In contract law a mistake is incorrect understanding by one or more parties to a contract and may be used as grounds to invalidate the agreement. Common law has identified three different types of mistake in contract: unilateral mistake, mutual mistake, and common mistake.

Unilateral mistake

A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter. The courts will uphold such a contract unless it was determined that the non-mistaken party was aware of the mistake and tried to take advantage of the mistake.

The leading case on unilateral mistake is Smith v. Hughes (1871).

Mistake of identity

It is also possible for a contract to be voidable if there was a mistake in the identity of the contracting party. In the leading English case of Lewis v Avery [1971] 3 All ER 907 Lord Denning held that the contract can only be avoided if the plaintiff can show, that at the time of agreement, the plaintiff believed the other party's identity was of vital importance. A mere mistaken belief as to the credibility of the other party is not sufficient.

Mutual mistake

A mutual mistake is when both parties of a contract are mistaken as to the terms. Each believe they are contracting to something different. The court usually tries to uphold such a mistake if a reasonable interpretation of the terms can be found.

The famous case of the Peerless ship is an example in the case of Raffles v. Wichelhaus, (1864) 2 Hurl. & C. 906. The defendant had made an order for the purchase of cotton for goods arriving on a certain boat Peerless from Bombay leaving in October. However a different boat arrived called Peerless, also from Bombay, but having left in December. The plaintiff merchant sought to enforce the contract for the sale of cotton, but the defendant refused stating that it was not the cotton that he had ordered. The court stated that reasonable meaning must be found. However, on the facts, there was no single reasonable interpretation of the terms, both parties were equally mistaken, thus the contract was void.

Common mistake

A common mistake is where both parties hold the same mistaken belief of the facts.

The House of Lords case of Bell v. Lever Brothers Ltd. established that common mistake can only void a contract if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.

Later in Solle v. Butcher, Lord Denning added requirements for common mistake in equity, which loosened the requirements to show common mistake. However, since that time the case has been heavily criticized in cases such as Great Peace.