R2d § 152
When Mistake of Both Parties Makes a Contract Voidable
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154. (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.
Professor's notes
Elements: (1) where a mistake of BOTH parties at the time of contracting was as to a basic assumption on which the contract was made AND has a material effect on the agreed exchange, the contract is voidable by the adversely affected party UNLESS that party bears the risk under § 154.
Sherwood v. Walker (barren cow Rose) operationalizes: both parties believed Rose was infertile; rescission allowed.
Wood v. Boynton (uncut diamond) shows the limit: without mutual mistake about identity, no rescission.
Common misunderstanding: students miss the "basic assumption" requirement. Mistakes about market value, quality grade, or future profitability typically are NOT basic assumptions: they are risks the parties allocated by contracting. Mistakes about the IDENTITY or EXISTENCE of the subject matter usually are. The Sherwood/Wood line is the central doctrinal puzzle here.
Cases that operationalize this rule
Text
R2d § 152. When Mistake of Both Parties Makes a Contract Voidable.
(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.
(2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.