Which concept refers to a legal situation where both parties agree based on a false belief?

The concept that refers to a legal situation where both parties agree based on a false belief is identified as a bilateral mistake. This occurs when both parties involved in a contract enter into the agreement under a mutual misunderstanding about a fundamental aspect of the agreement. For instance, if both parties believe that a specific car being sold is a vintage model, but it turns out to be a replica or a different model altogether, they are both laboring under the same false belief, which can lead to the contract being voided because the essential terms are not met due to this misunderstanding.

In this scenario, neither party intended to deceive the other, and the mistake substantially affects the agreement's basis. This is crucial because a bilateral mistake highlights that both parties share the flawed assumption, which differentiates it from situations where only one party is mistaken or where one party is misleading the other.

Understanding a bilateral mistake is important in contract law because it underscores the circumstances under which an agreement may be rendered unenforceable, ensuring that both parties must have a correct understanding of the contract's essential terms for it to be valid.