Contracts and Sales Multistate Bar Practice Exam

In a case of bilateral mistake, under what conditions can a contract be voided?

1. It must involve a mutual understanding of all terms

2. It concerns a basic assumption on which the contract is made, affecting the exchange

3. Only if there are witnesses to the agreement

4. It involves a misunderstanding of the parties’ respective abilities

The correct answer is: It concerns a basic assumption on which the contract is made, affecting the exchange

In the context of contract law, a bilateral mistake occurs when both parties share a misunderstanding regarding a fundamental aspect of the contract. For a contract to be voided on the grounds of bilateral mistake, it is essential that the mistake concerns a basic assumption on which the contract is made and that this mistake significantly affects the agreed-upon exchange. This means that if both parties are operating under a shared false belief regarding a crucial fact—such as the identity of the subject matter, the value of the good, or the legal status of an element involved in the contract—these misconceptions can alter the essence of what was bargained. Therefore, if the misunderstanding is significant enough to undermine the foundational elements of the contract, the parties may be released from their obligations, as their consent was not truly informed regarding the core terms. Understanding this principle is key to recognizing when the courts may allow a contract to be rescinded due to errors shared by both parties, emphasizing the importance of mutual understanding in contractual agreements.