Contracts Class Notes 2/17/04

The sister asks the brother to buy a piece of land from her from out in the boondocks. The sister sells it to him for $275. After she sells it to him, she gets mad at him and sues him and she beats him!

We have a contract for the purchase and sale of Greenacre. It’s performed. A deed is transferred from vendor to vendee. Later, the vendor is able to rescind. How come? It’s possible to transfer land with no consideration at all and have it stand up. A completed gift of land will be upheld even though there’s no consideration, as long as there’s no undue influence or anything bad like that. You can also convey land for what looks like inadequate consideration (“a peppercorn”). If she wanted a family heirloom like a lock of her mother’s hair and she offered the land in exchange for it, that’s fine, even though the hair might have a market value of approximately nothing.

The parties make the bargain and courts will enforce the bargain they make. As long as there is consideration, adequacy is immaterial. We won’t disturb transactions unless there is something wrong. There must be something more than mere inadequacy of consideration. What’s the something else here? Why will we upset this deal?

Jackson got $275 for the land and it turned out to be worth ten times as much.

This is nothing like Raffles v. Wichelaus. There is no doubt that there is both subjective and objective mutual assent in this case. What is the mistake here, if there is one?

Suppose we have Farmer Brown, who has 200 acres of agricultural land on Blackacre outside of Podunk City, which has begun to grow. The land is fertile. In a few years, you’ll be able to “plant houses” on the land, which has increased the land’s value. It’s not too hard to predict that this land will be developed soon. Farmer Brown is getting ready to retire and decides to sell his farm. He negotiates with various purchasers, and eventually sells the land to a developer at a price that is significantly more than it would be worth if the land were further from the town, yet significantly less than it would be if the land were closer to the town such that it’s ready for development immediately. The land is sold for $500,000. Shortly after the contract is made and performed, oil is discovered under the land. It will now be worth $50,000,000. Can Farmer Brown do anything about it? How might this situation differ from that in Jackson v. Seymour? In the present case, there was a close relationship between the brother and sister. There is no confidential relationship between Farmer Brown and the developer. Must the confidential relationship be present?

Would Jackson we entitled to the same relief if the purchaser were not her brother? Can the result of this case be justified merely on the basis of mistake? The sister trusts the brother to advise her in her business affairs. Neither of them knew that there was merchantable timber on the land. Both of them thought that $275 was an appropriate price for the land. But the brother cuts down the trees and gets $2500. What’s the mistake here?

Restatement Second § 151 says that “A mistake is a belief that is not in accord with the facts.” There is a mistake in this case, because both sides shared the belief that there was no merchantable timber on the land and that it was just pasture. That was not in accord with the facts: there were valuable trees on the land. It’s a shared or mutual mistake. Is that enough reason, by itself, to undo the contract, or do we also need a confidential relationship?

What’s the legal heading this case goes under? What doctrine about we supposed to learn something about in connection with this case? It’s constructive fraud. The word “constructive” means “pretend”. It is something that is “constructed” by the law. There is no fraud here, so we’ll pretend there is fraud when there isn’t in order to get justice.

Seymour could have defrauded his sister if he had been on the land and knew it had valuable timber on it, and knowing that had lied to his sister, inducing her to sell. That would be actual fraud, and she would be able to rescind on that basis. Notice that an ordinary garden-variety fraud case also involves a mistake. The frauder induces a mistake on the part of the victim. The frauder says, for example: “There is no valuable timber there.” That causes a mistaken belief on the part of the victim. It’s easier to give relief when one party is reprehensible and has caused the other party to be mistaken.

On the actual facts of this case, Seymour didn’t really lie about anything. But we’re going to treat him the same way that we would treat him had he been a frauder because there was a confidential relationship, because the consideration is grossly inadequate ($275 is not nearly enough money), put it together, and you have a constructive fraud case.

Jackson trusted Seymour to pay her a fair price for the land. She was relying on him to do that. When he doesn’t, he’s breaking an implicit promise to pay fair value for the land. You don’t have a constructive fraud case against an outsider or anyone dealing at arm’s length, because there is no basis for implying a promise that such a person is going to treat you fairly. Each party is left to fend for him or herself.

In this case, Jackson is virtually counting on Seymour as a fiduciary. That raises difficulties in terms of making bargains.

Suppose that in three years, I become a lawyer. Say I practice law and have clients. It will be difficult making deals with clients. I will have a fiduciary relationship with my clients. Say one of my clients has a piece of land that I think I could pick up at a cheap price. Don’t do that! Never deal with your clients except in the basic lawyer-client relationship. You can get in lots of trouble! It is possible to do it, and some lawyers do it all the time. Clovis thinks it’s bad practice. If you’re going to do it, you have to tell your client things that you wouldn’t tell a stranger with whom you deal at arm’s length.

For example, you have to tell your client that the land is worth more than you’re offering. You must make a record of any such disclosure. It’s not worth the effort. It’s a bad idea. What’s the point? It’s possible to make hard-edged deals in fiduciary situations or confidential situations, but these are situations where the courts are going to police the bargain. To make a hard-edged deal, you’ll have to make full disclosure and make sure that the client in the attorney-client relationship really wants to do what the deal calls for.

The first think that is called for in a fiduciary relationship is full disclosure. But that doesn’t explain the result of Jackson v. Seymour. Seymour didn’t know anything and thus didn’t have anything to disclose. It’s also not a pure mistake case. When did Seymour first do something wrong? It’s when he saw the trees and decided to take the money and run without telling his sister.

In this case, the court tries as best it can to put the parties in the position they were in before the contract was made. Jackson must give up the $275 with interest. That goes back to Seymour. Seymour must give back the land and cough up what he got when he sold the trees, with interest. He will be recompensed for the taxes he paid when he owned the land, also with interest. We’ll do as sensitive a job as we can of backing out of the situation and putting both sides in their pre-contract position.

Were the parties careless? Sure! They could have gone and looked at the land. If they’d done that, they would have figured out that there were big trees on the land. One lesson of this case is that you can get relief even though you’ve been a little careless. Negligence doesn’t necessarily bar you from relief in cases like this.

This is not a pure mistake case. Say the deal was between Jackson and Tazewell Wilkins. Say neither of them knew there were trees there. If that had been the deal, she would have been stuck with the contract, in Clovis’s opinion.

There was a mistake, because they both assumed there was no timber.

Sherwood v. Walker

In this case, the sellers are successful in avoiding the contract even though there is no confidential relationship between the buyer and the seller.

Who was Hiram Walker? Why is he pictured in the book? He founded the Canadian Club distillery. He marketed booze!

This is a case of the purchase and sale of a cow. The seller is the founder of a successful, sizeable business. Who is the buyer? He was a banker. We have a distiller selling a cow to a banker. Most people buying and selling cows are farmers, or maybe butcher shops or packers or something like that. The cow had no horns. This was a recent result of breeding. If they don’t have horns, they can’t beat each other up as much. So there was some actual utility in being able to breed cows that have no horns. These were fancy, highfalutin’ cattle with snob appeal.

What was the trouble with Rose 2d of Aberlone? They thought she was barren, but she turned out to be fertile. If you have a cow that won’t breed, you can eat it. If a cow will breed, then it might produce milk and offspring. In this situation, a pure-bred highfalutin’ cow will breed and produce offspring who are also pure-bred and highfalutin’. But if she can’t breed, she’s hamburger. Walker is willing to sell the cow to make hamburger.

But it seems highly unlikely that Sherwood is buying the cow to make hamburger. What is Sherwood’s interest in the cow? He wanted to try to get her pregnant (by way of a bull). He thought it was a long shot, but since he was only paying a beef price, he figured he might enjoying having her anyway, and maybe he would get lucky and the cow would get pregnant and he would make out as a big winner. That’s the deal between the Walkers and Sherwood.

The Walkers refuse to deliver Rose because they find out that she’s pregnant. They say that they’re going to hold onto her. Sherwood sues. He thinks he’s entitled to the cow. The Supreme Court of Michigan finds that Sherwood loses out because there was mutual mistake.

Why should we void a transaction on the basis of mutual mistake? We’re looking for mutual mistake in regard to a basic underlying assumption. Sometimes we’ll give relief to a party that’s disadvantaged by a mistake. We should think about the problems of doing that. What are the costs upon the party that would be advantaged by the mistake?

For a clearer factual pattern, change the nature of the buyer. Suppose that the Walkers, frustrated with the fact that Rose hasn’t gotten pregnant, agree to sell her to a butcher shop or beef packer for 5.5 cents per pound. After the contract is made, but before she’s been packed, it is discovered that she is pregnant. The Walkers say that they want her back. The buyer doesn’t want to give her back, but instead will sell her.

What favors the buyer? We want promises enforced when they are made. We want people to be able to rely on promises. We unwind very few promises.

But why will we probably roll back this bargain? It’s because our intent is to protect the expectation interest, and in this case, the buyer is going to get an unearned, unbargained-for windfall if the contract is not rolled back. We will allow avoidance if and only if the buyer can be backed out of the situation. The seller can avoid if he gives the buyer his money back and compensates the buyer for any reasonable reliance he had on the deal. You try to put both parties back to their pre-contract positions.

Sometimes it’s too late to put the parties back in their original position. For example, what if you find out the cow is pregnant after she’s packed? Then it’s too late to retract and the seller will be out of luck.

The power of avoidance is typically limited in time, and you can lose it by not exercising it in a timely fashion by letting the other party rely in some way that prejudices the other party.

It’s clear what ought to happen when the buyer is Bill’s Butcher Shop and it’s a “beef price” contract.

Both parties’ underlying basic assumption was that it was very unlikely that Rose is a breeder. If Sherwood takes her home and gets her pregnant, he’s a winner. If he fails, then he’s a loser. Is that an argument against rescission? What was the underlying basic assumption on which this deal rested? Was that assumption contrary to fact? If we do have a mutual mistake as to a basic underlying assumption, then, under the totality of the circumstances, should we allow rescission?

Clovis thinks that the assumption was: “Probably barren, but might be able to breed.” That was mistaken because she was already pregnant! You couldn’t rescind if she hadn’t been pregnant, but then Sherwood took her home and got her pregnant later. The risk that Rose was pregnant now was not considered or exchanged. That’s why we should allow the Walkers to rescind.

Frequently, when people make bargains, they shift risks and potentialities. But some things are so far out of their contemplation that we won’t treat them as having shifted.

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