Final answer:
Rescission is permissible when both parties of a contract are mutually mistaken about a material fact, which is information that could influence their decision to contract. The rescission annuls the agreement, restoring parties to their pre-contractual state.
Step-by-step explanation:
True, rescission of a contract is generally permitted where both parties to a contract are operating under a mutual mistake regarding a material fact. A material fact is information that, if known to the parties at the time of agreement, could have significantly affected their decision to enter into the contract. If both parties are mistaken about a material fact, neither has the true understanding of the situation, which is a crucial element for a valid contract.
For instance, if two parties enter into a contract for the sale of a parcel of land, believing it to be suitable for building a commercial property, and later discover that the land is actually zoned for residential use only, this mistaken belief about a material fact could lead to justified rescission of the contract by either party.
Rescission restores the parties to their positions before the contract was formed, effectively cancelling the contractual obligations. However, it is essential to note that not all mistakes will entitle the parties to rescind a contract, only those concerning a material fact.