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Can I Get Out of a Contract Due to

Can I Get Out of a Contract Due to "Mutual Mistake"?

One of the most important concepts in business law is mutual assent or the “meeting of the minds.” At its most basic, mutual assent refers to the common understanding among all parties to a contract. For instance, if Bill offers Jane $1 for an apple, but Jane thought that Bill had offered her $2 for an orange, there is no meeting of the minds, and therefore no contract between them.

Court Voids Contract Due to Incorrect Sales Figures

Under New York law, if both parties are mistaken with respect to the key facts of a purported contract, the agreement may be voided as the product of a “mutual mistake.” Here is a recent example from a decision by the Appellate Division, Third Department. Unlike the above example of apples and oranges, this case involves a slightly more complex sale involving a convenience store.

The plaintiff here agreed to lease the store from the defendant. During negotiations over the agreement, the plaintiff asked the defendant to provide records of the store's sales figures for the previous month. Based on this information, the plaintiff concluded the store could turn a profit and he signed the contract.

Only later did the plaintiff learn that the store's actual sales figures for the specified month were 30% lower than reported. It turned out the defendant had “mismarked” figures from a different month. The defendant claimed it was an honest make and it did not act in bad faith.

Nevertheless, the plaintiff said he would never have agreed to take over the store had he been provided with the correct sales figures at the outset. Accordingly, he asked a judge to rescind the contract on the basis of the parties' “mutual mistake.” The judge agreed and entered judgment in favor of the plaintiff.

The defendant appealed, but the Third Department concurred with the trial court. The appeals court said there was “clear and convincing proof that a substantial mutual mistake occurred such that there was no meeting of the minds as to the basis for the store's profitability.” The court also rejected the defendant's argument that the plaintiff was negligent in not making a greater effort to “obtain more complete sales records before signing the contract.” While a buyer must perform his own “due diligence” before purchasing or leasing a business, in this case the plaintiff's actions were “reasonable” given the defendant only offered limited access to its records and employees and there was a “longstanding relationship” of trust between the parties (at least prior to this litigation).

Need Help With a Business Sale?

Negotiating to buy or sell a business is rarely a simple matter. There are a number of legal issues that may come up even during a routine negotiation between parties that know and trust one another. An experienced New York corporate and business transactions attorney can provide advice and assistance to help protect you against fraud or errors that can affect your bottom line. Contact the offices of Nisar & Mason, P.C. if you need to speak with a Long Island business attorney as soon as possible.
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