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San Diego Business Contracts: When Mistake in Fact Will Allow Rescission

With respect to San Diego business contracts, there are some circumstances in which a party can rescind a contract if there has been a mistake about material facts related to the contract. Avoiding mistakes of fact is one reason that it is important to retain a good San Diego corporate attorney to help draft your contract.

Rescission Based on Mutual Mistake-of-Fact

There are two sections of the California Civil Code relevant to issues of mistake-in-fact. The first provision, section 1689(b)(1), permits a court to order rescission of a contract where “the consent of the party rescinding, or of any party jointly contracting with him, was given by mistake.” Second, section 1577 defines mistake of fact as

“a mistake, not caused by the neglect of a legal duty on the part of the person making the mistake, and consisting in:

An unconscious ignorance or forgetfulness of a fact past or present, material to the contract; or,
Belief in the present existence of a thing material to the contract, which does not exist, or in the past existence of such a thing, which has not existed.”

See Cal. Civil Code, § 1577 and 1689(b)(1). Examples of mistake-in-fact include mistakes as to:

The nature of the transaction
The identity of the parties
The identity of the things to which the contract relates
The occurrence of collateral happenings
And more

Note that mistake-in-fact will only allow rescission if the mistake is material. Unimportant aspects of the contract — aspects that are not central to the purpose of the contract — will not be grounds for rescission.

The case of Cleopatra Records, Inc. v. Mutrux, Case No. No. B267390 (Cal. App. 2nd Dist. 2017) (unpublished opinion) provides a good illustration. In that case, Brian Perera and his wife founded a company called Cleopatra Records, Inc. (Cleopatra). In 2004, Cleopatra, through Perera, agreed to invest $250,000 with a musician/writer/songwriter named Fred Mutrux. The investment vehicle was a series of musicals collectively called the “American Pop Anthology.” Cleopatra agreed to invest in exchange for a 20% interest in the musicals.

Over the next five years, Cleopatra paid another $500,000 to Mutrux who used much of the money to pay for his personal expenses. Only one of Mutrux’s plays, “Million Dollar Quartet,” became financially successful.

By 2012, Perera and his wife has become suspicious of Mutrux and the use of the investment from Cleopatra. When asked about “Million Dollar Quartet,” Mutrux claimed that Cleopatra never had an interest in it because it was fully subscribed (fully financed by investors) prior to the 2004 contract. The Pereras and Cleopatra disagreed and argued that they had invested in all of Mutrux’s plays. Litigation was filed in 2014. The Pereras and Cleopatra alleged various claims including a request for rescission of the contract on the basis of mistake-in-fact. The Pereras and Cleopatra demanded return of their investment.

The trial court eventually agreed with the plaintiffs and ordered Mutrux to return $830,000 in restitution. The trial court found there to be a mistake-in-fact based on the specifics of the case. According to the court, the written contracts and the facts surrounding those contracts demonstrated that the parties misunderstood which musicals were included in the investment and which were not — the plaintiffs believes all musicals were included; Mutrux believed only a limited list was included. Since the mistake went to the heart of the contract — was “material” — the court ordered rescission. The Court of Appeals affirmed.

Again, the case highlights the importance of using written contracts, carefully drafting those contracts, and seeking the advice and counsel of a good corporate attorney.

Call San Diego Corporate Law Today

For more information, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Call Mr. Leonard at (858) 483-9200 or contact him via email. Like us on Facebook.