Contracts
Class Notes
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 won’t 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
Let’s
say there’s 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 wasn’t negligent, (2) the plaintiff was negligent and
his negligence caused the accident, and (3) the plaintiff is exaggerating and
the suit isn’t worth $1,000,000. There
is a bench trial, at the end of which the plaintiff and plaintiff’s counsel are
very nervous, thinking they may have lost the trial. They are worried they’ll get zilch. The defendant and the defendant’s counsel are
also very nervous. They worry that there
might be a $1,000,000 verdict. The
parties are eager to settle.
At
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
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 you’re
mistaken about something that already happened you may get off the hook.
What’s
a single-premium annuity? It’s 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 you’re an insurance company? You would be thinking about two things: (1)
the current interest rate, and (2) how long will the annuitant live? You’d use actuarial tables to determine on
average how long someone with the annuitant’s 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
you’re going to buy an annuity, you’re taking the risk that an annuitant will
die soon. $100,000 could potentially go down the drain
after three months. If you’re concerned
about this, the insurance company will sell you an annuity that’s guaranteed
for a certain number of years, even if the annuitant dies. But the payments won’t 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
can’t snap up an offer that’s 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 § 153 (b).
On
the other hand, if you’re just lazy and someone takes advantage of your
laziness, you won’t 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 breeder’s price of $850. Two days later, the Walkers decide that they
made a big mistake because Rose’s twin sister was sold at auction for
$2000. They can’t rescind! This is just a mistake in judgment! Sherwood did not induce them to make such a
poor judgment. We find that bad judgment
shouldn’t 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 it’s going down
or not going up or not going up fast enough.
Why would the buyer buy it? His judgment
is different from the seller’s. The
buyer thinks the security will go up and be a winner. One of those parties is going to be
wrong. But we won’t avoid that
contract.
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. We’ll give people relief
even if you were careless. This is
articulated in § 157. Your fault in
being careless won’t 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 court’s view. The risk that the dealer could have gotten $850
or $350 was shifted, but the risk that it was a counterfeit wasn’t 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 didn’t
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
You
may not have to volunteer information about why you’re buying the land with the
oil under it, but you can’t lie if you’re asked directly.
Why
is insider trading illegal? When we have
buyer’s 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 buyer’s information
should be available to the seller and everyone else. In the securities market,
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 he’s won a car.
The offeror didn’t 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. It’s a very favorable contract, but it’s just
the contract that the offeror offered.
When
are we going to unwind for a unilateral mistake?
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. We’ll
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. We’ll 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 can’t snap up an offer that’s too good to be true.
When
we put mistake together with promises, we’ll often get warranties.
For
example, Smith and Zimbalist make a deal to sell what they call a “Stradivarius”. It turns out to be a fake. The plaintiff doesn’t try the “mutual mistake”
theory to try to avoid the contract.
Instead, the plaintiff’s 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? That’s
not good for the seller, but what if it’s 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.