Final answer:
Mutual mistake is a contract defense when both parties have wrong beliefs about a fundamental aspect of the contract, impacting the exchange materially, potentially making the contract void or voidable.
Step-by-step explanation:
Mutual mistake can be a defense to the formation of a contract if both parties are under a misconception about a basic assumption on which the contract is made, and this misconception has a material effect on the agreed exchange.
Mutual mistake occurs when both parties share an incorrect belief about an important fact that is essential to the nature of the contract. If a mutual mistake is present, the contract may be void or voidable on the grounds that there was no 'meeting of the minds' or mutual assent, which is required for a contract to be valid.
For example, if two parties contract for the sale of a painting both parties believe to be an original, but the painting turns out to be a copy, this could be considered a mutual mistake that significantly alters the value of the contract.