What is a "bilateral mistake" in contract law?

A bilateral mistake occurs when both parties involved in a contract have a mutual misunderstanding regarding a fundamental fact or assumption that is essential to the agreement. This shared error about the terms or subject matter of the contract typically affects the validity of the contract, as it indicates that the consent required for a legally binding agreement was not adequately given due to the misinformation held by both parties.

In contract law, this scenario may allow for the contract to be voided or rescinded because the parties did not accurately share the same understanding of the critical elements involved. For instance, if two parties enter a contract believing they are agreeing to a specific property that they both mistakenly think is for sale, and later discover that the property in question is not available, they both acted based on an incorrect premise, leading to a bilateral mistake.

This understanding differentiates the situation from mere misrepresentation, unilateral mistakes, or modifications of the contract, ensuring that the focus remains on the shared misconceptions that impact the validity and enforceability of the contract itself.