Economic Analysis of Concept of Contractual Mistake

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The court system is sometimes called on to rescind a contract between parties where one party has entered into the agreement based on faulty information. In some cases of mistake, courts will enforce the agreement as written, on the premise that the party claiming mistake accepted the risk of the mistake as part of the contracting process. In other cases, courts may rescind or modify the terms if, in the event of a unilateral mistake, the other party knew of the mistake but made no effort to correct it leading to injury of the mistaken party to the contract. This paper will endeavor to analyze the rules of contractual mistake through the economic concepts of efficiency, Pareto optimality, and the difference principle postulated by John Rawls.

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