Contracts
Class Notes
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”.
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.
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?
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.
To
get an excuse under § 261, your performance must be rendered impracticable. Suppose in
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.
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.
What’s
the difference between this case and, on the one hand,