Contractual Mutual Mistakes

• Published date: 26 October 2022
• Subject Matter: Corporate/Commercial Law, Securities, Shareholders
• Law Firm: Efraim Weinstein Law Offices
• Author: Efraim Weinstein Law Offices

Background

Contracts are made when there is a meeting of wills between the buyer and the seller. There are cases where the circumstances under which the contract was made contain one of various types of flaws in this 'meeting of the minds', which are stipulated in the Contracts Law¹ (hereinafter, the "Law"), a flaw which has consequences for the continuation of the contractual relationship between the parties. For example, when a contract is the result of a mistake, deception, coercion, duress and even the illegality of the agreement, the Law allows the parties under certain circumstances to release themselves from it (see sections 14, 15, 17 and 18 of the Law), and even considers it to be void (see sections 13 and 30 of the Law).

On the basis of a mistake

At the root of contractual mistake lies a flaw in the will of the party who entered into the contract. The mistake exists when there is a substantial gap between the way one of the parties subjectively perceived the contract and its objective situation. The mistake can be a mistake of fact or a mistake of law. When the three elements exist: fundamental mistake; the other party is aware of such mistake; a causal connection between the mistake and the making of the contract, then the party that made the mistake can cancel the contract. If the other party did not know at all about the mistake, the ability to cancel is conditional on the approval of the court².

One type of mistake is excluded from the scope of grounds that qualify for the cancellation of the contract, and this is a mistake in the evaluation of the transaction. A party who has regretted or made a mistake in his economic evaluation of the contract is not entitled to cancel the contract. A conclusion, in retrospect, that the contract is not worthwhile or is not economical, does not constitute grounds for cancelling the contract. At the same time, an error that distorts the expectations, risks and commercial considerations with which a party viewed the contract is not an error in the evaluation of the transaction (even if it has economic consequences that affect the value of the item that was sold³).

The essence of the mutual mistake

Another distinct type of contractual mistake is the "common/mutual mistake". This is a situation where both parties were wrong about a certain fact, and a contract was made between them on an erroneous factual or legal basis. In such a case, there is consent between them regarding the obligations that each of them...