Mutual Mistake and Contract Validity

The essence of contract law is an offer by one party that is accepted by another party and where the contracting parties come to a “meeting of the minds” concerning the essential contract terms.  But, what if the parties are mistaken about the same material fact involving a key element of the contract?  The parties have, indeed, reached a meeting of the minds, but they are mistaken.  Can they get out of the contract?  A mutual mistake was involved in this case.

Here, the defendants purchased of a residential lot from the plaintiffs and intended to move a house onto the lot.  At the time the purchase contract was entered into, the parties believed that sewer and water lines were available nearby.  Later, the parties orally agreed to share the cost of installing a water line.  When the defendants move their house to the parcel, the water line started to be installed.  However, during the installation process, the parties discovered that the water main was not where they had originally believed that it was located.  As a result, the parties signed a separate agreement at the real estate closing under which the plaintiffs agreed to pay one-half of the cost of extending the water line through their adjoining property and the defendants would be responsible for the installation of the line from the nearest connection of the city to the newly installed line.   Ultimately, the defendants drilled a well on their lot, but disputes arose surrounding the entire real estate transaction and the parties ended up in litigation.  

One of the primary points of contention was the defendants’ claim that the real estate contract was induced by mutual mistake – the location of the water main.  Thus, they wanted the contract reformed and then a finding that the plaintiffs breached the contract.  The court noted that a mutual mistake in the formation of a contract does not automatically void a contract, it only makes the contract voidable. But, the parties didn’t seek to void the contract.  Instead they entered into a separate, binding agreement.  So, the real estate contract was valid.  On the defendants’ claim that the plaintiffs breached their warranty of title by failing to deliver a deed without encumbrances, the appellate court agreed and ordered the plaintiffs to remove any liens or encumbrances.  Schulte v. Harvey, No. 9-808/09-0327, 2009 Iowa App. LEXIS 1632 (Iowa Ct. App., Dec. 17, 2009)