Anglo-AmericanContract 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 mistakeO 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.