Contracts Class Notes 2/3/04


Hoffman v. Chapman


This case is about the doctrine of reformation.  The idea is that when we have a mistake in integration (like a slip of the pen of the wrong keystroke), under appropriate circumstances we will reform (fix) the writing to make it reflect the underlying agreement that has been reached.


What safeguards are found in Hoffman that are built into that doctrine?  One safeguard is that we have a higher standard of proof for a reformation case than for other civil cases.  For most civil cases, the standard of proof is “preponderance of the evidence”.  For reformation, courts in various jurisdictions have various standards, but the most common standard is “clear and convincing evidence”.  That is considered to be somewhere between the “preponderance” and “reasonable doubt” standards.


What’s the biggest safeguard?  What kind of doctrine is it?  What keeps people from getting carried away by their emotions?  This is an equitable doctrine.  That means this is purely a question for the judge.  Juries have nothing to do with reformation.  Some suits are entirely about reformation, whereas other suits seek damages, specific performance and other stuff and reformation is one issue along the way.  If the claim is mostly an action at law with a little bit of a suit in equity, the judge will look at the reformation outside the presence of the jury and fix it or not.


But what do you have to show by clear and convincing evidence?  Why are we reforming the writing?  We’re trying to conform it to the underlying agreement.  Therefore, we must show the underlying agreement with clear and convincing evidence.


The deal in this case was for half a lot with one house for $3600.  The writing described a deal for a whole lot with two houses for $3600 also.  That’s a good way to show the underlying agreement: $3600 is probably not the market price for two whole houses and a whole lot.  These are strong facts.


But let’s say there was an underlying agreement, but the parties changed it and came up with a final written agreement.  Doesn’t that run into the parol evidence rule?  Well, this doctrine doesn’t bar reformation, but the parol evidence rule might make it harder to prove that the parties had some different underlying agreement.


One way contracts can get messed up is by writing down numbers wrong.  It’s easy to mess up $10,000 by writing $1,000 or $100,000.


This case tells you that “equity aids the vigilant”.  Clovis says “Write that down and remember it.”


We also learn that you can fix your mistakes in the law even if you were careless or negligent.  The case also tells us that if we have a reformation case, the mistake must be mutual (shared in by both parties).  We can say this because the person who wrote the deed is considered an agent for both parties.  That makes it easier to reform the contract.


What if the mistake is unilateral?  Let’s say the vendor messes up and writes down “two houses” instead of “one house”.  The buyer thinks “boy oh boy”.  This seems like a stronger case for reformation.  However, many courts state that you can’t reform in the case of unilateral mistake.  You may be able to rescind and back out of the contract, but you can’t reform.  So that’s what courts say.  But according to Clovis, when the court wants to reform the contract, they’ll find some way in which the mistake was mutual in order to get to the result they want.  Clovis claims that we won’t find a case that holds that a reformation will not be made due to unilateral mistake.  He says to be leery of the statement that “mistakes must be mutual in order to reform a contract”.


We have a deed that contains a mistake.  You can reform it as to the two parties involved in the mistake.  But let’s say the purchasers sell the land to an innocent third party who thinks he is legitimately buying both houses.  They’re in good faith, they pay good money, and they don’t have notice.  You can’t reform against that person.


This is a mistake in integration.  We have already seen that you can have another kind of mistake: a failure of communication (like Raffles).  If there is no objective mutual assent and no subjective mutual assent, we simply rescind the writing because there is no underlying agreement.  We must be able to distinguish these kinds of mistakes.  Sometimes the distinction can involve some subtleties and difficulties.


A hypothetical


Farmer Brown owns two farms and he’d like to sell one but not both.  Pretty soon, both farms are going to get developed into suburban farms.  A developer is interested in the farm that’s for sale (though he doesn’t know the farmer has two of them).  Farmer Brown is in Central Ohio, and the developer is in New York.  The developer references a certain road name, but the farmer goes by old county road numbers.  Farmer Brown says he wants to sell the one on County Road 28.  Farmer Brown says his price is $200,000.  The developer sends a contract that describes the farm the developer want to buy, but not the one the farmer wants to sell.  The developer later sues the farmer for specific performance.  What can the farmer do about that?  The farmer could potentially say that there was no subjective mutual assent.  Whether there is objective mutual assent is a more difficult question.  It sounds as if both parties were pretty careless and there isn’t any very good basis for preferring either party’s meaning.  The farmer can probably make the contract go away because they didn’t reach mutual assent.


However, the farmer might say: “I said County Road 28, and that tells you where the one I wanted to sell was.  My meaning was much more reasonable than his.  Therefore, the more reasonable meaning under objective mutual assent is the one I wanted.  I will counterclaim for specific performance and to have the contract reformed to correspond with the underlying agreement (my underlying agreement).”  So the underlying agreement might be formed by objective mutual assent.


There’s a difference between a failure of communication mistake and a mistake of integration.


Let’s reverse the factual pattern in Hoffman.  Say the underlying agreement was for the entire lot with both houses, and the price is reasonable for a whole lot with two houses.  But when it was written down, there was a mistake such that the deed conveys only one house.  An effort is made to reform the underlying agreement.


The argument could be raised that the underlying agreement was oral, and for land, and thus the statute of frauds could prevent that.  Courts usually reject that argument, saying that the statute of frauds will not bar reformation.


It is argued that the court is not enforcing an oral agreement, but rather correcting a writing to enforce the agreement that the parties actually made.  Then we are enforcing the writing, which satisfies the statute of frauds.  Thus, it can be argued that the statute of frauds can never bar reformation.


The interpretation of writings


How do we figure out what the words on a piece of paper mean?  This has something to do with the parol evidence rule and raises the same sorts of arguments.  Some people, led by Williston, are reluctant to admit extrinsic evidence with respect to the interpretation of writings.


There is some vocabulary that you need to know.  There are two different labels that mean about the same thing applied to this approach: the “four corners” rule, which says that you ought to be able to interpret the words that are there just by looking at the piece of paper and reading.  It is supposed that a judge can read a writing carefully just as well as anybody else or better.


Another way to look at it is that if you sign a paper that has a relatively clear meaning, you ought to be held to that.  The standard, dictionary meaning of a writing is said to be the most reasonable.  This is called the “plain meaning rule” approach.


This approach allows the resolution of many disputes on summary judgment and makes for more efficiency and less litigation.  Interpreting a writing is also something that an appellate court can do just as easily as a trial court.  That makes it appropriate in many cases for an appellate court to reverse.  That lets us develop precedent as to what certain words mean.


Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co.


Here we see the more liberal approach: we’ll always admit evidence for the purpose of interpreting a writing.  Also, words don’t just have one meaning, but rather have a context in which they are used.  This approach has virtues, but also costs.  This approach is less efficient and may reward liars.  This approach is taken both by the UCC and by the Restatement Second.


In UCC § 2-202, it is stated in the comments that words are to be understood in their commercial context and not merely through rules of law.


In § 214, we find that parol evidence is admissible to establish the meaning of a writing.


In § 212, the comment says that we can make an effort to figure out what the parties really meant even if the words seem clear on their face.  This makes litigation more complicated and expensive sometimes.  It creates more uncertainty.  It bothers people who write their agreement in plain English and who want it enforced just as it looks.


What words have a plain meaning?  How many pounds are in a ton?  It depends on whether it’s a regular ton or a “long” ton.  You might want to interpret the word “ton”.  How many ounces in a ton?  How many in a dozen?  What about a baker’s dozen?  If a contract involves bakers, and they’re talking about dozens, you might suppose that a dozen is 13.  If you have a baker and a non-baker contracting, you might not be too sure.  “At least 50%” might really mean “49.51% or more” according to a course of dealing.  There’s another case in which “black” means “white”.  Cotton that is clearly white is referred to as black because it comes in black pods.


You can use words in a non-dictionary way, and people do it all the time, including commercial people.  One of the underlying biases of the UCC is that idea that we ought to interpret agreements and enforce them in a commercial way.  The people who made the deals should have the deal they thought they made upheld.  They shouldn’t have a deal forced on them that they never contemplated.


Our editors tell us something about canons of construction.  The Restatement Second gives us some rules of interpretation starting at § 202 and continuing through § 207.


That’s it for this section.  We already talked about standardized agreements.


Henningsen v. Bloomfield Motors, Inc.


Here’s a famous case!  In this case, Henningsen decided to buy a Mother’s Day present for his wife, and so he decided to buy a new car.  He went to Bloomfield Motors.  He was a personal friend of the owner and president of the company.  They had a typical bargain over the purchase of a new car.  They checked it out, drove it around the block, and haggled about the price.  Then the papers were produced and the parties sign them.


There was one piece of paper with writing on the front and back that says his remedies are limited to repair or replacement of defective parts.  He signs!


There’s a problem with the steering wheel, and the car is totaled.  Mrs. Henningsen gets into an accident.  The car company says that their remedy is limited to replacing the “ribbon” that was broken which caused the accident.


Why did the court allow a remedy beyond the award of a new ribbon?  Why don’t they bind Henningsen to the contract as written?  The court says a lot of things.  We must separate the wheat from the chaff.


Is the court concerned about the relative bargaining power of the parties?  We might say: “So what?  Powerful and not powerful people ought to be free to make contracts with each other.”  Lots of agreements between big, strong people and little people get enforced without batting an eye.


What did the parties in fact agree to?  What did they bargain for?  Or is the court saying that what the parties agreed to was unconscionable and thus will not be enforced on the basis of public policy?


It may be easier for the plaintiffs to win by saying that they never agreed to the “a ribbon will do it” deal.  Then the judge can decide on the basis of saying that “these parties didn’t agree, and thus you win”.  That’s not as big a hill to claim as to say that “you agreed, but this agreement has no redeeming social value, so we won’t enforce it”.  It’s much harder for a judge to strike down a contract as unconscionable than to strike it down as simply never having been made.


So why does this court decide the case the way it does?  The provision wasn’t unusual.  It is even allowed by UCC § 2-719.  That section lets you limit damages in certain ways.  Does that mean that this case is bad law?  No, it’s good law.  Why did the court do what it did in this case?


Normally, you’re bound by what you sign whether you read it or not.  Why should the result be any different here?  One thought we find in the opinion is that a reasonable person would not get out of this language the idea that it disqualifies the car buyer from suing for personal injuries.


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