<
Contract Doctrine, Theory & Practice Volume Two

Contract Doctrine, Theory & Practice Volume Two
1st Edition
J.H. Verkerke
Introduction
Contract Doctrine, Theory & Practice

                

 

Contract Doctrine,

Theory & Practice

 

Volume Two

 

 

 

J.H. Verkerke

 

 

 

CALI eLangdell Press 2012

Notices

 This work by J.H. Verkerke is licensed and published by CALI eLangdell Press under a Creative Commons Attribution-Non Commercial-ShareAlike 3.0 Unported License. CALI and CALI eLangdell Press reserve under copyright all rights not expressly granted by this Creative Commons license. CALI and CALI eLangdell Press do not assert copyright in US Government works or other public domain material included herein. Permissions beyond the scope of this license may be available through feedback@cali.org.

In brief, the terms of that license are that you may copy, distribute, and display this work, or make derivative works, so long as

  •  you give CALI eLangdell Press and the author credit;
  •  you do not use this work for commercial purposes; and
  • you distribute any works derived from this one under the same licensing terms as this.

Suggested attribution format for original work:

J.H. Verkerke, Contract Doctrine, Theory & Practice, Published by CALI eLangdell Press. Available under a Creative Commons BY-NC-SA 3.0 License.

Permission for the Restatement of Contracts, copyright 2012 by The American Law Institute. Reproduced with permission. All rights reserved.

CALI® and eLangdell® are United States federally registered trademarks owned by the Center for Computer-Assisted Legal Instruction. The cover art design is a copyrighted work of CALI, all rights reserved. The CALI graphical logo is a trademark and may not be used without permission.

Should you create derivative works based on the text of this book or other Creative Commons materials therein, you may not use this book’s cover art and the aforementioned logos, or any derivative thereof, to imply endorsement or otherwise without written permission from CALI.

This material does not contain nor is intended to be legal advice. Users seeking legal advice should consult with a licensed attorney in their jurisdiction. The editors have endeavored to provide complete and accurate information in this book. However, CALI does not warrant that the information provided is complete and accurate. CALI disclaims all liability to any person for any loss caused by errors or omissions in this collection of information.

About the Author

Before he received his law degree from Yale in 1990, J. H. (Rip) Verkerke earned a master's of philosophy in economics. Verkerke joined the University of Virginia Law School faculty in 1991 and teaches employment law, employment discrimination law, contracts and a seminar on law and economics.

While at Yale, Verkerke was articles editor and articles administrator for the Yale Law Journal and held a number of fellowships, including the John M. Olin Fellowship in Law, Economics, and Public Policy. After graduation, he clerked for Judge Ralph K. Winter Jr. of the U.S. Court of Appeals for the Second Circuit.

In June 1996 Verkerke received a three-year grant from the University of Virginia's Academic Enhancement Program to establish the Program for Employment and Labor Law Studies at the Law School. He served as visiting professor of law at the University of Texas at Austin in the fall of 1997. Verkerke also participated in an ABA project to draft a new labor code for the transitional government of Afghanistan. In 2007, Verkerke received an All-University Teaching Award from UVA, and in 2011, he was selected as an inaugural member of the University Academy of Teaching.

About CALI eLangdell Press

The Center for Computer-Assisted Legal Instruction (CALI®) is: a nonprofit organization with over 200 member US law schools, an innovative force pushing legal education toward change for the better. There are benefits to CALI membership for your school, firm, or organization. eLangdell® is our electronic press with a mission to publish more open books for legal education.

How do we define "open?"

  • Compatibility with devices like smartphones, tablets, and e-readers; as well as print.
  • The right for educators to remix the materials through more lenient copyright policies.
  • The ability for educators and students to adopt the materials for free.

Find available and upcoming eLangdell titles at elangdell.cali.org. Show support for CALI by following us on Facebook and Twitter, and by telling your friends and colleagues where you received your free book.

Preface

Our reading assignments this semester will include all of the elements that make up a conventional casebook. You will read judicial opinions, statutory provisions, academic essays, and hypotheticals. You will puzzle over common law doctrines and carefully parse statutes. We will try to develop theories that can predict and justify the patterns of judicial decisions we observe.

Why study contract law?

The first semester of law school is mostly about learning to speak a new legal language (but emphatically not “legalese”), to formulate and evaluate legal arguments, to become comfortable with the distinctive style of legal analysis. We could teach these skills using almost any legal topic. But we begin the first-year curriculum with subjects that pervade the entire field of law. Contract principles have a long history and they form a significant part of the way that lawyers think about many legal problems. As you will discover when you study insurance law, employment law, family law, and dozens of other practice areas, your knowledge of contract doctrine and theory will be invaluable.

Why collaborative teaching materials?

The ultimate goal of this project is to involve many professors in producing a library of materials for teaching contracts (and other subjects). For the moment, I will be solely responsible for collecting public domain content and generating problems and explanatory essays. These embryonic reading materials will grow and evolve as I use and expand them and as other professors join in producing additional content. I gratefully acknowledge the extraordinary work of my talented research assistants who have been instrumental in helping me to put these materials together. Thanks to Sarah Bryan, Mario Lorello, Elizabeth Young, Vishal Phalgoo, Valerie Barker and Jim Sherwood.

I believe that it is equally important to involve students in the ongoing process of refining and improving how we teach legal subjects. Our collaboration site will provide a platform for student-generated content and lively dialogue. With your enthusiastic engagement, we will finish the semester with an excellent understanding of contracts and a useful collection of reference materials. I invite each of you to join us for what will be a challenging, sometimes frustrating, but ultimately rewarding, intellectual journey.

Chapter One
Defining the Obligation to Perform

We have thus far focused on the rules that determine whether the parties have made an enforceable contract. Our attention now shifts to the question of performance. What conduct will be sufficient to fulfill each party’s obligation under the contract? Are there circumstances that might excuse performance?

1.1. Excuse

When we make or receive promises, we understand that there are at least some circumstances that will extinguish the resulting obligation to perform. In social settings, a “good excuse” exists whenever an unexpected contingency prevents someone from fulfilling her promise. If Sharon has agreed to give several friends a ride to a concert, mechanical trouble with her car excuses her from a duty to drive, but not from a duty to tell her friends promptly about her inability to drive. If, however, Sharon is seriously injured in a car accident on the way to pick up her friends, no one would condemn her for failing to call.

What is it about our understanding of Sharon’s promise that allows us to make these nuanced judgments about responsibility? Notice first that the words of the promise itself play no role in establishing that mechanical trouble would excuse performance or in distinguishing between the consequences of mechanical trouble and personal injury. Sharon made an unqualified promise to drive her friends to the concert, and no one expects her to recite a litany of circumstances in which she will be unable to perform. Instead, we rely on a shared understanding about what events justify nonperformance.

Commercial agreements ordinarily involve comparatively complex obligations. Their express terms likewise cover a wider array of contingencies. However, no contract can possibly provide for every event that might occur between the execution of the contract and the time for performance. In the two cases that follow, consider carefully the role of contractual language in allocating the risks of unexpected contingencies. Try to develop a theory that can explain and perhaps justify the results in these cases.

1.1.1. Principal Case – Stees v. Leonard

Stees v. Leonard

Supreme Court of Minnesota

20 Minn. 494 (1874)

[1]  Appeal by defendants from an order of the district court, Ramsey county, denying a new trial.

[2] The action was brought to recover damages for a failure of defendants to erect and complete a building on a lot of plaintiffs, on Minnesota street, between Third and Fourth streets, in the city of St. Paul, which, by an agreement under seal between them and plaintiffs, the defendants had agreed to build, erect, and complete, according to plans and specifications annexed to and made part of the agreement. The defendants commenced the construction of the building, and had carried it to the height of three stories, when it fell to the ground. The next year, 1869, they began again and carried it to the same height as before, when it again fell to the ground, whereupon defendants refused to perform the contract. They claimed that in their attempts to erect the building they did the work in all respects according to the plans and specifications, and that the failure to complete the building and its fall on the two occasions was due to the fact that the soil upon which it was to be constructed was composed of quicksand, and when water flowed into it, was incapable of sustaining the building. The offers of proof by defendants, and the character of the allegations in the answer, under which the court held some of the offers inadmissible, are sufficiently indicated in the opinion.

Young, J.

[3] The general principle of law which underlies this case is well established. If a man bind himself, by a positive, express contract, to do an act in itself possible, he must perform his engagement, unless prevented by the act of God, the law, or the other party to the contract. No hardship, no unforeseen hindrance, no difficulty short of absolute impossibility, will excuse him from doing what he has expressly agreed to do. This doctrine may sometimes seem to bear heavily upon contractors; but, in such cases, the hardship is attributable, not to the law, but to the contractor himself, who has improvidently assumed an absolute, when he might have undertaken only a qualified, liability. The law does no more than enforce the contract as the parties themselves have made it. Many cases illustrating the application of the doctrine to every variety of contract are collected in the note to Cutter v. Powell, 2 Smith, Lead. Cas. 1.

[4] The rule has been applied in several recent cases, closely analogous to the present in their leading facts. In Adams v. Nichols, 19 Pick. 275, the defendant, Nichols, contracted to erect a dwelling-house for plaintiff on plaintiff's land. The house was nearly completed, when it was destroyed by accidental fire. It was held that the casualty did not relieve the contractor from his obligation to perform the contract he had deliberately entered into. The court clearly state and illustrate the rule, as laid down in the note to Walton v. Waterhouse, 2 Wms. Saunders, 422, and add: “In these and similar cases, which seem hard and oppressive, the law does no more than enforce the exact contract entered into. If there be any hardship, it arises from the indiscretion or want of foresight of the suffering party. It is not the province of the law to relieve persons from the improvidence of their own acts.”

[5] In School District v. Dauchy, 25 Conn. 530, the defendant contracted to build and complete a school-house. When nearly finished, the building was struck by lightning, and consumed by the consequent fire, and the defendant refused to rebuild, although plaintiffs offered to allow him such further time as should be necessary. It was held that this non-performance was not excused by the destruction of the building. The court thus state the rule: “If a person promise absolutely, without exception or qualification, that a certain thing shall be done by a given time, or that a certain event shall take place, and the thing to be done, or the event, is neither impossible nor unlawful at the time of the promise, he is bound by his promise, unless the performance, before that time, becomes unlawful.”

[6] School Trustees v. Bennett, 3 Dutcher, 513, is almost identical, in its material facts, with the present case. The contractors agreed to build and complete a school-house, and find all materials therefor, according to specifications annexed to the contract; the building to be located on a lot owned by plaintiff, and designated in the contract. When the building was nearly completed it was blown down by a sudden and violent gale of wind. The contractors again began to erect the building, when it fell, solely on account of the soil on which it stood having become soft and miry, and unable to sustain the weight of the building; although, when the foundations were laid, the soil was so hard as to be penetrated with difficulty by a pickax, and its defects were latent. The plaintiff had a verdict for the amount of the installments paid under the contract as the work progressed. The verdict was sustained by the supreme court, which held that the loss, although arising solely from a latent defect in the soil, and not from a faulty construction of the building, must fall on the contractor.

[7]   In the opinion of the court, the question is fully examined, many cases are cited, and the rule is stated “that where a party by his own contract creates a duty or charge upon himself he is bound to make it good if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract…. If, before the building is completed or accepted, it is destroyed by fire or other casualty, the loss falls upon the builder; he must rebuild. The thing may be done, and he has contracted to do it….No matter how harsh and apparently unjust in its operation the rule may occasionally be, it cannot be denied that it has its foundations in good sense and inflexible honesty. He that agrees to do an act should do it, unless absolutely impossible. He should provide against contingencies in his contract. Where one of two innocent persons must sustain a loss, the law casts it upon him who has agreed to sustain it; or, rather, the law leaves it where the agreement of the parties has put it….Neither the destruction of the incomplete building by a tornado, nor its falling by a latent softness of the soil, which rendered the foundation insecure, necessarily prevented the performance of the contract to build, erect, and complete this building for the specified price. It can still be done, for aught that was opened to the jury as a defense, and overruled by the court.”

[8] In Dermott v. Jones, 2 Wall. 1, the foundation of the building sank, owing to a latent defect in the soil, and the owner was compelled to take down and rebuild a portion of the work. The contractor having sued for his pay, it was held that the owner might recoup the damages sustained by his deviation from the contract. The court refer with approval to the cases cited, and say: “The principle which controlled them rests upon a solid foundation of reason and justice. It regards the sanctity of contracts. It requires a party to do what he has agreed to do. If unexpected impediments lie in the way, and a loss ensue, it leaves the loss where the contract places it. If the parties have made no provision for a dispensation, the rule of law gives none. It does not allow a contract fairly made to be annulled, and it does not permit to be interpolated what the parties themselves have not stipulated.”

[9] Nothing can be added to the clear and cogent arguments we have quoted in vindication of the wisdom and justice of the rule which must govern this case, unless it is in some way distinguishable from the cases cited.

[10] It is argued that the spot on which the building is to be erected is not designated with precision in the contract, but is left to be selected by the owner; that, under the contract, the right to designate the particular spot being reserved to plaintiffs, they must select one that will sustain the building described in the specifications, and if the spot they select is not, in its natural state, suitable, they must make it so; that in this respect the present case differs from School Trustees v. Bennett.

[11] The contract does not, perhaps, designate the site of the proposed building with absolute certainty; but in this particular it is aided by the pleadings. The complaint states that defendants contracted to erect the proposed building on “ a certain piece of land, of which the plaintiffs then were, and now are, the owners in fee, fronting on Minnesota street, between Third and Fourth streets, in the city of St. Paul.” The answer expressly admits that the defendants entered into a contract to erect the building, according to the plans, etc., “on that certain piece of land in said complaint described,” and that they “entered upon the performance of said contract, and proceeded with the erection of said building,” etc. This is an express admission that the contract was made with reference to the identical piece of land on which the defendants afterwards attempted to perform it, and leaves no foundation in fact for the defendants' argument.

[12] It is no defense to the action that the specifications directed that “footings” should be used as the foundation of the building, and that the defendants, in the construction of these footings, as well as in all other particulars, conformed to the specifications. The defendants contracted to ““erect and complete the building.” Whatever was necessary to be done in order to complete the building, they were bound by the contract to do. If the building could not be completed without other or stronger foundations than the footings specified, they were bound to furnish such other foundations. If the building could not be erected without draining the land, then they must drain the land, “because they have agreed to do everything necessary to erect and complete the building.” 3 Dutcher 520; and, see Dermott v. Jones, supra, where the same point was made by the contractor, but ruled against him by the court.

[13] As the draining of the land was, in fact, necessary to the erection and completion of the building, it was a thing to be done, under the contract, by the defendants. The prior parol agreement that plaintiffs should drain the land, related, therefore, to a matter embraced within the terms of the written contract, and was not, as claimed by defendants' counsel, collateral thereto. It was, accordingly, under the familiar rule, inadmissible in evidence to vary the terms of the written contract, and was properly excluded.

[14] In their second and third offers the defendants proposed to prove that after the making of the written contract, and when the defendants, in the course of their excavation for the cellar and foundation, first discovered that the soil, being porous and spongy, would not sustain the building, unless drained, the plaintiffs proposed and promised to keep the soil well drained during the construction of the building; that, in consequence, the defendants did not drain the same; that plaintiffs for a time kept the soil drained, but afterwards, and just before the fall of the building, they neglected to drain, in consequence of which neglect the soil became saturated with water, and the building fell; and that a like promise was made by defendants at the beginning of the erection of the second building, followed by like part performance and neglect, and subsequent, and consequent, fall of the building.

[15]  The rule that a sealed contract cannot be varied by a subsequent parol agreement, is of great antiquity, the maxim on which it rests, unumquodque dissolvitur eodem modo, quo ligatur, being one of the most ancient in our law. Broom, Leg. Max. 877; 5 Rep. 26 a, citing Bracton, lib. 2, fol. 28; and, see Bracton, fol. 101. In early days the rigor with which it was enforced in the courts of law, led to the interference of chancery to prevent injustice. Per Lord ELLESMERE, Earl of Oxford's Case, 2 Lead. Cas. in Eq. 508*; 1 Spence, Eq. Jur. 636. In later times that rigor has become much relaxed, although the English courts of law have refused to permit sealed contracts to be varied by parol in cases of great hardship. Littler v. Holland, 3 Term R. 590; Gwynne v. Davy, 1 Man. & Gr. 857; West v. Blakeway, 2 Man. & Gr. 729; and, see Albert v. Grosvenor Investment Co. L. R. 3 Q. B. 123.

[16] But, in this country, it has become a well-settled exception to the rule, that a sealed contract may be modified by a subsequent parol agreement, if the latter has been executed, or has been so acted on that the enforcing of the original contract would be inequitable. Munroe v. Perkins, 9 Pick. 298; Mill-dam Foundry v. Hovey, 21 Pick. 417; Blasdell v. Souther, 6 Gray 149; Foster v. Dawber, 6 Exch. 854, and note; Thurston v. Ludwig, 6 Ohio St. 1; Delacroix v. Bulkley, 13 Wend. 71; Allen v. Jaquish, 21 Wend. 628; Vicary v. Moore, 2 Watts, 451; Lawall v. Rader, 24 Pa. St. 283; Carrier v. Dilworth, 59 Pa. St. 406; Richardson v. Cooper, 25 Me. 450; Lawrence v. Dole, 11 Vt. 549; Patrick v. Adams, 29 Vt. 376; Seibert v. Leonard, 17 Minn. 436, (Gil. 410;) Very v. Levy, 13 How. 345; 1 Smith, Lead. Cas. (6th Ed.) 576.

[17] Whether the evidence offered shows a valid consideration for the plaintiff's promise, or whether it shows that such promise, though without consideration, has been so acted on as to inure, by way of estoppel or otherwise, to release defendants from their obligation to drain, are questions that were fully discussed at the bar, but which we are not called upon to determine; for the objection is well taken by counsel for the plaintiffs, that the evidence embraced in the second and third offers is inadmissible under the pleadings.

[18] In their answer, the defendants allege an offer and promise by plaintiffs (made after the defendants had commenced work under the contract) to keep the land drained during the erection of the building. No consideration is alleged for this promise, and, as nudum pactum, it could of itself have no effect to vary the obligations imposed on the defendants by the sealed contract. The answer proceeds to allege “that the plaintiffs wholly and wrongfully failed and neglected to drain or cause to be drained the said piece of land, or any part of the same.” It is clear that the defendants would have no right to rely on this naked promise, followed by no acts of plaintiffs in part performance. If the defendants went on with the building, without taking the precaution to drain the land, they proceeded at their own risk. The answer sets up no facts on which an estoppel can be founded, and shows no defense to the action.

[19] But the defendants, at the trial, offered to prove, not only that the plaintiffs offered to drain the land, but also “that the plaintiffs did, for a time, keep the same drained,…but afterwards they neglected to do so,” etc. Assuming that the facts offered to be proved would constitute a defense, (and we are not prepared to say they would not,) no such defense is pleaded in the answer.

[20] The tendency of this proof was to establish a new defense, not pleaded, and to contradict, rather than to sustain, the allegations of the answer. For this reason it was inadmissible, even if the facts offered to be proved would, if admissible constitute a defense to the action. If the proof offered would have no such tendency, it was immaterial, and for this reason also was rightly excluded. And as all the evidence embraced in each offer was offered as a whole, and a part thereof was inadmissible, the entire offers were properly rejected.

[21] The objection that the evidence offered was “incompetent, irrelevant, and immaterial,” was sufficiently specific. The defendants' counsel must know the contents of the answer, and that evidence inconsistent therewith is inadmissible, if objected to.

[22] There was, therefore, no error in the exclusion of the evidence offered, and the order appealed from is affirmed.

 

1.1.1 Discussion of Stees v. Leonard

The owners allegedly promised but failed to keep the soil drained. Why did the Stees court refuse to entertain the argument that the owners’ promise had modified the original contract or that the builder had relied on that promise to its detriment?

What exactly did the contract in this case require the builder to do?

Did the parties discuss or negotiate over the possibility that the soil might be unable to support the building?

Try applying the comparative advantage criterion to this situation. Can you think of arguments that would support imposing the risk of poor soil conditions on the owner? On the builder?

1.1.2. Principal Case – Taylor v. Caldwell

Taylor v. Caldwell

King’s Bench

3 B. & S. 826, 112 Eng. Rep. 309 (1863)

Blackburn J.

[1] In this case the plaintiffs and defendants had, on the 27th May, 1861, entered into a contract by which the defendants agreed to let the plaintiffs have the use of The Surrey Gardens and Music Hall on four days then to come, viz., the 17th June, 15th July, 5th August and 19th August, for the purpose of giving a series of four grand concerts, and day and night fetes at the Gardens and Hall on those days respectively; and the plaintiffs agreed to take the Gardens and Hall on those days, and pay 100£ for each day. The parties inaccurately call this a "letting," and the money to be paid a "rent;" but the whole agreement is such as to shew that the defendants were to retain the possession of the Hall and Gardens so that there was to be no demise of them, and that the contract was merely to give the plaintiffs the use of them on those days. Nothing however, in our opinion, depends on this. The agreement then proceeds to set out various stipulations between the parties as to what each was to supply for these concerts and entertainments, and as to the manner in which they should be carried on. The effect of the whole is to shew that the existence of the Music Hall in the Surrey Gardens in a state fit for a concert was essential for the fulfilment of the contract—such entertainments as the parties contemplated in their agreement could not be given without it. After the making of the agreement, and before the first day on which a concert was to be given, the Hall was destroyed by fire. This destruction, we must take it on the evidence, was without the fault of either party, and was so complete that in consequence the concerts could not be given as intended. And the question we have to decide is whether, under these circumstances, the loss which the plaintiffs have sustained is to fall upon the defendants. The parties when framing their agreement evidently had not present to their minds the possibility of such a disaster, and have made no express stipulation with reference to it, so that the answer to the question must depend upon the general rules of law applicable to such a contract.

[2] There seems no doubt that where there is a positive contract to do a thing, not in itself unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burthensome or even impossible. The law is so laid down in 1 Roll. Abr. 450, Condition (G), and in the note (2) to Walton v. Waterhouse (2 Wms. Saund. 421 a. 6th ed.), and is recognised as the general rule by all the Judges in the much discussed case of Hall v. Wright (E. B. & E. 746). But this rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied: and there are authorities which, as we think, establish the principle that where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor. There seems little doubt that this implication tends to further the great object of making the legal construction such as to fulfil the intention of those who entered into the contract. For in the course of affairs men in making such contracts in general would, if it were brought to their minds, say that there should be such a condition. Accordingly, in the Civil law, such an exception is implied in every obligation of the class which they call obligatio de certo corpore. The rule is laid down in the Digest, lib. xLv., tit. l, de verborum obligationibus, 1. 33. "Si Stichus certo die dari promissus, ante diem moriatur: non tenetur promissor." The principle is more fully developed in l. 23. "Si ex legati causa, aut ex stipulatii hominem certum mihi debeas: non aliter post mortem ejus tenearis mihi, quam si per te steterit, quominus vivo eo eum mihi dares: quod ita fit, si aut interpellatus non dedisti, aut occidisti eum." The examples are of contracts respecting a slave, which was the common illustration of a certain subject used by the Roman lawyers, just as we are apt to take a horse; and no doubt the propriety, one might almost say necessity, of the implied condition is more obvious when the contract relates to a living animal, whether man or brute, than when it relates to some inanimate thing (such as in the present case a theatre) the existence of which is not so obviously precarious as that of the live animal, but the principle is adopted in the Civil law as applicable to every obligation of which the subject is a certain thing. The general subject is treated of by Pothier, who in his Traite des Obligations, partie 3, chap. 6, art. 3, § 668 states the result to be that the debtor corporis certi is freed from his obligation when the thing has perished, neither by his act, nor his neglect, and before he is in default, unless by some stipulation he has taken on himself the risk of the particular misfortune which has occurred.

[3] Although the Civil law is not of itself authority in an English Court, it affords great assistance in investigating the principles on which the law is grounded. And it seems to us that the common law authorities establish that in such a contract the same condition of the continued existence of the thing is implied by English law.

[4] There is a class of contracts in which a person binds himself to do something which requires to be performed by him in person; and such promises, e.g. promises to marry, or promises to serve for a certain time, are never in practice qualified by an express exception of the death of the party; and therefore in such cases the contract is in terms broken if the promisor dies before fulfilment. Yet it was very early determined that, if the performance is personal, the executors are not liable; Hyde v. The Dean of Windsor (Cro. Eliz. 552, 553). See 2 Wms. Exors. 1560, 5th ed., where a very apt illustration is given. "Thus," says the learned author, "if an author undertakes to compose a work, and dies before completing it, his executors are discharged from this contract: for the undertaking is merely personal in its nature, and, by the intervention of the contractor's death, has become impossible to be performed." For this he cites a dictum of Lord Lyndhurst in Marshall v. Broadhurst (1 Tyr. 348, 349), and a case mentioned by Patteson J. in Wentworth v. Cock (10 A. & E. 42, 45-46). In Hall v. Wright (E. B. & E. 746, 749), Crompton J., in his judgment, puts another case. "Where a contract depends upon personal skill, and the act of God renders it impossible, as, for instance, in the case of a painter employed to paint a picture who is struck blind, it may be that the performance might be excused."

[5] It seems that in those cases the only ground on which the parties or their executors, can be excused from the consequences of the breach of the contract is, that from the nature of the contract there is an implied condition of the continued existence of the life of the contractor, and, perhaps in the case of the painter of his eyesight. In the instances just given, the person, the continued existence of whose life is necessary to the fulfilment of the contract, is himself the contractor, but that does not seem in itself to be necessary to the application of the principle; as is illustrated by the following example. In the ordinary form of an apprentice deed the apprentice binds himself in unqualified terms to "serve until the full end and term of seven years to be fully complete and ended," during which term it is covenanted that the apprentice his master "faithfully shall serve," and the father of the apprentice in equally unqualified terms binds himself for the performance by the apprentice of all and every covenant on his part. (See the form, 2 Chitty on Pleading, 370, 7th ed. by Greening.) It is undeniable that if the apprentice dies within the seven years, the covenant of the father that he shall perform his covenant to serve for seven years is not fulfilled, yet surely it cannot be that an action would lie against the father? Yet the only reason why it would not is that he is excused because of the apprentice's death.

[6] These are instances where the implied condition is of the life of a human being, but there are others in which the same implication is made as to the continued existence of a thing. For example, where a contract of sale is made amounting to a bargain and sale, transferring presently the property in specific chattels, which are to be delivered by the vendor at a future day; there, if the chattels, without the fault of the vendor, perish in the interval, the purchaser must pay the price and the vendor is excused from performing his contract to deliver, which has thus become impossible.

[7] That this is the rule of the English law is established by the case of Rugg v. Minett (11 East, 210), where the article that perished before delivery was turpentine, and it was decided that the vendor was bound to refund the price of all those lots in which the property had not passed; but was entitled to retain without deduction the price of those lots in which the property had passed, though they were not delivered, and though in the conditions of sale, which are set out in the report, there was no express qualification of the promise to deliver on payment. It seems in that case rather to have been taken for granted than decided that the destruction of the thing sold before delivery excused the vendor from fulfilling his contract to deliver on payment.

[8] This also is the rule in the Civil law, and it is worth noticing that Pothier, in his celebrated Traite du Contrat de Vente (see Part. 4, § 307, etc.; and Part. 2, ch. 1, sect. 1, art. 4, § 1), treats this as merely an example of the more general rule that every obligation de certo corpore is extinguished when the thing ceases to exist. See Blackburn on the Contract of Sale, p. 173.

[9] The same principle seems to be involved in the decision of Sparrow v. Sowyate (W. Jones, 29), where, to an action of debt on an obligation by bail, conditioned for the payment of the debt or the render of the debtor, it was held a good plea that before any default in rendering him the principal debtor died. It is true that was the case of a bond with a condition, and a distinction is sometimes made in this respect between a condition and a contract. But this observation does not apply to Williams v. Lloyd (W. Jones, 179). In that case the count, which was in assumpsit, alleged that the plaintiff had delivered a horse to the defendant, who promised to redeliver it on request. Breach, that though requested to redeliver the horse he refused. Plea, that the horse was sick and died, and the plaintiff made the request after its death; and on demurrer it was held a good plea, as the bailee was discharged from his promise by the death of the horse without default or negligence on the part of the defendant. "Let it be admitted," say the Court, "that he promised to deliver it on request, if the horse die before, that is become impossible by the act of God, so the party shall be discharged, as much as if an obligation were made conditioned to deliver the horse on request, and he died before it." And Jones, adds the report, cited 22 Ass. 41, in which it was held that a ferryman who had promised to carry a horse safe across the ferry was held chargeable for the drowning of the animal only because he had overloaded the boat, and it was agreed, that notwithstanding the promise no action would have lain had there been no neglect or default on his part. It may, we think, be safely asserted to be now English law, that in all contracts of loan of chattels or bailments if the performance of the promise of the borrower or bailee to return the things lent or bailed, becomes impossible because it has perished, this impossibility (if not arising from the fault of the borrower or bailee from some risk which he has taken upon himself) excuses the borrower or bailee from the performance of his promise to redeliver the chattel. The great case of Coggs v. Bernard (1 Smith's L. C. 171, 5th ed.; 2 L. Raym. 909) is now the leading case on the law of bailments, and Lord Holt, in that case, referred so much to the Civil law that it might perhaps be thought that this principle was there derived direct from the civilians, and was not generally applicable in English law except in the ease of bailments; but the case of Williams v. Lloyd (W. Jones, 179), above cited, shews that the same law had been already adopted by the English law as early as The Book of Assizes. The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. In none of these cases is the promise in words other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel. In the present case, looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance.

[10] We think, therefore, that the Music Hall having ceased to exist, without fault of either party, both parties are excused, the plaintiffs from taking the gardens and paying the money, the defendants from performing their promise to give the use of the Hall and Gardens and other things. Consequently the rule must be absolute to enter the verdict for the defendants.

[11] Rule absolute.

1.2.1 Paradine v. Jane

Suppose that a rich Englishman rents a castle from a neighboring lord. Their brief lease agreement specifies a four-year term and a rental rate. It also makes the lessee responsible for ordinary maintenance during the term of the lease. Imagine now that the armies of Prince Rupert occupy the region and force the lessee to leave the property. Would the lessee be excused from paying rent during the occupation? Or is the lessor entitled to receive rental payments until the end of the lease term?

Here is what one court had to say about these questions:

[I]f a house be destroyed by tempest, or by enemies, the lessee is excused.… [W]hen the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. And therefore if the lessee covenant to repair a house, though it be burnt by lightning, or thrown down by enemies, yet he ought to repair it. Dyer 33.a. 40 E.3. 6.h. … Another reason was added, that as the lessee is to have the advantage of casual profits, so he must run the hazard of casual losses, and not lay the whole of the burthen of them upon his lessor; and Dyer 56.6 was cited for this purpose, that though the land be surrounded, or gained by the sea, or made barren by wildfire, yet the lessor shall have his whole rent: and judgment was given for the plaintiff.

Paradine v. Jane, Aleyn 26, 82 Eng. Rep. 897 (K.B. 1647).

1.2.2 Analyzing Risk

Economists and businesspeople often analyze contingencies using the framework of expected value. According to this approach, the magnitude of a risk (R) equals the product of its impact (I) and the probability (P) that the particular risk will materialize. The formula R = I · P summarizes this relationship and suggests the analytic usefulness of identifying these distinct components of risk.

Legal analysis of risk allocation often requires even more detailed attention to each party’s relationship with a particular risk. Consider, for example, the risk discussed in Taylor v. Caldwell that a shipment of turpentine will be burned at the docks before it reaches the purchaser. It may be helpful to think of three broad factors affecting the optimal allocation of this risk between the parties. First, which one of the parties is best able to assess the risk of fire? Who has better access to information or can gather relevant information at lower cost? Second, which party is best positioned to avoid the risk? Who can more cheaply take precautions to reduce the impact or probability of harm? Finally, which party could most easily insure against the risk?

1.2.3 Discussion of Taylor v. Caldwell

On what basis does the Taylor court decide to excuse Caldwell from performing his contractual obligation to provide the Surrey Gardens and Music Hall to Taylor? The court must decide how to allocate the risk that the music hall would be burned down before the first concert. Does the contract language play any role in the court’s decision? If not the contract language, then what is the source of the court’s rule for allocating this risk?

Suppose that one of your talented classmates contracts with you to provide high quality class notes covering each meeting of all of your first-semester courses. Tragically, this classmate dies before she has an opportunity to perform. How might the risk analysis framework outlined above apply to this risk? Are you or your classmate in a better position to assess, avoid or insure against the risk of her untimely demise? Is it helpful to consider separately the impact and probability of her death?

Does a similar analysis shed any light on how to allocate the risk that materialized in Taylor v. Caldwell? Can we draw any conclusions from this analysis about how to choose the socially optimal legal rule to govern excuse?

1.2. Mistake

We have already encountered contract doctrines that excuse performance when certain contingencies arise. In Stees v. Leonard, for example, the court observes that performance would have been excused if it were physically impossible to complete the building. Similarly, the court in Taylor v. Caldwell finds that the destruction of property necessary for performance excuses both parties’ duties under the contract. The doctrine of commercial impracticability modestly extends these principles to excuse a promisor when performance “has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.” U.C.C. § 2-615. See also Restatement (Second) of Contracts (1981) § 261 (“Discharge by Supervening Impracticability”) [hereinafter Restatement (Second)]. Finally, the common law also excuses performance when “a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.” Restatement (Second) § 265. Taken together, these doctrines establish a set of default rules for allocating the risk of events that make performance more difficult or impair the value of performance. However, the parties remain free to opt out of this default risk allocation by including appropriate language in their contract.

The rules governing unilateral and mutual mistake that we examine in this section are another example of default risk allocations. In these cases, one or both of the parties has made a contract based on a mistaken belief about important facts. As with the excuse doctrines, the parties may opt out with express language allocating the risk. Disputes most often arise, however, when neither party has anticipated the particular mistake and provided for it in the contract. As you read the cases that follow, try to determine what policy concerns affect the structure of these default rules.

The Restatement (Second) describes the mistake doctrines in the following terms:

§ 151 Mistake Defined

A mistake is a belief that is not in accord with the facts.

§ 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.

§ 153 When Mistake of One Party Makes a Contract Voidable

Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in § 154, and

(a) the effect of the mistake is such that enforcement of the contract would be unconscionable, or

(b) the other party had reason to know of the mistake or his fault caused the mistake.

§ 154 When a Party Bears the Risk of a Mistake

A party bears the risk of a mistake when

(a) the risk is allocated to him by agreement of the parties, or

(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or

(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

1.2.1. Principal Case – Sherwood v. Walker

Sherwood v. Walker

Supreme Court of Michigan

66 Mich. 568, 33 N.W. 919 (1887)

MORSE, J.

[1] Replevin for a cow. Suit commenced in justice's court; judgment for plaintiff; appealed to circuit court of Wayne county, and verdict and judgment for plaintiff in that court. The defendants bring error, and set out 25 assignments of the same.

[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. 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 inclose 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.

The order upon Graham inclosed 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. On the nineteenth of May, the plaintiff wrote Graham as follows:

PLYMOUTH, May 19, 1886.

Mr. George Graham, Greenfield-DEAR SIR: I have bought Rose or Lucy from Mr. Walker, and will be there for her Friday morning, nine or ten o'clock. Do not water her in the morning.

Yours, etc., T.C. SHERWOOD.

[5] Plaintiff explained the mention of the two cows in this letter by testifying that, when he wrote this letter, the order and letter of defendants was at his home, and, writing in a hurry, and being uncertain as to the name of the cow, and not wishing his cow watered, he thought it would do no harm to name them both, as his bill of sale would show which one he had purchased. Plaintiff also testified that he asked defendants to give him a price on the balance of their herd at Greenfield, as a friend thought of buying some, and received a letter dated May 17, 1886, in which they named the price of five cattle, including Lucy, at $90, and Rose 2d at $80. When he received the letter he called defendants up by telephone, and asked them why they put Rose 2d in the list, as he had already purchased her. They replied that they knew he had, but thought it would make no difference if plaintiff and his friend concluded to take the whole herd.

[6] The foregoing is the substance of all the testimony in the case.

[7] The circuit judge instructed the jury that if they believed the defendants, when they sent the order and letter to plaintiff, meant to pass the title to the cow, and that the cow was intended to be delivered to plaintiff, it did not matter whether the cow was weighed at any particular place, or by any particular person; and if the cow was weighed afterwards, as Sherwood testified, such weighing would be a sufficient compliance with the order. If they believed that defendants intended to pass the title by writing, it did not matter whether the cow was weighed before or after suit brought, and the plaintiff would be entitled to recover. The defendants submitted a number of requests which were refused. The substance of them was that the cow was never delivered to plaintiff, and the title to her did not pass by the letter and order; and that under the contract, as evidenced by these writings, the title did not pass until the cow was weighed and her price thereby determined; and that, if the defendants only agreed to sell a cow that would not breed, then the barrenness of the cow was a condition precedent to passing title, and plaintiff cannot recover. The court also charged the jury that it was immaterial whether the cow was with calf or not. It will therefore be seen that the defendants claim that, as a matter of law, the title of this cow did not pass, and that the circuit judge erred in submitting the case to the jury, to be determined by them, upon the intent of the parties as to whether or not the title passed with the sending of the letter and order by the defendants to the plaintiff.

[Paragraphs 8-13 discuss the comparatively arcane (and now archaic) issue of passing legal title to the cow. This portion of the opinion is not central to understanding mistake doctrine and thus you may feel free to skim until you reach paragraph 14.]

[8] This question as to the passing of title is fraught with difficulties, and not always easy of solution. An examination of the multitude of cases bearing upon this subject, with their infinite variety of facts, and at least apparent conflict of law, ofttimes tends to confuse rather than to enlighten the mind of the inquirer. It is best, therefore, to consider always, in cases of this kind, the general principles of the law, and then apply them as best we may to the facts of the case in hand.

[9] The cow being worth over $50, the contract of sale, in order to be valid, must be one where the purchaser has received or accepted part of the goods, or given something in earnest, or in part payment, or where the seller has signed some note or memorandum in writing. How.St. § 6186. Here there was no actual delivery, nor anything given in payment or in earnest, but there was a sufficient memorandum signed by the defendants to take the case out of the statute, if the matter contained in such memorandum is sufficient to constitute a completed sale. It is evident from the letter that the payment of the purchase price was not intended as a condition precedent to the passing of the title. Mr. Sherwood is given his choice to pay the money to Graham at King's cattle-yards, or to send check by mail.

[10] Nor can there be any trouble about the delivery. The order instructed Graham to deliver the cow, upon presentation of the order, at such cattle-yards. But the price of the cow was not determined upon to a certainty. Before this could be ascertained, from the terms of the contract, the cow had to be weighed; and, by the order inclosed with the letter, Graham was instructed to have her weighed. If the cow had been weighed, and this letter had stated, upon such weight, the express and exact price of the animal, there can be no doubt but the cow would have passed with the sending and receipt of the letter and order by the plaintiff. Payment was not to be a concurrent act with the delivery, and therein this case differs from Case v. Dewey, 55 Mich. 116, 20 N.W.Rep. 817, and 21 N.W.Rep. 911. Also, in that case, there was no written memorandum of the sale, and a delivery was necessary to pass the title of the sheep; and it was held that such delivery could only be made by a surrender of the possession to the vendee, and an acceptance by him. Delivery by an actual transfer of the property from the vendor to the vendee, in a case like the present, where the article can easily be so transferred by a manual act, is usually the most significant fact in the transaction to show the intent of the parties to pass the title, but it never has been held conclusive. Neither the actual delivery, nor the absence of such delivery, will control the case, where the intent of the parties is clear and manifest that the matter of delivery was not a condition precedent to the passing of the title, or that the delivery did not carry with it the absolute title. The title may pass, if the parties so agree, where the statute of frauds does not interpose without delivery, and property may be delivered with the understanding that the title shall not pass until some condition is performed.

[11]  And whether the parties intended the title should pass before delivery or not is generally a question of fact to be determined by a jury. In the case at bar the question of the intent of the parties was submitted to the jury. This submission was right, unless from the reading of the letter and the order, and all the facts of the oral bargaining of the parties, it is perfectly clear, as a matter of law, that the intent of the parties was that the cow should be weighed, and the price thereby accurately determined, before she should become the property of the plaintiff. I do not think that the intent of the parties in this case is a matter of law, but one of fact. The weighing of the cow was not a matter that needed the presence or any act of the defendants, or any agent of theirs, to be well or accurately done. It could make no difference where or when she was weighed, if the same was done upon correct scales, and by a competent person. There is no pretense but what her weight was fairly ascertained by the plaintiff. The cow was specifically designated by this writing, and her delivery ordered, and it cannot be said, in my opinion, that the defendants intended that the weighing of the animal should be done before the delivery even, or the passing of title. The order to Graham is to deliver her, and then follows the instruction, not that he shall weigh her himself, or weigh her, or even have her weighed, before delivery, but simply, “Send halter with the cow, and have her weighed.”

[12] It is evident to my mind that they had perfect confidence in the integrity and responsibility of the plaintiff, and that they considered the sale perfected and completed when they mailed the letter and order to plaintiff. They did not intend to place any conditions precedent in the way, either of payment of the price, or the weighing of the cow, before the passing of the title. They cared not whether the money was paid to Graham, or sent to them afterwards, or whether the cow was weighed before or after she passed into the actual manual grasp of the plaintiff. The refusal to deliver the cow grew entirely out of the fact that, before the plaintiff called upon Graham for her, they discovered she was not barren, and therefore of greater value than they had sold her for.

[13] The following cases in this court support the instruction of the court below as to the intent of the parties governing and controlling the question of a completed sale, and the passing of title: Lingham v. Eggleston, 27 Mich. 324; Wilkinson v. Holiday, 33 Mich. 386; Grant v. Merchants' & Manufacturers' Bank, 35 Mich. 527; Carpenter v. Graham, 42 Mich. 194, 3 N.W.Rep. 974; Brewer v. Michigan Salt Ass'n, 47 Mich. 534, 11 N.W.Rep. 370; Whitcomb v. Whitney, 24 Mich. 486; Byles v. Colier, 54 Mich. 1, 19 N.W.Rep. 565; Scotten v. Sutter, 37 Mich. 527, 532; Ducey Lumber Co. v. Lane, 58 Mich. 520, 525, 25 N.W.Rep. 568; Jenkinson v. Monroe, 28 N.W.Rep. 663.

[14]  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. 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. 1 Benj. Sales, §§ 605, 606; Leake, Cont. 339; Story, Sales, (4th Ed.) §§ 377, 148. See, also, Cutts v. Guild, 57 N.Y. 229; Harvey v. Harris, 112 Mass. 32; Gardner v. Lane, 9 Allen, 492, 12 Allen, 44; Huthmacher v. Harris' Adm'rs, 38 Pa.St. 491; Byers v. Chapin, 28 Ohio St. 300; Gibson v. Pelkie, 37 Mich. 380, and cases cited; Allen v. Hammond, 11 Pet. 63-71.

[15] 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.

[16]  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. 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 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.

[17] 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., [who, despite his name, is unrelated to the plaintiff] (dissenting)

[18]  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. I agree with my Brother MORSE that the contract made was not within the statute of frauds, and the payment for the property was not a condition precedent to the passing of the title from the defendants to the plaintiff. And I further agree with him that the plaintiff was entitled to a delivery of the property to him when the suit was brought, unless there was a mistake made which would invalidate the contract, and I can find no such mistake. There is no pretense there was any fraud or concealment in the case, and an intimation or insinuation that such a thing might have existed on the part of either of the parties would undoubtedly be a greater surprise to them than anything else that has occurred in their dealings or in the case.

[19] As has already been stated by my brethren, the record shows that the plaintiff is a banker and farmer as well, carrying on a farm, and raising the best breeds of stock, and lived in Plymouth, in the county of Wayne, 23 miles from Detroit; that the defendants lived in Detroit, and were also dealers in stock of the higher grades; that they had a farm at Walkerville, in Canada, and also one in Greenfield in said county of Wayne, and upon these farms the defendants kept their stock. The Greenfield farm was about 15 miles from the plaintiff's. In the spring of 1886 the plaintiff, learning that the defendants had some “polled Angus cattle” for sale, was desirous of purchasing some of that breed, and meeting the defendants, or some of them, at Walkerville, inquired about them, and was informed that they had none at Walkerville, “but had a few head left on their farm in Greenfield, and asked the plaintiff to go and see them, stating that in all probability they were sterile and would not breed.” In accordance with said request, the plaintiff, on the fifth day of May, went out and looked at the defendants' cattle at Greenfield, and found one called “Rose, Second,” which he wished to purchase, and the terms were finally agreed upon at five and a half cents per pound, live weight, 50 pounds to be deducted for shrinkage. The sale was in writing, and the defendants gave an order to the plaintiff directing the man in charge of the Greenfield farm to deliver the cow to plaintiff. This was done on the fifteenth of May. On the twenty-first of May plaintiff went to get his cow, and the defendants refused to let him have her; claiming at the time that the man in charge at the farm thought the cow was with calf, and, if such was the case, they would not sell her for the price agreed upon. The record further shows that the defendants, when they sold the cow, believed the cow was not with calf, and barren; that from what the plaintiff had been told by defendants (for it does not appear he had any other knowledge or facts from which he could form an opinion) he believed the cow was farrow, but still thought she could be made to breed. The foregoing shows the entire interview and treaty between the parties as to the sterility and qualities of the cow sold to the plaintiff. The cow had a calf in the month of October.

[20]  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.

[21] It is claimed that a mutual mistake of a material fact was made by the parties when the contract of sale was made. There was no warranty in the case of the quality of the animal. When a mistaken fact is relied upon as ground for rescinding, such fact must not only exist at the time the contract is made, but must have been known to one or both of the parties. Where there is no warranty, there can be no mistake of fact when no such fact exists, or, if in existence,neither party knew of it, or could know of it; and that is precisely this case. If the owner of a Hambletonian horse had speeded him, and was only able to make him go a mile in three minutes, and should sell him to another, believing that was his greatest speed, for $300, when the purchaser believed he could go much faster, and made the purchase for that sum, and a few days thereafter, under more favorable circumstances, the horse was driven a mile in 2 min. 16 sec., and was found to be worth $20,000, I hardly think it would be held, either at law or in equity, by any one, that the seller in such case could rescind the contract. The same legal principles apply in each case.

[22] In this case neither party knew the actual quality and condition of this cow at the time of the sale. The defendants say, or rather said, to the plaintiff, “they had a few head left on their farm in Greenfield, and asked plaintiff to go and see them, stating to plaintiff that in all probability they were sterile and would not breed.” Plaintiff did go as requested, and found there these cows, including the one purchased, with a bull. The cow had been exposed, but neither knew she was with calf or whether she would breed. The defendants thought she would not, but the plaintiff says that he thought she could be made to breed, but believed she was not with calf. The defendants sold the cow for what they believed her to be, and the plaintiff bought her as he believed she was, after the statements made by the defendants. No conditions whatever were attached to the terms of sale by either party. It was in fact as absolute as it could well be made, and I know of no precedent as authority by which this court can alter the contract thus made by these parties in writing—interpolate in it a condition by which, if the defendants should be mistaken in their belief that the cow was barren, she could be returned to them and their contract should be annulled. It is not the duty of courts to destroy contracts when called upon to enforce them, after they have been legally made. There was no mistake of any material fact by either of the parties in the case as would license the vendors to rescind. There was no difference between the parties, nor misapprehension, as to the substance of the thing bargained for, which was a cow supposed to be barren by one party, and believed not to be by the other. As to the quality of the animal, subsequently developed, both parties were equally ignorant, and as to this each party took his chances. If this were not the law, there would be no safety in purchasing this kind of stock.

[23] I entirely agree with my brethren that the right to rescind occurs whenever “the thing actually delivered or received is different in substance from the thing bargained for, and intended to be sold; but if it be only a difference in some quality or accident, even though the misapprehension may have been the actuating motive” of the parties in making the contract, yet it will remain binding. In this case the cow sold was the one delivered. What might or might not happen to her after the sale formed no element in the contract. The case of Kennedy v. Panama Mail Co., L.R. 2 Q.B. 587, and the extract cited therefrom in the opinion of my brethren, clearly sustains the views I have taken. See, also, Smith v. Hughes, L.R. 6 Q.B. 597; Carter v. Crick, 4 Hurl. & N. 416.

[24] According to this record, whatever the mistake was, if any, in this case, it was upon the part of the defendants, and while acting upon their own judgment. It is, however, elementary law, and very elementary, too, “that the mistaken party, without any common understanding with the other party in the premises as to the quality of an animal, is remediless if he is injured through his own mistake.” Leake, Cont. 338; Torrance v. Bolton, L.R. 8 Ch. 118; Smith v. Hughes, L.R. 6 Q.B. 597.

[25] The case cited by my brethren from 37 Mich. I do not think sustains the conclusion reached by them. In that case the subject-matter about which the contract was made had no existence, and in such case Mr. Justice GRAVES held there was no contract; and to the same effect are all the authorities cited in the opinion. That is certainly not this case. Here the defendants claim the subject-matter not only existed, but was worth about $800 more than the plaintiff paid for it.

[26] The case of Huthmacher v. Harris, 38 Pa. St. 491, is this: A party purchased at an administrator's sale a drill-machine, which had hid away in it by the deceased a quantity of notes, to the amount of $3,000, money to the amount of over $500, and two silver watches and a pocket compass of the value of $60.25. In an action of trover for the goods, it was held that nothing but the machine was sold or passed to the purchasers, neither party knowing that the machine contained any such articles.

[27] In Cutts v. Guild, 57 N.Y. 229, the defendant, as assignee, recovered a judgment against D. & H. He also recovered several judgments in his own name on behalf of the T. Co. The defendant made an assignment of and transferred the first judgment to an assignee of the plaintiff—both parties supposing and intending to transfer one of the T. Co. judgments—and it was held that such contract of assignment was void, because the subject-matter contained in the assignment was not contracted for.

[28] In the case of Byers v. Chapin, 28 Ohio St. 300, the defendant sold the plaintiffs 5,000 oil barrels. The plaintiffs paid $5,000 upon their purchase, and took some of the barrels. The barrels proved to be unfit for use, and the contract was rescinded by consent of the parties. The defendant, instead of returning all the money paid to the purchaser, retained a portion and gave plaintiffs his note for the remainder. The plaintiffs brought suit upon this note. The defendant claimed that, under the contract of sale of the barrels, they were to be glued by the plaintiffs, which the plaintiffs properly failed to do, and this fact was not known to defendant when he agreed to rescind, and gave the note, and therefore the note was given upon a mistaken state of facts, falsely represented to the defendant, and which were known to the plaintiffs. On the proofs, the jury found for the defendant, and the verdict was affirmed.

[29] In Gardner v. Lane, 9 Mass. 492, it is decided that if, upon a sale of No. 1 mackerel, the vendor delivers No. 3 mackerel, and some barrels of salt, no title to the articles thus delivered passes.

[30]  Allen v. Hammond, 11 Pet. 63, decides that if a life-estate in land is sold, and at the time of the sale the estate is terminated by the death of the person in whom the right vested, a court of equity will rescind the purchase.

[31] In Harvey v. Harris, 112 Mass. 32, at an auction, two different grades of flour were sold, and a purchaser of the second claimed to have bought a quantity of the first grade, under a sale made of the second, and this he was not allowed to do, because of the mutual mistake; the purchaser had not in fact bought the flour he claimed. In this case, however, it is said it is true that, if there is a mutual agreement of the parties for the sale of particular articles of property, a mistake of misapprehension as to the quality of the articles will not enable the vendor to repudiate the sale.

[32] The foregoing are all the authorities relied on as supporting the positions taken by my brethren in this case. I fail to discover any similarity between them and the present case; and I must say, further, in such examination as I have been able to make, I have found no adjudicated case going to the extent, either in law or equity, that has been held in this case. In this case, if either party had superior knowledge as to the qualities of this animal to the other, certainly the defendants had such advantage. I understand the law to be well settled that “there is no breach of any implied confidence that one party will not profit by his superior knowledge as to facts and circumstances” actually within the knowledge of both, because neither party reposes in any such confidence unless it be specially tendered or required, and that a general sale does not imply warranty of any quality, or the absence of any; and if the seller represents to the purchaser what he himself believes as to the qualities of an animal, and the purchaser buys relying upon his own judgment as to such qualities, there is no warranty in the case, and neither has a cause of action against the other if he finds himself to have been mistaken in judgment.

[33] The only pretense for avoiding this contract by the defendants is that they erred in judgment as to the qualities and value of the animal. I think the principles adopted by Chief Justice CAMPBELL in Williams v. Spurr completely cover this case, and should have been allowed to control in its decision. See 24 Mich. 335. See, also, Story, Sales, §§ 174, 175, 382, and Benj. Sales, § 430. The judgment should be affirmed.

 

2.1.1 The Story of Sherwood v. Walker

A recently published law review article provides a wealth of background information about the parties (and the cow) involved in Sherwood v. Walker. It appears that Hiram Walker, the seller, was the moving force behind the famous brand of Canadian Club Whiskey, and the buyer Theodore Clark Sherwood was a prominent banker who went on to found a financial institution that eventually became a part of Bank One. We also learn from the article that after losing in the Michigan Supreme Court, Sherwood purchased Rose the 2d from Walker for an undisclosed price. See Norman Otto Stockmeyer, To Err Is Human, To Moo Bovine: The Rose of Aberlone Story, 24 Thomas Cooley L. Rev. 491 (2007).

2.1.2 Lenawee County Bd. of Health v. Messerly

In a subsequent case, Lewanee County Bd. of Health v. Messerly, 331 N.W.2d 203 (Mich. 1982), the Michigan Supreme Court had occasion to revisit the Sherwood v. Walker decision and expressed its frustration with the distinction the earlier case had drawn between mistakes that go to the “essence of the consideration” from those affecting merely its “quality or value.” The court had this to say about the Sherwood opinion:

[Sherwood] arguably distinguishes mistakes affecting the essence of the consideration from those which go to its quality or value, affording relief on a per se basis for the former but not the latte…. However, the distinctions which may be drawn from Sherwood … do not provide a satisfactory analysis of the nature of a mistake sufficient to invalidate a contract. Often, a mistake relates to an underlying factual assumption which, when discovered, directly affects value, but simultaneously and materially affects the essence of the contractual consideration. It is disingenuous to label such a mistake collateral…. [The parties in this case] both mistakenly believed that the property which was the subject of their land contract would generate income as rental property. The fact that it could not be used for human habitation deprived the property of its income earning potential and rendered it less valuable. However, this mistake, while directly and dramatically affecting the property’s value, cannot accurately be characterized as collateral because it affects the very essence of the consideration…. We find that the inexact and confusing distinction between contractual mistakes running to value and those touching the substance of the consideration serves only as an impediment to a clear and helpful analysis for the equitable resolution of cases in which mistake is alleged and proven. Accordingly, the [holding of Sherwood is limited to the facts of that case.]

In Messerly, the parties’ contract included an express “as is” clause. The following passage shows how such a clause is relevant to analyzing under Restatement (Second) § 154 whether the risk of mistake has been allocated to one of the parties.

In cases of mistake by two equally blameless parties, we are required, in the exercise of our equitable powers, to determine which blameless party should assume the loss resulting from the misapprehension they shared. Normally that can only be done by drawing upon our “own notions of what is reasonable and just under all the surrounding circumstances….” Equity suggests that, in this case, the risk should be allocated to the purchasers. We are guided to that conclusion, in part, by the standards announced in § 154 of the Restatement of Contracts, [Second], for determining when a party bears the risk of mistake…. Section 154(a) suggests that the court should look first to whether the parties have agreed to the allocation of the risk between themselves. While there is no express assumption in the contract by either party of the risk of the property becoming uninhabitable, there was indeed some agreed allocation of the risk to the vendees by the incorporation of an “as is” clause into the contract…. [The incorporation] of this clause is a persuasive indication that, as between them, such risk as related to the “present condition” of the property should lie with the purchaser. If the “as is” clause is to have any meaning at all, it must be interpreted to refer to those defects which were unknown at the time that contract was executed.

Id. at 31–32.

Despite the Messerly court’s disapproval of the reasoning in Sherwood, Professor Stockmeyer notes that Sherwood remains a staple of Contracts casebooks and treatises. He also defends the case’s vitality as legal authority in Michigan. Stockmeyer concludes:

Perhaps most tellingly of all, in a 2006 mutual mistake case, Ford Motor Co. v. Woodhaven, a unanimous Michigan Supreme Court discussed Sherwood at length, ignored [Messerly] completely, and announced that Rose’s case was still viable: “Our review of our precedents involving the law of mistake indicates that the peculiar and appropriate meaning that the term ‘mutual mistake’ has acquired in our law has not changed since Sherwood.”

Stockmeyer, supra, at 501-02.

Although Stockmeyer’s account is correct as far as it goes, Ford Motor Co. v. Woodhaven may tell us less about the law of mistake in Michigan than he supposes. The Ford Motor court relies explicitly on the Sherwood majority’s understanding of the facts—particularly their highly questionable assertion that neither of the parties to the sale contract thought that Rose could be made to breed. With this important limitation in mind, it is perhaps more accurate to say that Ford Motor reaffirmed an uncontroversial proposition—If two parties are both mistaken about a fundamental attribute of the good they are exchanging, then the doctrine of mutual mistake makes it possible to argue for rescission. As our discussion of Sherwood v. Walker will reveal, however, the majority’s opinion also makes far less defensible claims about the parties’ beliefs and about the importance of a distinction between the “substance” and a mere “quality” of the item being exchanged. The Ford Motor court has nothing whatsoever to say about these more controversial aspects of Sherwood.

2.1.3 Discussion of Sherwood v. Walker

What is the best argument that you could make on behalf of Walker (the seller)?

How would you argue the case for Sherwood?

Was this case correctly decided?

1.2.2. Principal Case – Anderson v. O’Meara

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 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 off-shore 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 $35,000 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.

[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 $29,000, 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. 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; Hayman v. Dowda, Tex.Civ.App., 233 S.W.2d 466; Bryan v. Dallas National Bank, Tex.Civ.App., 135 S.W.2d 249; 58 C.J.S. Mistake, p. 832. 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-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.  See 3 Corbin, Contracts 692, § 610. 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.” Moreover, the appellee contends that the appellant's knowledge of his intended use of the dredge was conclusively established by the testimony of two of the appellant's employees, because, on the authority of Griffin v. Superior Insurance Co., 161 Tex. 195, 338 S.W.2d 415, this testimony constitutes admissions, conclusive against the appellant. In the Griffin case, it was held that a party's testimony must be “deliberate, clear and unequivocal” before it is conclusive against him. The testimony on which the appellee relies falls short of being “clear and unequivocal.” If the statement of one witness were taken as conclusive, it would not establish that he knew the appellee intended to use the dredge as a sweep dredge,  and the other witness spoke with incertitude.  The testimony is not conclusive and is only one factor to be considered by the finder of facts. See 9 Wigmore, Evidence (3d Ed.) 397, 2594a.

[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. Smith v. United States, 5th Cir. 1961, 287 F.2d 299; Levine v. Johnson, 5th Cir. 1961, 287 F.2d 623; Horton v. U.S. Steel Corp., 5th Cir. 1961, 286 F.2d 710. 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. Edwards v. Trinity & B.V.R. Co., 54 Tex. Civ.App. 334, 118 S.W. 572; 13 Tex.Jur.2d 481, Contracts § 257; Annot., 59 A.L.R. 809. 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. Wheeler v. Holloway, Tex.Com.App. 276 S.W. 653; Ebberts v. Carpenter Production Co., Tex.Civ.App., 256 S.W.2d 601; American Maid Flour Mills v. Lucia, Tex.Civ.App., 285 S.W. 641; Cole v. Kjellberg, Tex.Civ.App., 141 S.W. 120; Edwards v. Trinity & B.V.R. Co., supra; 13 Tex.Jur.2d 482, Contracts § 258. It has been stated that “though 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.” American Maid Flour Mills v. Lucia, supra. 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. Annot., 1 A.L.R.2d 9, 89; see 30 C.J.S. Equity § 47, p. 376. Whether the mistaken party's negligence will preclude relief depends to a great extent upon the circumstances in each instance. Edwards v. Trinity & B.V.R. Co., supra.

[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 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 appellant is in the same position as the party seeking relief on the grounds of mistake in Wheeler v. Holloway, supra, and the same result must follow. In the Wheeler case it was held that relief should be denied where the mistaken party exercised ‘no diligence whatever’ in ascertaining the readily accessible facts before he entered into a contract.

[15] 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.

2.2.1 Discussion of Anderson v. O’Meara

What is the best way to frame the case for Anderson (the seller)?

Does the testimony recounted in footnotes 4 and 5 present any problem for your argument?

How might you respond to the buyer’s reliance on this testimony?

How do the relevant Restatement (Second) sections apply to this case?

Are there any provisions of the Restatement (Second) that permit a court to use a comparative advantage analysis in this situation?

2.2.2 Hypo of the Sterile Calf

Suppose that Max Backus, a Texas cattle breeder attends an auction in search of promising breeding stock. He purchases one Rob of Aberdeen, a 16-day old bull calf for a price of $5,000. The minimum age at which the fertility of a bull can be determined is about one year. When the calf is 18 months old, veterinary tests establish conclusively that the calf was incurably sterile at birth. If the parties had known about the calf’s condition, Rob would have been worth only $30 at the time of the auction.

Backus now seeks rescission of the sale contract. What arguments would you expect the parties to make and what is the most likely outcome of the case?

1.3. Substantial Performance
1.3.1. Principal Case – Jacob & Youngs v. Kent

The following case involves a dispute about the brand of pipe installed in the defendant’s newly constructed “country residence.” As you read the case, consider what the defendant might have done differently to ensure that the court would respect his professed desire for Reading pipe.

Jacob & Youngs v. Kent

Court of Appeals of New York

230 N.Y. 239, 129 N.E. 889 (1921)

Cardozo, J.

[1] The plaintiff built a country residence for the defendant at a cost of upwards of $77,000, and now sues to recover a balance of $3,483.46, remaining unpaid. The work of construction ceased in June, 1914, and the defendant then began to occupy the dwelling. There was no complaint of defective performance until March, 1915. One of the specifications for the plumbing work provides that” 'all wrought iron pipe must be well galvanized, lap welded pipe of the grade known as 'standard pipe' of Reading manufacture.” The defendant learned in March, 1915, that some of the pipe, instead of being made in Reading, was the product of other factories. The plaintiff was accordingly directed by the architect to do the work anew. The plumbing was then encased within the walls except in a few places where it had to be exposed. Obedience to the order meant more than the substitution of other pipe. It meant the demolition at great expense of substantial parts of the completed structure. The plaintiff left the work untouched, and asked for a certificate that the final payment was due. Refusal of the certificate was followed by this suit.

[2] The evidence sustains a finding that the omission of the prescribed brand of pipe was neither fraudulent nor willful. It was the result of the oversight and inattention of the plaintiff's subcontractor. Reading pipe is distinguished from Cohoes pipe and other brands only by the name of the manufacturer stamped upon it at intervals of between six and seven feet. Even the defendant's architect, though he inspected the pipe upon arrival, failed to notice the discrepancy. The plaintiff tried to show that the brands installed, though made by other manufacturers, were the same in quality, in appearance, in market value and in cost as the brand stated in the contract—that they were, indeed, the same thing, though manufactured in another place. The evidence was excluded, and a verdict directed for the defendant. The Appellate Division reversed, and granted a new trial.

[3] We think the evidence, if admitted, would have supplied some basis for the inference that the defect was insignificant in its relation to the project. The courts never say that one who makes a contract fills the measure of his duty by less than full performance. They do say, however, that an omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting damage, and will not always be the breach of a condition to be followed by a forfeiture (Spence v. Ham, 163 N. Y. 220; Woodward v. Fuller, 80 N. Y. 312; Glacius v. Black, 67 N. Y. 563, 566; Bowen v. Kimbell, 203 Mass. 364, 370). The distinction is akin to that between dependent and independent promises, or between promises and conditions (Anson on Contracts [Corbin's ed.], sec. 367; 2 Williston on Contracts, sec. 842). Some promises are so plainly independent that they can never by fair construction be conditions of one another. (Rosenthal Paper Co. v. Nat. Folding Box & Paper Co., 226 N. Y. 313; Bogardus v. N. Y. Life Ins. Co., 101 N. Y. 328). Others are so plainly dependent that they must always be conditions. Others, though dependent and thus conditions when there is departure in point of substance, will be viewed as independent and collateral when the departure is insignificant (2 Williston on Contracts, secs. 841, 842; Eastern Forge Co. v. Corbin, 182 Mass. 590, 592; Robinson v. Mollett, L. R., 7 Eng. & Ir. App. 802, 814; Miller v. Benjamin, 142 N. Y. 613). Considerations partly of justice and partly of presumable intention are to tell us whether this or that promise shall be placed in one class or in another. The simple and the uniform will call for different remedies from the multifarious and the intricate. The margin of departure within the range of normal expectation upon a sale of common chattels will vary from the margin to be expected upon a contract for the construction of a mansion or a “skyscraper.” There will be harshness sometimes and oppression in the implication of a condition when the thing upon which labor has been expended is incapable of surrender because united to the land, and equity and reason in the implication of a like condition when the subject-matter, if defective, is in shape to be returned. From the conclusion that promises may not be treated as dependent to the extent of their uttermost minutiae without a sacrifice of justice, the progress is a short one to the conclusion that they may not be so treated without a perversion of intention. Intention not otherwise revealed may be presumed to hold in contemplation the reasonable and probable. If something else is in view, it must not be left to implication. There will be no assumption of a purpose to visit venial faults with oppressive retribution.

[4] Those who think more of symmetry and logic in the development of legal rules than of practical adaptation to the attainment of a just result will be troubled by a classification where the lines of division are so wavering and blurred. Something, doubtless, may be said on the score of consistency and certainty in favor of a stricter standard. The courts have balanced such considerations against those of equity and fairness, and found the latter to be the weightier. The decisions in this state commit us to the liberal view, which is making its way, nowadays, in jurisdictions slow to welcome it (Dakin & Co. v. Lee, 1916, 1 K. B. 566, 579). Where the line is to be drawn between the important and the trivial cannot be settled by a formula. “In the nature of the case precise boundaries are impossible” (2 Williston on Contracts, sec. 841). The same omission may take on one aspect or another according to its setting. Substitution of equivalents may not have the same significance in fields of art on the one side and in those of mere utility on the other. Nowhere will change be tolerated, however, if it is so dominant or pervasive as in any real or substantial measure to frustrate the purpose of the contract (Crouch v. Gutmann, 134 N. Y. 45, 51). There is no general license to install whatever, in the builder's judgment, may be regarded as “just as good” (Easthampton L. & C. Co., Ltd., v. Worthington, 186 N. Y. 407, 412). The question is one of degree, to be answered, if there is doubt, by the triers of the facts (Crouch v. Gutmann; Woodward v. Fuller, supra), and, if the inferences are certain, by the judges of the law (Easthampton L. & C. Co., Ltd., v. Worthington, supra). We must weigh the purpose to be served, the desire to be gratified, the excuse for deviation from the letter, the cruelty of enforced adherence. Then only can we tell whether literal fulfilment is to be implied by law as a condition. This is not to say that the parties are not free by apt and certain words to effectuate a purpose that performance of every term shall be a condition of recovery. That question is not here. This is merely to say that the law will be slow to impute the purpose, in the silence of the parties, where the significance of the default is grievously out of proportion to the oppression of the forfeiture. The willful transgressor must accept the penalty of his transgression (Schultze v. Goodstein, 180 N. Y. 248, 251; Desmond-Dunne Co. v. Friedman-Doscher Co., 162 N. Y. 486, 490). For him there is no occasion to mitigate the rigor of implied conditions. The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong (Spence v. Ham, supra).

[5] In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing. Some of the exposed sections might perhaps have been replaced at moderate expense. The defendant did not limit his demand to them, but treated the plumbing as a unit to be corrected from cellar to roof. In point of fact, the plaintiff never reached the stage at which evidence of the extent of the allowance became necessary. The trial court had excluded evidence that the defect was unsubstantial, and in view of that ruling there was no occasion for the plaintiff to go farther with an offer of proof. We think, however, that the offer, if it had been made, would not of necessity have been defective because directed to difference in value. It is true that in most cases the cost of replacement is the measure (Spence v. Ham, supra). The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value. Specifications call, let us say, for a foundation built of granite quarried in Vermont. On the completion of the building, the owner learns that through the blunder of a subcontractor part of the foundation has been built of granite of the same quality quarried in New Hampshire. The measure of allowance is not the cost of reconstruction. “There may be omissions of that which could not afterwards be supplied exactly as called for by the contract without taking down the building to its foundations, and at the same time the omission may not affect the value of the building for use or otherwise, except so slightly as to be hardly appreciable.” (Handy v. Bliss, 204 Mass. 513, 519. Cf. Foeller v. Heintz, 137 Wis. 169, 178; Oberlies v. Bullinger, 132 N. Y. 598, 601; 2 Williston on Contracts, sec. 805, p. 1541) The rule that gives a remedy in cases of substantial performance with compensation for defects of trivial or inappreciable importance, has been developed by the courts as an instrument of justice. The measure of the allowance must be shaped to the same end.

[6] The order should be affirmed, and judgment absolute directed in favor of the plaintiff upon the stipulation, with costs in all courts.

McLaughlin, J. (dissenting).

[7] I dissent. The plaintiff did not perform its contract. Its failure to do so was either intentional or due to gross neglect which, under the uncontradicted facts, amounted to the same thing, nor did it make any proof of the cost of compliance, where compliance was possible.

[8] Under its contract it obligated itself to use in the plumbing only pipe (between 2,000 and 2,500 feet) made by the Reading Manufacturing Company. The first pipe delivered was about 1,000 feet and the plaintiff's superintendent then called the attention of the foreman of the subcontractor, who was doing the plumbing, to the fact that the specifications annexed to the contract required all pipe used in the plumbing to be of the Reading Manufacturing Company. They then examined it for the purpose of ascertaining whether this delivery was of that manufacture and found it was. Thereafter, as pipe was required in the progress of the work, the foreman of the subcontractor would leave word at its shop that he wanted a specified number of feet of pipe, without in any way indicating of what manufacture. Pipe would thereafter be delivered and installed in the building, without any examination whatever. Indeed, no examination, so far as appears, was made by the plaintiff, the subcontractor, defendant's architect, or any one else, of any of the pipe except the first delivery, until after the building had been completed. Plaintiff's architect then refused to give the certificate of completion, upon which the final payment depended, because all of the pipe used in the plumbing was not of the kind called for by the contract. After such refusal, the subcontractor removed the covering or insulation from about 900 feet of pipe which was exposed in the basement, cellar and attic, and all but 70 feet was found to have been manufactured, not by the Reading Company, but by other manufacturers, some by the Cohoes Rolling Mill Company, some by the National Steel Works, some by the South Chester Tubing Company, and some which bore no manufacturer's mark at all. The balance of the pipe had been so installed in the building that an inspection of it could not be had without demolishing, in part at least, the building itself.

[9] I am of the opinion the trial court was right in directing a verdict for the defendant. The plaintiff agreed that all the pipe used should be of the Reading Manufacturing Company. Only about two-fifths of it, so far as appears, was of that kind. If more were used, then the burden of proving that fact was upon the plaintiff, which it could easily have done, since it knew where the pipe was obtained. The question of substantial performance of a contract of the character of the one under consideration depends in no small degree upon the good faith of the contractor. If the plaintiff had intended to, and had complied with the terms of the contract except as to minor omissions, due to inadvertence, then he might be allowed to recover the contract price, less the amount necessary to fully compensate the defendant for damages caused by such omissions. (Woodward v. Fuller, 80 N. Y. 312; Nolan v. Whitney, 88 N. Y. 648.) But that is not this case. It installed between 2,000 and 2,500 feet of pipe, of which only 1,000 feet at most complied with the contract. No explanation was given why pipe called for by the contract was not used, nor was any effort made to show what it would cost to remove the pipe of other manufacturers and install that of the Reading Manufacturing Company. The defendant had a right to contract for what he wanted. He had a right before making payment to get what the contract called for. It is no answer to this suggestion to say that the pipe put in was just as good as that made by the Reading Manufacturing Company, or that the difference in value between such pipe and the pipe made by the Reading Manufacturing Company would be either “nominal or nothing.” Defendant contracted for pipe made by the Reading Manufacturing Company. What his reason was for requiring this kind of pipe is of no importance. He wanted that and was entitled to it. It may have been a mere whim on his part, but even so, he had a right to this kind of pipe, regardless of whether some other kind, according to the opinion of the contractor or experts, would have been “just as good, better, or done just as well.” He agreed to pay only upon condition that the pipe installed were made by that company and he ought not to be compelled to pay unless that condition be performed. (Schultze v. Goodstein, 180 N. Y. 248; Spence v. Ham, supra; Steel S. & E. C. Co. v. Stock, 225 N. Y. 173; Van Clief v. Van Vechten, 130 N. Y. 571; Glacius v. Black, 50 N. Y. 145; Smith v. Brady, 17 N. Y. 173, and authorities cited on p. 185.) The rule, therefore, of substantial performance, with damages for unsubstantial omissions, has no application. (Crouch v. Gutmann, 134 N. Y. 45; Spence v. Ham, 163 N. Y. 220.)

What was said by this court in Smith v. Brady (supra) is quite applicable here:

I suppose it will be conceded that everyone has a right to build his house, his cottage or his store after such a model and in such style as shall best accord with his notions of utility or be most agreeable to his fancy. The specifications of the contract become the law between the parties until voluntarily changed. If the owner prefers a plain and simple Doric column, and has so provided in the agreement, the contractor has no right to put in its place the more costly and elegant Corinthian. If the owner, having regard to strength and durability, has contracted for walls of specified materials to be laid in a particular manner, or for a given number of joists and beams, the builder has no right to substitute his own judgment or that of others. Having departed from the agreement, if performance has not been waived by the other party, the law will not allow him to allege that he has made as good a building as the one he engaged to erect. He can demand payment only upon and according to the terms of his contract, and if the conditions on which payment is due have not been performed, then the right to demand it does not exist. To hold a different doctrine would be simply to make another contract, and would be giving to parties an encouragement to violate their engagements, which the just policy of the law does not permit.

[10]  I am of the opinion the trial court did not err in ruling on the admission of evidence or in directing a verdict for the defendant.

[11] For the foregoing reasons I think the judgment of the Appellate Division should be reversed and the judgment of the Trial Term affirmed.

 

3.1.1 Perfect Tender and Substantial Performance

Under the Uniform Commercial Code, the standard for performance is “perfect tender” rather than “substantial performance.”

§ 2-601. Buyer’s Rights on Improper Delivery

Subject to the provisions of this Article on installment contracts (Section 2-612) and on shipment by seller (Section 2-504), and unless otherwise agreed under the sections on contractual limitations of remedy (Sections 2-718 and 2-719), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may

(a) reject the whole; or

(b) accept the whole; or

(c) accept any commercial unit or units and reject the rest.

This rule applies to contracts for the sale of “goods” as defined in the UCC. Thus, with the exception of the seller’s limited right to “cure” a defective tender under U.C.C. § 2-508, buyers of goods may reject a seller’s performance for even a minor failure to conform to the description or quality of the goods specified in the contract.

In contrast, the doctrine enunciated in Jacob & Youngs v. Kent, allows a promisor to provide “substantial performance” and pay damages for any “trivial and innocent defects.” Courts ordinarily apply this doctrine to complex service and construction contracts.

3.1.2 Motion for Rehearing in Jacob & Youngs v. Kent

According to the record on appeal in Jacob & Youngs v. Kent, the contract with the builder included the following language:

Any work furnished by the Contractor, the material or workmanship of which is defective or which is not fully in accordance with the drawings or specifications, in every respect, will be rejected and is to be immediately torn down, removed and remade or replaced in accordance with the drawings and specifications, whenever discovered…. The Owner shall have the option at all times to allow the defective or improper work to stand and to receive from the Contractor a sum of money equivalent to the difference in value of the work as performed and as herein specified.

After losing on appeal, Kent filed a motion for rehearing and called the court’s attention to this clause. The New York Court of Appeals responded with a brief per curiam opinion:

The court did not overlook the specification which provides that defective work shall be replaced. The promise to replace, like the promise to install, is to be viewed, not as a condition, but as independent and collateral, when the defect is trivial and innocent. The law does not nullify the covenant, but restricts the remedy to damages.

230 N.Y. 656 (1921).

3.1.3 Discussion of Jacob & Youngs v. Kent

Suppose that, contrary to fact, a rule of perfect tender applied to construction contracts. If you were negotiating an agreement on behalf of a builder, what risks would you anticipate? What contract terms might you propose to the owner in order to protect your client from those risks? How might the owner’s willingness to agree to vary the perfect tender rule affect the price the builder should charge for the project?

Now imagine how the same negotiation would proceed under the rule of substantial performance. Suppose that the owner cares deeply about having Reading rather than Cohoes or National pipe. Can you propose contract language that would ensure that the builder must tear out and replace any non-Reading pipe? Are there any additional terms that the parties could include in their contract to protect the builder from the special risks associated with promising to use only Reading pipe?

Judge Cardozo argues for a rule that permits the builder to avoid the high cost of tearing out and replacing nonconforming pipe because the defect is “both innocent and trivial.” The owner must be content with receiving damages for the difference in market value between Reading and other brands of pipe. In his dissent, Judge McLaughlin casts the builder’s conduct in a different light and advocates strict application of the contract specifications. What incentives do these competing rules create for builders and owners? Could a court devise what we have called a “compound liability rule” that polices potential misconduct by both parties?

1.4. Exclusive Dealing Contracts

A number of the contracts we have studied thus far involved a single exchange of payment for an easily defined performance. Thus, for example, Bailey sought to collect for the cost of boarding Bascom’s Folly; Lucy wanted Zehmer to convey title to the Ferguson farm; and Lefkowitz sought to enforce the Great Minneapolis Surplus Store’s advertised deal on fur pieces. Other cases concerned more complex disputes about whether the promisor completed performance satisfactorily, as in Stees v. Leonard and Jacob & Youngs v. Kent. Or the circumstances required a court to find an implied term excusing performance, as in Taylor v. Caldwell, or to create (and then terminate) an option to accept a subcontractor’s bid, as in Pavel Enterprises v. A.S. Johnson Co.

In this section, we introduce a new source of complexity to the contracting process. Exclusive dealing contracts are one example of a broader category of “relational contracts” that involve repeated occasions for performance and payment. The familiar employment relationship exemplifies many of the characteristic features of a relational contract. Performance ordinarily occurs over a considerable length of time. Neither party can be certain at the outset exactly what tasks the employee will undertake or what opportunities the employer will be able to offer in exchange. Many unknown contingencies potentially affect both the cost of the parties’ performance and the alternative opportunities they have during the term of the contract. Finally, it is impossible to draft specific contract language that will adequately address each of the innumerable contingencies that may arise.

Commercial parties confront these problems in long-term supply contracts, in exclusive distributorship agreements, in some publishing contracts, and in countless other situations. The Uniform Commercial Code provides broad guidelines for certain relational contracts involving the sale of goods. Please read UCC § 2-306 Output, Requirements and Exclusive Dealings.

This UCC section addresses both exclusive dealing and so-called “output or requirements” contracts. An output contract commits the buyer to purchase and the seller to sell the entire output of a particular production facility. A requirements contract similarly obligates one party to purchase the entire quantity of a particular good that it needs from the other party who commits to supply those requirements.

For output and requirements contracts, an initial problem is to establish that the promisors’ commitments are sufficiently definite to warrant enforcement. The official comment 2 to U.C.C. § 2‑306 expressly rejects cases holding that the quantity term of an output or requirements contract is too indefinite. For exclusive dealing contracts, courts confront an analogous question of whether the recipient of exclusive rights has provided any consideration. As you can see, UCC § 2-306 answers this question in the affirmative. The first of the common law cases that follows, Wood v. Lucy, Lady Duff-Gordon, shows how a noted jurist reasoned about consideration in an exclusive dealing contract. The second case, Bloor v. Falstaff, interprets specific contractual language establishing a standard of performance quite similar to the implied “best efforts” obligation of U.C.C. § 2-306.

As you read both of these cases, consider first how the court addresses the problem of consideration and then what sort of guidance the decision offers about the applicable performance standard.

1.4.1. Principal Case – Wood v. Lucy, Lady Duff-Gordon

Wood v. Lucy, Lady Duff-Gordon

Court of Appeals of New York

222 N.Y. 88, 118 N.E. 214 (1917)

Cardozo, J.

1. The defendant styles herself “a creator of fashions.” Her favor helps a sale. Manufacturers of dresses, millinery and like articles are glad to pay for a certificate of her approval. The things which she designs, fabrics, parasols and what not, have a new value in the public mind when issued in her name. She employed the plaintiff to help her to turn this vogue into money. He was to have the exclusive right, subject always to her approval, to place her indorsements on the designs of others. He was also to have the exclusive right to place her own designs on sale, or to license others to market them. In return, she was to have one-half of “all profits and revenues” derived from any contracts he might make. The exclusive right was to last at least one year from April 1, 1915, and thereafter from year to year unless terminated by notice of ninety days. The plaintiff says that he kept the contract on his part, and that the defendant broke it. She placed her indorsement on fabrics, dresses and millinery without his knowledge, and withheld the profits. He sues her for the damages, and the case comes here on demurrer.

2. The agreement of employment is signed by both parties. It has a wealth of recitals. The defendant insists, however, that it lacks the elements of a contract. She says that the plaintiff does not bind himself to anything. It is true that he does not promise in so many words that he will use reasonable efforts to place the defendant's indorsements and market her designs.

3. We think, however, that such a promise is fairly to be implied. The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view to-day. A promise may be lacking, and yet the whole writing may be “instinct with an obligation,” imperfectly expressed (SCOTT, J., in McCall Co. v. Wright, 133 App. Div. 62; Moran v. Standard Oil Co., 211 N. Y. 187, 198). If that is so, there is a contract.

4. The implication of a promise here finds support in many circumstances. The defendant gave an exclusive privilege. She was to have no right for at least a year to place her own indorsements or market her own designs except through the agency of the plaintiff. The acceptance of the exclusive agency was an assumption of its duties (Phoenix Hermetic Co. v. Filtrine Mfg. Co., 164 App. Div. 424; W. G. Taylor Co. v. Bannerman, 120 Wis. 189; Mueller v. Bethesda Mineral Spring Co., 88 Mich. 390). We are not to suppose that one party was to be placed at the mercy of the other (Hearn v. Stevens & Bro., 111 App. Div. 101, 106; Russell v. Allerton, 108 N. Y. 288). Many other terms of the agreement point the same way. We are told at the outset by way of recital that “the said Otis F. Wood possesses a business organization adapted to the placing of such indorsements as the said Lucy, Lady Duff-Gordon has approved.” The implication is that the plaintiff's business organization will be used for the purpose for which it is adapted. But the terms of the defendant's compensation are even more significant. Her sole compensation for the grant of an exclusive agency is to be one-half of all the profits resulting from the plaintiff's efforts. Unless he gave his efforts, she could never get anything. Without an implied promise, the transaction cannot have such business “efficacy as both parties must have intended that at all events it should have” (BOWEN, L. J., in The Moorcock, 14 P. D. 64, 68). But the contract does not stop there. The plaintiff goes on to promise that he will account monthly for all moneys received by him, and that he will take out all such patents and copyrights and trademarks as may in his judgment be necessary to protect the rights and articles affected by the agreement. It is true, of course, as the Appellate Division has said, that if he was under no duty to try to market designs or to place certificates of indorsement, his promise to account for profits or take out copyrights would be valueless. But in determining the intention of the parties, the promise has a value. It helps to enforce the conclusion that the plaintiff had some duties. His promise to pay the defendant one-half of the profits and revenues resulting from the exclusive agency and to render accounts monthly, was a promise to use reasonable efforts to bring profits and revenues into existence. For this conclusion, the authorities are ample (Wilson v. Mechanical Orguinette Co., 170 N. Y. 542; Phoenix Hermetic Co. v. Filtrine Mfg. Co., supra; Jacquin v. Boutard, 89 Hun, 437; 157 N. Y. 686; Moran v. Standard Oil Co., supra; City of N. Y. v. Paoli, 202 N. Y. 18; M'Intyre v. Belcher, 14 C. B. [N. S.] 654; Devonald v. Rosser & Sons, 1906, 2 K. B. 728; W. G. Taylor Co. v. Bannerman, supra; Mueller v. Bethesda Mineral Spring Co., supra; Baker Transfer Co. v. Merchants' R. & I. Mfg. Co., 1 App. Div. 507).

5. The judgment of the Appellate Division should be reversed, and the order of the Special Term affirmed, with costs in the Appellate Division and in this court.

CUDDEBACK, MCLAUGHLIN and ANDREWS, JJ., concur; HISCOCK, Ch. J., CHASE and CRANE, JJ., dissent.

 

4.1.1 The Background of Wood v. Lucy, Lady Duff-Gordon

As her name suggests, Lady Duff-Gordon was a British clothing designer who had considerable success in England before attempting to enter the American market with Wood’s promotional assistance. Wood and Lucy hoped that her fame would lead American clothing makers to value her endorsement of their products. The litigation grew out of Lucy’s decision to make a separate deal with Sears, Roebuck and Company to sell a line of her dresses through the company’s mail order catalogue. Wood objected that the Sears deal violated his exclusive right to market her products in the United States. Adding insult to injury, it appears that the “Lucile” line was too expensive for most Sears customers. The company evidently lost more than $26,000 and dropped the line from its catalogue.

Lucy was quite a celebrity in her day and even tasted some scandal for her conduct as a survivor in the sinking of the Titanic. For more on the story of Lucy and her dresses, see Walter Pratt, American Contract Law at the Turn of the Century, 39 S.C. L. Rev. 415 (1988), and Victor Goldberg, Framing Contract Law: An Economic Perspective 57-58 (2007).

4.1.2 Reading Wood v. Lucy, Lady Duff-Gordon

Although judicial opinions often make one outcome appear inevitable, great legal advocates develop a creative ability to imagine how the court could have reached the opposite result. Professor Karl Llewellyn has offered this strikingly different reading of the situation in Wood:

The plaintiff in this action rests his case upon his own carefully prepared form agreement, which has as its first essence his own omission of any expression whatsoever of any obligation of any kind on the part of this same plaintiff. We thus have the familiar situation of a venture in which one party, here the defendant, has an asset, with what is, in advance, purely speculative value. The other party, the present plaintiff, who drew the agreement, is a marketer eager for profit, but chary of risk. The legal question presented is whether the plaintiff, while carefully avoiding all risk in the event of failure, can nevertheless claim full profit in the event that the market may prove favorable in its response. The law of consideration joins with the principles of business decency in giving the answer. And the answer is no.

Karl Llewellyn, A Lecture on Appellate Advocacy, 29 U. Chi. L. Rev. 627, 637-38 (1962).

4.1.3 Discussion of Wood v. Lucy, Lady Duff-Gordon

Professor Karl Llewellyn offers a reading of the facts that raises grave doubts about whether the agent, Wood, has provided any consideration for Lady Duff-Gordon’s promise to pay him a commission on all U.S. sales of her designs. How does Judge Cardozo avoid this problem and find an enforceable contract? What facts about the relationship of the parties does he use to support this conclusion?

To what standard of performance does Judge Cardozo hold Wood? What exactly is Wood obliged to do under his contract with Lady Duff-Gordon?

4.1.4 Hypo on Real Estate Sales

Suppose that Bob is selling his house. He signs an exclusive listing contract with Kay, a real estate broker. According to the terms of the contract, Bob promises to pay Kay six percent of the selling price of his home if she, or anyone else, sells the house during the next three months.

Is Bob’s promise to pay supported by consideration? If so, what is the consideration and what argument justifies us in concluding that it exists?

Now suppose that Kay, the agent, has found a buyer. The buyer, Sue, signs a contract in which she agrees to buy the house for $250,000 but the document provides that “this sale is conditional on the buyer obtaining a mortgage in the amount of $200,000 at an interest rate not to exceed seven (7) percent.”

Is Sue’s promise illusory? Could she simply sit on her hands and do nothing and then cancel the contract for failure of the financing contingency?

As an attorney for Bob, the seller, what would you tell him about his chances of succeeding in a suit to enforce any duties Sue might have to obtain a mortgage?

Can you think of any measures that Bob or his agent Kay could take to reduce the risk that Sue will avoid the contract by failing to obtain financing?

Finally, suppose that Bob has similar concerns about how much effort Kay will expend promoting the sale of his house. He may worry, for example, that Kay will simply list his property in the Multiple Listing Service (MLS) and then wait passively until another agent brings a prospective buyer to view the house. It is customary in such cases for the listing broker, Kay, to share the sale commission with the other broker. However, Kay might reasonably believe that a low-effort promotional strategy will maximize her net income.

What sort of terms could Bob demand in a future listing contract to address this possibility? Do you foresee any problems that might arise with specific performance standards? Would a simpler contract, promising a commission of six percent of the purchase price to anyone who sells the house, be more likely to achieve Bob’s objectives?

1.4.2. Principal Case – Bloor v. Falstaff Brewing Corp.

Bloor v. Falstaff Brewing Corp

United States Court of Appeals, Second Circuit

601 F.2d 609 (1979)

Friendly, Circuit Judge:

[1] This action, wherein federal jurisdiction is predicated on diversity of citizenship, 28 U.S.C. § 1332, was brought in the District Court for the Southern District of New York, by James Bloor, Reorganization Trustee of Balco Properties Corporation, formerly named P. Ballantine & Sons (Ballantine), a venerable and once successful brewery based in Newark, N. J. He sought to recover from Falstaff Brewing Corporation (Falstaff) for breach of a contract dated March 31, 1972, wherein Falstaff bought the Ballantine brewing labels, trademarks, accounts receivable, distribution systems and other property except the brewery. The price was $4,000,000 plus a royalty of fifty cents on each barrel of the Ballantine brands sold between April 1, 1972 and March 31, 1978. Although other issues were tried, the appeals concern only two provisions of the contract. These are:

8. Certain Other Covenants of Buyer. (a) After the Closing Date the (Buyer) will use its best efforts to promote and maintain a high volume of sales under the Proprietary Rights.

2(a)(v) (The Buyer will pay a royalty of $.50 per barrel for a period of 6 years), provided, however, that if during the Royalty Period the Buyer substantially discontinues the distribution of beer under the brand name “Ballantine” (except as the result of a restraining order in effect for 30 days issued by a court of competent jurisdiction at the request of a governmental authority), it will pay to the Seller a cash sum equal to the years and fraction thereof remaining in the Royalty Period times $1,100,000, payable in equal monthly installments on the first day of each month commencing with the first month following the month in which such discontinuation occurs….

[2] Bloor claimed that Falstaff had breached the best efforts clause, 8(a), and indeed that its default amounted to the substantial discontinuance that would trigger the liquidated damage clause, 2(a)(v). In an opinion that interestingly traces the history of beer back to Domesday Book and beyond, Judge Brieant upheld the first claim and awarded damages but dismissed the second. Falstaff appeals from the former ruling, Bloor from the latter. Both sides also dispute the court's measurement of damages for breach of the best efforts clause.

[3] We shall assume familiarity with Judge Brieant's excellent opinion, 454 F. Supp. 258 (S.D.N.Y.1978), from which we have drawn heavily, and will state only the essentials. Ballantine had been a family owned business, producing low-priced beers primarily for the northeast market, particularly New York, New Jersey, Connecticut and Pennsylvania. Its sales began to decline in 1961, and it lost money from 1965 on. On June 1, 1969, Investors Funding Corporation (IFC), a real estate conglomerate with no experience in brewing, acquired substantially all the stock of Ballantine for $16,290,000. IFC increased advertising expenditures, levelling off in 1971 at $1 million a year. This and other promotional practices, some of dubious legality, led to steady growth in Ballantine's sales despite the increased activities in the northeast of the “nationals”  which have greatly augmented their market shares at the expense of smaller brewers. However, this was a profitless prosperity; there was no month in which Ballantine had earnings and the total loss was $15,500,000 for the 33 months of IFC ownership.

[4] After its acquisition of Ballantine, Falstaff continued the $1 million a year advertising program, IFC's pricing policies, and also its policy of serving smaller accounts not solely through sales to independent distributors, the usual practice in the industry, but by use of its own warehouses and trucks the only change being a shift of the retail distribution system from Newark to North Bergen, N.J., when brewing was concentrated at Falstaff's Rhode Island brewery. However, sales declined and Falstaff claims to have lost $22 million in its Ballantine brand operations from March 31, 1972 to June 1975. Its other activities were also performing indifferently, although with no such losses as were being incurred in the sale of Ballantine products, and it was facing inability to meet payrolls and other debts. In March and April 1975 control of Falstaff passed to Paul Kalmanovitz, a businessman with 40 years experience in the brewing industry. After having first advanced $3 million to enable Falstaff to meet its payrolls and other pressing debts, he later supplied an additional $10 million and made loan guarantees, in return for which he received convertible preferred shares in an amount that endowed him with 35% of the voting power and became the beneficiary of a voting trust that gave him control of the board of directors.

[5] Mr. Kalmanovitz determined to concentrate on making beer and cutting sales costs. He decreased advertising, with the result that the Ballantine advertising budget shrank from $1 million to $115,000 a year.  In late 1975 he closed four of Falstaff's six retail distribution centers, including the North Bergen, N.J. depot, which was ultimately replaced by two distributors servicing substantially fewer accounts. He also discontinued various illegal practices that had been used in selling Ballantine products.  What happened in terms of sales volume is shown in plaintiff's exhibit 114 J, a chart which we reproduce in the margin.  With 1974 as a base, Ballantine declined 29.72% in 1975 and 45.81% in 1976 as compared with a 1975 gain of 2.24% and a 1976 loss of 13.08% for all brewers excluding the top 15. Other comparisons are similarly devastating, at least for 1976.  Despite the decline in the sale of its own labels as well as Ballantine's, Falstaff, however, made a substantial financial recovery. In 1976 it had net income of $8.7 million and its year-end working capital had increased from $8.6 million to $20.2 million and its cash and certificates of deposit from $2.2 million to $12.1 million.

[6] Seizing upon remarks made by the judge during the trial that Falstaff's financial standing in 1975 and thereafter “is probably not relevant” and a footnote in the opinion, 454 F. Supp. at 267 n. 7,  appellate counsel for Falstaff contend that the judge read the best efforts clause as requiring Falstaff to maintain Ballantine's volume by any sales methods having a good prospect of increasing or maintaining sales or, at least, to continue lawful methods in use at the time of purchase, no matter what losses they would cause. Starting from this premise, counsel reason that the judge's conclusion was at odds with New York law, stipulated by the contract to be controlling, as last expressed by the Court of Appeals in Feld v. Henry S. Levy & Sons, Inc., 335 N.E.2d 320 (N.Y. 1975). The court was there dealing with a contract whereby defendant agreed to sell and plaintiff to purchase all bread crumbs produced by defendant at a certain factory. During the term of the agreement defendant ceased producing bread crumbs because production with existing facilities was “very uneconomical”, and the plaintiff sued for breach. The case was governed by § 2-306 of the Uniform Commercial Code which provides:

§ 2-306. Output, Requirements and Exclusive Dealings

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

[7] Affirming the denial of cross-motions for summary judgment, the court said that, absent a cancellation on six months' notice for which the contract provided:

[D]efendant was expected to continue to perform in good faith and could cease production of the bread crumbs, a single facet of its operation, only in good faith. Obviously, a bankruptcy or genuine imperiling of the very existence of its entire business caused by the production of the crumbs would warrant cessation of production of that item; the yield of less profit from its sale than expected would not. Since bread crumbs were but a part of defendant's enterprise and since there was a contractual right of cancellation, good faith required continued production until cancellation, even if there be no profit. In circumstances such as these and without more, defendant would be justified, in good faith, in ceasing production of the single item prior to cancellation only if its losses from continuance would be more than trivial, which, overall, is a question of fact.

335 N.E.2d 323.  Falstaff argues from this that it was not bound to do anything to market Ballantine products that would cause “more than trivial” losses.

[8]  Other cases suggest that under New York law a “best efforts” clause imposes an obligation to act with good faith in light of one's own capabilities. In Van Valkenburgh v. Hayden Publishing Co., 30 N.Y.2d 34, 330 N.Y.S.2d 329, 281 N.E.2d 142 (1972), the court held a publisher liable to an author when, in clear bad faith after a contract dispute, he hired another to produce a book very similar to plaintiff's and then promoted it to those who had been buying the latter. On the other hand, a defendant having the exclusive right to sell the plaintiff's product may sell a similar product if necessary to meet outside competition, so long as he accounts for any resulting losses the plaintiff can show in the sales of the licensed product. Parev Products Co. v. I. Rokeach & Sons, 124 F.2d 147 (2 Cir. 1941). A summary definition of the best efforts obligation, cited by Judge Brieant, 454 F. Supp. at 266, is given in Arnold Productions, Inc. v. Favorite Films Corp., 176 F.Supp. 862, 866 (S.D.N.Y.1959), aff'd 298 F.2d 540 (2 Cir. 1962), to wit, performing as well as “the average prudent comparable” brewer.

[9]  The net of all this is that the New York law is far from clear and it is unfortunate that a federal court must have to apply it.

[10] We do not think the judge imposed on Falstaff a standard as demanding as its appellate counsel argues that he did. Despite his footnote 7, see note 6 supra, he did not in fact proceed on the basis that the best efforts clause required Falstaff to bankrupt itself in promoting Ballantine products or even to sell those products at a substantial loss. He relied rather on the fact that Falstaff's obligation to “use its best efforts to promote and maintain a high volume of sales” of Ballantine products was not fulfilled by a policy summarized by Mr. Kalmanovitz as being:

We sell beer and you pay for it….We sell beer, F.O.B. the brewery. You come and get it.

however sensible such a policy may have been with respect to Falstaff's other products. Once the peril of insolvency  had been averted, the drastic percentage reductions in Ballantine sales as related to any possible basis of comparison, see fn. 5, required Falstaff at least to explore whether steps not involving substantial losses could have been taken to stop or at least lessen the rate of decline. The judge found that, instead of doing this, Falstaff had engaged in a number of misfeasances and nonfeasances which could have accounted in substantial measure for the catastrophic drop in Ballantine sales shown in the chart, see 454 F. Supp. at 267-72. These included the closing of the North Bergen depot which had serviced “Mom and Pop” stores and bars in the New York metropolitan area; Falstaff's choices of distributors for Ballantine products in the New Jersey and particularly the New York areas, where the chosen distributor was the owner of a competing brand; its failure to take advantage of a proffer from Guinness-Harp Corporation to distribute Ballantine products in New York City through its Metrobeer Division; Falstaff's incentive to put more effort into sales of its own brands which sold at higher prices despite identity of the ingredients and were free from the $0.50 a barrel royalty burden; its failure to treat Ballantine products evenhandedly with Falstaff's; its discontinuing the practice of setting goals for salesmen; and the general Kalmanovitz policy of stressing profit at the expense of volume. In the court's judgment, these misfeasances and nonfeasances warranted a conclusion that, even taking account of Falstaff's right to give reasonable consideration to its own interests, Falstaff had breached its duty to use best efforts as stated in the Van Valkenburgh decision, supra, 30 N.Y.2d at 46, 330 N.Y.S.2d at 334, 281 N.E.2d at 145.

[11] Falstaff levels a barrage on these findings. The only attack which merits discussion is its criticism of the judge's conclusion that Falstaff did not treat its Ballantine brands evenhandedly with those under the Falstaff name. We agree that the subsidiary findings “that Falstaff but not Ballantine had been advertised extensively in Texas and Missouri” and that “(i)n these same areas Falstaff, although a ‘premium’ beer, was sold for extended periods below the price of Ballantine,” while literally true, did not warrant the inference drawn from them. Texas was Falstaff territory and, with advertising on a cooperative basis, it was natural that advertising expenditures on Falstaff would exceed those on Ballantine. The lower price for Falstaff was a particular promotion of a bicentennial can in Texas, intended to meet a particular competitor.

[12] However, we do not regard this error as undermining the judge's ultimate conclusion of breach of the best efforts clause. While that clause clearly required Falstaff to treat the Ballantine brands as well as its own, it does not follow that it required no more. With respect to its own brands, management was entirely free to exercise its business judgment as to how to maximize profit even if this meant serious loss in volume. Because of the obligation it had assumed under the sales contract, its situation with respect to the Ballantine brands was quite different. The royalty of $.50 a barrel on sales was an essential part of the purchase price. Even without the best efforts clause Falstaff would have been bound to make a good faith effort to see that substantial sales of Ballantine products were made, unless it discontinued under clause 2(a)(v) with consequent liability for liquidated damages. Cf. Wood v. Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917) (Cardozo, J.). Clause 8 imposed an added obligation to use “best efforts to promote and maintain a high volume of sales ….” (emphasis supplied). Although we agree that even this did not require Falstaff to spend itself into bankruptcy to promote the sales of Ballantine products, it did prevent the application to them of Kalmanovitz' philosophy of emphasizing profit uber alles without fair consideration of the effect on Ballantine volume. Plaintiff was not obliged to show just what steps Falstaff could reasonably have taken to maintain a high volume for Ballantine products. It was sufficient to show that Falstaff simply didn't care about Ballantine's volume and was content to allow this to plummet so long as that course was best for Falstaff's overall profit picture, an inference which the judge permissibly drew. The burden then shifted to Falstaff to prove there was nothing significant it could have done to promote Ballantine sales that would not have been financially disastrous.

[13] Having correctly concluded that Falstaff had breached its best efforts covenant, the judge was faced with a difficult problem in computing what the royalties on the lost sales would have been. There is no need to rehearse the many decisions that, in a situation like this, certainty is not required; “(t)he plaintiff need only show a ‘stable foundation for a reasonable estimate of royalties he would have earned had defendant not breached’ ”. Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 926 (2 Cir. 1977), quoting Freund v. Washington Square Press, Inc., 34 N.Y.2d 379, 383, 357 N.Y.S.2d 857, 861, 314 N.E.2d 419, 421 (1974). After carefully considering other possible bases, the court arrived at the seemingly sensible conclusion that the most nearly accurate comparison was with the combined sales of Rheingold and Schaefer beers, both, like Ballantine, being “price” beers sold primarily in the northeast, and computed what Ballantine sales would have been if its brands had suffered only the same decline as a composite of Rheingold and Schaefer.

[14] Falstaff's principal criticism of the method of comparison, in addition to that noted in fn. 5, supra, was that the judge erred in saying, 454 F. Supp. at 279, that inclusion of Rheingold made “the comparison a conservative one” since “(t)he brewery was closed in early 1974 and production halted for a time.” Falstaff is right that the halt in Rheingold production works the other way since the lowered figure for the base year made the percentage decline in subsequent years appear to be less than it in fact was. Against this, however, is the fact that the Rheingold 1977 figures do not include sales for the end of 1977 after the sale of Rheingold to Schmidt's Brewery, which counterbalances this error in some degree. In any event the Rheingold sales were only 25.7% of the combined sales in 1974 and 16.8% In 1977. Another criticism is that the deduction from the initial computation of lost royalties of $29,193.50 for the period April 1976 to March 1978 as representing royalties lost through the cessation of illegal practices was insufficient; it may well have been but the judge used the best figures he had. A possible objection, namely, that Schaefer maintained its sales only by incurring large losses, a fact now possibly subject to judicial notice, see The F. & M. Schaefer Corporation v. C. Schmidt & Sons, Inc., 597 F.2d 814, 817 (2d Cir. 1979), was not advanced with sufficient specificity to have required consideration. It is true, more generally, that the award may overcompensate the plaintiff since Falstaff was not necessarily required to do whatever Rheingold and Schaefer did. But that is the kind of uncertainty which is permissible in favor of a plaintiff who has established liability in a case like this. As said in Wakeman v. Wheeler & Wilson Mfg. Co., 101 N.Y. 205, 209, 4 N.E. 264 (1886):

(W)hen it is certain that damages have been caused by a breach of contract, and the only uncertainty is to their amount, there can rarely be good reason for refusing on account of such uncertainty, any damages whatever for the breach. A person violating his contract should not be permitted entirely to escape liability because the amount of damage which he caused is uncertain.

[15] We also reject plaintiff's complaint on his cross-appeal that the court erred in not taking as its standard for comparison the grouping of all but the top 15 brewers, Ballantine having ranked 16th in 1971. The judge was entirely warranted in believing that the Rheingold-Schaefer combination afforded a better standard of comparison.

[16] We can dispose quite briefly of the portion of the plaintiff's cross-appeal which claims error in the rejection of his contention that Falstaff's actions triggered the liquidated damage clause. One branch of this puts heavy weight on the word “distribution”; the claim is that the closing of the North Bergen center and Mr. Kalmanovitz' general come-and-get-it philosophy was, without more, a substantial discontinuance of “distribution”. On this basis plaintiff would be entitled to invoke the liquidated damage clause even if Falstaff's new methods had succeeded in checking the decline in Ballantine sales. Another fallacy is that, country-wide, Falstaff substantially increased the number of distributors carrying Ballantine labels. Moreover the term “distribution”, as used in the brewing industry, does not require distribution by the brewer's own trucks and employees. The norm rather is distribution through independent wholesalers. Falstaff's default under the best efforts clause was not in returning to that method simpliciter but in its failure to see to it that wholesale distribution approached in effectiveness what retail distribution had done.

[17] Plaintiff contends more generally that permitting a decline of 63.12% In Ballantine sales from 1974 to 1977 was the equivalent of quitting the game. However, as Judge Brieant correctly pointed out, a large part of this drop was attributable “to the general decline of the market share of the smaller brewers” as against the “nationals”, 454 F. Supp. at 266, and even the 518,899 barrels sold in 1977 were not a negligible amount of beer.

[18] The judgment is affirmed. Plaintiff may recover two-thirds of his costs.

 

4.2.1 “Best Efforts” as Joint Maximization

As you can see from the opinion in Bloor v. Falstaff, courts have struggled to define what the vague “best efforts” standard requires. At what level of output does the grantee of exclusive rights satisfy its contractual obligation? How much effort must an exclusive distributor expend to promote the grantor’s product? When does promoting a competing product constitute a violation of the best efforts duty?

Professors Charles Goetz and Robert Scott have argued that “best efforts” should be understood to require an exclusive distributor to maximize the joint gains of the parties. See Charles J. Goetz and Robert E. Scott, Principles of Relational Contracts, 67 Va. L. Rev. 1089 (1981). They argue that this joint maximization interpretation forces the distributor to choose an efficient level of effort. Goetz and Scott explain that both parties benefit from maximizing the contractual pie available to be divided between them. The decision rule they propose envisions the parties as a single firm with the manufacturing costs of the principal and the distribution costs of the agent. As a practical matter, the joint maximization standard requires the distributor to undertake any promotional effort that will yield a joint benefit greater than its joint cost.

4.2.2 Discussion of Bloor v. Falstaff

How does Judge Friendly resolve Balco’s claim for liquidated damages?

If they did not substantially discontinue distribution of Ballantine brands, what exactly did Falstaff do wrong?

What did the “best efforts” clause require?

With the many problems and uncertainties that they face in enforcing best efforts obligations, why do parties enter exclusive dealing arrangements rather than simply selling to all comers?

What is the central problem that parties who grant exclusive rights normally encounter?

4.2.3 Hypo on Joint Maximization

A court is trying to decide whether Falstaff should have to spend an extra $100,000 on advertising Ballantine brands. Suppose that the following table describes the expected returns from this additional investment in advertising:

 

Net Gains

 

Falstaff

Balco

Joint

 

Case One

($50,000)

$60,000

$10,000

 

Case Two

($50,000)

$30,000

($20,000)

 

 

 

In each case, what will Falstaff want to do?

What does Balco want Falstaff to do?

What decision satisfies the joint maximization criterion?

The Bloor v. Falstaff court emphatically does not analyze the case in these terms. Would joint maximization be an improvement over the method the court employs?

Under the joint maximization criterion, how would a court determine if there has been a breach of the best efforts obligation?

How do parties prove their case?

Showing only first chapter for book preview.