Contracts Class Notes 2/23/04

 

The Smith v. Zimbalist handout problem

 

Smith lets Zimbalist have “this Stradivarius” for $5,000.  It’s hard to tell whether you have a real Stradivarius or a fake, and there are a lot of fakes around.  If violin really was a Stradivarius, it would be worth $20,000 on the open market.  Zimbalist is surprised that the violin he picked was a fake worth only $1,000.  What kinds of causes of action might he have?

 

He could allege mutual mistake as to a basic underlying assumption: the assumption was that this was a genuine Stradivarius, but both parties were mistaken and therefore avoidance of the contract ought to apply, meaning that Zimbalist can return the fake and get his $5,000 back.

 

An alternative argument for Zimbalist that he and his lawyers pick in this case (for obvious reasons) is that there was a warranty by description.  The warranty is that “this is a genuine Stradivarius”.  The warranty is made under UCC § 2-313(1)(b).  The measure of damages is given by § 2-714(2).  That measure of damages is the difference between what the thing would have been worth if it was as warranted and what it actually was worth.  Thus, Zimbalist would argue, he needs $19,000 to be put in the position performance would have done.

 

Thus far, we have learned that warranty liability is promissory, and the remedy is to protect the buyer’s expectation interest by putting them in the position performance would have done.  Another remedy for breach of warranty is simply rescission.  You wouldn’t want to do it in this case, because undoing the contract doesn’t get you as much money.

 

So both mutual mistake and breach of warranty can potentially lead to the same remedy.  That’s one lesson from the case.

 

Say we represent Smith.  What defenses should he come up with?  Smith could use mistake defensively.  If he argues mistake, the result would be rescission, but he wouldn’t get to keep the $5,000.  Suppose he believes that he ought to keep the $5,000.  How does he argue that?  First off, how might he argue that there was no warranty?

 

§ 2-313(1)(a) doesn’t help Zimbalist because Smith didn’t make any statement about the violin whatsoever.

 

§ 2-313(1)(b), on the other hand, doesn’t require the description be made by the seller in order to constitute a warranty.  There is an excellent chance that Zimbalist’s statement in regard to the violin could be found to create a warranty.  It’s very possible that there is a warranty created by the use of the word “Stradivarius”.

 

Tribe v. Peterson

 

This case says that you can have a warranty that a horse is calm and gentle that is not broken by the horse bucking.  The court says that a calm horse may buck under certain circumstances.  So let’s say that you’re Smith again.  Say both guys know that a genuine Stradivarius would be worth $20,000.  Why would the violin change hands for only $5,000?  It seems to make sense that they agree that it’s something that may or may not be the genuine article.

 

What does the word “Stradivarius” mean in this context?  Does it mean an authenticated Stradivarius?  Does it mean something that might be a Stradivarius?  A standard word of description in different contexts can mean different things.

 

What does the word “car” mean?  What is warranted by the description “car”?  It depends on the circumstances.  It depends on whether you bought a “car” from Toys ‘R’ Us or whether you bought it from a car dealer.  You would expect a car from a car dealer to have brakes and an engine and all that.

 

On the other hand, if you buy a “car” for $750 and it’s described as “runs good”, you get a whole lot less.  When you buy it from a junkyard, you get less still.

 

One helpful index to what the seller has agreed to sell is price.  That will tell us a good deal about what the words of description mean.  Two knowledgeable people bargained a price that is between the price of a genuine Stradivarius and the price of a fake.

 

“A closed mouth gathers no feet.”

 

Each party to the deal probably knows that the violin hasn’t been authenticated.  There’s a chance, given the rarity of Stradivariuses, that it might be a genuine, but there is a bigger chance that it might be a fake.  The price reflects the fact that these risks have been exchanged.

 

This may be kind of a gambling transaction.  If that’s what it is, the deal should be allowed to stand, given that these are sophisticated, knowledgeable parties.

 

There is also no mistake, because the underlying assumption was that it might be genuine but probably isn’t.  There was no mistake as to that assumption whether or not it turns out that that violin is genuine.

 

If this argument doesn’t work for Smith, a fallback position would be that the contract should be avoided because it was based on a mutual mistake, in which case Smith loses $4,000, which is better than losing $19,000.

 

So what lesson do we derive from this problem?  Sometimes a seller will want to use mutual mistake defensively against an aggressive buyer trying to win a big verdict based on breach of warranty.

 

Does the UCC take away the chance to argue mistake in a warranty situation?  Let’s say a buyer could establish that there was a warranty that this was a genuine Stradivarius.  Should we ever let the seller off the hook on the grounds of mutual mistake, limiting the buyer to a rescission and avoidance remedy rather than protecting the buyer’s expectation interest?

 

The answer depends on putting together § 1-103 with §§ 2-313 and 2-714(2).  § 1-103 “grandfathers” in common law principles, including mistake.  But do the provisions of §§ 2-313 and 2-714(2) displace the law of mistake, or do we allow the law of mistake to supplement those provisions?  Not every court will apply the statutes the same way, but a number of courts would allow the law of mistake to supplement if the seller is especially sympathetic.  Once in a while, though not often, a seller in a warranty case can obtain some relief by using a mistake argument defensively.

 

Notice that whether we have a § 2-313 warranty turns on whether the description, affirmation of fact, promise, sample or model becomes part of the basis of the bargain.  Mutual mistake turns on the finding of an untrue underlying basic assumption.

 

But how do we figure out what the basis of the bargain is?  That’s just as hard as finding out what the parties’ basic assumptions were.

 

Excuse

 

Contract liability is by and large strict liability.  Did you make a promise?  Is it enforceable?  Did you break it?  If the answer to each of these questions is yes, by and large you’re liable for damages or for specific performance.  We usually don’t recognize any excuses.

 

Taylor v. Caldwell

 

This is a case that does grant an excuse under circumstances where, before this case, we might not have granted one.  This case also deals with unforeseen circumstances and supervening events: things that happen after contract formation and before performance that create problems for performance.

 

The promise on the part of the defendant in this case was that the owner of the hall would make it available on four summer days to the plaintiff.  The contract was made in May.  Sometime between the contract formation in May and the first of the promised dates, the hall burned to the ground.  Because it had burned to the ground, the owner didn’t make it available to the concert promoters.  The promoters said: “We’re looking at a big loss here!  We spent a lot of money getting ready for these concerts!  You broke your promise, and you should pay!”  But the King’s Bench says that the owner doesn’t have to pay anything.

 

This only happens when neither party is at fault.  This is an “Act of God”, and neither of the parties was at fault.

 

Before this case, the law said: “If you promise, you ought to perform, and if you don’t, you’re going to pay damages.  This law is not too harsh because you should have thought about this when you entered into the agreement.  You should have conditioned your promise.”

 

So you could argue that you should never promise something that you can’t deliver.  You can only really promise that the halls will be made available if they’re not destroyed before the date of performance.

 

However, this court says that the condition is implicit in the contract.  The court lets the promisor off the hook in a situation where the promisor could have expressly conditioned its promise.  Since the old law was so hard-edged, the court comes to this result by finding an implicit qualification.  This throws less of a wrench into the old law than a more radical interpretation might.

 

Is this decision, the way it’s written, kind of conflicted?  Clovis doesn’t think so.  The opinion is talking about an underlying basic assumption, which may be unarticulated, semi-conscious or unconscious.  The underlying basic assumption here is that the hall is still going to be there on the date of performance and it’s not going to burn down.

 

The parties have included no express provision for what will happen if the hall burns down.  They’re silent about that issue in their agreement.  The court fills a gap, supplies a term that the parties haven’t agreed upon.  The court recognizes that there is a deal here and will insert a provision that it feels is reasonable under the circumstances in order to deal with this event.  The usual provision that will be supplied is: “You promised, you broke your promise, and thus you’ll be liable in damages.”  But sometimes, we’ll be more lenient.

 

If you have a underlying basic assumption that the hall is not going to burn down or that the hall is going to be there on the date of performance, but supervening events destroy the hall without the fault of either party, and that renders performance by one party impracticable or impossible, then there will be an excuse.  The level of “impractical” here is said to be very high.  It means more than just impractical, it means practically impossible.  Check out Restatement Second § 261.

 

Say you have an employment contract where the employee promises to work for the employer for two years.  The employee works for six months and then dies.  The employee is excused from performance for the remaining 18 months and will not be in breach.  If you’re the employer, you can’t get money for damages out of the employee’s estate.  The employee’s death has rendered the employee’s performance impossible.  You can probably get this from either § 261 or § 262.

 

Notice that § 261 ends with the words: “unless the language or the circumstances indicate the contrary”.  An employee’s death will typically be “the occurrence of an event the non-occurrence of which renders performance impossible”.  But the employee could promise that in the case of his death the employer will be compensated.

 

So you get an excuse in a personal services contract if you die or if you get sick enough that you can’t work.  The sickness excuse may not be a total excuse.  It’s only temporary.  When you get better, you probably have to go back.

 

An example from this case is that a painter contracted to paint a picture will be excused if he goes blind before he completes the picture.

 

Taylor grants an excuse even when you don’t have a death, illness, or blindness, but rather the destruction of an asset essential to the performance of the contract.

 

To get an excuse under § 261, your performance must be rendered impracticable.  Suppose in Taylor, the hall does not burn down, but rather the weather conditions on each of the four dates are terrible, such that very few people are going to come out to the concerts.  The promoter is disappointed.  Is there any excuse to the promoter to pay for the four nights?  Typically no.

 

Who’s got the risk?  When you make a promise, you typically have to do it, even when doing it becomes more troublesome and expensive than you previously anticipated.  But there are some troubles that are so great and so surprising that we’ll say that the risk of such events were not assumed.

 

In this case, the contract is avoided.  The promoters don’t have to pay.  If they have paid, they have to get their money back.  The big deal is that the owner is not in breach and therefore is not liable for the significant losses that the promoter has incurred by reasonably relying on the owner’s promise and being disappointed when it can’t be and isn’t performed.

 

So granting an excuse is good for the person excused, but it’s bad for the person on whom the excuse operates.

 

How do we think about these cases?  Well, what were the underlying assumptions?  What risks were exchanged when the contract was made?  What risks were not contemplated?  Was there an event catastrophic enough to grant an excuse?

 

Tompkins v. Dudley

 

A builder almost finishes building a new school, but then it burns down.  The builder says that he ought to get an excuse, but the court says no and says that he must build it over again, at which point he’ll get paid once even though he built it twice.  This case represents the current state of the law.  But why do we do it this way?  Why is no excuse allowed here?

 

One way to explain this result is precedent.  There is authority for saying that we’ll put the risk on the builder.  Just like mutual mistake and identifying the underlying basic assumptions, there are hard issues here.

 

Keep in mind two things:

 

1.     This is a good situation for the parties to have express clauses that settle what happens in the case of a fire, flood, labor disturbance, war, or anything else.  We have lots of clauses like this, and these clauses frequently serve useful purposes.  It’s easier to read and apply these clauses than to figure out what the underlying basic assumptions were.

  1. There’s something to be said for predictable precedents when we’re dealing with unpredictably destructive events.  Having predictable rules also makes it easier to contract out of them.  If you don’t like it, why has it persisted?  Because parties can agree around it.  They can shift the loss to an insurance company.

 

What’s the difference between this case and, on the one hand, Taylor, and on the other hand, Carroll v. Bowersock?

 

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