Dinn, Hochman & Potter, LLC

What is the contractual effect of unilateral and mutual mistakes?

Parties to an agreement, particularly a business agreement, do not operate in an environment of perfect knowledge. Sometimes after entering into a contract either or both of the parties to it may realize that a mistake has occurred in the way the contract was written or in the business assumptions that formed the basis for entering into it. When mistakes are made, what is the legal effect on the contract and the parties' rights and obligations under it?

Contract mistakes can generally be broken down into two main types: mutual and unilateral.

Mutual mistake:  As the term implies, when both parties to the agreement make a mistake about material facts underlying the contract at the time they entered into it, and the effect of the mistake is to thwart the parties' expectations, the doctrine of mutual mistake can allow them to back out of the agreement. This often goes under the term, "rescission and restitution", meaning that the contract is rescinded and the parties will take other necessary steps (such as refunding initial payments or sending back shipments) to put them both to the degree possible back into the position they were in before they entered into the contract.

Unilateral mistake: If only one party made a mistake about the contract when it was concluded, the law in Ohio and elsewhere tends to be less forgiving, especially if the party making the mistake is a business and not a consumer. Parties to a contract are expected to have read and understood the agreement before entering into it; claiming to have been surprised by a term or condition in the agreement that turns out to be unfavorable is seldom an excuse to avoid having to perform under the contract's terms in the same way that being ignorant of a law is no defense to an accusation of having broken a law.

A good way to avoid a mutual or a unilateral mistake when creating an agreement is to work closely with a business law firm when negotiating and drafting it. Or, if a disagreement arises after entering into a contract that is based on a mistake, a business attorney can help to determine what contractual remedies may be available under the circumstances.

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