Business Law - Mutual Mistake

In a business setting situations may arise when two parties enter into a contract only to find out that a mutual mistake was made involving the terms of the contract.  These situations can be frustrating to both parties, considering that both parties agreed to the terms of the contract and fully expected to receive whatever the terms of the contract stated.   After all, nobody is perfect and mistakes often happen, especially when dealing with contracts.

In the scenario provided, an individual is considering the purchase of a new car.  In the course of the negotiations, this individual tells the salesperson that he wants a 3.2 liter V-6 engine and not the 3.9 liter because of concerns over gas mileage.  A contract is signed agreeing to purchase the vehicle with the 3.2 liter engine. Unbeknownst to both parties, the manufacturer had already stopped producing both the 3.2 liter and 3.9 liter models, and instead was producing only 3.5 liter models.  Assuming that the individual recognized the mistake and asked to return the vehicle for a refund and the salesperson declined, the contract can be voidable by the purchaser.

        If the individual making the purchase is not content with the 3.5 liter model, he can use the mutual material mistake defense as a means of disputing the validity of the contract.  In a perfect world, the salesperson and individual would come to terms to settle the dispute, sometimes this is not the case and contract disputes must be settled legally.  

Twomey and Jennings state:  When both parties enter into a contract under a mutually mistaken understanding concerning a basic assumption of fact or law on which the contract is made, the contract is voidable by the adversely affected party if the mistake has a material effect on the agreed exchange.

Another element to the mutual mistake defense is the assumption of risk.  If there was a strong possibility of risk at the time of the contract that was known, the mutual mistake defense may not hold up in court (http://www.legalmatch.com/law-library/article/revoking-contracts-mutual-mistake.html).

When applying this explanation of mutual mistake to the scenario provided, the individual making the purchase is the adversely affected party due to receiving a vehicle that was not agreed upon.  Both the salesperson and the individual entered the agreement with the misunderstanding that the 3.2 liter was no longer available to purchase.  Both parties assumed that the 3.2 liter model was still available when in all actuality it was no longer being produced.  A court may have to determine if there was an assumed risk but it seems that in this case, the individual did not have an assumption of risk that the purchased vehicle would have a different engine.  As a result, the individual would receive a different vehicle than stated in the contract therefore making the contract voidable due to a mutual mistake by both parties.

Parties to a sales contract should be able to rescind a contract because of mutual mistake of fact because the nature of contract is to create a binding agreement that both parties agree to. One of the basic elements of a contract is mutual assent, when both parties agree to the terms stated on the contract.  If both parties of a contract make an honest mistake, why should either party suffer from that mistake? This is especially true to the adversely affected person, such as the individual in our scenario.

Smith and Smith state:  The party fearing he has inferior information may want "insurance" that he is not being taken advantage of (for example, warranty or guarantee). In cases where such insurance is not privately provided, it can be provided implicitly by the government. This is precisely what the mutual mistake doctrine does-it provides a way for a deal to be "undone" if the bargain turns out to be different than assumed. (19 J. Legal Stud. 467 (1990)
Contract Law, Mutual Mistake, and Incentives to Produce and Disclose Information, Smith, Janet Kiholm, Smith, Richard L.
[ 22 pages, 467 to 488 ])

Mutual mistake of fact is a way to terminate a contract and return to the conditions before the agreement was made.  

Ethical behavior is an important practice in business.  Merriam-Webster defines ethics as “rules of behavior based on ideas about what is morally good and bad. (http://www.merriam-webster.com/dictionary/ethic).” Based on this definition I do not believe that either party acted unethically in this case.  Both the purchaser and the salesperson acted on what they believed to be true.  However, the salespersons lack of information on the vehicle he was selling and refusing a refund for the purchased vehicle would be unethical according to the National Automobile Dealers Association (NADA).   If the salesperson was a NADA member, they would be expected to follow the standards and principles in the NADA code of ethics.  In short, the NADA code of ethics requires that dealers “Represent our products clearly and factually”, “Advertise our products in a positive, factual, and informative manner,” and “resolve customer concerns promptly and courteously,”  all of which the salesperson failed to do. https://www.nada.org/Publications/CodeOfEthics/).