(1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and
(a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or
(b) the other party had not at the time of avoidance reasonably acted in reliance on the contract.
(2) However, a party may not avoid the contract if
(a) it was grossly negligent in committing the mistake; or
(b) the mistake relates to a matter in regard to which the risk of mistake was assumed or, having regard to the circumstances, should be borne by the mistaken party.
This Article states the conditions necessary for a mistake to be relevant with a view to avoidance of the contract. The introductory part of paragraph (1) determines the conditions under which a mistake is sufficiently serious to be taken into account; sub-paragraphs (a) and (b) of paragraph (1) add the conditions regarding the party other than the mistaken party; paragraph (2) deals with the conditions regarding the mistaken party.
1. Serious mistake
To be relevant, a mistake must be serious. Its weight and import¬ance are to be assessed by reference to a combined objective/subjective standard, namely what “a reasonable person in the same situation as the party in error” would have done if it had known the true circumstances at the time of the conclusion of the contract. If it would not have contracted at all, or would have done so only on materially different terms, then, and only then, is the mistake considered to be serious.
In this context the introductory part of paragraph (1) relies on an open-ended formula, rather than indicating specific essential elements of the contract to which the mistake must relate. This flexible approach allows full account to be taken of the intentions of the parties and the circumstances of the case. In ascertaining the parties’ intentions, the rules of interpretation laid down in Chapter 4 must be applied. General commercial standards and relevant usages will be particularly important.
Normally in commercial transactions certain mistakes, such as those concerning the value of goods or services or mere expectations or motivations of the mistaken party, are not considered to be relevant. The same is true of mistakes as to the identity of the other party or its personal qualities, although special circumstances may sometimes render such mistakes relevant (e.g. when services to be rendered require certain personal qualifications or when a loan is based upon the credit-worthiness of the borrower).
The fact that a reasonable person would consider the circumstances erroneously assumed to be essential is however not sufficient, since additional requirements concerning both the mistaken and the other party must be met if a mistake is to become relevant.
2. Conditions concerning the party other than the mistaken party
A mistaken party may avoid the contract only if the other party satisfies one of four conditions laid down in paragraph (1).
The first three conditions indicated in sub-paragraph (a) have in common the fact that the other party does not deserve protection because of its involvement in one way or another with the mistaken party’s error.
The first condition is that both parties laboured under the same mistake.
1. A and B, when concluding a contract for the sale of a sports car, were not and could not have been aware of the fact that the car had in the meantime been stolen. Avoidance of the contract is admissible.
However, if the parties erroneously believe the object of the contract to be in existence at the time of the conclusion of the contract, while in reality it had already been destroyed, Article 3.1.3 has to be taken into account.
The second condition is that the error of the mistaken party is caused by the other party. This is the case whenever the error can be traced to specific representations made by the latter party, be they express or implied, negligent or innocent, or to conduct which in the circumstances amounts to a representation. Even silence may cause an error. A mere “puff” in advertising or in negotiations will normally be tolerated.
If the error was caused intentionally, Article 3.2.5 applies.
The third condition is that the other party knew or ought to have known of the error of the mistaken party and that it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error. What the other party ought to have known is what should have been known to a reasonable person in the same situation as that party. In order to avoid the contract the mistaken party must also show that the other party was under a duty to inform it of its error.
The fourth condition is laid down in sub-paragraph (b) and is that the party other than the mistaken party had not, up to the time of avoidance, reasonably acted in reliance on the contract. For the time of avoidance, see Articles 3.2.12 and 1.10.
3. Conditions concerning the mistaken party
Paragraph (2) of this Article mentions two cases in which the mistaken party may not avoid the contract.
The first of these, dealt with in sub-paragraph (a), is that the error is due to the gross negligence of the mistaken party. In such a situation it would be unfair to the other party to allow the mistaken party to avoid the contract.
Sub-paragraph (b) contemplates the situation where the mistaken party either has assumed the risk of mistake or where this risk should in the circumstances be borne by it. An assumption of the risk of mistake is a frequent feature of speculative contracts. A party may conclude a contract in the hope that its assumption of the existence of certain facts will prove to be correct, but may nevertheless undertake to assume the risk of this not being so. In such circumstances it will not be entitled to avoid the contract for its mistake.
2. A sells to B a picture “attributed” to the relatively unknown painter C at a fair price for such paintings. It is subsequently discovered that the work was painted by the famous artist D. A cannot avoid its contract with B on the ground of its mistake, since the fact that the picture was only “attributed” to C implied the risk that it might have been painted by a more famous artist.
Sometimes both parties assume a risk. However, speculative contracts involving conflicting expectations of future developments, e.g. those concerning prices and exchange rates, may not be avoided on the ground of mistake, since the mistake would not be one as to facts existing at the time of the conclusion of the contract.