Anglo-American
Contract and Torts
Prof. Mark P. Gergen
Class 12
Mistake and changed
circumstances
Frigaliment Importing Co. v. B.N.S. Intern. Sales Corp, p. 164.
• Contract for chicken between German buyer and US seller.
• Plaintiff understood chicken to mean “young chicken, suitable
for broiling and frying.” Defendant thought it meant “any bird
of that genus that meet contract specifications on weight and
quality.” Defendant shipped stewing hens (fowl).
• Plaintiff took first shipment and protested when it learned
contents. Second shipment was stopped.
• Plaintiff is suing for damages based on the difference between
the contract price for broilers and the market price at the time
of delivery.
Judge Friendly begins by looking at the contract to see if it
establishes the meaning of chicken. He finds no answer
there. See p. 165 top.
Next he looks at communications between the parties and
their testimony about the apparent meaning of what was
said. See p. 165 bottom. This, too, is inconclusive.
Next he looks at expert testimony regarding trade usage and
government regulations on the quality of chicken (which
favored the seller). See p. 166-167. He finds these to be
inconclusive as well.
We learn at pp. 167-168
• The contract price for the large birds was 33 cents per
pound.
• At the time of the contract the wholesale price for
broilers was between 35 to 37 cents.
• The wholesale price for fowl was 30 cents.
At the bottom of p. 168 Friendly concludes
• The defendant honestly believed it could fulfill the
contract with fowl
• This belief was not unreasonable.
At the very bottom of the page Friendly notes that the
plaintiff’s subjectively believed that it was entitled to broilers
but that this does not establish it had a right to broilers.
What if the seller had brought a counter-claim for damages?
One infers that this claim would have failed because the buyer’s
subjective belief also was not unreasonable.
Frigaliment then would be a mutual misunderstanding case,
like Raffles, p. 133.
If one party’s subjective understanding of “chicken” had been
more reasonable in the circumstances, then that party would
have been entitled to damages. This would illustrate the usual
application of the objective principle.
Rectification/Reformation to correct mistranscription, p.
163 bottom.
Parties reach agreement on a term but the term is
inaccurately transcribed in written contract. The equitable
remedy of reformation/rectification is available to correct
the writing.
Same result may be reached by interpretation if court is
willing and able to disregard plain meaning of written
contract. See City & Westminster Properties v. Mudd, p. 137.
Doctrine remains important in places like Texas and to
correct documents, such as deeds and insurance policies,
on which third parties might rely.
This is an equitable remedy. As such, factual decisions are
for the judge and not the jury even in US.
Reformation illustrates tendency in the common law to
describe the law in terms of remedies and not the causative
events that make the remedy available.
Other examples of this tendency you have seen include
estoppel and restitution.
Unilateral mistake—communicative errors, p. 158 and p. 169
(mistakes in transmission)
Hartog v. Collin &Shields (KBD 1939) “the parties had
negotiated for the sale of animal skins by the pound, as was
the custom in the trade, but the contract referred to them by
the piece. Holding that the plaintiff must have known of the
seller’s mistake, the contract was adjudged void for mistake.”
This summary suggests the possibility of reformation or of
finding a contract to pay by the pound rather than by the
piece.
But perhaps the plaintiff (the buyer who gained from the
mistake) realized the mistake and hoped to profit thereby.
This brings into play the rule stated at p. 158 bottom: if “the
non-mistaken party knew or should have known of the other
party’s error . . . the contract is voidable by the mistaken party.”
For the same point referring to errors in transmission see p. 169
(top, Section e)
This rule applies as a general matter only to
communicative errors.
If a seller mistakenly undervalues an object, then a buyer
generally may take advantage of the seller’s error in
valuation.
To knowingly take advantage of a communicative error
sometimes is treated as a form of deceit.
Convention for the International Sale of Goods, Article 8(1)
“For the purposes of this Convention statements made by and
other conduct of a party are to be interpreted according to his
intent where the other party knew or could not have been
unaware what that intent was.”
The materials at the bottom of p. 158 address a different
problem.
Buyer means to order 100 kg of flour. As a result of an error,
the purchase order is for 1000 kg. The seller accepts
reasonably thinking the order was for 1000 kg. and begins
shipping. May the buyer cancel the order once he discovers the
error on the basis of unilateral mistake?
The traditional answer in the common law was no. Some
courts now allow the buyer to cancel in such a situation if
the buyer can return the seller to the status quo, such as by
paying any shipping costs that have been incurred.
Landlord and tenant negotiate a lease with an understanding that
the tenant will pay the utilities. As a result of an error in drafting
the lease, the lease states that landlord will pay.
A court can correct the error using general principles of
interpretation if the parol evidence rule and plain meaning rule do
not preclude this solution.
If interpretation cannot be used, then other doctrines are available.
If the tenant was not aware of the error, then reformation is
available.
If the tenant was aware of the error, then unilateral mistake or
deceit/fraud is available.
A judge who is required to follow National Union v. CBI,
Supp 47, is not compelled to enforce the literal term of a
writing contract if she concludes the term do not reflect the
parties actual agreement.
She may
•
•
•
•
find the term ambiguous on it face
find a latent ambiguity
use the doctrine of reformation
use the doctrines of unilateral mistake or fraud
“[T]he elaborate formula with its multitude of sub-formulas
. . .permit[s] the judge to range as freely as his judgment
dictates. . . . [T]he point to be stressed here is that whatever
sort of judgment is desired, the formulas which have been
evolved and their coteries of attendant phrases provide the
most flexible accommodation without in the least impairing
their own integrity or that of the judicial process. A science of
law could ask little better by way of intellectual machinery for
handling these varied and difficult cases.”
Leon Green
“Covert tools are unreliable tools.”
Karl Lewellyn
Parties communicate regarding an agreement, which they
embody in a writing, to achieve a mutually beneficial exchange.
I.
Error in communication results in a misunderstanding
regarding the existence or terms of the agreement.
• Resolve the misunderstanding against whoever is more
at fault using interpretation, unilateral mistake. . . .
• If neither party is more at fault, then avoid the contract
based on mutual misunderstanding.
• If the party not at fault has not relied on contract, then
perhaps allow party at fault to avoid contract on the
basis of mistake
II. Error in transcribing their agreement in written contract.
Fix the error using reformation or interpretation. . . if
the error is clearly established
III. Error regarding the value of what is being exchanged,
such as the authorship of a painting, the maker of a
violin, or whether King’s coronation will take place as
scheduled . . .
Mutual mistake
O meets T while O is traveling for the summer. He agrees to
lease an apartment he owns and lives in to T for the summer
while he is away. Unbeknownst to both parties, the building has
been destroyed in a fire. Which of these results seems right to
you and why?
a) O is liable to T for any additional expense incurred by
T finding another similar place to live.
b) T is liable to O for the summer rent.
c) Neither party is liable to the other.
Mistake v. Misprediction
•Different doctrines (mutual mistake , impossibility,
impracticability, frustration of purpose)
•Perhaps different criteria.
If T has paid a deposit for the lease, then should he recover the
deposit?
Bases for allocating risk to a party
1) Agreement
2) Background rules
3) Assume “foreseeable” risks are meant to
be dealt with by carrying out the terms of
agreement.
A party bears the risk of a mistake if
(a) the risk is allocated to him by the agreement of the
parties
(b) he is aware, at the time the contract is made, that he has
only limited knowledge with respect to the facts to
which the mistake relates but treats his limited
knowledge as sufficient (“conscious ignorance”)
An employee signs a global release of all legal claims she has or
might have against an employer on termination, known or unknown
to her, in return for a severance payment. Later she learns that she
and other women were underpaid in violation of anti-discrimination
laws. May she avoid the release on grounds of mistake?
The issue in De Balkany v. Christies, p. 151, and Smith v.
Zimbalist, p. 159, is whether a buyer of a valuable art object
(painting and violin) bears the risk the object is not authentic.
Generally if a seller makes express representations regarding
the quality of a good, then these are treated as warranties.
Statements of opinion in the nature of “puffery” are
not warranties.
In a sale of goods by a merchant there is an implied warranty of
merchantability that the goods are of “fair average quality,” “fit
for ordinary purposes,” “pass without objection in trade,” etc . . .
These rules cast on a seller the risk of unknown defects in the
quality of a good.
A seller who wants to avoid these risks must avoid making
warranties and must disclaim implied warranties such as by
selling a good “As is.”
Smith v. Zimbalist, p. 159. Sale by a violinist to a collector of two
violins thought to be made by Stradivarius and Guarnerius. Bill
of sale described the violins by their supposed makers. The
violins turned out to be imitations. The seller is suing for the
balance of the purchase price.
In the older cases discussed by the court at pp. 160-161 a
description of a violin by a seller as “by Stradivarius” is not
treated as a warranty. Why? Typically a statement of fact
regarding a good is a warranty especially if the fact bears on the
price. What is the difference?
As the cited cases indicate, even if a statement is not usually
treated as a warranty a seller is liable if it knows or has reason to
know the statement is untrue. Indeed, this is deceit.
At pp. 162-163 the court chooses to follow more recent authority
to treat the description as a warranty. Only one of the cases it
relies upon is good authority. Of these two, which one is the
better authority?
Power v. Barham (jury may find statement of artist is a
warranty of authenticity).
Flint v. Lyon (statement that sale is of flour of a
specific type is a warranty that flour will be of that
type).
Sherwood v. Walker, p. 161, is an odd case. Cow was sold on
the assumption she was barren and so worth $80 she turned
out to be fertile and worth $750. Held seller is relieved from
contract based on mutual mistake.
• This is a mutual mistake case, not a warranty
case.
• The result is widely viewed as wrong. The
court that decided it repudiated the reasoning
a year later.
• A seller generally bears the risk an object is
more valuable than the parties believe.
De Balkany v. Christie’s (QBD 1997), p. 151
Buyer of what was described as an Egon Schiele painting in the
auction catalogue claimed that the work was a forgery.
Schiele originally painted the work. 94% of the painting had
been painted over by an unknown party after the original paint
had flaked off. The unknown party also added the initials ES.
Egon Schiele
Christie’s argued that the work was authentic and the
overpainting was a question of the condition of the work, which
the contract did not guarantee. All works are sold in “as is”
condition.
The Christie’s contract provided that works found to be forgeries
could be returned within five years of a sale unless
“(1) catalogue description at the date of the auction was in
accordance with the then generally accepted opinion of
scholars...; or (2) it can be established that the Lot is a
Forgery only by means of a scientific process not generally
accepted for use until after publication of the catalogue...
or by means of a process which at the date of the auction
was unreasonably expensive or impractical or likely to have
caused damage to the Lot;”
You have the opinion of the trial judge. As you read it ask
yourself why sophisticated commercial parties seem to prefer
having their disputes resolved by judges who decide cases in
this way.
At pp. 152-153 Judge Morison explains why he concludes the
painting was a forgery and not a restoration. He places great
weight on the addition of the initials.
At pp. 154-156 Judge Morison addresses the application of
clause 11(b) in Christie’s contract. It provided that right to
return a forgery was unavailable if:
“(1) catalogue description at the date of the auction was in
accordance with the then generally accepted opinion of
scholars...; or (2) it can be established that the Lot is a Forgery
only by means of a scientific process not generally accepted for
use until after publication of the catalogue... or by means of a
process which at the date of the auction was unreasonably
expensive or impractical or likely to have caused damage to the
Lot;”
As to (1) he essentially finds there was no scholarly opinion on
authenticity. Bearing both on (1) and (2), he finds that a careful
inspection would have quickly revealed the over-painting.
Part III, pp. 156-158, turns to possible availability of a claim for
negligent misstatement. This is “dicta” since it is unnecessary
to the decision. The issue was heavily contested by both sides.
Judge Morison is working with Henderson v. Merrett Syndicates,
p. 18.
The bottom of p. 157 and top of p. 158 bears close reading.
Morison concludes:
1) He would find an assumption of responsibility by the
dealer.
2) But the terms of the catalog negated any obligation
regarding authenticity other than as provided by the
catalog.
3) Therefore, regrettably, there is no claim in tort for
negligence.
Discharge based on later events, misprediction (not mistake),
pp. 181-183.
The common law used to take an unforgiving position. See
Paradine v. Jane (1648)(holding tenant must pay rent for land
though it is inaccessible due to war).
The common law has relaxed somewhat. Authority and some
pertinent rules are collected at p. 182.
Krell v. Henry (1903), extends the principle to relieve someone who
licensed rooms to watch a coronation from obligation to pay the
balance when the coronation was cancelled. The tenant did not
seek to recover his deposit. He would not have recovered it.
This was the position of the English common law until it was
changed by statute in the mid-20th century. Impracticability would
excuse an obligation but was not a basis for affirmative relief.
You saw the same curious position in the English materials on
estoppel.