Contracts Class Notes 2/18/04


More on Sherwood


The law of mutual mistake: a useful way to think about it is that when parties make an agreement, some risks are good and others are bad, but some risks are shifted and we wonít avoid the transaction because one of those shifted risks comes to pass.


In Sherwood v. Walker, the basic deal agreed to by the parties was, according to Clovis, Rose was ďprobably barren, but might be able to breedĒ.The risk in regard to whether she could breed was shifted by agreement.However, the risk that she was already pregnant was not shifted by agreement.Thatís what the court finds in the case.


Letís say thereís a car accident where the plaintiff sues the defendant for $1,000,000.The suit is filed and will be litigated.The defendant defends by saying (1) the defendant wasnít negligent, (2) the plaintiff was negligent and his negligence caused the accident, and (3) the plaintiff is exaggerating and the suit isnít worth $1,000,000.There is a bench trial, at the end of which the plaintiff and plaintiffís counsel are very nervous, thinking they may have lost the trial.They are worried theyíll get zilch.The defendant and the defendantís counsel are also very nervous.They worry that there might be a $1,000,000 verdict.The parties are eager to settle.


At 1 PM, they reach an agreement whereby the plaintiff gives up all his claims in exchange for $500,000.The plaintiff will get something, and the defendant wonít be stuck with the $1,000,000.Then they do a rude thing: they donít tell the judge that they have settled!They leave the judge to sweat it out.At 5 PM, the judge announces her decision: letís say itís a $0 recovery or a $1,000,000 recovery.The disadvantaged party will want to get out of the contract made at 1 PM.For example, if itís a $0 verdict, the defendant will want to avoid the settlement agreement.


It turns out that neither side can get out of the settlement agreement.This has been well-litigated.How could we throw mutual mistake into the mix?What if the case was already decided at 11 AM but neither party knew?Now, the party that was disadvantaged by the settlement agreement will be able to get out of it.


Both parties had assumed that the case was undecided at the time of settlement.When the judge has already decided the case, you have something that is avoidable.What the judge does in the future is a risk you take, but if youíre mistaken about something that already happened you may get off the hook.


Whatís a single-premium annuity?Itís an annuity that you pay for all at one time.Insurance companies sell these annuities.For a single premium of, for example, $100,000, you can buy an annuity that will provide a monthly payment for the rest of your life.How would you market and price these annuities if youíre an insurance company?You would be thinking about two things: (1) the current interest rate, and (2) how long will the annuitant live?Youíd use actuarial tables to determine on average how long someone with the annuitantís age and characteristics will live.The insurance company takes the risk of whether the annuitant will live a short time or a long time.


If youíre going to buy an annuity, youíre taking the risk that an annuitant will die soon.$100,000 could potentially go down the drain after three months.If youíre concerned about this, the insurance company will sell you an annuity thatís guaranteed for a certain number of years, even if the annuitant dies.But the payments wonít be as high per month.


Say the husband buys a straight life annuity on his wife.The husband spends $100,000.The husband and the insurance company assume that the wife is a healthy 55-year-old woman.But they were both wrong.The wife had terminal cancer and died four months later.The husband wants to get his $100,000 contract less the payment his wife received.Will he be able to do that?No, because the actuarial risk had already been shifted!The husband chose not to get a different annuity where he would have gotten less money but a guarantee of money after the wife dies.But what if the wife is dead at the time the annuity is purchased?The annuity contract will shift a whole bunch of risks, but according to case law it will not shift the risk that she was already dead at the time the contract is signed.The husband will be able to back out of the annuity contract.Remember that both good and bad risks can be shifted.


You canít snap up an offer thatís too good to be true!


Sometimes unilateral mistake can void a contract.If one party makes a mistake and the other party has reason to know of the mistake, then the mistaken party can get off the hook.See ß 153 (b).


On the other hand, if youíre just lazy and someone takes advantage of your laziness, you wonít be entitled to get out of the contract later.Conscious ignorance is not the same as mistake.


We will rarely, if ever, avoid a contract on the basis of a mistake in judgment.


Say we change the facts of Sherwood and suppose there is no question that Rose is a breeder.Everyone knows this, and she is sold at the breederís price of $850.Two days later, the Walkers decide that they made a big mistake because Roseís twin sister was sold at auction for $2000.They canít rescind!This is just a mistake in judgment!Sherwood did not induce them to make such a poor judgment.We find that bad judgment shouldnít let people get out of a deal.


Consider the purchase and sale of investment securities.Most of the time, the seller sells it because they think itís going down or not going up or not going up fast enough.Why would the buyer buy it?His judgment is different from the sellerís.The buyer thinks the security will go up and be a winner.One of those parties is going to be wrong.But we wonít avoid that contract.Clovis says thatís itís overbroad to say that Sherwood v. Walker doesnít apply to the purchase and sale of investment securities.If a contract for investment securities is made that rests on the assumption that the books are accurate, but unbeknownst to both parties the books are messed up, it would make a case for rescinding the deal.


It might make a difference in the case of the jewelry store that the person who made the mistake was the clerk and not the proprietor.


Everybody makes mistakes.Weíll give people relief even if you were careless.This is articulated in ß 157.Your fault in being careless wonít bar you from a suit unless your fault was particularly egregious.When you make a mistake, the law may be gentle with you and it may let you avoid the contract.


Beachcomber Coins, Inc. v. Boskett


This is a semi-pro coin dealer versus a pro coin dealer.Both sides know something about old coins.The semi-pro bought a coin for $450 and sold it to the dealer for $500.Then the dealer turned around and tried to make a deal for $700.But the coin turns out to be a counterfeit.The semi-pro and the pro just assumed that it was genuine.The risk that it was a counterfeit was not shifted in the courtís view.The risk that the dealer could have gotten $850 or $350 was shifted, but the risk that it was a counterfeit wasnít shifted at all.


Say a guy finds a pretty stone in the road.A friend says that he wants to buy it.Neither person knows what it is.The buyer proposes to sell it for a $1, and the seller agrees.It turns out to be a diamond worth $40,000.Both sides assumed that they didnít know what the heck it was.


Somebody may have a lot of information to the effect that there are opportunities in a particular place.The party with the information goes out to make some purchases to take advantage of this value.Suppose an oil company employs geologists and they decide that there is a lot of oil in Vermont where oil has never been discovered before.They go around buying up a bunch of farms at decent prices to farms.If they had disclosed that they thought there was oil under there, the prices would shoot way up.But if they disclose the information, they donít get to take advantage of the information they have.


You may not have to volunteer information about why youíre buying the land with the oil under it, but you canít lie if youíre asked directly.


Why is insider trading illegal?When we have buyerís fraud in securities trading, the buyer has obtained non-public information and is trading on the basis of that information.The theory is that the buyerís information should be available to the seller and everyone else.In the securities market,


Elsinore Union Elementary School Dist. v. Kastorff


This is a case of unilateral mistake.When you have a mutual mistake, one in which the parties share, that tends to make avoidance of the contract easier.When you have a non-mistaken party and the mistaken party wants out of the contract, we may be slow to let them out because we want to preserve the stability of contracts and the protection of the expectation interest of the non-mistaken part.


Recall Cobaugh v. Klick-Lewis.Cobaugh shoots a hole-in-one, and thinks heís won a car.The offeror didnít intend to extend the offer to Cobaugh, but the offeror made the mistake of not pulling the marker down.So Cobaugh got a contract!Why?He had no reason to know it was a mistake, for one thing.Also, enforcement is not unconscionable.Itís a very favorable contract, but itís just the contract that the offeror offered.


When are we going to unwind for a unilateral mistake?Elsinore is one of the big sources for ß 153 of the Restatement Second.


Kastorff left out all the costs of plumbing in his bid.In fact, he put in a negative amount.That made his bid the lowest.Kastoroff assumed that all components of the cost of building and that he added the numbers correctly.Weíll have avoidance when the mistakes were clerical, mechanical, and dumb-headed.Those are the mistakes most likely to produce relief and avoidance.This contract is voidable by Kastorff, the party to whom the mistake is adverse.This case is decided on the basis that enforcement of this contract would be unconscionable.It would be very harsh and oppressive for the party benefiting from the mistake to insist on enforcement.Weíll also grant relief if the benefiting party had reason to know of the mistake.When the mistake is particularly egregious, the other party may well have reason to know a mistake has been made.You canít snap up an offer thatís too good to be true.


When we put mistake together with promises, weíll often get warranties.


For example, Smith and Zimbalist make a deal to sell what they call a ďStradivariusĒ.It turns out to be a fake.The plaintiff doesnít try the ďmutual mistakeĒ theory to try to avoid the contract.Instead, the plaintiffís lawyer asserts that there was a warranty here and the expectation interest guaranteed by the warranty should be protected.


For breach of warranty, you can get rescission, just like you would for mutual mistake, but you also might get protection of your expectation interest, which may give much more money to the buyer.Can the seller say, defensively, that this was a case of mutual mistake and thus rescission is in order?Thatís not good for the seller, but what if itís better than paying out expectation damages for breach of warranty?These two ideas can produce quite different remedies.


We will start with the question of whether this contract ought to be avoided for mutual mistake versus whether we have an express warranty by description.


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