Mistake & Misunderstanding
257 Chapter 9: Misunderstanding & Mistake
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Misunderstanding & mistake are the first of the so-called "formation defenses" that are covered in this text. Essentially, a formation defense is used to avoid finding an enforceable contract when offer, acceptance, and consideration or a valid consideration substitute are present. Other formation defenses in upcoming chapters include Misrepresentation (Chapter 10), Duress (Chapter 11), and Unconscionability (Chapter 12). There are others but they are not specifically covered in this book; they function in the same way.
When the common law lawyers approached the problem of whether or not to enforce a contract where the parties appeared to have entered into it based on a misunderstanding or under a mistaken belief, they tried to solve the problem without appearing to create any new law. They tried to apply the existing principles of contract law in a way that would produce a just result. In the first case that follows, Raffles v. Wichelhaus, which is one of the classics of the common law contract tradition, the court may be thought of as taking the position that there was no offer and acceptance because the offeror and the offeree were talking about two different things. This approach is preserved today in R2d § 20(1)(a), addressing the effect of misunderstanding.
If you are not used to reading nineteenth century English case reports, this one will be a little hard to follow. It is not an opinion of the court as we are used to seeing them. Instead, it is a third party account of the oral arguments and the decision the judges rendered orally upon the conclusion of the arguments all of which were conducted publicly. The first three paragraphs are the reporter's summary of the decision below and the pleadings. Then we have the argument of the plaintiff's lawyer (Milward) and that of the defendant's lawyer (Mellish). In these paragraphs, the questions and comments of the judges are shown in brackets.
The procedural posture is interesting, too. In the old pleading practice it was very common to raise a demurrer to a complaint. The demurrer is similar to the modern Federal Rule of Civil Procedure 12(b)(6) motion in that it was a device for dismissing a complaint that failed to state a cause of action for which relief could be granted. Under the old practice, however, demurrers were even more common than are 12(b)(6) motions today. The pleading practice was very rigid. It required that every element of the case 258 to be proved had to be stated in the pleading in the correct manner. Demurrers were often sustained when the complaint contained very minor deficiencies. Originally a case that was dismissed on a demurrer could not be re-filed; in modern terminology, we would say it was "dismissed with prejudice." Many meritorious claims were lost on technicalities of pleading.
There were stories, probably apocryphal, of judges who prided themselves on how seldom they allowed the case to be decided on the merits. Later, it became the practice to sustain demurrers "with leave to amend." This meant the plaintiff could file a new complaint and try to get it right. After this changed, the demurrer was no longer a device for avoiding the merits but it was still (and perhaps is today in its modern FRCP 12(b)(6) form) a device for delay and harassment. Each time a new complaint was filed, the defendant's lawyer could wait until the last day to file before filing his demurrer to the complaint, which would then have to be set for hearing. If the demurrer was sustained, the plaintiff would have to file a new complaint and the defendant would again wait until the last day to file a demurrer. If the plaintiff's lawyer was not a capable and careful pleader, he could be strung out for months or years in this fashion.
In this case we have a more unusual pleading---a demurrer to the answer. This is a pleading that says the answer does not state a valid defense and, thus, the relief requested in the complaint should be summarily granted. ---------
Raffles v. Wichelhaus, Court of Exchequer, 2 Hurl. & C. 906 (1864)
[1]Jan. 20, 1864.---To a declaration for not accepting Surat cotton which the defendant bought of the plaintiff "to arrive ex 'Peerless' from Bombay," the defendant pleaded that he meant a ship called the "Peerless" which sailed from Bombay in October, and the plaintiff was not ready to deliver any cotton which arrived by that ship, but only cotton which arrived by another ship called the "Peerless," which sailed from Bombay in December. Held, [by the court below] on demurrer, that the plea was a good answer [and thus suit was dismissed].
[2]Declaration. For that it was agreed between the plaintiff and the defendants, to wit, at Liverpool, that the plaintiff should sell to the defendants, and the defendants buy of the plaintiff, certain goods, to wit, 125 bales of Surat cotton, guaranteed middling fair merchant's Dhollorah, to arrive ex "Peerless" from Bombay; and that the cotton should be taken from the quay, and that the defendants would pay the plaintiff for the same at a certain rate, to wit, at the rate of 17 1/4d. per pound, within a certain 259 time then agreed upon after the arrival of the said goods in England. Averments: that the said goods did arrive by the said ship from Bombay in England, to wit at Liverpool, and the plaintiff was then and there ready, and willing and offered to deliver the said goods to the defendants, etc.1 Breach: that the defendants refused to accept the said goods or pay the plaintiff for them.
[3]Plea: That the said ship mentioned in the said agreement was meant and intended by the defendants to be the ship called the "Peerless," which sailed from Bombay, to wit, in October; and that the plaintiff was not ready and willing and did not offer to deliver to the defendants any bales of cotton which arrived by the last mentioned ship, but instead thereof was only ready and willing and offered to deliver to the defendants 125 bales of Surat cotton which arrived by another and different ship, which was also called the "Peerless," and which sailed from Bombay, to wit, in December.
For the Plaintiff
[4]Milward in support of the demurrer [to the answer---Eds.]. The contract was for the sale of a number of bales of cotton of a particular description, which the plaintiff was ready to deliver. It is immaterial by what ship the cotton was to arrive, long as it was a ship called the "Peerless." The words "to arrive ex 'Peerless,' " only mean that if the vessel is lost on the voyage, the contract is to be at an end. [Pollock, C.B. It would be a question for the jury whether both parties meant the same ship called the "Peerless."] That would be so if the contract was for the sale of a ship called the "Peerless;" but it is for the sale of cotton on board a ship of that name. [Pollock, C.B. The defendant only bought that cotton which was to arrive by a particular ship. It may as well be said, that if there is a contract for the purchase of certain goods in warehouse A., that is satisfied by the delivery of goods of the same description in warehouse B.] In that case there would be goods in both warehouses; here it does not appear that the plaintiff had any goods on board the other "Peerless." [Martin, B. It is imposing on the defendant a contract different from that which he entered into. Pollock, C.B. It is like a contract for the purchase of wine coming from a particular estate in France or Spain, where there are two estates of that name.] The defendant has no right to contradict by parol evidence a written contract good upon the face of it. He does not impute misrepresentation or fraud, but only says that he fancied the ship was a different one. Intentions of no avail, unless stated at the time of the contract; [Pollock, C.B. One vessel sailed in October and the other in December.] The time of sailing is no part of the contract.
260 For the Defendant
[5]Mellish (Cohen with him), in support of the plea, There is nothing on the Face of the contract to show that any particular ship called the "Peerless" was meant; but the moment it appears that two ships called the "Peerless" were about to sail from Bombay there is a latent ambiguity, and parol evidence may be given for the purpose of showing that the defendant meant one "Peerless," and the plaintiff another. That being so, there was no consensus ad idem, and therefore no binding contract. He was then stopped by the Court.
[6]Per Curiam. (A) There must be judgment for the defendants . . . (A) Pollock, C.B., Martin B., and Pigott, B.
Notes and Questions
1.What was the argument for the plaintiff? For the defendant?
2.What was the holding of the court?
3.As noted in the introduction to this chapter, R2d § 20 captures the modern version of the misunderstanding doctrine, structured to cover the situation where neither party knows of the misunderstanding, and where both or only one does.
4.The case that follows is another of the classics. It presented more of a challenge for the judges who were trying to avoid creating any new doctrine for dealing with a mistake of fact---something different from a simple misunderstanding. The case involves the sale of a cow, and both parties were definitely referring to the same cow, but because they may have both been under a misapprehension as to its breeding capabilities, the majority wanted to avoid finding that a contract had been formed. Watch the way they do it.
Sherwood v. Walker, Supreme Court of Michigan, 66 Mich. 568, 33 N.W. 919 (1887)
Morse, J.
[1]Replevin for a cow.2 Suit commenced in justice's court; judgment for plaintiff; appealed to circuit court of Wayne county, and verdict and 261 judgment for plaintiff in that court. The defendants bring error, and set out 25 assignments of the same. [We reverse.---Eds.]
[2]The main controversy depends upon the construction of a contract for the sale of the cow. The plaintiff claims that the title passed, and bases his action upon such claim. The defendants contend that the contract was executory, and by its terms no title to the animal was acquired by plaintiff.3 The defendants reside at Detroit, but are in business at Walkerville, Ontario, and have a farm at Greenfield, in Wayne county, upon which were some blooded cattle supposed to be barren as breeders. The Walkers are importers and breeders of polled Angus cattle. The plaintiff is a banker living at Plymouth, in Wayne County. He called upon the defendants at Walkerville for the purchase of some of their stock, but found none there that suited him. Meeting one of the defendants afterwards, he was informed that they had a few head upon their Greenfield farm. He was asked to go out and look at them, with the statement at the time that they were probably barren, and would not breed. May 5, 1886, plaintiff went out to Greenfield, and saw the cattle. A few days thereafter, he called upon one of the defendants with the view of purchasing a cow, known as "Rose 2d of Aberlone." After considerable talk, it was agreed that defendants would telephone Sherwood at his home in Plymouth in reference to the price. The second morning after this talk he was called up by telephone, and the terms of the sale were finally agreed upon. He was to pay five and one-half cents per pound, live weight, fifty pounds shrinkage. He was asked how he intended to take the cow home, and replied that he might ship her from King's cattle-yard. He requested defendants to confirm the sale in writing, which they did by sending him the following letter:
WALKERVILLE, May 15, 1886.
T.C. Sherwood, President, etc. DEAR SIR:
We confirm sale to you of the cow Rose 2d of Aberlone, lot 56 of our catalogue, at five and half cents per pound, less fifty pounds shrink. We enclose herewith order on Mr. Graham for the cow. You might leave check with him, or mail to us here, as you prefer.
Yours, truly, HIRAM WALKER & SONS.
262 The order upon Graham enclosed in the letter read as follows:
WALKERVILLE, May 15, 1886.
George Graham:
You will please deliver at King's cattle-yard to Mr. T.C. Sherwood, Plymouth, the cow Rose 2d of Aberlone, lot 56 of our catalogue. Send halter with the cow, and have her weighed.
Yours truly, HIRAM WALKER & SONS. [3]On the twenty-first of the same month the plaintiff went to defendants' farm at Greenfield, and presented the order and letter to Graham, who informed him that the defendants had instructed him not to deliver the cow. Soon after, the plaintiff tendered to Hiram Walker, one of the defendants, \$80, and demanded the cow. Walker refused to take the money or deliver the cow. The plaintiff then instituted this suit. After he had secured possession of the cow under the writ of replevin, the plaintiff caused her to be weighed by the constable who served the writ, at a place other than King's cattle-yard. She weighed 1,420 pounds.
[4]When the plaintiff, upon the trial in the circuit court, had submitted his proofs showing the above transaction, defendants moved to strike out and exclude the testimony from the case, for the reason that it was irrelevant and did not tend to show that the title to the cow passed, and that it showed that the contract of sale was merely executory. The court refused the motion, and an exception was taken. The defendants then introduced evidence tending to show that at the time of the alleged sale it was believed by both the plaintiff and themselves that the cow was barren and would not breed; that she cost \$850, and if not barren would be worth from \$750 to \$1,000; that after the date of the letter, and the order to Graham, the defendants were informed by said Graham that in his judgment the cow was with calf, and therefore they instructed him not to deliver her to plaintiff, and on the twentieth of May, 1886, telegraphed plaintiff what Graham thought about the cow being with calf, and that consequently they could not sell her. The cow had a calf in the month of October following.
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[5]It appears from the record that both parties supposed this cow was barren and would not breed, and she was sold by the pound for an insignificant sum as compared with her real value if a breeder. She was evidently sold and purchased on the relation of her value for beef, unless the plaintiff had learned of her true condition, and concealed such knowledge from the defendants. Before the plaintiff secured the possession of the animal, the defendants learned that she was with calf, and therefore of great value, and undertook to rescind the sale by refusing to deliver her. 263 The question arises whether they had a right to do so. The circuit judge ruled that this fact did not avoid the sale and it made no difference whether she was barren or not. I am of the opinion that the court erred in this holding. I know that this is a close question, and the dividing line between the adjudicated cases is not easily discerned. But it must be considered as well settled that a party who has given an apparent consent to a contract of sale may refuse to execute it, or he may avoid it after it has been completed, if the assent was founded, or the contract made, upon the mistake of a material fact, such as the subject-matter of the sale, the price, or some collateral fact materially inducing the agreement; and this can be done when the mistake is mutual.
[6]If there is a difference or misapprehension as to the substance of the thing bargained for; if the thing actually delivered or received is different in substance from the thing bargained for, and intended to be sold,---then there is no contract; but if it be only a difference in some quality or accident, even though the mistake may have been the actuating motive to the purchaser or seller, or both of them, yet the contract remains binding. "The difficulty in every case is to determine whether the mistake or misapprehension is as to the substance of the whole contract, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not affect the substance of the whole consideration." Kennedy v. Panama, etc., Mail Co., L.R. 2 Q.B. 580, 587. It has been held, in accordance with the principles above stated, that where a horse is bought under the belief that he is sound, and both vendor and vendee honestly believe him to be sound, the purchaser must stand by his bargain, and pay the full price, unless there was a warranty.
[7]It seems to me, however, in the case made by this record, that the mistake or misapprehension of the parties went to the whole substance of the agreement. If the cow was a breeder, she was worth at least \$750; if barren, she was worth not over \$80.4 The parties would not have made the contract of sale except upon the understanding and belief that she was incapable of breeding, and of no use as a cow. It is true she is now the identical animal that they thought her to be when the contract was made; there is no mistake as to the identity of the creature. Yet the mistake was not of the mere quality of the animal, but went to the very nature of the thing. A barren cow is substantially a different creature than a breeding one. There is as much difference between them for all purposes of use as there is between an ox and a cow that is capable of breeding and giving milk. If the mutual mistake had simply related to the fact whether she was with calf or not for one season, then it might have been a good sale, but the mistake affected the character of the animal for all time, and for its present and ultimate use. She was not in fact the animal, or the kind of animal, the 264 defendants intended to sell or the plaintiff to buy. She was not a barren cow, and, if this fact had been known, there would have been no contract. The mistake affected the substance of the whole consideration, and it must be considered that there was no contract to sell or sale of the cow as she actually was. The thing sold and bought had in fact no existence. She was sold as a beef creature would be sold; she is in fact a breeding cow, and a valuable one. The court should have instructed the jury that if they found that the cow was sold, or contracted to be sold, upon the understanding of both parties that she was barren, and useless for the purpose of breeding, and that in fact she was not barren, but capable of breeding, then the defendants had a right to rescind, and to refuse to deliver, and the verdict should be in their favor. [8]The judgment of the court below must be reversed, and a new trial granted, with costs of this court to defendants.
Campbell, C.J., and Champlin, J., concurred.
Sherwood, J., (dissenting.)
[9]I do not concur in the opinion given by my brethren in this case. I think the judgments before the justice and at the circuit were right . . .
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[10]There is no question but that the defendants sold the cow representing her of the breed and quality they believed the cow to be, and that the purchaser so understood it. And the buyer purchased her believing her to be of the breed represented by the sellers, and possessing all the qualities stated, and even more. He believed she would breed. There is no pretense that the plaintiff bought the cow for beef, and there is nothing in the record indicating that he would have bought her at all only that he thought she might be made to breed. Under the foregoing facts---and these are all that are contained in the record material to the contract---it is held that because it turned out that the plaintiff was more correct in his judgment as to one quality of the cow than the defendants, and a quality, too, which could not by any possibility be positively known at the time by either party to exist, the contract may be annulled by the defendants at their pleasure. I know of no law, and have not been referred to any, which will justify any such holding, and I think the circuit judge was right in his construction of the contract between the parties.
Notes and Questions
1.Mutual mistake? Or a skilled (or lucky) guess and investment by Mr. Sherwood? Did the majority or the dissent get it right?
265 2.Rose 2d of Aberlone is a good illustration of business valuation. If she was only "a beef creature" (paragraph 7) to be sold essentially as scrap or for liquidation, she was worth approximately \$80. If she could breed and produce milk, she was worth "at least \$750" (Id.). What explains the \$670 differential? The answer is the net present value of the income that Rose could generate over her useful life. In other words, after subtracting the cost of her care, feeding, and housing, she was expected to produce a series of cash flows with a discounted present value of \$750 as a breeder but only \$80 if she was to go to immediate slaughter. Business assets like Rose, an apartment building, a copyright-protected song, patented process, or a newly-minted associate attorney are viewed, for business purposes, as things that will produce a stream of positive and negative cash flows that, when discounted their net present value, determine their value. Objective as that sounds, valuation is difficult. One must accurately forecast not only the revenues and their timing---in Rose's case, the cash from slaughter or the sales of milk and calves---but also the operating costs---here, Rose's care, feeding, and housing---as well as the appropriate discount rate or required rate of return (to perform the discounting of future dollars into present value dollars). Changing any of these variables changes the indicated value.
3.Notice the final five words of paragraph 6 in Sherwood v. Walker: "unless there was a warranty." A warranty is a statement of fact about the subject matter of a contract in which the warranting party states the condition of the subject matter. If the condition of the subject matter is later proved to be different than as stated, the party in whose favor the warranty runs may seek damages from the warranting party for breach of warranty. Warranties are used in contracts to allocate risk between the parties. They are essentially what are colloquially known as "guarantees" for, say, a car, mattress, or vacuum cleaner. (Legal guaranties like the one at issue in the Frishman case in Chapter 5 are different and are never spelled with the double "e" at the end). In many jurisdictions, warranties terminate at the "closing"---when the main consideration is exchanged---unless the contract specifies that they survive.
4.Plaintiff Sherwood was a gentleman farmer who made his living as president of the Plymouth National Bank at the time of the lawsuit. Later, he would be appointed to be Michigan's first State Commissioner of Banking.
5.The defendants are the same Hiram Walker & Sons that make alcoholic beverages. Anticipating prohibition in the United States, Mr. Walker built his distillery on the Canadian side of the Detroit River. He proved prescient, if not about 60 years early, in his anticipation. Attempting to stigmatize him, his competitors secured the passage of a law requiring alcoholic beverage manufacturers to label their product with their country of origin. He managed to turn this tactic in his favor through an advertising campaign for the "Canadian Club" brand of whiskey that hinted that Canadian whiskey was superior to its United States counterpart.
6.After this appeal, on remand a circuit court jury sided with Sherwood. No further appeal was taken and Walker lost Rose. She went on to have five 266 additional calves. She had previously calved in 1883, but not in 1884 or 1885, the two years prior to the events involved in Sherwood v. Walker.
Problem 9-1 It is 1890. You are a lawyer in Michigan. You are representing a party in a case on appeal to the Michigan Supreme Court, which recently decided Sherwood v. Walker. The case involves the sale of a mine. At the time the contract of sale was made, both parties believed that there was sufficient commercial grade iron ore in the mine to make the mine worth the contract price. When it was discovered that there was substantially less ore than the parties thought, the buyer tried to back out. At trial, the court issued the following "Findings of Fact:"
1.The mine contains iron ore, but it does not contain sufficient ore to be commercially viable.
2.Because the mine does contain iron ore, it is NOT different in substance from what the parties bargained for.
3.Both parties bargained for a mine that contained sufficient commercial grade iron ore to make the mine worth the contract price.
4.The buyer would not have entered into the contract if it had known the true facts.
You are bound by the above findings of fact, which the Supreme Court will accept as true. Never mind the fact that some of these "findings of fact" might more properly be categorized as questions of law, which the court could decide de novo on appeal. The Court has indicated it will not go into that issue.
Assume that the only reported decision relevant to the case is Sherwood v. Walker. Locate, in that case:
(a)the language most favorable to the buyer.
(b)the language most favorable to the seller.
Wood v. Boynton, Supreme Court of Wisconsin, 64 Wis. 265, 25 N.W. 42 (1885)
Taylor, J.
[1]This action was brought in the circuit court for Milwaukee county to recover the possession of an uncut diamond of the alleged value of 267 \$1,000.5 The case was tried in the circuit court, and after hearing all the evidence in the case, the learned circuit judge directed the jury to find a verdict for the defendants. The plaintiff excepted to such instruction, and, after a verdict was rendered for the defendants, moved for a new trial upon the minutes of the judge. The motion was denied, and the plaintiff duly excepted, and after judgment was entered in favor of the defendants, appealed to this court. The defendants are partners in the jewelry business. On the trial it appeared that on and before the twenty-eighth of December, 1883, the plaintiff was the owner of and in the possession of a small stone of the nature and value of which she was ignorant; that on that day she sold it to one of the defendants for the sum of one dollar. Afterwards it was ascertained that the stone was a rough diamond, and of the value of about \$700. After hearing this fact the plaintiff tendered the defendants the one dollar, and ten cents as interest, and demanded a return of the stone to her. The defendants refused to deliver it, and therefore she commenced this action.
[2]The plaintiff testified to the circumstances attending the sale of the stone to Mr. Samuel B. Boynton, as follows:
The first time Boynton saw that stone he was talking about buying the topaz, or whatever it is, in September or October. I went into the store to get a little pin mended, and I had it in a small box,---the pin,---a small earring; . . . this stone, and a broken sleeve-button were in the box. Mr. Boynton turned to give me a check for my pin. I thought I would ask him what the stone was, and I took it out of the box and asked him to please tell me what that was. He took it in his hand and seemed some time looking at it. I told him I had been told it was a topaz, and he said it might be. He says, "I would buy this; would you sell it?" I told him I did not know but what I would. What would it be worth? And he said he did not know; he would give me a dollar and keep it as a specimen, and I told him I would not sell it; and it was certainly pretty to look at. He asked me where I found it, and I told him in Eagle. He asked about how far out, and I said right in the village, and I went out. Afterwards, and about the twenty-eighth of December, I needed money pretty badly, and thought every dollar would help, and I took it back to Mr. Boynton and told him I had brought back the topaz, and he says, "Well, yes; what did I offer you for it?" and I says, "One dollar;" and he stepped to the change drawer and gave me the dollar, and I went out. In another part of her testimony she says: "Before I sold the stone I had no knowledge whatever that it was a diamond. I told him that I had been advised that it was probably a topaz, and he said probably it 268 was. The stone was about the size of a canary bird's egg, nearly the shape of an egg,---worn pointed at one end; it was nearly straw color,---a little darker." She also testified that before this action was commenced she tendered the defendants \$1.10, and demanded the return of the stone, which they refused. This is substantially all the evidence of what took place at and before the sale to the defendants, as testified to by the plaintiff herself. She produced no other witness on that point.
[3]The evidence on the part of the defendant is not very different from the version given by the plaintiff, and certainly is not more favorable to the plaintiff. Mr. Samuel B. Boynton, the defendant to whom the stone was sold, testified that at the time he bought this stone, he had never seen an uncut diamond; had seen cut diamonds, but they are quite different from the uncut ones; "he had no idea this was a diamond, and it never entered his brain at the time." Considerable evidence was given as to what took place after the sale and purchase, but that evidence has very little if any bearing, upon the main point in the case. [4]This evidence clearly shows that the plaintiff sold the stone in question to the defendants, and delivered it to them in December, 1883, for a consideration of one dollar. By such sale the title to the stone passed by the sale and delivery to the defendants. How has that title been divested and again vested in the plaintiff? The contention of the learned counsel for the appellant is that the title became vested in the plaintiff by the tender to the Boyntons of the purchase money with interest, and a demand of a return of the stone to her. Unless such tender and demand revested the title in the appellant, she cannot maintain her action. The only question in the case is whether there was anything in the sale which entitled the vendor (the appellant) to rescind the sale and so revest the title in her. The only reasons we know of for rescinding a sale and revesting the title in the vendor so that he may maintain an action at law for the recovery of the possession against his vendee are (1) that the vendee was guilty of some fraud in procuring a sale to be made to him; (2) that there was a mistake made by the vendor in delivering an article which was not the article sold,---a mistake in fact as to the identity of the thing sold with the thing delivered upon the sale. This last is not in reality a rescission of the sale made, as the thing delivered was not the thing sold, and no title ever passed to the vendee by such delivery.
[5]In this case, upon the plaintiff's own evidence, there can be no just ground for alleging that she was induced to make the sale she did by any fraud or unfair dealings on the part of Mr. Boynton. Both were entirely ignorant at the time of the character of the stone and of its intrinsic value. Mr. Boynton was not an expert in uncut diamonds, and had made no examination of the stone, except to take it in his hand and look at it before he made the offer of one dollar, which was refused at the time, and 269 afterwards accepted without any comment or further examination made by Mr. Boynton. The appellant had the stone in her possession for a long time, and it appears from her own statement that she had made some inquiry as to its nature and qualities. If she chose to sell it without further investigation as to its intrinsic value to a person who was guilty of no fraud or unfairness which induced her to sell it for a small sum, she cannot repudiate the sale because it is afterwards ascertained that she made a bad bargain. There is no pretense of any mistake as to the identity of the thing sold. It was produced by the plaintiff and exhibited to the vendee before the sale was made, and the thing sold was delivered to the vendee when the purchase price was paid. Suppose the appellant had produced the stone, and said she had been told it was a diamond, and she believed it was, but had no knowledge herself as to its character or value, and Mr. Boynton had given her \$500 for it, could he have rescinded the sale if it had turned out to be a topaz or any other stone of very small value? Could Mr. Boynton have rescinded the sale on the ground of mistake? Clearly not, nor could he rescind it on the ground that there had been a breach of warranty, because there was no warranty, nor could he rescind it on the ground of fraud, unless he could show that she falsely declared that she had been told it was a diamond, or, if she had been so told, still she knew it was not a diamond.
[6]It is urged, with a good deal of earnestness, on the part of the counsel for the appellant that, because it has turned out that the stone was immensely more valuable than the parties at the time of the sale supposed it was, such fact alone is a ground for the rescission of the sale, and that fact was evidence of fraud on the part of the vendee. Whether inadequacy of price is to be received as evidence of fraud, even in a suit in equity to avoid a sale, depends upon the facts known to the parties at the time the sale is made. When this sale was made the value of the thing sold was open to the investigation of both parties, neither knowing its intrinsic value, and, so far as the evidence in this case shows, both supposed that the price paid was adequate. How can fraud be predicated upon such a sale, even though after investigation showed that the intrinsic value of the thing sold was hundreds of times greater than the price paid? It certainly shows no such fraud as would authorize the vendor to rescind the contract and bring an action at law to recover the possession of the thing sold. Whether that fact would have any influence in an action in equity to avoid the sale we need not consider.
[7]We can find nothing in the evidence from which it could be justly inferred that Mr. Boynton, at the time he offered the plaintiff one dollar for the stone, had any knowledge of the real value of the stone, or that he entertained even a belief that the stone was a diamond. It cannot, therefore, be said that there was a suppression of knowledge on the part of the defendant as to the value of the stone which a court of equity might seize upon to avoid the sale. . . . The following cases show that, in the 270 absence of fraud or warranty, the value of the property sold, as compared with the price paid, is no ground for a rescission of a sale. However unfortunate the plaintiff may have been in selling this valuable stone for a mere nominal sum, she has failed entirely to make out a case either of fraud or mistake in the sale such as will entitle her to a rescission of such sale so as to recover the property sold in an action at law.
[8]The judgment of the circuit court is affirmed.
Problem 9-2
Buyer and Seller entered into a contract for the purchase and sale of a quantity of apples. Both Buyer and Seller believed that the apples had little value because they were being stored in a Latin American city that had been surrounded by a rebel army and would rot before the siege was lifted. As a result, the apples were sold for a small fraction of their market price. Unknown to either party, at the time the contract was entered into the local government had already routed the rebels, and the Seller's agents were in the process of arranging shipment of the apples to the United States.
(a)How would this case be analyzed under the rule of Sherwood v. Walker?
(b)How would this case be analyzed under R2d §§ 152, 154?
(c)How would this case be analyzed under UNIDROIT articles 3.4 and 3.5?
(d)Would the result be the same if, at the time the contract was made, the city was still surrounded with no expectation that the siege would be lifted, but shortly after the contract was made the government forces launched a bold and totally unexpected offensive which lifted the siege?
Notes and Questions
1.The Modern Bases of Mistake
Contracts are intended to allow parties to plan and, to the extent feasible, to reduce or allocate their risks. It is generally accepted that courts should honor parties' risk allocations. When the parties don't spell out the risk allocation in their agreement, however, the court has to allocate the risk in the way it thinks the parties would have intended had they thought about it. The modern law of mistake is based on the premise that parties entering into a contract do not usually intend to assume the risk of a mutual mistake of fact that materially alters the benefits and burdens of the deal.
271 Mistake is covered in Chapter 6, sections 151 to 158 of the R2d and articles 3.4 to 3.7 of the UNIDROIT principles.
2.Fixed Price and Cost-Plus Contracts Parties entering into contracts often have to choose between fixed-price and cost-plus contracts. In a fixed-price contract, the person performing the services (usually referred to as the "contractor") agrees to do the job for a set price. In a cost-plus contract, the contractor agrees to do the job for the amount of the costs she incurs (materials, subcontractors, etc.) plus an additional amount (often a percentage of the costs) to cover her overhead and provide a profit.
The main effect of the choice between a fixed-price contract and a cost-plus contract is to allocate the risk that the job will be more (or, theoretically at least, less) difficult than the parties anticipated. A fixed-price contract allocates that risk to the contractor. If the job turns out to be more difficult than expected to complete, the contractor loses. A cost-plus contract allocates that risk to the person employing the contractor. If on a cost-plus contract the job turns out to take more time or materials than expected, the customer bears the extra cost. Because on a fixed-price contract, the contractor assumes the risk that the job will be more expensive than anticipated, courts are very reluctant to let contractors out of their fixed-price contracts on the basis of mistake. To do so would be to deprive the customer of what he bargained for.
It stands to reason that a contractor will charge a higher price on a fixed-price contract than on a cost-plus contract. We'll discuss this more rigorously shortly, but first let's consider why parties might prefer one type of contract over the other. One reason is that one party or the other might be better able to bear the financial risk. For example, a family entering into a contract to have a home built or remodeled might have only a certain amount of money available and they need to be sure the cost won't exceed that amount, so they would need to enter into a fixed-price contract. On the other hand, a company developing a new weapons system or information management system for the government might not have the wherewithal to absorb billions of dollars of losses, so it would need to enter into a cost-plus contract.
A fixed-price contract gives an incentive to the contractor to be efficient. The fact that cost-plus contracts don't provide such an incentive is a criticism often leveled at government cost-plus contracts. As a result, governments and other parties that routinely enter into cost-plus contracts have developed sophisticated variations on the simple cost-plus contract that provide incentives to meet budget goals.
Fixed-price contracts give the customer the opportunity to make potential contractors compete against each other. The customer can solicit several bids and take the lowest one. Usually this is done informally, but in some cases it is done in the manner of a formal auction, usually with sealed bids. Laws often require government contracts to be awarded on the basis of sealed bids. This is done in an attempt to prevent or reduce favoritism and corruption. 272 Sometimes a customer will get a bid from a contractor, disclose it to a second contractor and ask that contractor to beat it. This is known as "shopping the bid" and is frowned on in most industries. Some contractors will refuse to deal with customers known to be bid shoppers. On the other hand, shopping the bid tends to encourage competition, drive down prices, and benefit consumers, at least if there is a large market and good information involved. Consider how the development of Internet based price comparisons has benefitted consumers of goods and services in just this way by reducing the cost of wide comparison shopping and allowing continuous "bid shopping" through on-line auctions.
An advantage of the cost-plus contract is that it allows for easy modification of the deal. If you decide you want marble instead of linoleum in the entry of the home you're building on a cost-plus basis, you just tell the contractor and she adds the actual cost plus her fee to the price. If you have a fixed-price contract, you have to negotiate the amount of the increased cost every time you make a change. This is one reason that the Department of Defense procures weapons systems on a cost-plus basis. It wants to have the flexibility to improve the technology as the project develops.
3.Fixed Fee Contracts in Legal Work A considerable amount of legal business is billed on an hourly basis, which is a form of cost-plus contract. The client takes the risk that the matter will take longer than anticipated, which it often does. Clients are putting pressure on lawyers to bill business matters on a fixed-fee basis. Lawyers are generally resisting this. A fixed fee gives the lawyer an incentive to overlook problems rather than find them and fix them. A lawyer on a fixed fee also tends to be less effective as a negotiator. Legal negotiations are often won by the person who is willing to sit and argue until the other person gives in.
On the other hand, lawyers working on a fixed fee basis have a strong incentive to conduct their work efficiently, and conduct only those tasks that have a strong likelihood of resulting in a payoff or acceptable resolution. Once legal services are priced like widgets, the incentive is to produce widgets for less. This has already happened in the insurance defense field and in employer-side labor law practice. It is spreading into standardized commercial finance and lending practice and will probably continue to spread through the legal profession.
4.What Alan Greenspan Doesn't Want You to Know
Aluminum Company of America v. Essex Group, Inc., 499 F.Supp. 53 (W.D. Pa. 1980), is an interesting mistake case involving a large and sophisticated business deal. The parties entered into a long-term (21 years) contract under which ALCOA was to convert ore owned by Essex into aluminum and deliver the finished aluminum to Essex. The price for the conversion was based on a complex formula designed to assure that Essex received aluminum at a price below the normal market price while ALCOA made a reasonable, but not excessive, profit. To develop the formula, the parties hired Alan Greenspan, who later became Chairman of the Federal 273 Reserve at the close of the 20th Century, but was then an independent consultant. Greenspan's formula provided that part of the price would increase in proportion to ALCOA's average hourly labor cost. This was of course to compensate ALCOA for increases in the cost of the labor expended on the conversion. Another component of the price was to rise in proportion to the Wholesale Price Index. (The Wholesale Price Index, which has since been modified and renamed the Producer Price Index, is like the Consumer Price Index in that it measures increases and decreases in prices. The Consumer Price Index measures how much consumers pay for a range of things consumers regularly purchase. The Wholesale Price Index measured the prices that businesses paid for a range of things that businesses purchase.) This was designed to compensate ALCOA for increases in its non-labor costs.
The formula was designed to give ALCOA a "net income" of between one and seven cents per pound of aluminum processed over and above ALCOA's costs of labor, materials, and other things directly attributable to the processing of the aluminum. This "net income" was to compensate ALCOA for the capital invested in its plants and equipment and for its management and overhead costs. It was also intended to give ALCOA a profit. Essex on the other hand, was intended to have an assured source of aluminum from which it could make wire.
Unfortunately, Mr. Greenspan's formula, for which we can assume he was paid a handsome fee, did not work as advertised. The 1973 oil embargo, an event that may have produced more contract law than any other single event in history, caused electricity prices to rise dramatically. New pollution control regulations added to the increase in electricity prices. Because aluminum production uses huge amounts of electricity, the increase in electricity prices caused ALCOA's non-labor costs to go up much more than the formula compensated them for. Electricity prices went up much more than the Wholesale Price Index did. The result of this was that ALCOA began to suffer huge losses. They estimated that if they were forced to complete the contract they would lose \$75 million. At the same time, aluminum prices went up dramatically, largely because of the increase in electricity prices. This gave Essex a windfall. Instead of using all the aluminum to make wire as the parties anticipated, Essex began selling some of it at a huge profit.
ALCOA sued to get out of the contract, claiming mutual mistake (among other things). The court held in favor of ALCOA, relying in part on Sherwood v. Walker. Essex asserted that the mistake was not a mistake as to a present fact (which is grounds for relief), but a mistake as to a future event (which is not). The court, however, decided that the mistake was the belief that Mr. Greenspan had created a viable formula. Thus, the court said that because the formula was bad from the beginning, it was a mistake as to a present fact rather than a mistake as to a future event (whether the formula would work). Are you convinced by this distinction? Although it is hard to say categorically that the court was wrong, many are not convinced.
274 Essex also claimed that ALCOA had assumed the risk by not including in the contract a provision that would have limited its losses if the formula didn't work. The court didn't buy this, either. It said that ALCOA probably just believed that risk was so small that it was not worth the effort to negotiate and draft a provision covering it.
So, now you know something more about contract law and the former chairman of the Federal Reserve---a man whose forward-looking pronouncements have moved markets worldwide. His work is deemed reliable but not guaranteed---that would be an example of irrational exuberance.
Jaynes v. Louisville & Nashville Railroad, United States District Court, Eastern District, Tennessee, 560 F. Supp. 57 (1981)
Neese, District Judge.
Memorandum Opinion and Orders
[1]This is an action by a former employee of the defendant railroad to recover damages under the Federal Employers' Liability Act (FELA), 45 U.S.C. §§ 51 et seq., 45 U.S.C. § 56. The defendant moved for a summary judgment on the ground that the claim of the plaintiff is barred by an accord and satisfaction. There being genuine issues of material fact extant between the parties concerning such affirmative defense, summary judgment is not appropriate. See Rule 56(c), Federal Rules of Civil Procedure.
[2]It is undisputed that on May 6, 1977, in consideration of the sum of \$1,312.006 paid to him by the defendant, the plaintiff Mr. Jaynes executed a document, agreeing to release the defendant from any claim arising out of the accident which forms the basis of this action. That release specifically encompassed " . . . injuries not now known whether or not the undersigned has been advised by doctors or others in any way."
[3]The plaintiff seeks to avoid such release, by claiming that such was the result of a mutual mistake of the parties as to the nature of his injury. Cf. Edwards v. Western & Atlantic R., C.A. 5th (1977), 552 F.2d 137, 138 (a mutual mistake as to the expected course of healing of the plaintiff's injury, as opposed to a mutual mistake as to the nature of the injury, is not sufficient to avoid a release).
[4]The record herein is akin to that before the court in Taylor v. Chesapeake & Ohio Railway Company, C.A. 4th (1975), 518 F.2d 536. In reviewing the granting by the District Court of the railroad's motion for 275 summary judgment, the Court of Appeals stated succinctly the legal principles which govern this Court's consideration of Clinchfield's motion:
* * *
It is axiomatic that summary judgment is never authorized if there is any genuine issue of fact between the parties and that, in determining whether there is any such issue, the facts, including any legitimate inferences therefrom, are to be viewed in the light most favorable to the opposing party. It is equally settled that the validity of a release attacked in a FELA case is governed by federal law, which recognizes mutual mistake as a ground for voiding a release. [Footnote references omitted.---Eds.]
Taylor v. Chesapeake & Ohio Railway Company, supra, 518 F.2d at 536--37. The question presented thus narrows to, whether there is " . . . sufficient evidence in the record before the Court of mutual mistake to constitute a genuine issue of fact in the case?" 518 F.2d at 537.
[5]Construing the record herein, including any legitimate inferences drawn therefrom, in the light most favorable to the plaintiff, it is possible to conclude that, on May 6, 1977, both Mr. Jaynes and Clinchfield's claim-agent assumed mistakenly that the plaintiff had suffered no serious or permanent injury.7 There is evidence that some 10 days earlier Clinchfield's physician had released Mr. Jaynes to return to his work. Had these parties understood that the plaintiff's injury was other than minor " . . . it would have been unlikely that a modest settlement, covering substantially little more than lost time to date, would have been made." Ibid., 518 F.2d at 538. These facts, and the reasonable inferences therefrom, are sufficient to raise a genuine issue of material fact as to the validity of the release upon which the defendant relies. Taylor v. Chesapeake & Ohio Railway Company, supra.
The motion of the defendant for a summary judgment hereby is DENIED.
--------- Notes and Questions
1.The release stated very clearly that it covered "injuries not now known whether or not the undersigned has been advised by doctors or others in any way." In any other context that language would probably be read as the signer's assumption of the risk that he had injuries he was not aware of. In the case of releases of personal injury claims, however, courts have often been unwilling to use such language to preclude the mistake defense. The courts have had to balance two competing policy considerations. On the one hand, 276 there is a policy of favoring devices (like releases) that allow disputes to be resolved quickly and economically. On the other hand, judges want to protect unsophisticated injured people who may have a need for immediate cash against exploitation by insurance companies who are more knowledgeable because they enter into transactions like these all the time. (Economists call such knowledgeable folks "repeat players" to signify that they have powers and abilities far beyond those of mere mortals.)
The extreme example of this solicitude for people signing releases comes not from a court but from a legislature. California Civil Code § 1542, mentioned earlier in another context provides:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.
2.Suppose a person with a broken leg signs a release in the reasonable belief that the leg will heal and that she will be able to walk normally. If, for reasons that she could not have anticipated, the leg does not heal properly and she can never walk again, the straightforward application of the mistake doctrine holds that she cannot avoid the release on the grounds of mistake. Her mistake is of a future, not a present, fact. What is the rationale for this result?
Anderson Brothers Corp. v. O'Meara, United States Court of Appeals, Fifth Circuit, 306 F.2d 672 (1962)
Jones, Circuit Judge.
[1]The appellant, Anderson Brothers Corporation, a Texas corporation engaged in the business of constructing pipelines, sold a barge dredge to the appellee, Robert W. O'Meara, a resident of Illinois who is an oil well driller doing business in several states and Canada. The appellee brought this suit seeking rescission of the sale or, in the alternative, damages. After trial without a jury, the appellee's prayer of rescission was denied, but damages were awarded. The court denied the appellant's counterclaim for the unpaid purchase price of the dredge. Both parties have appealed. Appellant contends that no relief should have been given to the appellee, and the appellee contends that the damages awarded to him were insufficient.
[2]The dredge which the appellant sold to the appellee was specially designed to perform the submarine trenching necessary for burying a pipeline under water. In particular it was designed to cut a relatively narrow trench in areas where submerged rocks, stumps and logs might be encountered. The dredge could be disassembled into its larger component 277 277 parts, moved over land by truck, and reassembled at the job site. The appellant built the dredge from new and used parts in its own shop. The design was copied from a dredge which appellant had leased and successfully used in laying a pipeline across the Mississippi River. The appellant began fabrication of the dredge in early 1955, intending to use it in performing a contract for laying a pipeline across the Missouri River. A naval architect testified that the appellant was following customary practice in pipeline operations by designing a dredge for a specific use. Dredges so designed can be modified, if necessary, to meet particular situations. For some reason construction of the dredge was not completed in time for its use on the job for which it was intended, and the dredge was never used by the appellant. After it was completed, the dredge was advertised for sale in a magazine. This advertisement came to the appellee's attention in early December, 1955. The appellee wanted to acquire a dredge capable of digging canals fifty to seventy-five or eighty feet wide and six to twelve feet deep to provide access to offshore oil well sites in southern Louisiana.
[3]On December 8, 1955, the appellee or someone employed by him contacted the appellant's Houston, Texas, office by telephone and learned that the price of the dredge was \$45,000. Terms of sale were discussed, and later that day the appellant sent a telegram to the appellee who was then in Chicago, saying it accepted the appellee's offer of \$35,0008 for the dredge to be delivered in Houston. The appellee's offer was made subject to an inspection. The next day Kennedy, one of the appellee's employees, went to Houston from New Orleans and inspected the dredge. Kennedy, it appears, knew nothing about dredges but was familiar with engines. After inspecting the engines of the dredge, Kennedy reported his findings to the appellee by telephone and then signed an agreement with the appellant on behalf of the appellee. In the agreement, the appellant acknowledged receipt of \$17,500. The agreement made provision for payment of the remaining \$17,500 over a period of seventeen months. The dredge was delivered to the appellee at Houston on December 11, 1955, and from there transported by the appellee to his warehouse in southern Louisiana. The barge was transported by water, and the ladder, that part of the dredge which extends from the barge to the stream bed and to which the cutting devices are attached, was moved by truck. After the dredge arrived at his warehouse the appellee executed a chattel mortgage in favor of the appellant and a promissory note payable to the order of the appellant. A bill of sale dated December 17, 1955, was given the appellee in which the appellant warranted only title and freedom from encumbrances. Both the chattel mortgage and the bill of sale described the dredge and its component parts in detail.
278 [4]The record contains much testimony concerning the design and capabilities of the dredge including that of a naval architect who, after surveying the dredge, reported "I found that the subject dredge . . . had been designed for the purpose of dredging a straight trench over a river, lake or other body of water." The testimony shows that a dredge designed to perform sweep dredging, the term used to describe the dredging of a wide channel, must be different in several respects from one used only for trenching operations. The naval architect's report listed at least five major items to be replaced, modified, or added before the dredge would be suited to the appellee's intended use. It is clear that the appellee bought a dredge which, because of its design, was incapable, without modification, of performing sweep dredging.
[5]On July 10, 1956, about seven months after the sale and after the appellee had made seven monthly payments pursuant to the agreement between the parties, the appellee's counsel wrote the appellant stating in part that "Mr. O'Meara has not been able to put this dredge in service and it is doubtful that it will ever be usable in its present condition." After quoting at length from the naval architect's report, which was dated January 28, 1956, the letter suggested that the differences between the parties could be settled amicably by the appellant's contributing \$10,000 toward the estimated \$12,000 to \$15,000 cost of converting the trenching dredge into a sweep dredge. The appellant rejected this offer and on July 23, 1956, the appellee's counsel wrote the appellant tendering return of the dredge and demanding full restitution of the purchase price. This suit followed the appellant's rejection of the tender and demand.
[6]In his complaint the appellee alleged breaches of expressed and implied warranty and fraudulent representations as to the capabilities of the dredge. By an amendment he alleged as an alternative to the fraud count that the parties had been mistaken in their belief as to the operations of which the dredge was capable, and thus there was a mutual mistake which prevented the formation of a contract. The appellee sought damages of over \$29,0009, representing the total of principal and interest paid the appellant and expenses incurred in attempting to operate the dredge. In the alternative, the appellee asked for rescission and restitution of all money expended by him in reliance on the contract. The appellant answered denying the claims of the appellee and counterclaiming for the unpaid balance. [7]The district court found that:
At the time the dredge was sold by the defendant to the plaintiff, the dredge was not capable for performing sweep dredging operations in shallow water, unless it was modified extensively. 279 Defendant had built the dredge and knew the purpose for which it was designed and adapted. None of the defendant's officers or employees knew that plaintiff intended to use the dredge for shallow sweep dredging operations. Gier (an employee of the appellant who talked with the appellee or one of his employees by telephone) mistakenly assumed that O'Meara intended to use the dredge within its designed capabilities.
At the time the plaintiff purchased this dredge he mistakenly believed that the dredge was capable without modification of performing sweep dredging operations in shallow water.
[8]The court further found that the market value of the dredge on the date of sale was \$24,000, and that the unpaid balance on the note given for part of the purchase price was \$10,500. Upon its findings the court concluded that:
The mistake that existed on the part of both plaintiff and defendant with respect to the capabilities of the subject dredge is sufficient to and does constitute mutual mistake, and the plaintiff is entitled to recover the damages he has suffered as a result thereof.
[9]These damages were found to be "equal to the balance due on the purchase price" plus interest, and were assessed by cancellation of the note and chattel mortgage and vesting title to the barge in the appellee free from any encumbrance in favor of the appellant. The court also concluded that the appellee was "not entitled to rescission of this contract." Further findings and conclusions, which are not challenged in this Court, eliminate any considerations of fraud or breach of expressed or implied warranties. The judgment for damages rests entirely upon the conclusion of mutual mistake. The district court's conclusion that the parties were mutually mistaken "with respect to the capabilities of the subject dredge" is not supported by its findings. "A mutual mistake is one common to both parties to the contract, each laboring under the same misconception." St. Paul Fire & Marine Insurance Co. v. Culwell, Tex.Com.App., 62 S.W.2d 100. The appellee's mistake in believing that the dredge was capable, without modification, of performing sweep dredging was not a mistake shared by the appellant, who had designed and built the dredge for use in trenching operations and knew its capabilities. The mistake on the part of the appellant's employee in assuming that the appellee intended to use the dredge within its designed capabilities was certainly not one shared by the appellee, who acquired the dredge for use in sweep dredging operations. The appellee alone was mistaken in assuming that the dredge was adapted, without modification, to the use he had in mind.
[10]The appellee insists that even if the findings do not support a conclusion of mutual mistake, he is entitled to relief under the well- 280 established doctrine that knowledge by one party to a contract that the other is laboring under a mistake concerning the subject matter of the contract renders it voidable by the mistaken party. As a predicate to this contention, the appellee urges that the trial court erred in finding that "None of defendant's officers or employees knew that plaintiff intended to use the dredge for shallow sweep dredging operations."
[11]There is a conflict in the evidence on the question of the appellant's knowledge of the appellee's intended use, and it cannot be held that the district court's finding is clearly erroneous. It is to be noted that the trial court before whom the appellee testified, did not credit his testimony that he had made a telephone call in which, he said, he personally informed an employee of the appellant of his plans for the use of the dredge.
[12]The appellee makes a further contention that when he purchased the dredge he was laboring under a mistake so grave that allowing the sale to stand would be unconscionable. The ground urged is one which has apparently been recognized in some circumstances. However, the Texas courts have held that when unilateral mistake is asserted as a ground for relief, the care which the mistaken complainant exercised or failed to exercise in connection with the transaction sought to be avoided is a factor for consideration. Although a court of equity will relieve against mistake, it will not assist a man whose condition is attributable to the want of due diligence which may be fairly expected from a reasonable person. This is consistent with the general rule of equity that when a person does not avail himself of an opportunity to gain knowledge of the facts, he will not be relieved of the consequences of acting upon supposition. Whether the mistaken party's negligence will preclude relief depends to a great extent upon the circumstances in each instance.
[13]The appellee saw fit to purchase the dredge subject to inspection, yet he sent an employee to inspect it who he knew had no experience with or knowledge of dredging equipment. It was found that someone familiar with such equipment could have seen that the dredge was then incapable of performing channel type dredging. Although, according to his own testimony, the appellee was conscious of his own lack of knowledge concerning dredges, he took no steps, prior to purchase, to learn if the dredge which he saw pictured and described in some detail in the advertisement, was suited to his purpose. Admittedly he did not even inquire as to the use the appellant had made or intended to make of the dredge, and the district court found that he did not disclose to the appellant the use he intended to make of the dredge. The finding is supported by evidence. The appellee did not attempt to obtain any sort of warranty as to the dredge's capabilities. The only conclusion possible is that the appellee exercised no diligence, prior to the purchase, in determining the uses to which the dredge might be put. Had he sent a qualified person, such as the
281 naval architect whom he later employed, to inspect the dredge he would have learned that it was not what he wanted, or had even made inquiry, he would have been informed as to the truth or have had a cause of action for misrepresentation if he had been given misinformation and relied upon it. The appellee chose to act on assumption rather than upon inquiry or information obtained by investigation, and, having learned his assumption was wrong, he asks to be released from the resulting consequences on the ground that, because of his mistaken assumption, it would be unconscionable to allow the sale to stand. The appellee seeks this, although the court has found that the appellant was not guilty of any misrepresentation or fault in connection with the transaction.
[14]The appellee should have taken nothing on his claim; therefore, it is unnecessary to consider the question raised by the cross-appeal. The other questions raised by the appellant need not be considered. The case must be reversed and remanded for further proceeding consistent with what we have here held.
Reversed and remanded.
Notes and Questions
1.Unconscionable vs. material effect. Under the R2d, a mutual mistake can make a contract voidable only when it has "a material effect on the agreed exchange of performances." The R2d doesn't give us much help in determining when there is a "material effect." It does, however, say: "It is not enough for [the party seeking to void the contract] to prove that he would not have made the contract had it not been for the mistake. He must show that the resulting imbalance in the agreed exchange is so severe that he cannot fairly be required to carry it out." R2d § 152 cmt. c. One example given by the R2d's drafters indicates that where the value of what was sold was half what the parties thought it was, the contract would be voidable. R2d § 152, Illustration 4. Another indicates that where the parties believed that the value of the consideration to be given by one party was \$150,000, but in reality it turns out to be \$110,000, the contract may be voidable. R2d § 152, Illustration 3.
Section 153 provides that unless the other party to the contract has reason to know of the mistake or is responsible for it, a unilateral mistake will make the contract voidable only if enforcement would be unconscionable. Unconscionability is one of those concepts of which lawyers and judge are likely to say "I can't define it, but I know it when I see it." In other words, you need to read a lot of cases to get a feel for the contours of the doctrine in a particular jurisdiction. One often quoted definition is that an unconscionable bargain is one which "no man in his senses and not under delusion would make on the one hand, and . . . no honest and fair man would accept on the other." It is often attributed to Hume v. United States, 132 U.S. 406, 411, 10 S.Ct. 134, 33 L.Ed. 393 (1889), but that opinion was quoting from an old English case, which in 282 turn was quoting from a law dictionary, which was very likely quoting from an even older case.
In any event, the idea is that where there is a unilateral mistake, the party seeking to void the contract should have to meet a much higher standard of unfairness. In Montgomery v. Strickland, 384 So. 2d 1085 (Ala. 1980), the court, applying an unconscionability standard to a unilateral mistake case, refused to set aside a contract which called for a seller of land to convey 32 acres where he thought he was selling only 21 or 22 acres.
2.Parties can allocate the rules of the unknown between them using representations and warranties. Representations and warranties are statements of fact pertinent to a contract. There are distinctions between representations and warranties and the actions that may be brought on them, but that is left for another text. See George W. Kuney, The Elements of Contract Drafting (3d ed. West 2011). For present purposes, it is enough to understand representations and warranties as statements that relate to the character, quality, condition, title to, or rights in the subject matter of a contract. For example, a statement that a sailboat was "carefully well equipped" and "very seaworthy" could be a warranty of its condition in a contract of sale. See Keith v. Buchanan, 173 Cal. App. 3d 13, 220 Cal. Rptr. 392 (1985). On the other hand, mere expressions of opinion will not rise to the level of a warranty. See Williams v. Lowenthal, 124 Cal. App. 179, 12 P.2d 75 (1932) (statement that a used jukebox "would probably not get out of order" was an opinion, not a warranty). If a statement is a warranty, and it turns out that the facts are not as warranted, then the party in whose favor the warranty runs can recover the cost of making the facts as warranted, the difference in value between what was warranted and what was delivered, or the actual damages caused by the breach of warranty from the warranting party. If a statement is a representation and it is untrue, it may give rise to an option to rescind the contract and recover any consideration already paid or proceed with the contract and bring an action for damages sounding in contract and possibly tort (negligent misrepresentation, misrepresentation, and fraud)---with the potential for punitive damages.
3.Most contracts prepared by lawyers like the Asset Purchase Agreement in the Introduction to this text have a special section or sections in which all or most of the representations or warranties are collected and expressed. Despite the distinctions between the purpose of representations and warranties, and the different remedies they may support, they are often combined in clauses under which a party represents and warrants that certain facts are true.
4.Compare and contrast the approaches to mistake in R2d sections 151 to 158 and those in UNIDROIT articles 3.4 to 3.7. Which approach do you find superior in substance? Which do you find superior in terms of organization and drafting? Why?
283 Lawyering Skills Problem
You are general counsel for an insurance company. The company's standard-form release to be signed by people whom the company is compensating for injuries allegedly caused by its insureds reads:
Releasor hereby releases, acquits and forever discharges Releasee and any other persons and entities of and from any and all actions, causes of action, claims, demands, damages, costs, loss of services, expenses and compensation on account of or in any way growing out of any and all known and unknown personal injuries resulting or to result from the accident that occurred on or about [date and time], at or about [location].
In spite of the language of the release, a number of courts have held that it does NOT release claims for injuries that the signer does not know she has when she signs the release and accepts the money based on the doctrine of mistake.
You have been asked to re-write the release to make it more likely that courts will interpret it to release claims for injuries not known at the time the release is signed. Explain what you would do and provide specific examples of how you would redraft it.
Don't worry about California Civil Code section 1542 discussed earlier. You will have local counsel draft a California-specific release. You will also, of course, have a law clerk do research to see if there are other states that have unusual requirements. But your job here is just to draft a basic release that will do the job in the ordinary run-of-the-mill state.