to mistake or misunderstanding. This includes knowing the types of mistake, the requirements for each defense, and the consequences for contract validity. You should be able to:

  • Recognize the difference between mutual mistake, unilateral mistake, and misunderstanding.
  • Identify when a contract is void or voidable due to mistake or misunderstanding.
  • Apply the rules for mistake regarding facts versus value or opinion.
  • Analyze the effect of mistake and misunderstanding on enforceability in MBE-style questions.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Which of the following is most likely to make a contract voidable?
    1. A mutual mistake about a basic fact that is material to the contract.
    2. A unilateral mistake about price, with no knowledge by the other party.
    3. A mutual mistake about the value of the subject matter.
    4. A misunderstanding about a minor contract term.
  2. If two parties attach different reasonable meanings to an ambiguous term in a contract, and neither knows of the other's interpretation, what is the result?
    1. The contract is voidable by either party.
    2. The contract is enforceable according to the more reasonable meaning.
    3. There is no contract.
    4. The contract is enforceable according to the drafter's meaning.
  3. Which of the following best describes the effect of a unilateral mistake known to the other party?
    1. The mistaken party is always bound.
    2. The contract is automatically void.
    3. The contract may be voidable if the non-mistaken party knew or should have known of the mistake.
    4. The contract is enforceable unless the mistake is about value.

Introduction

Contracts may be unenforceable if a party can show a valid defense. Among the most frequently tested defenses are mistake and misunderstanding. These doctrines address situations where parties are not truly in agreement due to an error about facts or terms. Understanding when mistake or misunderstanding will prevent contract enforcement is essential for MBE success.

Types of Mistake

Mistake as a defense falls into two main categories: mutual mistake and unilateral mistake. A related but distinct concept is misunderstanding, where the parties attach different meanings to a contract term.

Key Term: Mutual Mistake A situation where both parties are mistaken about a basic fact that is central to the contract at the time of agreement.

Key Term: Unilateral Mistake A situation where only one party is mistaken about a basic fact, and the other party is not.

Key Term: Misunderstanding A situation where the parties attach different reasonable meanings to an ambiguous term, and neither is aware of the other's interpretation.

Mutual Mistake

A contract is voidable by the adversely affected party if all of the following are true:

  • Both parties are mistaken about a basic fact existing at the time of contract formation.
  • The mistake goes to a fundamental assumption on which the contract was made.
  • The mistake has a material effect on the agreed exchange.
  • The adversely affected party did not bear the risk of the mistake.

If these requirements are met, the contract may be rescinded. However, a mutual mistake about the value or quality of the subject matter is generally not a defense.

Unilateral Mistake

If only one party is mistaken, the contract is usually enforceable. However, the mistaken party may avoid the contract if:

  • The non-mistaken party knew or should have known of the mistake, or
  • The mistake makes enforcement unconscionable.

A unilateral mistake about value or opinion is not a defense.

Misunderstanding (Ambiguous Terms)

If a contract term is ambiguous and each party attaches a different reasonable meaning to it:

  • If neither party knows of the ambiguity, there is no contract if the meanings are equally reasonable.
  • If one party knows of the ambiguity and the other does not, the contract is enforced according to the meaning of the party unaware of the ambiguity.
  • If both parties know of the ambiguity, there is no contract unless both intended the same meaning.

Worked Example 1.1

Two parties contract for the sale of "100 crates of apples." Seller believes this refers to 100 crates of green apples, while Buyer believes it means 100 crates of red apples. Neither party is aware of the other's interpretation, and both meanings are reasonable in the context.

Answer: There is no contract. This is a misunderstanding: both parties attached different reasonable meanings to an ambiguous term, and neither knew of the other's interpretation.

Worked Example 1.2

A homeowner agrees to sell a painting to a buyer for 5,000.Bothbelievethepaintingisanoriginalbyafamousartist.Afterthesale,itisdiscoveredthatthepaintingisacopyworthonly5,000. Both believe the painting is an original by a famous artist. After the sale, it is discovered that the painting is a copy worth only 100.

Answer: The contract is voidable for mutual mistake. Both parties were mistaken about a basic fact (authenticity), which was material to the contract.

Worked Example 1.3

A contractor submits a bid to build a house for 200,000butmakesacalculationerrorandmeanttobid200,000 but makes a calculation error and meant to bid 220,000. The homeowner accepts the bid, knowing that similar bids are much higher and suspecting a mistake.

Answer: The contract may be voidable for unilateral mistake. The homeowner knew or should have known of the contractor's error.

Exam Warning

On the MBE, a mistake about value or quality (e.g., paying too much or too little) is not a defense. Only a mistake about a basic fact, not opinion or value, may make a contract voidable.

Revision Tip

If you see an ambiguous term in a contract, always ask whether both parties reasonably interpreted it differently. If so, and neither knew of the other's meaning, there is no contract.

Key Point Checklist

This article has covered the following key knowledge points:

  • Mutual mistake allows rescission if both parties are mistaken about a basic, material fact.
  • Unilateral mistake is usually not a defense unless the other party knew or should have known of the mistake.
  • A mistake about value or opinion does not void a contract.
  • Misunderstanding of an ambiguous term may prevent contract formation if both parties attach different reasonable meanings.
  • The party who bears the risk of mistake cannot claim the defense.

Key Terms and Concepts

  • Mutual Mistake
  • Unilateral Mistake
  • Misunderstanding
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