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8.3.2.2 Notes - Sherwood v. Walker
by Kessler, Gilmore & Kronman
ANNOTATION DISPLAY
1
NOTE
2
1. The leading English case of Kennedy v. Panama, etc., Mail Co., L.R.
2 Q.B. 580 (1867), was relied on in both the majority and dissenting
opinions in Sherwood v. Walker as well as in the opinion of the court
in Wood v. Boynton. In the Kennedy case the Mail Company had
issued shares to raise capital for building a fleet of ships to be used in
the Pacific. In their prospectus the directors had in good faith
represented that they had a contract with the government of New
Zealand for carrying the European mails between New Zealand and
Panama (in Panama the mails were transported across the Isthmus
and reshipped for the Atlantic and Pacific legs of the journey). Relying
on that representation, Kennedy subscribed for 1,600 shares at £7
per share. It turned out that the London agent of the New Zealand
government had exceeded his authority in negotiating the contract,
which was subsequently repudiated by the government. A second
contract was negotiated on terms less favorable to the Mail
Company. Kennedy, who had paid down £2 per share, sued the
Mail Company to get his money back; the Mail Company
counterclaimed to recover the balance of £5 due on each share. At
the time the actions were brought the shares were selling for £5 per
share. Judgment was for the Mail Company on both the claim and
counterclaim. (Mellish, whom we have met before as winning counsel
in Raffles v. Wichelhaus, supra p. 869, was the losing counsel,
appearing for Kennedy. The opinion in Queens Bench was by
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Last Updated: June 02, 2014
Original Item: 8.3.2.2 Notes Sherwood v. Walker
Lineage of: 8.3.2.2 Notes Sherwood v. Walker
Current Annotated Text
09/27/2012 at 14:14 by
Kessler, Gilmore & Kronman
02/15/2015 at 20:47 by
rauvinj
03/12/2015 at 13:10 by
mengjiezou
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Name: Kessler, Gilmore &
Kronman
Blackburn, J., whom we shall meet again in Taylor v. Caldwell, infra
p. 920). On the facts as stated, do you think the Kennedy case is
"like" either Wood v. Boynton or Sherwood v. Walker? If you do, is it
an authority in support of the Wood decision? Does it support the
majority opinion or the dissent in Sherwood?
3
2. According to Professor (now Judge) Posner, Sherwood v. Walker
can best be approached "by asking how the parties would have
allocated the risk [of the cow's pregnancy] between them had they
foreseen it." Economic Analysis of Law 73 (2d ed. 1977). He
elaborates as follows:
4
This approach decomposes the contract into two distinct
agreements: an agreement respecting the basic
performance (the transfer of the cow) and an agreement
respecting a risk associated with the transfer (that the cow
will turn out to be different from what the parties
believed). In fact there was some evidence that Rose's
sale price included her value if pregnant, discounted
(very drastically of course) by the probability of that
happy eventuality. This evidence, if believed, would have
justified the court in concluding that the parties had
intended to transfer the risk of the cow's turning out to be
pregnant to the buyer, in which event delivery should
have been enforced. Even in the absence of any such
evidence, there would be an argument for placing on the
seller the risk that the cow is not what it seems. In general,
if not in every particular case, the owner will have
superior access to information concerning the actual or
probable characteristics of his property. This is the theory
on which the seller of a house is liable to the buyer for
any latent (as distinct from obvious) defects; a similar
principle could be used to decide cases of mutual
mistake. [footnotes omitted]
5
Do you agree with Posner's assessment of the case? The plaintiff in
Sherwood was a banker; would it have made a difference if he had
been a butcher?
6
3. In both Wood and Sherwood the thing being sold turned out to be
immensely more valuable than the parties had, in good faith,
assumed when they made their deal. In Kennedy the shares turned out
to be less valuable than they presumably would have been if the
representation in the prospectus had been true. Another case of the
Kennedy type was Smith v. Zimbalist, 2 Cal. App. 2d 324, 38 P.2d
170 (1934) (hearing denied by Supreme Court of California). Smith
was an elderly and evidently wealthy collector of rare violins (that is,
he was not a dealer). Zimbalist was a leading concert violinist.
Having been invited to inspect Smith's collection, Zimbalist identified
two violins as being a Stradivarius and a Guarnerius and offered to
buy them. Smith agreed to sell the two violins for $8,000; Zimbalist
paid $2,000 down and agreed to pay the balance in six equal
monthly installments. A "bill of sale" signed by Smith described the
violins as being a Stradivarius and a Guarnerius, stated the price and
the terms of payment, acknowledged receipt of the $2,000 down
payment and further provided: "I agree that Mr. Zimbalist shall have
the right to exchange these for any others in my collection should he
so desire." Zimbalist signed a comparable "memorandum." Before
Zimbalist had made any further payments, it was discovered that the
violins were copies that were not worth more than $300. Smith sued
Zimbalist to recover the unpaid balance of $6,000. Judgment was for
Zimbalist on two grounds. The first was that in a contract for the sale of
goods "the parties to the proposed contract are not bound where it
appears that in its essence each of them is honestly mistaken or in
error with reference to the identity of the subject matter of such
contract." The second was that, by the description in the bill of sale,
Smith had warranted that the violins were genuine. (Note that it was
Zimbalist who had initially identified the violins.) The trial court
concluded that Smith had not given a warranty, but it gave judgment
for Zimbalist, presumably on the first ground. It is curious that the
appellate court, in affirming the judgment, should have gone to the
trouble of reversing the trial judge on his handling of the warranty
issue. Possibly that may be taken to suggest that the appellate court
was not altogether satisfied with the first ground of decision. There is
no further reference in the opinion to the provision of the bill of sale
under which Zimbalist was to have the right to exchange the two
violins for any others in Smith's collection. It does not appear that
Zimbalist attempted to recover the $2,000 down payment. If he had,
how do you think the court would (or should) have disposed of the
claim?
7
4. Houser, J., in the course of his opinion in Smith v. Zimbalist,
digested Sherwood v. Walker at some length, adding the following
comment: "But to the contrary of such ruling on practically similar
facts, see Wood v. Boynton. . . ." Evidently Judge Houser regarded
the two cases as irreconcilable (same fact situations, opposite
holdings). Do you agree? See further the Note on Bell v. Lever
Brothers, Ltd., infra p. 896.
8
5. In Amalgamated Investment and Property Co. Ltd. v. John Walker &
Sons, Ltd., [1976] 3 All. E.R. 509 (C.A.), Walker in 1973 advertised
for the sale of land it owned in London. The land was occupied by a
large warehouse that had originally been built for the use of Walker,
a whiskey manufacturer, as a bonded warehouse and bottling factory
but was no longer used for that or any other purpose. The land was
described as being suitable for "occupation or redevelopment."
Amalgamated, making clear that it was interested in acquiring the
property for redevelopment, offered £1,710,000. On July 19, 1973,
Walker accepted the offer "subject to contract." On August 14
Walker, in response to an inquiry from Amalgamated, stated that it
was not aware of any proposal to have its warehouse designated as
a "building of special architectural or historic interest." On September
25 Amalgamated and Walker signed a contract for sale of the land
for £1,710,000. On September 26 the Department of the
Environment notified Walker that the warehouse had been listed as a
"building of special architectural or historic interest." The listing made
the land unavailable for redevelopment unless an exemption (a "listed
building consent") could be obtained from the Department. Until
receipt of the September 26 communication, neither Walker nor
Amalgamated had known that the Department was considering the
listing of the ware- house. The effect of the listing was to reduce the
value of the property from £1,710,000 (the contract price) to
£200,000.
9
Amalgamated sought rescission of the contract on the alternative
grounds of "common mistake" and "frustration." The trial judge denied
relief on either ground. A three-judge panel in the Court of Appeal
unanimously affirmed. As to "common mistake," there was no ground
for relief since the contract was signed on September 25 and the
warehouse was not officially "listed" until the following day when the
notification was signed and dispatched. As to "frustration," the
possibility that a building might be "listed" and thus made unavailable
for redevelopment was, as Buckley, L.J., put it, "a risk which inheres in
all ownership of buildings . . . a risk that every owner and every
purchaser of property must recognize that he is subject to." All the
judges expressed their horror and disgust at the procedures that the
Department of the Environment had followed in deciding to list the
Walker warehouse as a "building of special architectural or historic
interest" and wished Amalgamated the best of luck in its attempt to
secure an exemption.
10 6. In City of Everett v. Estate of Sumstad, 26 Wash. App. 742, 614
P.2d 1294 (1980) the facts were that the Estate had commissioned an
auctioneer to sell certain property belonging to the Estate, including a
safe. The safe contained an inner compartment with a combination
lock; the compartment was locked; the combination had been lost;
neither the Estate nor the auctioneer had had the compartment
opened by a locksmith, or knew what, if anything, was inside the
compartment. At the auction, the auctioneer stated these facts to the
bidders. A sign behind the auctioneer's block read: All Sales are Final.
The Mitchells, who operated a second-hand store and were regular
customers at the auction, bid on the safe for $50. They engaged a
locksmith who, on opening the locked compartment, found $32,207.
The locksmith turned the money over to the police. Both the Estate and
the Mitchells claimed the money; the City commenced an interpleader
action. Apparently no one knew how long the money had been in the
safe or who had originally owned it. The trial court awarded the fund
to the Estate and was affirmed on appeal by the majority of a threejudge panel. The majority opinion concluded that resolution of the
case "depends on an analysis of the objective theory of contract" and
that "the parties did not objectively enter into a contract for the sale of
the safe and its contents, but only a sale of the safe." [Emphasis in
original] The dissenting opinion collects cases, old and new, involving
property found in locked or sealed containers (see Annotation, 4
A.L.R.2d 318 (1949)). One of the cases is Durfee v. Jones, 11 R.L 588,
23 Am. Rep. 528 (1877). Plaintiff was the owner of a safe, which he
entrusted to the defendant for sale, but also with permission to use the
safe until it was sold. The defendant found some bank notes in a
crevice of the safe. The plaintiff (who did not claim to be the "original"
or "true" owner of the bank notes) naturally claimed them. The Rhode
Island court awarded the fund to the defendant, as a "finder." Holmes
discussed the Rhode Island case in his lecture on Possession, in The
Common Law 177 (M. Howe ed. 1963), commenting: "I venture to
think this decision wrong." Young, Half Measures, 81 Colum. L. Rev.
19,24 (1981), comments that in the City of Everett case the
Washington court "if [it] had characterized the problem as one of
mistake [instead of contract formation] ... might have been willing to
consider the argument that treasure troves ought to be divided
between the parties to a sale." However the issue in the case is
"characterized," how do you think the case should be decided? All
the money to the Estate? All the money to the Mitchells? Half to each?
Do any of the other materials in this section seem to you to throw any
light on this problem?
11
7. Assume that A contracts to sell his Blackacre to B for $50,000
(which both A and B consider to be a fair price). Subsequently it is
discovered that the land is oil-bearing and worth millions.
"Subsequently" in the preceding sentence can be taken to mean: 50
years after the conveyance; immediately after the conveyance;
immediately before the conveyance. Would you be in favor of taking
the time scheduled for performance under the contract as an absolute
cut-off? Or would you prefer a rule under which the seller could
recover the land if he discovered its true value within a reasonable
time after conveyance and sued to get it back before the buyer had
substantially changed his position or third parties had acquired rights
in the land? Or a rule under which, in cases of this type, seller and
buyer would divide the unanticipated profits? Cady v. Gale, 5 W. Va.
547 (1871), is an oil-bearing land case in which the discovery of oil
was made after the buyer of the land had paid the agreed
consideration and at a time when the seller ought to have (but had
not) conveyed to him. In the buyer's action for specific performance,
the Supreme Court of Appeals reversed the lower court and ordered
that the seller convey his interest in the land and account to the buyer
for interim rents and profits.
12
Suppose the buyer in Cady had been a professional geologist who,
after conducting a survey of the property in question, concluded it
was oil-bearing but said nothing about this to the seller. Compare
Laidlaw v. Organ, supra p. 89. Would you consider the buyer's
position to be stronger or weaker under these circumstances? A case
of this sort would probably be classified as one of unilateral mistake
(since only the seller is mistaken as to the property's true value). Do
you think it should be treated in the same fashion as the mistaken bid
cases, supra pp. 323-348, which have also traditionally been
classified under the heading of unilateral mistake? See Kronman,
Mistake, Disclosure, Information and the Law of Contracts, 7 J. Legal
Stud. 1 (1978).
13
8. In Ben v. Lever Brothers, Ltd., L.R. 1932 A.C. 161 (1931), the facts
were these: Lever Brothers had entered into employment contracts
with Bell and Snelling, under which the two men were to render
various services for the company in connection with its West African
cocoa business. Several years later, Lever Brothers decided to cancel
the contracts for purely financial reasons, and paid Bell and Snelling
£50,000 in return for their agreement to accept the cancellations. The
company subsequently discovered that during the period of their
employment, the two men had exploited their positions of trust in the
company for their own personal gain. Bell and Snelling had
apparently made no misrepresentations to the contrary, but neither
had they disclosed their own wrongdoing. If the fact of their
misconduct had been known at the time of the cancellation
agreement, Lever Brothers could have simply dismissed Bell and
Snelling with no compensation whatsoever. The company brought an
action to recover the money it had already paid them, claiming that it
had done so on the basis of an invalidating mistake, namely, its
ignorance of the fact that it could "have got rid of them for nothing."
The trial court gave judgment for Lever Brothers and was unanimously
affirmed by a Court of Appeal that included Scrutton, L.J. However, a
divided House of Lords reversed the judgment. In the course of his
opinion (or speech) for the majority view, Lord Atkin remarked:
14
[O]n the whole, I have come to the conclusion that it
would be wrong to decide that an agreement to terminate
a definite specified contract is void if it turns out that the
agreement had already been broken and could have
been terminated otherwise. The contract released is the
identical contract in both cases, and the party paying for
release gets exactly what he bargains for. It seems
immaterial that he could have got the same result in
another way, or that if he had known the true facts he
would not have entered into the bargain. A. buys B.'s
horse; he thinks the horse is sound and he pays the price
of a sound horse; he would certainly not have bought the
horse if he had known as the fact is that the horse is
unsound. If B. has made no representation as to
soundness and has not contracted that the horse is sound,
A. is bound and cannot recover back the price. A. buys a
picture from B.; both A. and B. believe it to be the work of
an old master, and a high price is paid. It turns out to be
a modern copy. A. has no remedy in the absence of
representation or warranty. A. agrees to take on lease or
to buy from B. an unfurnished dwelling-house. The house
is in fact uninhabitable. A. would never have entered into
the bargain if he had known the fact. A. has no remedy,
and the position is the same whether B. knew the facts or
not, so long as he made no representation or gave no
warranty. A. buys a roadside garage business from B.
abutting on a public thoroughfare: unknown to A., but
known to B., it has already been decided to construct a
byepass road which will divert substantially the whole of
the traffic from passing A's garage. Again A. has no
remedy. All these cases involve hardship on A. and
benefit B., as most people would say, unjustly. They can
be supported on the ground that it is of paramount
importance that contracts should be observed, and that if
parties honestly comply with the essentials of the
formation of contracts — i.e., agree in the same terms on
the same subject-matter — they are bound, and must rely
on the stipulations of the contract for protection from the
effect of facts unknown to them.
15
The case was evidently not one of easy or obvious solution. Nine
judges voted on the case. Six felt that Lever Brothers should recover
the settlements it had paid over to Bell and Snelling. However, the
three who felt that Bell and Snelling could keep the money were a
bare majority of the House of Lords. It may not be altogether
implausible to take this diversity of judicial views as illustrative of the
transition from the nineteenth-century rules on excuse from contractual
liability under mistake or impossibility theory to the much broader
twentieth-century excuse rules. Arguably, if the case had been
decided in the 1890s, all the judges would have held that Bell and
Snelling could keep the money. Perhaps, if the case had been
decided in the 1970s, all the judges would have held that Lever
Brothers could get the money back.
16
9. Lever Brothers entered into the settlement agreements with Bell and
Snelling in March of 1929, paid the money over on May 1,
discovered the facts about their misconduct in July and sued to get the
money back. Assume that Lever Brothers had discovered the facts in
April, refused to make any payments, and been sued by Bell and
Snelling. What result? Reconsider in this connection the time sequence
in Wood v. Boynton, supra p. 84, Sherwood v. Walker, supra p. 887,
and the cases digested in the Note following Sherwood. See also the
Note following Raffles v. Wichelhaus, supra p. 869. It should be
noted that none of the opinions in any of these cases (or in any other
cases of the same type known to the editors) contains the slightest hint
or suggestion that the time at which the true state of facts was
discovered (that is, before or after performance) was relevant to the
decision.
17
10. Under a rational system of law, do you think the plaintiff in Wood
v. Boynton should get the diamond back? If, in Smith v. Zimbalist,
Zimbalist had paid the full price before finding out that the violins
were copies, do you think he should get the money back? Do you
think that Bell and Snelling, despite their misconduct, should have
been allowed to keep the money Lever Brothers had paid them? And
how would you distribute the money found in the safe in the City of
Everett case? Do you think that your answers to the questions just put
are consistent with one another?
18
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