b'\x0cContract Doctrine,\nTheory & Practice\nVolume Two\n\nJ.H. Verkerke\n\nCALI eLangdell Press 2012\n\n\x0cNotices\nThis work by J.H. Verkerke is licensed and\npublished by CALI eLangdell Press under a Creative\nCommons Attribution-Non Commercial-ShareAlike 3.0 Unported License.\nCALI and CALI eLangdell Press reserve under copyright all rights not\nexpressly granted by this Creative Commons license. CALI and CALI\neLangdell Press do not assert copyright in US Government works or other\npublic domain material included herein. 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All rights reserved.\nCALI\xc2\xae and eLangdell\xc2\xae are United States federally registered\ntrademarks owned by the Center for Computer-Assisted Legal Instruction.\nThe cover art design is a copyrighted work of CALI, all rights reserved. The\nCALI graphical logo is a trademark and may not be used without permission.\nShould you create derivative works based on the text of this book or\nother Creative Commons materials therein, you may not use this book\xe2\x80\x99s\ncover art and the aforementioned logos, or any derivative thereof, to imply\nendorsement or otherwise without written permission from CALI.\nThis material does not contain nor is intended to be legal advice.\nUsers seeking legal advice should consult with a licensed attorney in their\n\niii\n\n\x0cjurisdiction. The editors have endeavored to provide complete and accurate\ninformation in this book. However, CALI does not warrant that the\ninformation provided is complete and accurate. CALI disclaims all liability to\nany person for any loss caused by errors or omissions in this collection of\ninformation.\n\niv\n\n\x0cAbout the Author\nBefore he received his law degree from Yale in 1990, J. H. (Rip)\nVerkerke earned a master\'s of philosophy in economics. Verkerke joined the\nUniversity of Virginia Law School faculty in 1991 and teaches employment\nlaw, employment discrimination law, contracts and a seminar on law and\neconomics.\nWhile at Yale, Verkerke was articles editor and articles administrator\nfor the Yale Law Journal and held a number of fellowships, including the John\nM. Olin Fellowship in Law, Economics, and Public Policy. After graduation,\nhe clerked for Judge Ralph K. Winter Jr. of the U.S. Court of Appeals for the\nSecond Circuit.\nIn June 1996 Verkerke received a three-year grant from the\nUniversity of Virginia\'s Academic Enhancement Program to establish the\nProgram for Employment and Labor Law Studies at the Law School. He\nserved as visiting professor of law at the University of Texas at Austin in the\nfall of 1997. Verkerke also participated in an ABA project to draft a new\nlabor code for the transitional government of Afghanistan. In 2007, Verkerke\nreceived an All-University Teaching Award from UVA, and in 2011, he was\nselected as an inaugural member of the University Academy of Teaching.\n\nv\n\n\x0cAbout CALI eLangdell Press\nThe Center for Computer-Assisted Legal Instruction (CALI\xc2\xae) is: a\nnonprofit organization with over 200 member US law schools, an innovative\nforce pushing legal education toward change for the better. There are\nbenefits to CALI membership for your school, firm, or organization.\neLangdell\xc2\xae is our electronic press with a mission to publish more open\nbooks for legal education.\nHow do we define "open?"\n\xef\x82\xb7\xef\x80\xa0\nCompatibility with devices like smartphones, tablets, and ereaders; as well as print.\n\xef\x82\xb7\xef\x80\xa0\nThe right for educators to remix the materials through more\nlenient copyright policies.\n\xef\x82\xb7\xef\x80\xa0\nfor free.\n\nThe ability for educators and students to adopt the materials\n\nFind available and upcoming eLangdell titles at elangdell.cali.org.\nShow support for CALI by following us on Facebook and Twitter, and by\ntelling your friends and colleagues where you received your free book.\n\nvi\n\n\x0cSummary of Contents\nIV. Defining the Obligation to Perform .......................................... 1\n1. Excuse .................................................................................................................. 1\n2. Mistake ............................................................................................................... 16\n3. Substantial Performance .................................................................................. 44\n4. Exclusive Dealing Contracts ........................................................................... 53\n\nV. Regulating the Bargaining Process .......................................... 73\n1. Unconscionability ............................................................................................. 73\n2. Modification ...................................................................................................... 87\n3. Rules Concerning Information ....................................................................... 98\n4. The Statute of Frauds..................................................................................... 136\n\nvii\n\n\x0cTable of Contents\nNotices ......................................................................................................... iii\nAbout the Author ........................................................................................ v\nAbout CALI eLangdell Press ....................................................................vi\nSummary of Contents ...............................................................................vii\nTable of Contents .....................................................................................viii\nPreface .......................................................................................................... xi\nWhy study contract law? ........................................................................... xi\nWhy collaborative teaching materials? .................................................... xi\nIV. Defining the Obligation to Perform ...................................... 1\n1. Excuse ...................................................................................................... 1\n1.1. Principal Case \xe2\x80\x93 Stees v. Leonard .......................................................... 2\n1.1.1. Discussion of Stees v. Leonard ........................................................... 8\n1.2. Principal Case \xe2\x80\x93 Taylor v. Caldwell ....................................................... 9\n1.2.1. Paradine v. Jane ..................................................................................15\n1.2.2. Analyzing Risk .................................................................................15\n1.2.3. Discussion of Taylor v. Caldwell ......................................................16\n2. Mistake ................................................................................................... 16\n2.1. Principal Case \xe2\x80\x93 Sherwood v. Walker ..................................................19\n2.1.1 The Story of Sherwood v. Walker ......................................................32\n2.1.2. Lenawee County Bd. of Health v. Messerly ..........................................33\n2.1.3. Discussion of Sherwood v. Walker ...................................................35\n2.2. Principal Case \xe2\x80\x93 Anderson v. O\xe2\x80\x99Meara ...............................................35\n2.2.1. Discussion of Anderson v. O\xe2\x80\x99Meara ................................................43\n2.2.2. Hypo of the Sterile Calf .................................................................43\n3. Substantial Performance ...................................................................... 44\n3.1. Principal Case \xe2\x80\x93 Jacob & Youngs v. Kent ...........................................44\n3.1.1. Perfect Tender and Substantial Performance .............................51\n\nviii\n\n\x0c3.1.2. Motion for Rehearing in Jacob & Youngs v. Kent ..........................52\n3.1.3. Discussion of Jacob & Youngs v. Kent.............................................52\n4. Exclusive Dealing Contracts ............................................................... 53\n4.1. Principal Case \xe2\x80\x93 Wood v. Lucy, Lady Duff-Gordon ....................54\n4.1.1. The Background of Wood v. Lucy, Lady Duff-Gordon ...................57\n4.1.2. Reading Wood v. Lucy, Lady Duff-Gordon .......................................57\n4.1.3. Discussion of Wood v. Lucy, Lady Duff-Gordon .............................58\n4.1.4. Hypo on Real Estate Sales .............................................................58\n4.2. Principal Case \xe2\x80\x93 Bloor v. Falstaff Brewing Corp. .........................59\n4.2.1. \xe2\x80\x9cBest Efforts\xe2\x80\x9d as Joint Maximization ..........................................69\n4.2.2. Discussion of Bloor v. Falstaff .........................................................70\n4.2.3. Hypo on Joint Maximization .........................................................70\nV. Regulating the Bargaining Process ...................................... 73\n1. Unconscionability ................................................................................. 73\n1.1. Principal Case \xe2\x80\x93 Williams v. Walker-Thomas Furniture Co. I............74\n1.2. Principal Case \xe2\x80\x93 Williams v. Walker-Thomas Furniture Co. II ..........76\n1.2.1. Procedural and Substantive Unconscionability ..........................83\n1.2.2. Rent-to-Own Industry and Consumer Protection Laws ...........84\n1.2.3. Uniform Commercial Code Unconscionability Provisions ......85\n1.2.4. Discussion of Unconscionability ..................................................86\n2. Modification .......................................................................................... 87\n2.1. Principal Case \xe2\x80\x93 Alaska Packers\xe2\x80\x99 Association v. Domenico ........88\n2.1.1. The Story of Alaska Packers Association v. Domenico .....................96\n2.1.2. Hypo on Modification ....................................................................97\n2.1.3. Discussion of Alaska Packers Association v. Domenico ...................98\n3. Rules Concerning Information ........................................................... 98\n3.1. Fraud and Affirmative Misrepresentation ......................................98\n3.2. Non-Disclosure and Concealment ............................................... 102\n3.3. Principal Case \xe2\x80\x93 Reed v. King ........................................................... 103\n3.4. Principal Case \xe2\x80\x93 Stambovsky v. Ackley ............................................ 110\n3.4.1. Discussion of Reed v. King and Stambovsky v. Ackley ................. 117\n\nix\n\n\x0c3.4.2. Kronman\xe2\x80\x99s Theory of Deliberately Acquired Information ... 118\n3.5. Principal Case \xe2\x80\x93 Obde v. Schlemeyer ................................................. 122\n3.5.1. Discussion of Obde v. Schlemeyer .................................................. 128\n3.6. Principal Case \xe2\x80\x93 L & N Grove, Inc. v. Chapman ........................... 128\n3.6.1. Discussion of L&N Grove v. Chapman ...................................... 135\n3.6.2. Hypo of Ivy Diamonds ............................................................... 135\n3.6.3. Further Discussion of L&N Grove v. Chapman ........................ 136\n4. The Statute of Frauds ........................................................................ 136\n4.1. Principal Case \xe2\x80\x93 Monetti, S.P.A. v. Anchor Hocking Corp. ..... 137\n4.1.1. Applying the UCC or Common Law Statute of Frauds ......... 149\n4.1.2. Discussion of Monetti v. Anchor Hocking..................................... 150\n4.1.3. Hypo on the UCC Statute of Frauds ........................................ 150\n4.1.4. Proposed Amendments to U.C.C. \xc2\xa7 2-201............................... 151\n\nx\n\n\x0cPreface\nOur reading assignments this semester will include all of the elements\nthat make up a conventional casebook. You will read judicial opinions,\nstatutory provisions, academic essays, and hypotheticals. You will puzzle over\ncommon law doctrines and carefully parse statutes. We will try to develop\ntheories that can predict and justify the patterns of judicial decisions we\nobserve.\nWhy study contract law?\nThe first semester of law school is mostly about learning to speak a\nnew legal language (but emphatically not \xe2\x80\x9clegalese\xe2\x80\x9d), to formulate and\nevaluate legal arguments, to become comfortable with the distinctive style of\nlegal analysis. We could teach these skills using almost any legal topic. But we\nbegin the first-year curriculum with subjects that pervade the entire field of\nlaw. Contract principles have a long history and they form a significant part\nof the way that lawyers think about many legal problems. As you will\ndiscover when you study insurance law, employment law, family law, and\ndozens of other practice areas, your knowledge of contract doctrine and\ntheory will be invaluable.\nWhy collaborative teaching materials?\nThe ultimate goal of this project is to involve many professors in\nproducing a library of materials for teaching contracts (and other subjects).\nFor the moment, I will be solely responsible for collecting public domain\ncontent and generating problems and explanatory essays. These embryonic\nreading materials will grow and evolve as I use and expand them and as other\nprofessors join in producing additional content. I gratefully acknowledge the\nextraordinary work of my talented research assistants who have been\ninstrumental in helping me to put these materials together. Thanks to Sarah\nBryan, Mario Lorello, Elizabeth Young, Vishal Phalgoo, Valerie Barker and\nJim Sherwood.\nI believe that it is equally important to involve students in the\nongoing process of refining and improving how we teach legal subjects. Our\ncollaboration site will provide a platform for student-generated content and\nlively dialogue. With your enthusiastic engagement, we will finish the\nsemester with an excellent understanding of contracts and a useful collection\n\nxi\n\n\x0cof reference materials. I invite each of you to join us for what will be a\nchallenging, sometimes frustrating, but ultimately rewarding, intellectual\njourney.\n\nxii\n\n\x0cIV. Defining the Obligation\nto Perform\nWe have thus far focused on the rules that determine whether the\nparties have made an enforceable contract. Our attention now shifts to the\nquestion of performance. What conduct will be sufficient to fulfill each\nparty\xe2\x80\x99s obligation under the contract? Are there circumstances that might\nexcuse performance?\n1. Excuse\nWhen we make or receive promises, we understand that there are at\nleast some circumstances that will extinguish the resulting obligation to\nperform. In social settings, a \xe2\x80\x9cgood excuse\xe2\x80\x9d exists whenever an unexpected\ncontingency prevents someone from fulfilling her promise. If Sharon has\nagreed to give several friends a ride to a concert, mechanical trouble with her\ncar excuses her from a duty to drive, but not from a duty to tell her friends\npromptly about her inability to drive. If, however, Sharon is seriously injured\nin a car accident on the way to pick up her friends, no one would condemn\nher for failing to call.\nWhat is it about our understanding of Sharon\xe2\x80\x99s promise that allows\nus to make these nuanced judgments about responsibility? Notice first that\nthe words of the promise itself play no role in establishing that mechanical\ntrouble would excuse performance or in distinguishing between the\nconsequences of mechanical trouble and personal injury. Sharon made an\nunqualified promise to drive her friends to the concert, and no one expects\nher to recite a litany of circumstances in which she will be unable to perform.\nInstead, we rely on a shared understanding about what events justify\nnonperformance.\nCommercial agreements ordinarily involve comparatively complex\nobligations. Their express terms likewise cover a wider array of\ncontingencies. However, no contract can possibly provide for every event\nthat might occur between the execution of the contract and the time for\nperformance. In the two cases that follow, consider carefully the role of\ncontractual language in allocating the risks of unexpected contingencies. Try\n\n\x0cto develop a theory that can explain and perhaps justify the results in these\ncases.\n1.1. Principal Case \xe2\x80\x93 Stees v. Leonard\nStees v. Leonard\nSupreme Court of Minnesota\n20 Minn. 494 (1874)\n[1]\nAppeal by defendants from an order of the district court,\nRamsey county, denying a new trial.\n[2]\nThe action was brought to recover damages for a failure\nof defendants to erect and complete a building on a lot of plaintiffs, on\nMinnesota street, between Third and Fourth streets, in the city of St.\nPaul, which, by an agreement under seal between them and plaintiffs, the\ndefendants had agreed to build, erect, and complete, according to plans\nand specifications annexed to and made part of the agreement. The\ndefendants commenced the construction of the building, and had carried\nit to the height of three stories, when it fell to the ground. The next year,\n1869, they began again and carried it to the same height as before, when\nit again fell to the ground, whereupon defendants refused to perform the\ncontract. They claimed that in their attempts to erect the building they\ndid the work in all respects according to the plans and specifications, and\nthat the failure to complete the building and its fall on the two occasions\nwas due to the fact that the soil upon which it was to be constructed was\ncomposed of quicksand, and when water flowed into it, was incapable of\nsustaining the building. The offers of proof by defendants, and the\ncharacter of the allegations in the answer, under which the court held\nsome of the offers inadmissible, are sufficiently indicated in the opinion.\nYOUNG, J.\n[3]\nThe general principle of law which underlies this case is\nwell established. If a man bind himself, by a positive, express contract, to\ndo an act in itself possible, he must perform his engagement, unless\nprevented by the act of God, the law, or the other party to the contract.\nNo hardship, no unforeseen hindrance, no difficulty short of absolute\nimpossibility, will excuse him from doing what he has expressly agreed to\ndo. This doctrine may sometimes seem to bear heavily upon contractors;\nbut, in such cases, the hardship is attributable, not to the law, but to the\n\n2\n\n\x0ccontractor himself, who has improvidently assumed an absolute, when he\nmight have undertaken only a qualified, liability. The law does no more\nthan enforce the contract as the parties themselves have made it. Many\ncases illustrating the application of the doctrine to every variety of\ncontract are collected in the note to Cutter v. Powell, 2 Smith, Lead. Cas. 1.\n[4]\nThe rule has been applied in several recent cases, closely\nanalogous to the present in their leading facts. In Adams v. Nichols, 19\nPick. 275, the defendant, Nichols, contracted to erect a dwelling-house\nfor plaintiff on plaintiff\'s land. The house was nearly completed, when it\nwas destroyed by accidental fire. It was held that the casualty did not\nrelieve the contractor from his obligation to perform the contract he had\ndeliberately entered into. The court clearly state and illustrate the rule, as\nlaid down in the note to Walton v. Waterhouse, 2 Wms. Saunders, 422, and\nadd: \xe2\x80\x9cIn these and similar cases, which seem hard and oppressive, the law\ndoes no more than enforce the exact contract entered into. If there be\nany hardship, it arises from the indiscretion or want of foresight of the\nsuffering party. It is not the province of the law to relieve persons from\nthe improvidence of their own acts.\xe2\x80\x9d\n[5]\nIn School District v. Dauchy, 25 Conn. 530, the defendant\ncontracted to build and complete a school-house. When nearly finished,\nthe building was struck by lightning, and consumed by the consequent\nfire, and the defendant refused to rebuild, although plaintiffs offered to\nallow him such further time as should be necessary. It was held that this\nnon-performance was not excused by the destruction of the building.\nThe court thus state the rule: \xe2\x80\x9cIf a person promise absolutely, without\nexception or qualification, that a certain thing shall be done by a given\ntime, or that a certain event shall take place, and the thing to be done, or\nthe event, is neither impossible nor unlawful at the time of the promise,\nhe is bound by his promise, unless the performance, before that time,\nbecomes unlawful.\xe2\x80\x9d\n[6]\nSchool Trustees v. Bennett, 3 Dutcher, 513, is almost\nidentical, in its material facts, with the present case. The contractors\nagreed to build and complete a school-house, and find all materials\ntherefor, according to specifications annexed to the contract; the building\nto be located on a lot owned by plaintiff, and designated in the contract.\nWhen the building was nearly completed it was blown down by a sudden\n\n3\n\n\x0cand violent gale of wind. The contractors again began to erect the\nbuilding, when it fell, solely on account of the soil on which it stood\nhaving become soft and miry, and unable to sustain the weight of the\nbuilding; although, when the foundations were laid, the soil was so hard\nas to be penetrated with difficulty by a pickax, and its defects were latent.\nThe plaintiff had a verdict for the amount of the installments paid under\nthe contract as the work progressed. The verdict was sustained by the\nsupreme court, which held that the loss, although arising solely from a\nlatent defect in the soil, and not from a faulty construction of the\nbuilding, must fall on the contractor.\n[7]\nIn the opinion of the court, the question is fully\nexamined, many cases are cited, and the rule is stated \xe2\x80\x9cthat where a party\nby his own contract creates a duty or charge upon himself he is bound to\nmake it good if he may, notwithstanding any accident by inevitable\nnecessity, because he might have provided against it by his contract\xe2\x80\xa6. If,\nbefore the building is completed or accepted, it is destroyed by fire or\nother casualty, the loss falls upon the builder; he must rebuild. The thing\nmay be done, and he has contracted to do it\xe2\x80\xa6.No matter how harsh and\napparently unjust in its operation the rule may occasionally be, it cannot\nbe denied that it has its foundations in good sense and inflexible honesty.\nHe that agrees to do an act should do it, unless absolutely impossible. He\nshould provide against contingencies in his contract. Where one of two\ninnocent persons must sustain a loss, the law casts it upon him who has\nagreed to sustain it; or, rather, the law leaves it where the agreement of\nthe parties has put it\xe2\x80\xa6.Neither the destruction of the incomplete\nbuilding by a tornado, nor its falling by a latent softness of the soil, which\nrendered the foundation insecure, necessarily prevented the performance\nof the contract to build, erect, and complete this building for the\nspecified price. It can still be done, for aught that was opened to the jury\nas a defense, and overruled by the court.\xe2\x80\x9d\n[8]\nIn Dermott v. Jones, 2 Wall. 1, the foundation of the\nbuilding sank, owing to a latent defect in the soil, and the owner was\ncompelled to take down and rebuild a portion of the work. The\ncontractor having sued for his pay, it was held that the owner might\nrecoup the damages sustained by his deviation from the contract. The\ncourt refer with approval to the cases cited, and say: \xe2\x80\x9cThe principle\n\n4\n\n\x0cwhich controlled them rests upon a solid foundation of reason and\njustice. It regards the sanctity of contracts. It requires a party to do what\nhe has agreed to do. If unexpected impediments lie in the way, and a loss\nensue, it leaves the loss where the contract places it. If the parties have\nmade no provision for a dispensation, the rule of law gives none. It does\nnot allow a contract fairly made to be annulled, and it does not permit to\nbe interpolated what the parties themselves have not stipulated.\xe2\x80\x9d\n[9]\nNothing can be added to the clear and cogent arguments\nwe have quoted in vindication of the wisdom and justice of the rule\nwhich must govern this case, unless it is in some way distinguishable\nfrom the cases cited.\n[10]\nIt is argued that the spot on which the building is to be\nerected is not designated with precision in the contract, but is left to be\nselected by the owner; that, under the contract, the right to designate the\nparticular spot being reserved to plaintiffs, they must select one that will\nsustain the building described in the specifications, and if the spot they\nselect is not, in its natural state, suitable, they must make it so; that in this\nrespect the present case differs from School Trustees v. Bennett.\n[11]\nThe contract does not, perhaps, designate the site of the\nproposed building with absolute certainty; but in this particular it is aided\nby the pleadings. The complaint states that defendants contracted to\nerect the proposed building on \xe2\x80\x9c a certain piece of land, of which the\nplaintiffs then were, and now are, the owners in fee, fronting on\nMinnesota street, between Third and Fourth streets, in the city of St.\nPaul.\xe2\x80\x9d The answer expressly admits that the defendants entered into a\ncontract to erect the building, according to the plans, etc., \xe2\x80\x9con that\ncertain piece of land in said complaint described,\xe2\x80\x9d and that they \xe2\x80\x9centered\nupon the performance of said contract, and proceeded with the erection\nof said building,\xe2\x80\x9d etc. This is an express admission that the contract was\nmade with reference to the identical piece of land on which the\ndefendants afterwards attempted to perform it, and leaves no foundation\nin fact for the defendants\' argument.\n[12]\nIt is no defense to the action that the specifications\ndirected that \xe2\x80\x9cfootings\xe2\x80\x9d should be used as the foundation of the building,\nand that the defendants, in the construction of these footings, as well as\n\n5\n\n\x0cin all other particulars, conformed to the specifications. The defendants\ncontracted to \xe2\x80\x9c\xe2\x80\x9cerect and complete the building.\xe2\x80\x9d Whatever was\nnecessary to be done in order to complete the building, they were bound\nby the contract to do. If the building could not be completed without\nother or stronger foundations than the footings specified, they were\nbound to furnish such other foundations. If the building could not be\nerected without draining the land, then they must drain the land,\n\xe2\x80\x9cbecause they have agreed to do everything necessary to erect and\ncomplete the building.\xe2\x80\x9d 3 Dutcher 520; and, see Dermott v. Jones, supra,\nwhere the same point was made by the contractor, but ruled against him\nby the court.\n[13]\nAs the draining of the land was, in fact, necessary to the\nerection and completion of the building, it was a thing to be done, under\nthe contract, by the defendants. The prior parol agreement that plaintiffs\nshould drain the land, related, therefore, to a matter embraced within the\nterms of the written contract, and was not, as claimed by defendants\'\ncounsel, collateral thereto. It was, accordingly, under the familiar rule,\ninadmissible in evidence to vary the terms of the written contract, and\nwas properly excluded.\n[14]\nIn their second and third offers the defendants proposed\nto prove that after the making of the written contract, and when the\ndefendants, in the course of their excavation for the cellar and\nfoundation, first discovered that the soil, being porous and spongy,\nwould not sustain the building, unless drained, the plaintiffs proposed\nand promised to keep the soil well drained during the construction of the\nbuilding; that, in consequence, the defendants did not drain the same;\nthat plaintiffs for a time kept the soil drained, but afterwards, and just\nbefore the fall of the building, they neglected to drain, in consequence of\nwhich neglect the soil became saturated with water, and the building fell;\nand that a like promise was made by defendants at the beginning of the\nerection of the second building, followed by like part performance and\nneglect, and subsequent, and consequent, fall of the building.\n[15]\nThe rule that a sealed contract cannot be varied by a\nsubsequent parol agreement, is of great antiquity, the maxim on which it\nrests, unumquodque dissolvitur eodem modo, quo ligatur, being one of the most\nancient in our law. Broom, Leg. Max. 877; 5 Rep. 26 a, citing Bracton, lib.\n\n6\n\n\x0c2, fol. 28; and, see Bracton, fol. 101. In early days the rigor with which it\nwas enforced in the courts of law, led to the interference of chancery to\nprevent injustice. Per Lord ELLESMERE, Earl of Oxford\'s Case, 2 Lead.\nCas. in Eq. 508*; 1 Spence, Eq. Jur. 636. In later times that rigor has\nbecome much relaxed, although the English courts of law have refused\nto permit sealed contracts to be varied by parol in cases of great hardship.\nLittler v. Holland, 3 Term R. 590; Gwynne v. Davy, 1 Man. & Gr. 857; West\nv. Blakeway, 2 Man. & Gr. 729; and, see Albert v. Grosvenor Investment Co. L.\nR. 3 Q. B. 123.\n[16]\nBut, in this country, it has become a well-settled\nexception to the rule, that a sealed contract may be modified by a\nsubsequent parol agreement, if the latter has been executed, or has been\nso acted on that the enforcing of the original contract would be\ninequitable. Munroe v. Perkins, 9 Pick. 298; Mill-dam Foundry v. Hovey, 21\nPick. 417; Blasdell v. Souther, 6 Gray 149; Foster v. Dawber, 6 Exch. 854,\nand note; Thurston v. Ludwig, 6 Ohio St. 1; Delacroix v. Bulkley, 13 Wend.\n71; Allen v. Jaquish, 21 Wend. 628; Vicary v. Moore, 2 Watts, 451; Lawall v.\nRader, 24 Pa. St. 283; Carrier v. Dilworth, 59 Pa. St. 406; Richardson v.\nCooper, 25 Me. 450; Lawrence v. Dole, 11 Vt. 549; Patrick v. Adams, 29 Vt.\n376; Seibert v. Leonard, 17 Minn. 436, (Gil. 410;) Very v. Levy, 13 How.\n345; 1 Smith, Lead. Cas. (6th Ed.) 576.\n[17]\nWhether the evidence offered shows a valid consideration\nfor the plaintiff\'s promise, or whether it shows that such promise, though\nwithout consideration, has been so acted on as to inure, by way of\nestoppel or otherwise, to release defendants from their obligation to\ndrain, are questions that were fully discussed at the bar, but which we are\nnot called upon to determine; for the objection is well taken by counsel\nfor the plaintiffs, that the evidence embraced in the second and third\noffers is inadmissible under the pleadings.\n[18]\nIn their answer, the defendants allege an offer and\npromise by plaintiffs (made after the defendants had commenced work\nunder the contract) to keep the land drained during the erection of the\nbuilding. No consideration is alleged for this promise, and, as nudum\npactum, it could of itself have no effect to vary the obligations imposed on\nthe defendants by the sealed contract. The answer proceeds to allege\n\xe2\x80\x9cthat the plaintiffs wholly and wrongfully failed and neglected to drain or\n\n7\n\n\x0ccause to be drained the said piece of land, or any part of the same.\xe2\x80\x9d It is\nclear that the defendants would have no right to rely on this naked\npromise, followed by no acts of plaintiffs in part performance. If the\ndefendants went on with the building, without taking the precaution to\ndrain the land, they proceeded at their own risk. The answer sets up no\nfacts on which an estoppel can be founded, and shows no defense to the\naction.\n[19]\nBut the defendants, at the trial, offered to prove, not only\nthat the plaintiffs offered to drain the land, but also \xe2\x80\x9cthat the plaintiffs\ndid, for a time, keep the same drained,\xe2\x80\xa6but afterwards they neglected to\ndo so,\xe2\x80\x9d etc. Assuming that the facts offered to be proved would\nconstitute a defense, (and we are not prepared to say they would not,) no\nsuch defense is pleaded in the answer.\n[20]\nThe tendency of this proof was to establish a new\ndefense, not pleaded, and to contradict, rather than to sustain, the\nallegations of the answer. For this reason it was inadmissible, even if the\nfacts offered to be proved would, if admissible constitute a defense to the\naction. If the proof offered would have no such tendency, it was\nimmaterial, and for this reason also was rightly excluded. And as all the\nevidence embraced in each offer was offered as a whole, and a part\nthereof was inadmissible, the entire offers were properly rejected.\n[21]\nThe objection that the evidence offered was\n\xe2\x80\x9cincompetent, irrelevant, and immaterial,\xe2\x80\x9d was sufficiently specific. The\ndefendants\' counsel must know the contents of the answer, and that\nevidence inconsistent therewith is inadmissible, if objected to.\n[22]\nThere was, therefore, no error in the exclusion of the\nevidence offered, and the order appealed from is affirmed.\n1.1.1. Discussion of Stees v. Leonard\nThe owners allegedly promised but failed to keep the soil drained.\nWhy did the Stees court refuse to entertain the argument that the owners\xe2\x80\x99\npromise had modified the original contract or that the builder had relied on\nthat promise to its detriment?\nWhat exactly did the contract in this case require the builder to do?\n\n8\n\n\x0cDid the parties discuss or negotiate over the possibility that the soil\nmight be unable to support the building?\nTry applying the comparative advantage criterion to this situation.\nCan you think of arguments that would support imposing the risk of poor\nsoil conditions on the owner? On the builder?\n1.2. Principal Case \xe2\x80\x93 Taylor v. Caldwell\nTaylor v. Caldwell\nKing\xe2\x80\x99s Bench\n3 B. & S. 826, 112 Eng. Rep. 309 (1863)\nBLACKBURN J.\n[1]\nIn this case the plaintiffs and defendants had, on the 27th\nMay, 1861, entered into a contract by which the defendants agreed to let\nthe plaintiffs have the use of The Surrey Gardens and Music Hall on four\ndays then to come, viz., the 17th June, 15th July, 5th August and 19th\nAugust, for the purpose of giving a series of four grand concerts, and day\nand night fetes at the Gardens and Hall on those days respectively; and\nthe plaintiffs agreed to take the Gardens and Hall on those days, and pay\n100\xc2\xa3 for each day. The parties inaccurately call this a "letting," and the\nmoney to be paid a "rent;" but the whole agreement is such as to shew\nthat the defendants were to retain the possession of the Hall and\nGardens so that there was to be no demise of them, and that the contract\nwas merely to give the plaintiffs the use of them on those days. Nothing\nhowever, in our opinion, depends on this. The agreement then proceeds\nto set out various stipulations between the parties as to what each was to\nsupply for these concerts and entertainments, and as to the manner in\nwhich they should be carried on. The effect of the whole is to shew that\nthe existence of the Music Hall in the Surrey Gardens in a state fit for a\nconcert was essential for the fulfilment of the contract\xe2\x80\x94such\nentertainments as the parties contemplated in their agreement could not\nbe given without it. After the making of the agreement, and before the\nfirst day on which a concert was to be given, the Hall was destroyed by\nfire. This destruction, we must take it on the evidence, was without the\nfault of either party, and was so complete that in consequence the\nconcerts could not be given as intended. And the question we have to\ndecide is whether, under these circumstances, the loss which the plaintiffs\n\n9\n\n\x0chave sustained is to fall upon the defendants. The parties when framing\ntheir agreement evidently had not present to their minds the possibility of\nsuch a disaster, and have made no express stipulation with reference to it,\nso that the answer to the question must depend upon the general rules of\nlaw applicable to such a contract.\n[2]\nThere seems no doubt that where there is a positive\ncontract to do a thing, not in itself unlawful, the contractor must perform\nit or pay damages for not doing it, although in consequence of\nunforeseen accidents, the performance of his contract has become\nunexpectedly burthensome or even impossible. The law is so laid down\nin 1 Roll. Abr. 450, Condition (G), and in the note (2) to Walton v.\nWaterhouse (2 Wms. Saund. 421 a. 6th ed.), and is recognised as the\ngeneral rule by all the Judges in the much discussed case of Hall v.\nWright (E. B. & E. 746). But this rule is only applicable when the\ncontract is positive and absolute, and not subject to any condition either\nexpress or implied: and there are authorities which, as we think, establish\nthe principle that where, from the nature of the contract, it appears that\nthe parties must from the beginning have known that it could not be\nfulfilled unless when the time for the fulfilment of the contract arrived\nsome particular specified thing continued to exist, so that, when entering\ninto the contract, they must have contemplated such continuing existence\nas the foundation of what was to be done; there, in the absence of any\nexpress or implied warranty that the thing shall exist, the contract is not\nto be construed as a positive contract, but as subject to an implied\ncondition that the parties shall be excused in case, before breach,\nperformance becomes impossible from the perishing of the thing without\ndefault of the contractor. There seems little doubt that this implication\ntends to further the great object of making the legal construction such as\nto fulfil the intention of those who entered into the contract. For in the\ncourse of affairs men in making such contracts in general would, if it\nwere brought to their minds, say that there should be such a condition.\nAccordingly, in the Civil law, such an exception is implied in every\nobligation of the class which they call obligatio de certo corpore. The rule\nis laid down in the Digest, lib. xLv., tit. l, de verborum obligationibus, 1.\n33. "Si Stichus certo die dari promissus, ante diem moriatur: non tenetur\npromissor." The principle is more fully developed in l. 23. "Si ex legati\n\n10\n\n\x0ccausa, aut ex stipulatii hominem certum mihi debeas: non aliter post\nmortem ejus tenearis mihi, quam si per te steterit, quominus vivo eo eum\nmihi dares: quod ita fit, si aut interpellatus non dedisti, aut occidisti eum."\nThe examples are of contracts respecting a slave, which was the common\nillustration of a certain subject used by the Roman lawyers, just as we are\napt to take a horse; and no doubt the propriety, one might almost say\nnecessity, of the implied condition is more obvious when the contract\nrelates to a living animal, whether man or brute, than when it relates to\nsome inanimate thing (such as in the present case a theatre) the existence\nof which is not so obviously precarious as that of the live animal, but the\nprinciple is adopted in the Civil law as applicable to every obligation of\nwhich the subject is a certain thing. The general subject is treated of by\nPothier, who in his Traite des Obligations, partie 3, chap. 6, art. 3, \xc2\xa7 668\nstates the result to be that the debtor corporis certi is freed from his\nobligation when the thing has perished, neither by his act, nor his neglect,\nand before he is in default, unless by some stipulation he has taken on\nhimself the risk of the particular misfortune which has occurred.\n[3]\nAlthough the Civil law is not of itself authority in an\nEnglish Court, it affords great assistance in investigating the principles on\nwhich the law is grounded. And it seems to us that the common law\nauthorities establish that in such a contract the same condition of the\ncontinued existence of the thing is implied by English law.\n[4]\nThere is a class of contracts in which a person binds\nhimself to do something which requires to be performed by him in\nperson; and such promises, e.g. promises to marry, or promises to serve\nfor a certain time, are never in practice qualified by an express exception\nof the death of the party; and therefore in such cases the contract is in\nterms broken if the promisor dies before fulfilment. Yet it was very early\ndetermined that, if the performance is personal, the executors are not\nliable; Hyde v. The Dean of Windsor (Cro. Eliz. 552, 553). See 2 Wms.\nExors. 1560, 5th ed., where a very apt illustration is given. "Thus," says\nthe learned author, "if an author undertakes to compose a work, and dies\nbefore completing it, his executors are discharged from this contract: for\nthe undertaking is merely personal in its nature, and, by the intervention\nof the contractor\'s death, has become impossible to be performed." For\nthis he cites a dictum of Lord Lyndhurst in Marshall v. Broadhurst (1 Tyr.\n\n11\n\n\x0c348, 349), and a case mentioned by Patteson J. in Wentworth v. Cock (10\nA. & E. 42, 45-46). In Hall v. Wright (E. B. & E. 746, 749), Crompton J.,\nin his judgment, puts another case. "Where a contract depends upon\npersonal skill, and the act of God renders it impossible, as, for instance,\nin the case of a painter employed to paint a picture who is struck blind, it\nmay be that the performance might be excused."\n[5]\nIt seems that in those cases the only ground on which the\nparties or their executors, can be excused from the consequences of the\nbreach of the contract is, that from the nature of the contract there is an\nimplied condition of the continued existence of the life of the contractor,\nand, perhaps in the case of the painter of his eyesight. In the instances\njust given, the person, the continued existence of whose life is necessary\nto the fulfilment of the contract, is himself the contractor, but that does\nnot seem in itself to be necessary to the application of the principle; as is\nillustrated by the following example. In the ordinary form of an\napprentice deed the apprentice binds himself in unqualified terms to\n"serve until the full end and term of seven years to be fully complete and\nended," during which term it is covenanted that the apprentice his master\n"faithfully shall serve," and the father of the apprentice in equally\nunqualified terms binds himself for the performance by the apprentice of\nall and every covenant on his part. (See the form, 2 Chitty on Pleading,\n370, 7th ed. by Greening.) It is undeniable that if the apprentice dies\nwithin the seven years, the covenant of the father that he shall perform\nhis covenant to serve for seven years is not fulfilled, yet surely it cannot\nbe that an action would lie against the father? Yet the only reason why it\nwould not is that he is excused because of the apprentice\'s death.\n[6]\nThese are instances where the implied condition is of the\nlife of a human being, but there are others in which the same implication\nis made as to the continued existence of a thing. For example, where a\ncontract of sale is made amounting to a bargain and sale, transferring\npresently the property in specific chattels, which are to be delivered by\nthe vendor at a future day; there, if the chattels, without the fault of the\nvendor, perish in the interval, the purchaser must pay the price and the\nvendor is excused from performing his contract to deliver, which has\nthus become impossible.\n\n12\n\n\x0c[7]\nThat this is the rule of the English law is established by\nthe case of Rugg v. Minett (11 East, 210), where the article that perished\nbefore delivery was turpentine, and it was decided that the vendor was\nbound to refund the price of all those lots in which the property had not\npassed; but was entitled to retain without deduction the price of those\nlots in which the property had passed, though they were not delivered,\nand though in the conditions of sale, which are set out in the report,\nthere was no express qualification of the promise to deliver on payment.\nIt seems in that case rather to have been taken for granted than decided\nthat the destruction of the thing sold before delivery excused the vendor\nfrom fulfilling his contract to deliver on payment.\n[8]\nThis also is the rule in the Civil law, and it is worth\nnoticing that Pothier, in his celebrated Traite du Contrat de Vente (see\nPart. 4, \xc2\xa7 307, etc.; and Part. 2, ch. 1, sect. 1, art. 4, \xc2\xa7 1), treats this as\nmerely an example of the more general rule that every obligation de certo\ncorpore is extinguished when the thing ceases to exist. See Blackburn on\nthe Contract of Sale, p. 173.\n[9]\nThe same principle seems to be involved in the decision\nof Sparrow v. Sowyate (W. Jones, 29), where, to an action of debt on an\nobligation by bail, conditioned for the payment of the debt or the render\nof the debtor, it was held a good plea that before any default in rendering\nhim the principal debtor died. It is true that was the case of a bond with a\ncondition, and a distinction is sometimes made in this respect between a\ncondition and a contract. But this observation does not apply to Williams\nv. Lloyd (W. Jones, 179). In that case the count, which was in assumpsit,\nalleged that the plaintiff had delivered a horse to the defendant, who\npromised to redeliver it on request. Breach, that though requested to\nredeliver the horse he refused. Plea, that the horse was sick and died, and\nthe plaintiff made the request after its death; and on demurrer it was held\na good plea, as the bailee was discharged from his promise by the death\nof the horse without default or negligence on the part of the defendant.\n"Let it be admitted," say the Court, "that he promised to deliver it on\nrequest, if the horse die before, that is become impossible by the act of\nGod, so the party shall be discharged, as much as if an obligation were\nmade conditioned to deliver the horse on request, and he died before it."\nAnd Jones, adds the report, cited 22 Ass. 41, in which it was held that a\n\n13\n\n\x0cferryman who had promised to carry a horse safe across the ferry was\nheld chargeable for the drowning of the animal only because he had\noverloaded the boat, and it was agreed, that notwithstanding the promise\nno action would have lain had there been no neglect or default on his\npart. It may, we think, be safely asserted to be now English law, that in all\ncontracts of loan of chattels or bailments if the performance of the\npromise of the borrower or bailee to return the things lent or bailed,\nbecomes impossible because it has perished, this impossibility (if not\narising from the fault of the borrower or bailee from some risk which he\nhas taken upon himself) excuses the borrower or bailee from the\nperformance of his promise to redeliver the chattel. The great case of\nCoggs v. Bernard (1 Smith\'s L. C. 171, 5th ed.; 2 L. Raym. 909) is now the\nleading case on the law of bailments, and Lord Holt, in that case, referred\nso much to the Civil law that it might perhaps be thought that this\nprinciple was there derived direct from the civilians, and was not\ngenerally applicable in English law except in the ease of bailments; but\nthe case of Williams v. Lloyd (W. Jones, 179), above cited, shews that the\nsame law had been already adopted by the English law as early as The\nBook of Assizes. The principle seems to us to be that, in contracts in\nwhich the performance depends on the continued existence of a given\nperson or thing, a condition is implied that the impossibility of\nperformance arising from the perishing of the person or thing shall\nexcuse the performance. In none of these cases is the promise in words\nother than positive, nor is there any express stipulation that the\ndestruction of the person or thing shall excuse the performance; but that\nexcuse is by law implied, because from the nature of the contract it is\napparent that the parties contracted on the basis of the continued\nexistence of the particular person or chattel. In the present case, looking\nat the whole contract, we find that the parties contracted on the basis of\nthe continued existence of the Music Hall at the time when the concerts\nwere to be given; that being essential to their performance.\n[10]\nWe think, therefore, that the Music Hall having ceased to\nexist, without fault of either party, both parties are excused, the plaintiffs\nfrom taking the gardens and paying the money, the defendants from\nperforming their promise to give the use of the Hall and Gardens and\n\n14\n\n\x0cother things. Consequently the rule must be absolute to enter the verdict\nfor the defendants.\n[11]\n\nRule absolute.\n\n1.2.1. Paradine v. Jane\nSuppose that a rich Englishman rents a castle from a neighboring\nlord. Their brief lease agreement specifies a four-year term and a rental rate.\nIt also makes the lessee responsible for ordinary maintenance during the term\nof the lease. Imagine now that the armies of Prince Rupert occupy the region\nand force the lessee to leave the property. Would the lessee be excused from\npaying rent during the occupation? Or is the lessor entitled to receive rental\npayments until the end of the lease term?\nHere is what one court had to say about these questions:\n[I]f a house be destroyed by tempest, or by enemies, the\nlessee is excused.\xe2\x80\xa6 [W]hen the party by his own contract creates\na duty or charge upon himself, he is bound to make it good, if he\nmay, notwithstanding any accident by inevitable necessity,\nbecause he might have provided against it by his contract. And\ntherefore if the lessee covenant to repair a house, though it be\nburnt by lightning, or thrown down by enemies, yet he ought to\nrepair it. Dyer 33.a. 40 E.3. 6.h. \xe2\x80\xa6 Another reason was added,\nthat as the lessee is to have the advantage of casual profits, so he\nmust run the hazard of casual losses, and not lay the whole of the\nburthen of them upon his lessor; and Dyer 56.6 was cited for this\npurpose, that though the land be surrounded, or gained by the\nsea, or made barren by wildfire, yet the lessor shall have his whole\nrent: and judgment was given for the plaintiff.\nParadine v. Jane, Aleyn 26, 82 Eng. Rep. 897 (K.B. 1647).\n1.2.2. Analyzing Risk\nEconomists and businesspeople often analyze contingencies using\nthe framework of expected value. According to this approach, the magnitude\nof a risk (R) equals the product of its impact (I) and the probability (P) that\nthe particular risk will materialize. The formula R = I \xc2\xb7 P summarizes this\nrelationship and suggests the analytic usefulness of identifying these distinct\ncomponents of risk.\n\n15\n\n\x0cLegal analysis of risk allocation often requires even more detailed\nattention to each party\xe2\x80\x99s relationship with a particular risk. Consider, for\nexample, the risk discussed in Taylor v. Caldwell that a shipment of turpentine\nwill be burned at the docks before it reaches the purchaser. It may be helpful\nto think of three broad factors affecting the optimal allocation of this risk\nbetween the parties. First, which one of the parties is best able to assess the\nrisk of fire? Who has better access to information or can gather relevant\ninformation at lower cost? Second, which party is best positioned to avoid the\nrisk? Who can more cheaply take precautions to reduce the impact or\nprobability of harm? Finally, which party could most easily insure against the\nrisk?\n1.2.3. Discussion of Taylor v. Caldwell\nOn what basis does the Taylor court decide to excuse Caldwell from\nperforming his contractual obligation to provide the Surrey Gardens and\nMusic Hall to Taylor? The court must decide how to allocate the risk that the\nmusic hall would be burned down before the first concert. Does the contract\nlanguage play any role in the court\xe2\x80\x99s decision? If not the contract language,\nthen what is the source of the court\xe2\x80\x99s rule for allocating this risk?\nSuppose that one of your talented classmates contracts with you to\nprovide high quality class notes covering each meeting of all of your firstsemester courses. Tragically, this classmate dies before she has an\nopportunity to perform. How might the risk analysis framework outlined\nabove apply to this risk? Are you or your classmate in a better position to\nassess, avoid or insure against the risk of her untimely demise? Is it helpful to\nconsider separately the impact and probability of her death?\nDoes a similar analysis shed any light on how to allocate the risk that\nmaterialized in Taylor v. Caldwell? Can we draw any conclusions from this\nanalysis about how to choose the socially optimal legal rule to govern excuse?\n2. Mistake\nWe have already encountered contract doctrines that excuse\nperformance when certain contingencies arise. In Stees v. Leonard, for\nexample, the court observes that performance would have been excused if it\nwere physically impossible to complete the building. Similarly, the court in\nTaylor v. Caldwell finds that the destruction of property necessary for\nperformance excuses both parties\xe2\x80\x99 duties under the contract. The doctrine of\n\n16\n\n\x0ccommercial impracticability modestly extends these principles to excuse a\npromisor when performance \xe2\x80\x9chas been made impracticable by the\noccurrence of a contingency the non-occurrence of which was a basic\nassumption on which the contract was made.\xe2\x80\x9d U.C.C. \xc2\xa7 2-615. See also\nRestatement (Second) of Contracts (1981) \xc2\xa7 261 (\xe2\x80\x9cDischarge by Supervening\nImpracticability\xe2\x80\x9d) [hereinafter Restatement (Second)]. Finally, the common\nlaw also excuses performance when \xe2\x80\x9ca party\xe2\x80\x99s principal purpose is\nsubstantially frustrated without his fault by the occurrence of an event the\nnon-occurrence of which was a basic assumption on which the contract was\nmade.\xe2\x80\x9d Restatement (Second) \xc2\xa7 265. Taken together, these doctrines\nestablish a set of default rules for allocating the risk of events that make\nperformance more difficult or impair the value of performance. However,\nthe parties remain free to opt out of this default risk allocation by including\nappropriate language in their contract.\nThe rules governing unilateral and mutual mistake that we examine in\nthis section are another example of default risk allocations. In these cases,\none or both of the parties has made a contract based on a mistaken belief\nabout important facts. As with the excuse doctrines, the parties may opt out\nwith express language allocating the risk. Disputes most often arise, however,\nwhen neither party has anticipated the particular mistake and provided for it\nin the contract. As you read the cases that follow, try to determine what\npolicy concerns affect the structure of these default rules.\nThe Restatement (Second) describes the mistake doctrines in the\nfollowing terms:\n\xc2\xa7 151 Mistake Defined\nA mistake is a belief that is not in accord with the facts.\n\xc2\xa7 152 When Mistake of Both Parties Makes a Contract\nVoidable\n(1) Where a mistake of both parties at the time a contract\nwas made as to a basic assumption on which the contract was made\nhas a material effect on the agreed exchange of performances, the\n\n17\n\n\x0ccontract is voidable by the adversely affected party unless he bears\nthe risk of the mistake under the rule stated in \xc2\xa7 154.\n(2) In determining whether the mistake has a material effect\non the agreed exchange of performances, account is taken of any\nrelief by way of reformation, restitution, or otherwise.\n\xc2\xa7 153 When Mistake of One Party Makes a Contract\nVoidable\nWhere a mistake of one party at the time a contract was\nmade as to a basic assumption on which he made the contract has a\nmaterial effect on the agreed exchange of performances that is\nadverse to him, the contract is voidable by him if he does not bear\nthe risk of the mistake under the rule stated in \xc2\xa7 154, and\n(a) the effect of the mistake is such that enforcement of the\ncontract would be unconscionable, or\n(b) the other party had reason to know of the mistake or his\nfault caused the mistake.\n\xc2\xa7 154 When a Party Bears the Risk of a Mistake\nA party bears the risk of a mistake when\n(a) the risk is allocated to him by agreement of the parties,\nor\n(b) he is aware, at the time the contract is made, that he has\nonly limited knowledge with respect to the facts to which the\nmistake relates but treats his limited knowledge as sufficient, or\n(c) the risk is allocated to him by the court on the ground\nthat it is reasonable in the circumstances to do so.\n\n18\n\n\x0c2.1. Principal Case \xe2\x80\x93 Sherwood v. Walker\n\nMORSE, J.\n\nSherwood v. Walker\nSupreme Court of Michigan\n66 Mich. 568, 33 N.W. 919 (1887)\n\n[1]\nReplevin for a cow. Suit commenced in justice\'s court;\njudgment for plaintiff; appealed to circuit court of Wayne county, and\nverdict and judgment for plaintiff in that court. The defendants bring\nerror, and set out 25 assignments of the same.\n[2]\nThe main controversy depends upon the construction of\na contract for the sale of the cow. The plaintiff claims that the title\npassed, and bases his action upon such claim. The defendants contend\nthat the contract was executory, and by its terms no title to the animal\nwas acquired by plaintiff. The defendants reside at Detroit, but are in\nbusiness at Walkerville, Ontario, and have a farm at Greenfield, in Wayne\ncounty, upon which were some blooded cattle supposed to be barren as\nbreeders. The Walkers are importers and breeders of polled Angus cattle.\nThe plaintiff is a banker living at Plymouth, in Wayne county. He called\nupon the defendants at Walkerville for the purchase of some of their\nstock, but found none there that suited him. Meeting one of the\ndefendants afterwards, he was informed that they had a few head upon\ntheir Greenfield farm. He was asked to go out and look at them, with the\nstatement at the time that they were probably barren, and would not\nbreed. May 5, 1886, plaintiff went out to Greenfield, and saw the cattle. A\nfew days thereafter, he called upon one of the defendants with the view\nof purchasing a cow, known as \xe2\x80\x9cRose 2d of Aberlone.\xe2\x80\x9d After\nconsiderable talk, it was agreed that defendants would telephone\nSherwood at his home in Plymouth in reference to the price. The second\nmorning after this talk he was called up by telephone, and the terms of\nthe sale were finally agreed upon. He was to pay five and one-half cents\nper pound, live weight, fifty pounds shrinkage. He was asked how he\nintended to take the cow home, and replied that he might ship her from\nKing\'s cattle-yard. He requested defendants to confirm the sale in\nwriting, which they did by sending him the following letter:\nWALKERVILLE, May 15, 1886.\n\n19\n\n\x0cT.C. Sherwood, President, etc.-DEAR SIR: We confirm\nsale to you of the cow Rose 2d of Aberlone, lot 56 of our\ncatalogue, at five and half cents per pound, less fifty pounds\nshrink. We inclose herewith order on Mr. Graham for the cow.\nYou might leave check with him, or mail to us here, as you\nprefer.\nYours, truly, HIRAM WALKER & SONS.\nThe order upon Graham inclosed in the letter read as follows:\nWALKERVILLE, May 15, 1886.\nGeorge Graham: You will please deliver at King\'s cattleyard to Mr. T.C. Sherwood, Plymouth, the cow Rose 2d of\nAberlone, lot 56 of our catalogue. Send halter with the cow, and\nhave her weighed.\nYours truly, HIRAM WALKER & SONS.\n[3]\nOn the twenty-first of the same month the plaintiff went\nto defendants\' farm at Greenfield, and presented the order and letter to\nGraham, who informed him that the defendants had instructed him not\nto deliver the cow. Soon after, the plaintiff tendered to Hiram Walker,\none of the defendants, $80, and demanded the cow. Walker refused to\ntake the money or deliver the cow. The plaintiff then instituted this suit.\nAfter he had secured possession of the cow under the writ of replevin,\nthe plaintiff caused her to be weighed by the constable who served the\nwrit, at a place other than King\'s cattle-yard. She weighed 1,420 pounds.\n[4]\nWhen the plaintiff, upon the trial in the circuit court, had\nsubmitted his proofs showing the above transaction, defendants moved\nto strike out and exclude the testimony from the case, for the reason that\nit was irrelevant and did not tend to show that the title to the cow passed,\nand that it showed that the contract of sale was merely executory. The\ncourt refused the motion, and an exception was taken. The defendants\nthen introduced evidence tending to show that at the time of the alleged\nsale it was believed by both the plaintiff and themselves that the cow was\nbarren and would not breed; that she cost $850, and if not barren would\nbe worth from $750 to $1,000; that after the date of the letter, and the\norder to Graham, the defendants were informed by said Graham that in\nhis judgment the cow was with calf, and therefore they instructed him\n\n20\n\n\x0cnot to deliver her to plaintiff, and on the twentieth of May, 1886,\ntelegraphed plaintiff what Graham thought about the cow being with\ncalf, and that consequently they could not sell her. The cow had a calf in\nthe month of October following. On the nineteenth of May, the plaintiff\nwrote Graham as follows:\nPLYMOUTH, May 19, 1886.\nMr. George Graham, Greenfield-DEAR SIR: I have\nbought Rose or Lucy from Mr. Walker, and will be there for her\nFriday morning, nine or ten o\'clock. Do not water her in the\nmorning.\nYours, etc., T.C. SHERWOOD.\n[5]\nPlaintiff explained the mention of the two cows in this\nletter by testifying that, when he wrote this letter, the order and letter of\ndefendants was at his home, and, writing in a hurry, and being uncertain\nas to the name of the cow, and not wishing his cow watered, he thought\nit would do no harm to name them both, as his bill of sale would show\nwhich one he had purchased. Plaintiff also testified that he asked\ndefendants to give him a price on the balance of their herd at Greenfield,\nas a friend thought of buying some, and received a letter dated May 17,\n1886, in which they named the price of five cattle, including Lucy, at $90,\nand Rose 2d at $80. When he received the letter he called defendants up\nby telephone, and asked them why they put Rose 2d in the list, as he had\nalready purchased her. They replied that they knew he had, but thought it\nwould make no difference if plaintiff and his friend concluded to take the\nwhole herd.\n[6]\n\nThe foregoing is the substance of all the testimony in the\n\ncase.\n[7]\nThe circuit judge instructed the jury that if they believed\nthe defendants, when they sent the order and letter to plaintiff, meant to\npass the title to the cow, and that the cow was intended to be delivered to\nplaintiff, it did not matter whether the cow was weighed at any particular\nplace, or by any particular person; and if the cow was weighed afterwards,\nas Sherwood testified, such weighing would be a sufficient compliance\nwith the order. If they believed that defendants intended to pass the title\nby writing, it did not matter whether the cow was weighed before or after\n\n21\n\n\x0csuit brought, and the plaintiff would be entitled to recover. The\ndefendants submitted a number of requests which were refused. The\nsubstance of them was that the cow was never delivered to plaintiff, and\nthe title to her did not pass by the letter and order; and that under the\ncontract, as evidenced by these writings, the title did not pass until the\ncow was weighed and her price thereby determined; and that, if the\ndefendants only agreed to sell a cow that would not breed, then the\nbarrenness of the cow was a condition precedent to passing title, and\nplaintiff cannot recover. The court also charged the jury that it was\nimmaterial whether the cow was with calf or not. It will therefore be seen\nthat the defendants claim that, as a matter of law, the title of this cow did\nnot pass, and that the circuit judge erred in submitting the case to the\njury, to be determined by them, upon the intent of the parties as to\nwhether or not the title passed with the sending of the letter and order by\nthe defendants to the plaintiff.\n[Paragraphs 8-13 discuss the comparatively arcane (and now\narchaic) issue of passing legal title to the cow. This portion of the opinion\nis not central to understanding mistake doctrine and thus you may feel\nfree to skim until you reach paragraph 14.]\n[8]\nThis question as to the passing of title is fraught with\ndifficulties, and not always easy of solution. An examination of the\nmultitude of cases bearing upon this subject, with their infinite variety of\nfacts, and at least apparent conflict of law, ofttimes tends to confuse\nrather than to enlighten the mind of the inquirer. It is best, therefore, to\nconsider always, in cases of this kind, the general principles of the law,\nand then apply them as best we may to the facts of the case in hand.\n[9]\nThe cow being worth over $50, the contract of sale, in\norder to be valid, must be one where the purchaser has received or\naccepted part of the goods, or given something in earnest, or in part\npayment, or where the seller has signed some note or memorandum in\nwriting. How.St. \xc2\xa7 6186. Here there was no actual delivery, nor anything\ngiven in payment or in earnest, but there was a sufficient memorandum\nsigned by the defendants to take the case out of the statute, if the matter\ncontained in such memorandum is sufficient to constitute a completed\nsale. It is evident from the letter that the payment of the purchase price\nwas not intended as a condition precedent to the passing of the title. Mr.\n\n22\n\n\x0cSherwood is given his choice to pay the money to Graham at King\'s\ncattle-yards, or to send check by mail.\n[10]\nNor can there be any trouble about the delivery. The\norder instructed Graham to deliver the cow, upon presentation of the\norder, at such cattle-yards. But the price of the cow was not determined\nupon to a certainty. Before this could be ascertained, from the terms of\nthe contract, the cow had to be weighed; and, by the order inclosed with\nthe letter, Graham was instructed to have her weighed. If the cow had\nbeen weighed, and this letter had stated, upon such weight, the express\nand exact price of the animal, there can be no doubt but the cow would\nhave passed with the sending and receipt of the letter and order by the\nplaintiff. Payment was not to be a concurrent act with the delivery, and\ntherein this case differs from Case v. Dewey, 55 Mich. 116, 20 N.W.Rep.\n817, and 21 N.W.Rep. 911. Also, in that case, there was no written\nmemorandum of the sale, and a delivery was necessary to pass the title of\nthe sheep; and it was held that such delivery could only be made by a\nsurrender of the possession to the vendee, and an acceptance by him.\nDelivery by an actual transfer of the property from the vendor to the\nvendee, in a case like the present, where the article can easily be so\ntransferred by a manual act, is usually the most significant fact in the\ntransaction to show the intent of the parties to pass the title, but it never\nhas been held conclusive. Neither the actual delivery, nor the absence of\nsuch delivery, will control the case, where the intent of the parties is clear\nand manifest that the matter of delivery was not a condition precedent to\nthe passing of the title, or that the delivery did not carry with it the\nabsolute title. The title may pass, if the parties so agree, where the statute\nof frauds does not interpose without delivery, and property may be\ndelivered with the understanding that the title shall not pass until some\ncondition is performed.\n[11]\nAnd whether the parties intended the title should pass\nbefore delivery or not is generally a question of fact to be determined by\na jury. In the case at bar the question of the intent of the parties was\nsubmitted to the jury. This submission was right, unless from the reading\nof the letter and the order, and all the facts of the oral bargaining of the\nparties, it is perfectly clear, as a matter of law, that the intent of the\nparties was that the cow should be weighed, and the price thereby\n\n23\n\n\x0caccurately determined, before she should become the property of the\nplaintiff. I do not think that the intent of the parties in this case is a\nmatter of law, but one of fact. The weighing of the cow was not a matter\nthat needed the presence or any act of the defendants, or any agent of\ntheirs, to be well or accurately done. It could make no difference where\nor when she was weighed, if the same was done upon correct scales, and\nby a competent person. There is no pretense but what her weight was\nfairly ascertained by the plaintiff. The cow was specifically designated by\nthis writing, and her delivery ordered, and it cannot be said, in my\nopinion, that the defendants intended that the weighing of the animal\nshould be done before the delivery even, or the passing of title. The\norder to Graham is to deliver her, and then follows the instruction, not\nthat he shall weigh her himself, or weigh her, or even have her weighed,\nbefore delivery, but simply, \xe2\x80\x9cSend halter with the cow, and have her\nweighed.\xe2\x80\x9d\n[12]\nIt is evident to my mind that they had perfect confidence\nin the integrity and responsibility of the plaintiff, and that they\nconsidered the sale perfected and completed when they mailed the letter\nand order to plaintiff. They did not intend to place any conditions\nprecedent in the way, either of payment of the price, or the weighing of\nthe cow, before the passing of the title. They cared not whether the\nmoney was paid to Graham, or sent to them afterwards, or whether the\ncow was weighed before or after she passed into the actual manual grasp\nof the plaintiff. The refusal to deliver the cow grew entirely out of the\nfact that, before the plaintiff called upon Graham for her, they\ndiscovered she was not barren, and therefore of greater value than they\nhad sold her for.\n[13]\nThe following cases in this court support the instruction\nof the court below as to the intent of the parties governing and\ncontrolling the question of a completed sale, and the passing of title:\nLingham v. Eggleston, 27 Mich. 324; Wilkinson v. Holiday, 33 Mich. 386;\nGrant v. Merchants\' & Manufacturers\' Bank, 35 Mich. 527; Carpenter v.\nGraham, 42 Mich. 194, 3 N.W.Rep. 974; Brewer v. Michigan Salt Ass\'n, 47\nMich. 534, 11 N.W.Rep. 370; Whitcomb v. Whitney, 24 Mich. 486; Byles v.\nColier, 54 Mich. 1, 19 N.W.Rep. 565; Scotten v. Sutter, 37 Mich. 527, 532;\n\n24\n\n\x0cDucey Lumber Co. v. Lane, 58 Mich. 520, 525, 25 N.W.Rep. 568; Jenkinson v.\nMonroe, 28 N.W.Rep. 663.\n[14]\nIt appears from the record that both parties supposed this\ncow was barren and would not breed, and she was sold by the pound for\nan insignificant sum as compared with her real value if a breeder. She was\nevidently sold and purchased on the relation of her value for beef, unless\nthe plaintiff had learned of her true condition, and concealed such\nknowledge from the defendants. Before the plaintiff secured the\npossession of the animal, the defendants learned that she was with calf,\nand therefore of great value, and undertook to rescind the sale by\nrefusing to deliver her. The question arises whether they had a right to do\nso. The circuit judge ruled that this fact did not avoid the sale and it made\nno difference whether she was barren or not. I am of the opinion that the\ncourt erred in this holding. I know that this is a close question, and the\ndividing line between the adjudicated cases is not easily discerned. But it\nmust be considered as well settled that a party who has given an apparent\nconsent to a contract of sale may refuse to execute it, or he may avoid it\nafter it has been completed, if the assent was founded, or the contract\nmade, upon the mistake of a material fact\xe2\x80\x94such as the subject-matter of\nthe sale, the price, or some collateral fact materially inducing the\nagreement; and this can be done when the mistake is mutual. 1 Benj.\nSales, \xc2\xa7\xc2\xa7 605, 606; Leake, Cont. 339; Story, Sales, (4th Ed.) \xc2\xa7\xc2\xa7 377, 148.\nSee, also, Cutts v. Guild, 57 N.Y. 229; Harvey v. Harris, 112 Mass. 32;\nGardner v. Lane, 9 Allen, 492, 12 Allen, 44; Huthmacher v. Harris\' Adm\'rs, 38\nPa.St. 491; Byers v. Chapin, 28 Ohio St. 300; Gibson v. Pelkie, 37 Mich. 380,\nand cases cited; Allen v. Hammond, 11 Pet. 63-71.\n[15]\nIf there is a difference or misapprehension as to the\nsubstance of the thing bargained for; if the thing actually delivered or\nreceived is different in substance from the thing bargained for, and\nintended to be sold\xe2\x80\x94then there is no contract; but if it be only a\ndifference in some quality or accident, even though the mistake may have\nbeen the actuating motive to the purchaser or seller, or both of them, yet\nthe contract remains binding. \xe2\x80\x9cThe difficulty in every case is to determine\nwhether the mistake or misapprehension is as to the substance of the\nwhole contract, going, as it were, to the root of the matter, or only to\nsome point, even though a material point, an error as to which does not\n\n25\n\n\x0caffect the substance of the whole consideration.\xe2\x80\x9d Kennedy v. Panama, etc.,\nMail Co., L.R. 2 Q.B. 580, 587. It has been held, in accordance with the\nprinciples above stated, that where a horse is bought under the belief that\nhe is sound, and both vendor and vendee honestly believe him to be\nsound, the purchaser must stand by his bargain, and pay the full price,\nunless there was a warranty.\n[16]\nIt seems to me, however, in the case made by this record,\nthat the mistake or misapprehension of the parties went to the whole\nsubstance of the agreement. If the cow was a breeder, she was worth at\nleast $750; if barren, she was worth not over $80. The parties would not\nhave made the contract of sale except upon the understanding and belief\nthat she was incapable of breeding, and of no use as a cow. It is true she\nis now the identical animal that they thought her to be when the contract\nwas made; there is no mistake as to the identity of the creature. Yet the\nmistake was not of the mere quality of the animal, but went to the very\nnature of the thing. A barren cow is substantially a different creature than\na breeding one. There is as much difference between them for all\npurposes of use as there is between an ox and a cow that is capable of\nbreeding and giving milk. If the mutual mistake had simply related to the\nfact whether she was with calf or not for one season, then it might have\nbeen a good sale, but the mistake affected the character of the animal for\nall time, and for its present and ultimate use. She was not in fact the\nanimal, or the kind of animal, the defendants intended to sell or the\nplaintiff to buy. She was not a barren cow, and, if this fact had been\nknown, there would have been no contract. The mistake affected the\nsubstance of the whole consideration, and it must be considered that\nthere was no contract to sell or sale of the cow as she actually was. The\nthing sold and bought had in fact no existence. She was sold as a beef\ncreature would be sold; she is in fact a breeding cow, and a valuable one.\nThe court should have instructed the jury that if they found that the cow\nwas sold, or contracted to be sold, upon the understanding of both\nparties that she was barren, and useless for the purpose of breeding, and\nthat in fact she was not barren, but capable of breeding, then the\ndefendants had a right to rescind, and to refuse to deliver, and the verdict\nshould be in their favor.\n\n26\n\n\x0c[17]\nThe judgment of the court below must be reversed, and a\nnew trial granted, with costs of this court to defendants.\nCAMPBELL, C.J., AND CHAMPLIN, J., CONCURRED.\nSHERWOOD, J., [WHO, DESPITE HIS NAME, IS UNRELATED TO THE\nPLAINTIFF] (DISSENTING)\n[18]\nI do not concur in the opinion given by my brethren in\nthis case. I think the judgments before the justice and at the circuit were\nright. I agree with my Brother MORSE that the contract made was not\nwithin the statute of frauds, and the payment for the property was not a\ncondition precedent to the passing of the title from the defendants to the\nplaintiff. And I further agree with him that the plaintiff was entitled to a\ndelivery of the property to him when the suit was brought, unless there\nwas a mistake made which would invalidate the contract, and I can find\nno such mistake. There is no pretense there was any fraud or\nconcealment in the case, and an intimation or insinuation that such a\nthing might have existed on the part of either of the parties would\nundoubtedly be a greater surprise to them than anything else that has\noccurred in their dealings or in the case.\n[19]\nAs has already been stated by my brethren, the record\nshows that the plaintiff is a banker and farmer as well, carrying on a farm,\nand raising the best breeds of stock, and lived in Plymouth, in the county\nof Wayne, 23 miles from Detroit; that the defendants lived in Detroit,\nand were also dealers in stock of the higher grades; that they had a farm\nat Walkerville, in Canada, and also one in Greenfield in said county of\nWayne, and upon these farms the defendants kept their stock. The\nGreenfield farm was about 15 miles from the plaintiff\'s. In the spring of\n1886 the plaintiff, learning that the defendants had some \xe2\x80\x9cpolled Angus\ncattle\xe2\x80\x9d for sale, was desirous of purchasing some of that breed, and\nmeeting the defendants, or some of them, at Walkerville, inquired about\nthem, and was informed that they had none at Walkerville, \xe2\x80\x9cbut had a\nfew head left on their farm in Greenfield, and asked the plaintiff to go\nand see them, stating that in all probability they were sterile and would\nnot breed.\xe2\x80\x9d In accordance with said request, the plaintiff, on the fifth day\nof May, went out and looked at the defendants\' cattle at Greenfield, and\nfound one called \xe2\x80\x9cRose, Second,\xe2\x80\x9d which he wished to purchase, and the\n\n27\n\n\x0cterms were finally agreed upon at five and a half cents per pound, live\nweight, 50 pounds to be deducted for shrinkage. The sale was in writing,\nand the defendants gave an order to the plaintiff directing the man in\ncharge of the Greenfield farm to deliver the cow to plaintiff. This was\ndone on the fifteenth of May. On the twenty-first of May plaintiff went\nto get his cow, and the defendants refused to let him have her; claiming\nat the time that the man in charge at the farm thought the cow was with\ncalf, and, if such was the case, they would not sell her for the price agreed\nupon. The record further shows that the defendants, when they sold the\ncow, believed the cow was not with calf, and barren; that from what the\nplaintiff had been told by defendants (for it does not appear he had any\nother knowledge or facts from which he could form an opinion) he\nbelieved the cow was farrow, but still thought she could be made to\nbreed. The foregoing shows the entire interview and treaty between the\nparties as to the sterility and qualities of the cow sold to the plaintiff. The\ncow had a calf in the month of October.\n[20]\nThere is no question but that the defendants sold the cow\nrepresenting her of the breed and quality they believed the cow to be, and\nthat the purchaser so understood it. And the buyer purchased her\nbelieving her to be of the breed represented by the sellers, and possessing\nall the qualities stated, and even more. He believed she would breed.\nThere is no pretense that the plaintiff bought the cow for beef, and there\nis nothing in the record indicating that he would have bought her at all\nonly that he thought she might be made to breed. Under the foregoing\nfacts\xe2\x80\x94and these are all that are contained in the record material to the\ncontract\xe2\x80\x94it is held that because it turned out that the plaintiff was more\ncorrect in his judgment as to one quality of the cow than the defendants,\nand a quality, too, which could not by any possibility be positively known\nat the time by either party to exist, the contract may be annulled by the\ndefendants at their pleasure. I know of no law, and have not been\nreferred to any, which will justify any such holding, and I think the circuit\njudge was right in his construction of the contract between the parties.\n[21]\nIt is claimed that a mutual mistake of a material fact was\nmade by the parties when the contract of sale was made. There was no\nwarranty in the case of the quality of the animal. When a mistaken fact is\nrelied upon as ground for rescinding, such fact must not only exist at the\n\n28\n\n\x0ctime the contract is made, but must have been known to one or both of\nthe parties. Where there is no warranty, there can be no mistake of fact\nwhen no such fact exists, or, if in existence, neither party knew of it, or\ncould know of it; and that is precisely this case. If the owner of a\nHambletonian horse had speeded him, and was only able to make him go\na mile in three minutes, and should sell him to another, believing that was\nhis greatest speed, for $300, when the purchaser believed he could go\nmuch faster, and made the purchase for that sum, and a few days\nthereafter, under more favorable circumstances, the horse was driven a\nmile in 2 min. 16 sec., and was found to be worth $20,000, I hardly think\nit would be held, either at law or in equity, by any one, that the seller in\nsuch case could rescind the contract. The same legal principles apply in\neach case.\n[22]\nIn this case neither party knew the actual quality and\ncondition of this cow at the time of the sale. The defendants say, or\nrather said, to the plaintiff, \xe2\x80\x9cthey had a few head left on their farm in\nGreenfield, and asked plaintiff to go and see them, stating to plaintiff that\nin all probability they were sterile and would not breed.\xe2\x80\x9d Plaintiff did go\nas requested, and found there these cows, including the one purchased,\nwith a bull. The cow had been exposed, but neither knew she was with\ncalf or whether she would breed. The defendants thought she would not,\nbut the plaintiff says that he thought she could be made to breed, but\nbelieved she was not with calf. The defendants sold the cow for what\nthey believed her to be, and the plaintiff bought her as he believed she\nwas, after the statements made by the defendants. No conditions\nwhatever were attached to the terms of sale by either party. It was in fact\nas absolute as it could well be made, and I know of no precedent as\nauthority by which this court can alter the contract thus made by these\nparties in writing\xe2\x80\x94interpolate in it a condition by which, if the\ndefendants should be mistaken in their belief that the cow was barren,\nshe could be returned to them and their contract should be annulled. It is\nnot the duty of courts to destroy contracts when called upon to enforce\nthem, after they have been legally made. There was no mistake of any\nmaterial fact by either of the parties in the case as would license the\nvendors to rescind. There was no difference between the parties, nor\nmisapprehension, as to the substance of the thing bargained for, which\n\n29\n\n\x0cwas a cow supposed to be barren by one party, and believed not to be by\nthe other. As to the quality of the animal, subsequently developed, both\nparties were equally ignorant, and as to this each party took his chances.\nIf this were not the law, there would be no safety in purchasing this kind\nof stock.\n[23]\nI entirely agree with my brethren that the right to rescind\noccurs whenever \xe2\x80\x9cthe thing actually delivered or received is different in\nsubstance from the thing bargained for, and intended to be sold; but if it\nbe only a difference in some quality or accident, even though the\nmisapprehension may have been the actuating motive\xe2\x80\x9d of the parties in\nmaking the contract, yet it will remain binding. In this case the cow sold\nwas the one delivered. What might or might not happen to her after the\nsale formed no element in the contract. The case of Kennedy v. Panama\nMail Co., L.R. 2 Q.B. 587, and the extract cited therefrom in the opinion\nof my brethren, clearly sustains the views I have taken. See, also, Smith v.\nHughes, L.R. 6 Q.B. 597; Carter v. Crick, 4 Hurl. & N. 416.\n[24]\nAccording to this record, whatever the mistake was, if\nany, in this case, it was upon the part of the defendants, and while acting\nupon their own judgment. It is, however, elementary law, and very\nelementary, too, \xe2\x80\x9cthat the mistaken party, without any common\nunderstanding with the other party in the premises as to the quality of an\nanimal, is remediless if he is injured through his own mistake.\xe2\x80\x9d Leake,\nCont. 338; Torrance v. Bolton, L.R. 8 Ch. 118; Smith v. Hughes, L.R. 6 Q.B.\n597.\n[25]\nThe case cited by my brethren from 37 Mich. I do not\nthink sustains the conclusion reached by them. In that case the subjectmatter about which the contract was made had no existence, and in such\ncase Mr. Justice GRAVES held there was no contract; and to the same\neffect are all the authorities cited in the opinion. That is certainly not this\ncase. Here the defendants claim the subject-matter not only existed, but\nwas worth about $800 more than the plaintiff paid for it.\n[26]\nThe case of Huthmacher v. Harris, 38 Pa. St. 491, is this: A\nparty purchased at an administrator\'s sale a drill-machine, which had hid\naway in it by the deceased a quantity of notes, to the amount of $3,000,\nmoney to the amount of over $500, and two silver watches and a pocket\n\n30\n\n\x0ccompass of the value of $60.25. In an action of trover for the goods, it\nwas held that nothing but the machine was sold or passed to the\npurchasers, neither party knowing that the machine contained any such\narticles.\n[27]\nIn Cutts v. Guild, 57 N.Y. 229, the defendant, as assignee,\nrecovered a judgment against D. & H. He also recovered several\njudgments in his own name on behalf of the T. Co. The defendant made\nan assignment of and transferred the first judgment to an assignee of the\nplaintiff\xe2\x80\x94both parties supposing and intending to transfer one of the T.\nCo. judgments\xe2\x80\x94and it was held that such contract of assignment was\nvoid, because the subject-matter contained in the assignment was not\ncontracted for.\n[28]\nIn the case of Byers v. Chapin, 28 Ohio St. 300, the\ndefendant sold the plaintiffs 5,000 oil barrels. The plaintiffs paid $5,000\nupon their purchase, and took some of the barrels. The barrels proved to\nbe unfit for use, and the contract was rescinded by consent of the parties.\nThe defendant, instead of returning all the money paid to the purchaser,\nretained a portion and gave plaintiffs his note for the remainder. The\nplaintiffs brought suit upon this note. The defendant claimed that, under\nthe contract of sale of the barrels, they were to be glued by the plaintiffs,\nwhich the plaintiffs properly failed to do, and this fact was not known to\ndefendant when he agreed to rescind, and gave the note, and therefore\nthe note was given upon a mistaken state of facts, falsely represented to\nthe defendant, and which were known to the plaintiffs. On the proofs,\nthe jury found for the defendant, and the verdict was affirmed.\n[29]\nIn Gardner v. Lane, 9 Mass. 492, it is decided that if, upon\na sale of No. 1 mackerel, the vendor delivers No. 3 mackerel, and some\nbarrels of salt, no title to the articles thus delivered passes.\n[30]\nAllen v. Hammond, 11 Pet. 63, decides that if a life-estate in\nland is sold, and at the time of the sale the estate is terminated by the\ndeath of the person in whom the right vested, a court of equity will\nrescind the purchase.\n[31]\nIn Harvey v. Harris, 112 Mass. 32, at an auction, two\ndifferent grades of flour were sold, and a purchaser of the second\nclaimed to have bought a quantity of the first grade, under a sale made of\n\n31\n\n\x0cthe second, and this he was not allowed to do, because of the mutual\nmistake; the purchaser had not in fact bought the flour he claimed. In\nthis case, however, it is said it is true that, if there is a mutual agreement\nof the parties for the sale of particular articles of property, a mistake of\nmisapprehension as to the quality of the articles will not enable the\nvendor to repudiate the sale.\n[32]\nThe foregoing are all the authorities relied on as\nsupporting the positions taken by my brethren in this case. I fail to\ndiscover any similarity between them and the present case; and I must\nsay, further, in such examination as I have been able to make, I have\nfound no adjudicated case going to the extent, either in law or equity, that\nhas been held in this case. In this case, if either party had superior\nknowledge as to the qualities of this animal to the other, certainly the\ndefendants had such advantage. I understand the law to be well settled\nthat \xe2\x80\x9cthere is no breach of any implied confidence that one party will not\nprofit by his superior knowledge as to facts and circumstances\xe2\x80\x9d actually\nwithin the knowledge of both, because neither party reposes in any such\nconfidence unless it be specially tendered or required, and that a general\nsale does not imply warranty of any quality, or the absence of any; and if\nthe seller represents to the purchaser what he himself believes as to the\nqualities of an animal, and the purchaser buys relying upon his own\njudgment as to such qualities, there is no warranty in the case, and neither\nhas a cause of action against the other if he finds himself to have been\nmistaken in judgment.\n[33]\nThe only pretense for avoiding this contract by the\ndefendants is that they erred in judgment as to the qualities and value of\nthe animal. I think the principles adopted by Chief Justice CAMPBELL\nin Williams v. Spurr completely cover this case, and should have been\nallowed to control in its decision. See 24 Mich. 335. See, also, Story,\nSales, \xc2\xa7\xc2\xa7 174, 175, 382, and Benj. Sales, \xc2\xa7 430. The judgment should be\naffirmed.\n2.1.1 The Story of Sherwood v. Walker\nA recently published law review article provides a wealth of\nbackground information about the parties (and the cow) involved in Sherwood\nv. Walker. It appears that Hiram Walker, the seller, was the moving force\n\n32\n\n\x0cbehind the famous brand of Canadian Club Whiskey, and the buyer\nTheodore Clark Sherwood was a prominent banker who went on to found a\nfinancial institution that eventually became a part of Bank One. We also learn\nfrom the article that after losing in the Michigan Supreme Court, Sherwood\npurchased Rose the 2d from Walker for an undisclosed price. See Norman\nOtto Stockmeyer, To Err Is Human, To Moo Bovine: The Rose of Aberlone Story,\n24 THOMAS COOLEY L. REV. 491 (2007).\n2.1.2. Lenawee County Bd. of Health v. Messerly\nIn a subsequent case, Lewanee County Bd. of Health v. Messerly, 331\nN.W.2d 203 (Mich. 1982), the Michigan Supreme Court had occasion to\nrevisit the Sherwood v. Walker decision and expressed its frustration with the\ndistinction the earlier case had drawn between mistakes that go to the\n\xe2\x80\x9cessence of the consideration\xe2\x80\x9d from those affecting merely its \xe2\x80\x9cquality or\nvalue.\xe2\x80\x9d The court had this to say about the Sherwood opinion:\n[Sherwood] arguably distinguishes mistakes affecting the\nessence of the consideration from those which go to its quality or\nvalue, affording relief on a per se basis for the former but not the\nlatte\xe2\x80\xa6. However, the distinctions which may be drawn from\nSherwood \xe2\x80\xa6 do not provide a satisfactory analysis of the nature of\na mistake sufficient to invalidate a contract. Often, a mistake\nrelates to an underlying factual assumption which, when\ndiscovered, directly affects value, but simultaneously and\nmaterially affects the essence of the contractual consideration. It\nis disingenuous to label such a mistake collateral\xe2\x80\xa6. [The parties\nin this case] both mistakenly believed that the property which was\nthe subject of their land contract would generate income as rental\nproperty. The fact that it could not be used for human habitation\ndeprived the property of its income earning potential and\nrendered it less valuable. However, this mistake, while directly\nand dramatically affecting the property\xe2\x80\x99s value, cannot accurately\nbe characterized as collateral because it affects the very essence of\nthe consideration\xe2\x80\xa6. We find that the inexact and confusing\ndistinction between contractual mistakes running to value and\nthose touching the substance of the consideration serves only as\nan impediment to a clear and helpful analysis for the equitable\nresolution of cases in which mistake is alleged and proven.\nAccordingly, the [holding of Sherwood is limited to the facts of that\ncase.]\n\n33\n\n\x0cIn Messerly, the parties\xe2\x80\x99 contract included an express \xe2\x80\x9cas is\xe2\x80\x9d clause.\nThe following passage shows how such a clause is relevant to analyzing\nunder Restatement (Second) \xc2\xa7 154 whether the risk of mistake has been\nallocated to one of the parties.\nIn cases of mistake by two equally blameless parties, we\nare required, in the exercise of our equitable powers, to determine\nwhich blameless party should assume the loss resulting from the\nmisapprehension they shared. Normally that can only be done by\ndrawing upon our \xe2\x80\x9cown notions of what is reasonable and just\nunder all the surrounding circumstances\xe2\x80\xa6.\xe2\x80\x9d Equity suggests that,\nin this case, the risk should be allocated to the purchasers. We are\nguided to that conclusion, in part, by the standards announced in\n\xc2\xa7 154 of the Restatement of Contracts, [Second], for determining\nwhen a party bears the risk of mistake\xe2\x80\xa6. Section 154(a) suggests\nthat the court should look first to whether the parties have agreed\nto the allocation of the risk between themselves. While there is\nno express assumption in the contract by either party of the risk\nof the property becoming uninhabitable, there was indeed some\nagreed allocation of the risk to the vendees by the incorporation\nof an \xe2\x80\x9cas is\xe2\x80\x9d clause into the contract\xe2\x80\xa6. [The incorporation] of\nthis clause is a persuasive indication that, as between them, such\nrisk as related to the \xe2\x80\x9cpresent condition\xe2\x80\x9d of the property should\nlie with the purchaser. If the \xe2\x80\x9cas is\xe2\x80\x9d clause is to have any meaning\nat all, it must be interpreted to refer to those defects which were\nunknown at the time that contract was executed.\nId. at 31\xe2\x80\x9332.\nDespite the Messerly court\xe2\x80\x99s disapproval of the reasoning in Sherwood,\nProfessor Stockmeyer notes that Sherwood remains a staple of Contracts\ncasebooks and treatises. He also defends the case\xe2\x80\x99s vitality as legal authority\nin Michigan. Stockmeyer concludes:\nPerhaps most tellingly of all, in a 2006 mutual mistake\ncase, Ford Motor Co. v. Woodhaven, a unanimous Michigan Supreme\nCourt discussed Sherwood at length, ignored [Messerly] completely,\nand announced that Rose\xe2\x80\x99s case was still viable: \xe2\x80\x9cOur review of\nour precedents involving the law of mistake indicates that the\npeculiar and appropriate meaning that the term \xe2\x80\x98mutual mistake\xe2\x80\x99\nhas acquired in our law has not changed since Sherwood.\xe2\x80\x9d\n\n34\n\n\x0cStockmeyer, supra, at 501-02.\nAlthough Stockmeyer\xe2\x80\x99s account is correct as far as it goes, Ford Motor\nCo. v. Woodhaven may tell us less about the law of mistake in Michigan than he\nsupposes. The Ford Motor court relies explicitly on the Sherwood majority\xe2\x80\x99s\nunderstanding of the facts\xe2\x80\x94particularly their highly questionable assertion\nthat neither of the parties to the sale contract thought that Rose could be\nmade to breed. With this important limitation in mind, it is perhaps more\naccurate to say that Ford Motor reaffirmed an uncontroversial proposition\xe2\x80\x94If\ntwo parties are both mistaken about a fundamental attribute of the good they\nare exchanging, then the doctrine of mutual mistake makes it possible to\nargue for rescission. As our discussion of Sherwood v. Walker will reveal,\nhowever, the majority\xe2\x80\x99s opinion also makes far less defensible claims about\nthe parties\xe2\x80\x99 beliefs and about the importance of a distinction between the\n\xe2\x80\x9csubstance\xe2\x80\x9d and a mere \xe2\x80\x9cquality\xe2\x80\x9d of the item being exchanged. The Ford\nMotor court has nothing whatsoever to say about these more controversial\naspects of Sherwood.\n2.1.3. Discussion of Sherwood v. Walker\nWhat is the best argument that you could make on behalf of Walker\n(the seller)?\nHow would you argue the case for Sherwood?\nWas this case correctly decided?\n2.2. Principal Case \xe2\x80\x93 Anderson v. O\xe2\x80\x99Meara\nAnderson Brothers Corp. v. O\xe2\x80\x99Meara\nUnited States Court of Appeals, Fifth Circuit\n306 F.2d 672 (1962)\nJONES, CIRCUIT JUDGE.\n[1]\nThe appellant, Anderson Brothers Corporation, a Texas\ncorporation engaged in the business of constructing pipelines, sold a\nbarge dredge to the appellee, Robert W. O\'Meara, a resident of Illinois\nwho is an oil well driller doing business in several states and Canada. The\nappellee brought this suit seeking rescission of the sale or, in the\nalternative, damages. After trial without a jury, the appellee\'s prayer of\nrescission was denied, but damages were awarded. The court denied the\nappellant\'s counterclaim for the unpaid purchase price of the dredge.\n\n35\n\n\x0cBoth parties have appealed.1 Appellant contends that no relief should\nhave been given to the appellee, and the appellee contends that the\ndamages awarded to him were insufficient.\n[2]\nThe dredge which the appellant sold to the appellee was\nspecially designed to perform the submarine trenching necessary for\nburying a pipeline under water. In particular it was designed to cut a\nrelatively narrow trench in areas where submerged rocks, stumps and\nlogs might be encountered. The dredge could be disassembled into its\nlarger component parts, moved over land by truck, and reassembled at\nthe job site. The appellant built the dredge from new and used parts in its\nown shop. The design was copied from a dredge which appellant had\nleased and successfully used in laying a pipeline across the Mississippi\nRiver. The appellant began fabrication of the dredge in early 1955,\nintending to use it in performing a contract for laying a pipeline across\nthe Missouri River. A naval architect testified that the appellant was\nfollowing customary practice in pipeline operations by designing a dredge\nfor a specific use. Dredges so designed can be modified, if necessary, to\nmeet particular situations. For some reason construction of the dredge\nwas not completed in time for its use on the job for which it was\nintended, and the dredge was never used by the appellant. After it was\ncompleted, the dredge was advertised for sale in a magazine. This\nadvertisement came to the appellee\'s attention in early December, 1955.\nThe appellee wanted to acquire a dredge capable of digging canals fifty to\nseventy-five or eighty feet wide and six to twelve feet deep to provide\naccess to off-shore oil well sites in southern Louisiana.\n[3]\nOn December 8, 1955, the appellee or someone\nemployed by him contacted the appellant\'s Houston, Texas, office by\ntelephone and learned that the price of the dredge was $45,000. Terms of\nsale were discussed, and later that day the appellant sent a telegram to the\nappellee who was then in Chicago, saying it accepted the appellee\'s offer\nof $35,000 for the dredge to be delivered in Houston. The appellee\'s\noffer was made subject to an inspection. The next day Kennedy, one of\nthe appellee\'s employees, went to Houston from New Orleans and\nAnderson Brothers Corporation will be referred to as the appellant and O\'Meara\nas the appellee.\n1\n\n36\n\n\x0cinspected the dredge. Kennedy, it appears, knew nothing about dredges\nbut was familiar with engines. After inspecting the engines of the dredge,\nKennedy reported his findings to the appellee by telephone and then\nsigned an agreement with the appellant on behalf of the appellee. In the\nagreement, the appellant acknowledged receipt of $17,500. The\nagreement made provision for payment of the remaining $17,500 over a\nperiod of seventeen months. The dredge was delivered to the appellee at\nHouston on December 11, 1955, and from there transported by the\nappellee to his warehouse in southern Louisiana. The barge was\ntransported by water, and the ladder, that part of the dredge which\nextends from the barge to the stream bed and to which the cutting\ndevices are attached, was moved by truck. After the dredge arrived at his\nwarehouse the appellee executed a chattel mortgage in favor of the\nappellant and a promissory note payable to the order of the appellant. A\nbill of sale dated December 17, 1955, was given the appellee in which the\nappellant warranted only title and freedom from encumbrances. Both the\nchattel mortgage and the bill of sale described the dredge and its\ncomponent parts in detail.\n[4]\nThe record contains much testimony concerning the\ndesign and capabilities of the dredge including that of a naval architect\nwho, after surveying the dredge, reported \xe2\x80\x9cI found that the subject\ndredge\xe2\x80\xa6had been designed for the purpose of dredging a straight trench\nover a river, lake or other body of water.\xe2\x80\x9d The testimony shows that a\ndredge designed to perform sweep dredging, the term used to describe\nthe dredging of a wide channel, must be different in several respects from\none used only for trenching operations. The naval architect\'s report listed\nat least five major items to be replaced, modified, or added before the\ndredge would be suited to the appellee\'s intended use. It is clear that the\nappellee bought a dredge which, because of its design, was incapable,\nwithout modification, of performing sweep dredging.\n[5]\nOn July 10, 1956, about seven months after the sale and\nafter the appellee had made seven monthly payments pursuant to the\nagreement between the parties, the appellee\'s counsel wrote the appellant\nstating in part that \xe2\x80\x9cMr. O\'Meara has not been able to put this dredge in\nservice and it is doubtful that it will ever be usable in its present\ncondition.\xe2\x80\x9d After quoting at length from the naval architect\'s report,\n\n37\n\n\x0cwhich was dated January 28, 1956, the letter suggested that the\ndifferences between the parties could be settled amicably by the\nappellant\'s contributing $10,000 toward the estimated $12,000 to $15,000\ncost of converting the trenching dredge into a sweep dredge. The\nappellant rejected this offer and on July 23, 1956, the appellee\'s counsel\nwrote the appellant tendering return of the dredge and demanding full\nrestitution of the purchase price. This suit followed the appellant\'s\nrejection of the tender and demand.\n[6]\nIn his complaint the appellee alleged breaches of\nexpressed and implied warranty and fraudulent representations as to the\ncapabilities of the dredge. By an amendment he alleged as an alternative\nto the fraud count that the parties had been mistaken in their belief as to\nthe operations of which the dredge was capable, and thus there was a\nmutual mistake which prevented the formation of a contract. The\nappellee sought damages of over $29,000, representing the total of\nprincipal and interest paid the appellant and expenses incurred in\nattempting to operate the dredge. In the alternative, the appellee asked\nfor rescission and restitution of all money expended by him in reliance on\nthe contract. The appellant answered denying the claims of the appellee\nand counterclaiming for the unpaid balance.\n[7]\n\nThe district court found that:\n\nAt the time the dredge was sold by the defendant to the\nplaintiff, the dredge was not capable for performing sweep\ndredging operations in shallow water, unless it was modified\nextensively. Defendant had built the dredge and knew the\npurpose for which it was designed and adapted. None of the\ndefendant\'s officers or employees knew that plaintiff intended to\nuse the dredge for shallow sweep dredging operations. Gier (an\nemployee of the appellant who talked with the appellee or one of\nhis employees by telephone) mistakenly assumed that O\'Meara\nintended to use the dredge within its designed capabilities.\nAt the time the plaintiff purchased this dredge he\nmistakenly believed that the dredge was capable without\nmodification of performing sweep dredging operations in shallow\nwater.\n\n38\n\n\x0c[8]\nThe court further found that the market value of the\ndredge on the date of sale was $24,000, and that the unpaid balance on\nthe note given for part of the purchase price was $10,500. Upon its\nfindings the court concluded that:\nThe mistake that existed on the part of both plaintiff and\ndefendant with respect to the capabilities of the subject dredge is\nsufficient to and does constitute mutual mistake, and the plaintiff\nis entitled to recover the damages he has suffered as a result\nthereof.\n[9]\nThese damages were found to be \xe2\x80\x9cequal to the balance\ndue on the purchase price\xe2\x80\x9d plus interest, and were assessed by\ncancellation of the note and chattel mortgage and vesting title to the\nbarge in the appellee free from any encumbrance in favor of the\nappellant. The court also concluded that the appellee was \xe2\x80\x9cnot entitled to\nrescission of this contract.\xe2\x80\x9d Further findings and conclusions, which are\nnot challenged in this Court, eliminate any considerations of fraud or\nbreach of expressed or implied warranties. The judgment for damages\nrests entirely upon the conclusion of mutual mistake.2 The district court\'s\nconclusion that the parties were mutually mistaken \xe2\x80\x9cwith respect to the\ncapabilities of the subject dredge\xe2\x80\x9d is not supported by its findings. \xe2\x80\x9cA\nmutual mistake is one common to both parties to the contract, each\nlaboring under the same misconception.\xe2\x80\x9d St. Paul Fire & Marine Insurance\nCo. v. Culwell, Tex.Com.App., 62 S.W.2d 100; Hayman v. Dowda,\nTex.Civ.App., 233 S.W.2d 466; Bryan v. Dallas National Bank,\nTex.Civ.App., 135 S.W.2d 249; 58 C.J.S. Mistake, p. 832. The appellee\'s\nmistake in believing that the dredge was capable, without modification, of\nperforming sweep dredging was not a mistake shared by the appellant,\nwho had designed and built the dredge for use in trenching operations\nand knew its capabilities. The mistake on the part of the appellant\'s\nemployee in assuming that the appellee intended to use the dredge within\nits designed capabilities was certainly not one shared by the appellee, who\nacquired the dredge for use in sweep dredging operations. The appellee\n\nThe disposition of this appeal does not require a review of the district court\'s\naction in awarding damages as a remedy for mutual mistake rather than granting\nrescission and attempting restoration of the status quo ante\n2\n\n39\n\n\x0calone was mistaken in assuming that the dredge was adapted, without\nmodification, to the use he had in mind.\n[10]\nThe appellee insists that even if the findings do not\nsupport a conclusion of mutual mistake, he is entitled to relief under the\nwell-established doctrine that knowledge by one party to a contract that\nthe other is laboring under a mistake concerning the subject matter of the\ncontract renders it voidable by the mistaken party.3 See 3 Corbin,\nContracts 692, \xc2\xa7 610. As a predicate to this contention, the appellee urges\nthat the trial court erred in finding that \xe2\x80\x9cNone of defendant\'s officers or\nemployees knew that plaintiff intended to use the dredge for shallow\nsweep dredging operations.\xe2\x80\x9d Moreover, the appellee contends that the\nappellant\'s knowledge of his intended use of the dredge was conclusively\nestablished by the testimony of two of the appellant\'s employees,\nbecause, on the authority of Griffin v. Superior Insurance Co., 161 Tex. 195,\n338 S.W.2d 415, this testimony constitutes admissions, conclusive against\nthe appellant. In the Griffin case, it was held that a party\'s testimony must\nbe \xe2\x80\x9cdeliberate, clear and unequivocal\xe2\x80\x9d before it is conclusive against him.\nThe testimony on which the appellee relies falls short of being \xe2\x80\x9cclear and\nunequivocal.\xe2\x80\x9d If the statement of one witness were taken as conclusive, it\nwould not establish that he knew the appellee intended to use the dredge\nas a sweep dredge,4and the other witness spoke with incertitude.5 The\nThe appellee does not complain of the district court\'s conclusion that he was not\nentitled to rescission. He urges, without citation of authority, that the relief to\nwhich he is entitled is by way of damages.\n3\n\n4\n\nGier, the appellant\'s shop foreman, testified:\nQ. Did Mr. O\'Meara in the telephone conversation tell\nyou what business he was in?\nA. No, he didn\'t.\nQ. He didn\'t. Mr. Gier, I suppose you have already\nanswered this. Did he say what he wanted that dredge for?\nQ. Now, did he (Kennedy) discuss with you what the\ndredge was going to be used for?\nA. Other than he just said they was going to pump some\nchannels out for some oil wells. That\'s all he said. He\ndidn\'t tell me how deep or how wide or anything\n\n5\n\nSmith, the appellant\'s office manager, testified:\nQ. \xe2\x80\xa6.Did you all discuss anything about the dredge itself?\n\n40\n\n\x0ctestimony is not conclusive and is only one factor to be considered by the\nfinder of facts. See 9 Wigmore, Evidence (3d Ed.) 397, 2594a.\n[11]\nThere is a conflict in the evidence on the question of the\nappellant\'s knowledge of the appellee\'s intended use, and it cannot be\nheld that the district court\'s finding is clearly erroneous. Smith v. United\nStates, 5th Cir. 1961, 287 F.2d 299; Levine v. Johnson, 5th Cir. 1961, 287\nF.2d 623; Horton v. U.S. Steel Corp., 5th Cir. 1961, 286 F.2d 710. It is to be\nnoted that the trial court before whom the appellee testified, did not\ncredit his testimony that he had made a telephone call in which, he said,\nhe personally informed an employee of the appellant of his plans for the\nuse of the dredge.\n[12]\nThe appellee makes a further contention that when he\npurchased the dredge he was laboring under a mistake so grave that\nallowing the sale to stand would be unconscionable. The ground urged is\none which has apparently been recognized in some circumstances.\nEdwards v. Trinity & B.V.R. Co., 54 Tex. Civ.App. 334, 118 S.W. 572; 13\nTex.Jur.2d 481, Contracts \xc2\xa7 257; Annot., 59 A.L.R. 809. However, the\nTexas courts have held that when unilateral mistake is asserted as a\nground for relief, the care which the mistaken complainant exercised or\nfailed to exercise in connection with the transaction sought to be avoided\nis a factor for consideration. Wheeler v. Holloway, Tex.Com.App. 276 S.W.\nA. No, not that I recall.\nQ. In other wordsA. I do vaguely remember him (Kennedy) mentioning to\nme that O\'Meara had an island over there and had some\noil wells on it. He was going to use this dredge to- they\nhad been hiring someone else to do the dredging into well\nlocations, and that\'s what he intended using this one for,\nto dredge into his well locations, and I don\'t remember\nnow how much he said it cost, but as well as I remember,\nit was rather expensive for a subcontractor just to dredge\nback to one well location, but by owning their own dredge\nthey would have a considerable saving there.\nQ. In other words, he said they had to dredge out a\nchannel so their drilling barge could get by?\nA. Yes. So they could get the drilling barge or equipment\nin there. There wasn\'t any roads there. That\'s the\nimpression I got.\n\n41\n\n\x0c653; Ebberts v. Carpenter Production Co., Tex.Civ.App., 256 S.W.2d 601;\nAmerican Maid Flour Mills v. Lucia, Tex.Civ.App., 285 S.W. 641; Cole v.\nKjellberg, Tex.Civ.App., 141 S.W. 120; Edwards v. Trinity & B.V.R. Co.,\nsupra; 13 Tex.Jur.2d 482, Contracts \xc2\xa7 258. It has been stated that\n\xe2\x80\x9cthough a court of equity will relieve against mistake, it will not assist a\nman whose condition is attributable to the want of due diligence which\nmay be fairly expected from a reasonable person.\xe2\x80\x9d American Maid Flour\nMills v. Lucia, supra. This is consistent with the general rule of equity that\nwhen a person does not avail himself of an opportunity to gain\nknowledge of the facts, he will not be relieved of the consequences of\nacting upon supposition. Annot., 1 A.L.R.2d 9, 89; see 30 C.J.S. Equity \xc2\xa7\n47, p. 376. Whether the mistaken party\'s negligence will preclude relief\ndepends to a great extent upon the circumstances in each instance.\nEdwards v. Trinity & B.V.R. Co., supra.\n[13]\nThe appellee saw fit to purchase the dredge subject to\ninspection, yet he sent an employee to inspect it who he knew had no\nexperience with or knowledge of dredging equipment. It was found that\nsomeone familiar with such equipment could have seen that the dredge\nwas then incapable of performing channel type dredging. Although,\naccording to his own testimony, the appellee was conscious of his own\nlack of knowledge concerning dredges, he took no steps, prior to\npurchase, to learn if the dredge which he saw pictured and described in\nsome detail in the advertisement, was suited to his purpose. Admittedly\nhe did not even inquire as to the use the appellant had made or intended\nto make of the dredge, and the district court found that he did not\ndisclose to the appellant the use he intended to make of the dredge. The\nfinding is supported by evidence. The appellee did not attempt to obtain\nany sort of warranty as to the dredge\'s capabilities. The only conclusion\npossible is that the appellee exercised no diligence, prior to the purchase,\nin determining the uses to which the dredge might be put. Had he sent a\nqualified person, such as the naval architect whom he later employed, to\ninspect the dredge he would have learned that it was not what he wanted,\nor had even made inquiry, he would have been informed as to the truth\nor have had a cause of action for misrepresentation if he had been given\nmisinformation and relied upon it. The appellee chose to act on\nassumption rather than upon inquiry or information obtained by\n\n42\n\n\x0cinvestigation, and, having learned his assumption was wrong, he asks to\nbe released from the resulting consequences on the ground that, because\nof his mistaken assumption, it would be unconscionable to allow the sale\nto stand. The appellee seeks this, although the court has found that the\nappellant was not guilty of any misrepresentation or fault in connection\nwith the transaction.\n[14]\nThe appellant is in the same position as the party seeking\nrelief on the grounds of mistake in Wheeler v. Holloway, supra, and the same\nresult must follow. In the Wheeler case it was held that relief should be\ndenied where the mistaken party exercised \xe2\x80\x98no diligence whatever\xe2\x80\x99 in\nascertaining the readily accessible facts before he entered into a contract.\n[15]\nThe appellee should have taken nothing on his claim;\ntherefore, it is unnecessary to consider the question raised by the crossappeal. The other questions raised by the appellant need not be\nconsidered. The case must be reversed and remanded for further\nproceeding consistent with what we have here held.\nReversed and remanded.\n2.2.1. Discussion of Anderson v. O\xe2\x80\x99Meara\nWhat is the best way to frame the case for Anderson (the seller)?\nDoes the testimony recounted in footnotes 4 and 5 present any\nproblem for your argument?\nHow might you respond to the buyer\xe2\x80\x99s reliance on this testimony?\nHow do the relevant Restatement (Second) sections apply to this\ncase?\nAre there any provisions of the Restatement (Second) that permit a\ncourt to use a comparative advantage analysis in this situation?\n2.2.2. Hypo of the Sterile Calf\nSuppose that Max Backus, a Texas cattle breeder attends an auction\nin search of promising breeding stock. He purchases one Rob of Aberdeen, a\n16-day old bull calf for a price of $5,000. The minimum age at which the\nfertility of a bull can be determined is about one year. When the calf is 18\nmonths old, veterinary tests establish conclusively that the calf was incurably\n\n43\n\n\x0csterile at birth. If the parties had known about the calf\xe2\x80\x99s condition, Rob\nwould have been worth only $30 at the time of the auction.\nBackus now seeks rescission of the sale contract. What arguments\nwould you expect the parties to make and what is the most likely outcome of\nthe case?\n3. Substantial Performance\n3.1. Principal Case \xe2\x80\x93 Jacob & Youngs v. Kent\nThe following case involves a dispute about the brand of pipe\ninstalled in the defendant\xe2\x80\x99s newly constructed \xe2\x80\x9ccountry residence.\xe2\x80\x9d As you\nread the case, consider what the defendant might have done differently to\nensure that the court would respect his professed desire for Reading pipe.\nJacob & Youngs v. Kent\nCourt of Appeals of New York\n230 N.Y. 239, 129 N.E. 889 (1921)\nCARDOZO, J.\n[1]\nThe plaintiff built a country residence for the defendant\nat a cost of upwards of $77,000, and now sues to recover a balance of\n$3,483.46, remaining unpaid. The work of construction ceased in June,\n1914, and the defendant then began to occupy the dwelling. There was\nno complaint of defective performance until March, 1915. One of the\nspecifications for the plumbing work provides that\xe2\x80\x9d \'all wrought iron\npipe must be well galvanized, lap welded pipe of the grade known as\n\'standard pipe\' of Reading manufacture.\xe2\x80\x9d The defendant learned in\nMarch, 1915, that some of the pipe, instead of being made in Reading,\nwas the product of other factories. The plaintiff was accordingly directed\nby the architect to do the work anew. The plumbing was then encased\nwithin the walls except in a few places where it had to be exposed.\nObedience to the order meant more than the substitution of other pipe.\nIt meant the demolition at great expense of substantial parts of the\ncompleted structure. The plaintiff left the work untouched, and asked for\na certificate that the final payment was due. Refusal of the certificate was\nfollowed by this suit.\n[2]\nThe evidence sustains a finding that the omission of the\nprescribed brand of pipe was neither fraudulent nor willful. It was the\n\n44\n\n\x0cresult of the oversight and inattention of the plaintiff\'s subcontractor.\nReading pipe is distinguished from Cohoes pipe and other brands only by\nthe name of the manufacturer stamped upon it at intervals of between six\nand seven feet. Even the defendant\'s architect, though he inspected the\npipe upon arrival, failed to notice the discrepancy. The plaintiff tried to\nshow that the brands installed, though made by other manufacturers,\nwere the same in quality, in appearance, in market value and in cost as the\nbrand stated in the contract\xe2\x80\x94that they were, indeed, the same thing,\nthough manufactured in another place. The evidence was excluded, and a\nverdict directed for the defendant. The Appellate Division reversed, and\ngranted a new trial.\n[3]\nWe think the evidence, if admitted, would have supplied\nsome basis for the inference that the defect was insignificant in its\nrelation to the project. The courts never say that one who makes a\ncontract fills the measure of his duty by less than full performance. They\ndo say, however, that an omission, both trivial and innocent, will\nsometimes be atoned for by allowance of the resulting damage, and will\nnot always be the breach of a condition to be followed by a forfeiture\n(Spence v. Ham, 163 N. Y. 220; Woodward v. Fuller, 80 N. Y. 312; Glacius v.\nBlack, 67 N. Y. 563, 566; Bowen v. Kimbell, 203 Mass. 364, 370). The\ndistinction is akin to that between dependent and independent promises,\nor between promises and conditions (Anson on Contracts [Corbin\'s ed.],\nsec. 367; 2 Williston on Contracts, sec. 842). Some promises are so\nplainly independent that they can never by fair construction be\nconditions of one another. (Rosenthal Paper Co. v. Nat. Folding Box & Paper\nCo., 226 N. Y. 313; Bogardus v. N. Y. Life Ins. Co., 101 N. Y. 328). Others\nare so plainly dependent that they must always be conditions. Others,\nthough dependent and thus conditions when there is departure in point\nof substance, will be viewed as independent and collateral when the\ndeparture is insignificant (2 Williston on Contracts, secs. 841, 842; Eastern\nForge Co. v. Corbin, 182 Mass. 590, 592; Robinson v. Mollett, L. R., 7 Eng. &\nIr. App. 802, 814; Miller v. Benjamin, 142 N. Y. 613). Considerations partly\nof justice and partly of presumable intention are to tell us whether this or\nthat promise shall be placed in one class or in another. The simple and\nthe uniform will call for different remedies from the multifarious and the\nintricate. The margin of departure within the range of normal expectation\n\n45\n\n\x0cupon a sale of common chattels will vary from the margin to be expected\nupon a contract for the construction of a mansion or a \xe2\x80\x9cskyscraper.\xe2\x80\x9d\nThere will be harshness sometimes and oppression in the implication of a\ncondition when the thing upon which labor has been expended is\nincapable of surrender because united to the land, and equity and reason\nin the implication of a like condition when the subject-matter, if\ndefective, is in shape to be returned. From the conclusion that promises\nmay not be treated as dependent to the extent of their uttermost minutiae\nwithout a sacrifice of justice, the progress is a short one to the conclusion\nthat they may not be so treated without a perversion of intention.\nIntention not otherwise revealed may be presumed to hold in\ncontemplation the reasonable and probable. If something else is in view,\nit must not be left to implication. There will be no assumption of a\npurpose to visit venial faults with oppressive retribution.\n[4]\nThose who think more of symmetry and logic in the\ndevelopment of legal rules than of practical adaptation to the attainment\nof a just result will be troubled by a classification where the lines of\ndivision are so wavering and blurred. Something, doubtless, may be said\non the score of consistency and certainty in favor of a stricter standard.\nThe courts have balanced such considerations against those of equity and\nfairness, and found the latter to be the weightier. The decisions in this\nstate commit us to the liberal view, which is making its way, nowadays, in\njurisdictions slow to welcome it (Dakin & Co. v. Lee, 1916, 1 K. B. 566,\n579). Where the line is to be drawn between the important and the trivial\ncannot be settled by a formula. \xe2\x80\x9cIn the nature of the case precise\nboundaries are impossible\xe2\x80\x9d (2 Williston on Contracts, sec. 841). The\nsame omission may take on one aspect or another according to its\nsetting. Substitution of equivalents may not have the same significance in\nfields of art on the one side and in those of mere utility on the other.\nNowhere will change be tolerated, however, if it is so dominant or\npervasive as in any real or substantial measure to frustrate the purpose of\nthe contract (Crouch v. Gutmann, 134 N. Y. 45, 51). There is no general\nlicense to install whatever, in the builder\'s judgment, may be regarded as\n\xe2\x80\x9cjust as good\xe2\x80\x9d (Easthampton L. & C. Co., Ltd., v. Worthington, 186 N. Y.\n407, 412). The question is one of degree, to be answered, if there is\ndoubt, by the triers of the facts (Crouch v. Gutmann; Woodward v. Fuller,\n\n46\n\n\x0csupra), and, if the inferences are certain, by the judges of the law\n(Easthampton L. & C. Co., Ltd., v. Worthington, supra). We must weigh the\npurpose to be served, the desire to be gratified, the excuse for deviation\nfrom the letter, the cruelty of enforced adherence. Then only can we tell\nwhether literal fulfilment is to be implied by law as a condition. This is\nnot to say that the parties are not free by apt and certain words to\neffectuate a purpose that performance of every term shall be a condition\nof recovery. That question is not here. This is merely to say that the law\nwill be slow to impute the purpose, in the silence of the parties, where\nthe significance of the default is grievously out of proportion to the\noppression of the forfeiture. The willful transgressor must accept the\npenalty of his transgression (Schultze v. Goodstein, 180 N. Y. 248, 251;\nDesmond-Dunne Co. v. Friedman-Doscher Co., 162 N. Y. 486, 490). For him\nthere is no occasion to mitigate the rigor of implied conditions. The\ntransgressor whose default is unintentional and trivial may hope for\nmercy if he will offer atonement for his wrong (Spence v. Ham, supra).\n[5]\nIn the circumstances of this case, we think the measure of\nthe allowance is not the cost of replacement, which would be great, but\nthe difference in value, which would be either nominal or nothing. Some\nof the exposed sections might perhaps have been replaced at moderate\nexpense. The defendant did not limit his demand to them, but treated the\nplumbing as a unit to be corrected from cellar to roof. In point of fact,\nthe plaintiff never reached the stage at which evidence of the extent of\nthe allowance became necessary. The trial court had excluded evidence\nthat the defect was unsubstantial, and in view of that ruling there was no\noccasion for the plaintiff to go farther with an offer of proof. We think,\nhowever, that the offer, if it had been made, would not of necessity have\nbeen defective because directed to difference in value. It is true that in\nmost cases the cost of replacement is the measure (Spence v. Ham, supra).\nThe owner is entitled to the money which will permit him to complete,\nunless the cost of completion is grossly and unfairly out of proportion to\nthe good to be attained. When that is true, the measure is the difference\nin value. Specifications call, let us say, for a foundation built of granite\nquarried in Vermont. On the completion of the building, the owner\nlearns that through the blunder of a subcontractor part of the foundation\nhas been built of granite of the same quality quarried in New Hampshire.\n\n47\n\n\x0cThe measure of allowance is not the cost of reconstruction. \xe2\x80\x9cThere may\nbe omissions of that which could not afterwards be supplied exactly as\ncalled for by the contract without taking down the building to its\nfoundations, and at the same time the omission may not affect the value\nof the building for use or otherwise, except so slightly as to be hardly\nappreciable.\xe2\x80\x9d (Handy v. Bliss, 204 Mass. 513, 519. Cf. Foeller v. Heintz, 137\nWis. 169, 178; Oberlies v. Bullinger, 132 N. Y. 598, 601; 2 Williston on\nContracts, sec. 805, p. 1541) The rule that gives a remedy in cases of\nsubstantial performance with compensation for defects of trivial or\ninappreciable importance, has been developed by the courts as an\ninstrument of justice. The measure of the allowance must be shaped to\nthe same end.\n[6]\nThe order should be affirmed, and judgment absolute\ndirected in favor of the plaintiff upon the stipulation, with costs in all\ncourts.\nMCLAUGHLIN, J. (DISSENTING).\n[7]\nI dissent. The plaintiff did not perform its contract. Its\nfailure to do so was either intentional or due to gross neglect which,\nunder the uncontradicted facts, amounted to the same thing, nor did it\nmake any proof of the cost of compliance, where compliance was\npossible.\n[8]\nUnder its contract it obligated itself to use in the\nplumbing only pipe (between 2,000 and 2,500 feet) made by the Reading\nManufacturing Company. The first pipe delivered was about 1,000 feet\nand the plaintiff\'s superintendent then called the attention of the foreman\nof the subcontractor, who was doing the plumbing, to the fact that the\nspecifications annexed to the contract required all pipe used in the\nplumbing to be of the Reading Manufacturing Company. They then\nexamined it for the purpose of ascertaining whether this delivery was of\nthat manufacture and found it was. Thereafter, as pipe was required in\nthe progress of the work, the foreman of the subcontractor would leave\nword at its shop that he wanted a specified number of feet of pipe,\nwithout in any way indicating of what manufacture. Pipe would thereafter\nbe delivered and installed in the building, without any examination\nwhatever. Indeed, no examination, so far as appears, was made by the\n\n48\n\n\x0cplaintiff, the subcontractor, defendant\'s architect, or any one else, of any\nof the pipe except the first delivery, until after the building had been\ncompleted. Plaintiff\'s architect then refused to give the certificate of\ncompletion, upon which the final payment depended, because all of the\npipe used in the plumbing was not of the kind called for by the contract.\nAfter such refusal, the subcontractor removed the covering or insulation\nfrom about 900 feet of pipe which was exposed in the basement, cellar\nand attic, and all but 70 feet was found to have been manufactured, not\nby the Reading Company, but by other manufacturers, some by the\nCohoes Rolling Mill Company, some by the National Steel Works, some\nby the South Chester Tubing Company, and some which bore no\nmanufacturer\'s mark at all. The balance of the pipe had been so installed\nin the building that an inspection of it could not be had without\ndemolishing, in part at least, the building itself.\n[9]\nI am of the opinion the trial court was right in directing a\nverdict for the defendant. The plaintiff agreed that all the pipe used\nshould be of the Reading Manufacturing Company. Only about twofifths of it, so far as appears, was of that kind. If more were used, then\nthe burden of proving that fact was upon the plaintiff, which it could\neasily have done, since it knew where the pipe was obtained. The\nquestion of substantial performance of a contract of the character of the\none under consideration depends in no small degree upon the good faith\nof the contractor. If the plaintiff had intended to, and had complied with\nthe terms of the contract except as to minor omissions, due to\ninadvertence, then he might be allowed to recover the contract price, less\nthe amount necessary to fully compensate the defendant for damages\ncaused by such omissions. (Woodward v. Fuller, 80 N. Y. 312; Nolan v.\nWhitney, 88 N. Y. 648.) But that is not this case. It installed between 2,000\nand 2,500 feet of pipe, of which only 1,000 feet at most complied with\nthe contract. No explanation was given why pipe called for by the\ncontract was not used, nor was any effort made to show what it would\ncost to remove the pipe of other manufacturers and install that of the\nReading Manufacturing Company. The defendant had a right to contract\nfor what he wanted. He had a right before making payment to get what\nthe contract called for. It is no answer to this suggestion to say that the\npipe put in was just as good as that made by the Reading Manufacturing\n\n49\n\n\x0cCompany, or that the difference in value between such pipe and the pipe\nmade by the Reading Manufacturing Company would be either \xe2\x80\x9cnominal\nor nothing.\xe2\x80\x9d Defendant contracted for pipe made by the Reading\nManufacturing Company. What his reason was for requiring this kind of\npipe is of no importance. He wanted that and was entitled to it. It may\nhave been a mere whim on his part, but even so, he had a right to this\nkind of pipe, regardless of whether some other kind, according to the\nopinion of the contractor or experts, would have been \xe2\x80\x9cjust as good,\nbetter, or done just as well.\xe2\x80\x9d He agreed to pay only upon condition that\nthe pipe installed were made by that company and he ought not to be\ncompelled to pay unless that condition be performed. (Schultze v.\nGoodstein, 180 N. Y. 248; Spence v. Ham, supra; Steel S. & E. C. Co. v. Stock,\n225 N. Y. 173; Van Clief v. Van Vechten, 130 N. Y. 571; Glacius v. Black, 50\nN. Y. 145; Smith v. Brady, 17 N. Y. 173, and authorities cited on p. 185.)\nThe rule, therefore, of substantial performance, with damages for\nunsubstantial omissions, has no application. (Crouch v. Gutmann, 134 N. Y.\n45; Spence v. Ham, 163 N. Y. 220.)\nWhat was said by this court in Smith v. Brady (supra) is quite\napplicable here:\nI suppose it will be conceded that everyone has a right to\nbuild his house, his cottage or his store after such a model and in\nsuch style as shall best accord with his notions of utility or be\nmost agreeable to his fancy. The specifications of the contract\nbecome the law between the parties until voluntarily changed. If\nthe owner prefers a plain and simple Doric column, and has so\nprovided in the agreement, the contractor has no right to put in\nits place the more costly and elegant Corinthian. If the owner,\nhaving regard to strength and durability, has contracted for walls\nof specified materials to be laid in a particular manner, or for a\ngiven number of joists and beams, the builder has no right to\nsubstitute his own judgment or that of others. Having departed\nfrom the agreement, if performance has not been waived by the\nother party, the law will not allow him to allege that he has made\nas good a building as the one he engaged to erect. He can\ndemand payment only upon and according to the terms of his\ncontract, and if the conditions on which payment is due have not\nbeen performed, then the right to demand it does not exist. To\nhold a different doctrine would be simply to make another\n\n50\n\n\x0ccontract, and would be giving to parties an encouragement to\nviolate their engagements, which the just policy of the law does\nnot permit.\n[10]\nI am of the opinion the trial court did not err in ruling on\nthe admission of evidence or in directing a verdict for the defendant.\n[11]\nFor the foregoing reasons I think the judgment of the\nAppellate Division should be reversed and the judgment of the Trial\nTerm affirmed.\n3.1.1. Perfect Tender and Substantial Performance\nUnder the Uniform Commercial Code, the standard for performance\nis \xe2\x80\x9cperfect tender\xe2\x80\x9d rather than \xe2\x80\x9csubstantial performance.\xe2\x80\x9d\n\xc2\xa7 2-601. Buyer\xe2\x80\x99s Rights on Improper Delivery\nSubject to the provisions of this Article on installment contracts\n(Section 2-612) and on shipment by seller (Section 2-504), and unless\notherwise agreed under the sections on contractual limitations of remedy\n(Sections 2-718 and 2-719), if the goods or the tender of delivery fail in\nany respect to conform to the contract, the buyer may\n(a) reject the whole; or\n(b) accept the whole; or\n(c) accept any commercial unit or units and reject the rest.\nThis rule applies to contracts for the sale of \xe2\x80\x9cgoods\xe2\x80\x9d as defined in\nthe UCC. Thus, with the exception of the seller\xe2\x80\x99s limited right to \xe2\x80\x9ccure\xe2\x80\x9d a\ndefective tender under U.C.C. \xc2\xa7 2-508, buyers of goods may reject a\nseller\xe2\x80\x99s performance for even a minor failure to conform to the description\nor quality of the goods specified in the contract.\nIn contrast, the doctrine enunciated in Jacob & Youngs v. Kent,\nallows a promisor to provide \xe2\x80\x9csubstantial performance\xe2\x80\x9d and pay damages\nfor any \xe2\x80\x9ctrivial and innocent defects.\xe2\x80\x9d Courts ordinarily apply this doctrine\nto complex service and construction contracts.\n\n51\n\n\x0c3.1.2. Motion for Rehearing in Jacob & Youngs v. Kent\nAccording to the record on appeal in Jacob & Youngs v. Kent, the\ncontract with the builder included the following language:\nAny work furnished by the Contractor, the material or\nworkmanship of which is defective or which is not fully in\naccordance with the drawings or specifications, in every respect,\nwill be rejected and is to be immediately torn down, removed and\nremade or replaced in accordance with the drawings and\nspecifications, whenever discovered\xe2\x80\xa6. The Owner shall have the\noption at all times to allow the defective or improper work to\nstand and to receive from the Contractor a sum of money\nequivalent to the difference in value of the work as performed\nand as herein specified.\nAfter losing on appeal, Kent filed a motion for rehearing and called\nthe court\xe2\x80\x99s attention to this clause. The New York Court of Appeals\nresponded with a brief per curiam opinion:\nThe court did not overlook the specification which\nprovides that defective work shall be replaced. The promise to\nreplace, like the promise to install, is to be viewed, not as a\ncondition, but as independent and collateral, when the defect is\ntrivial and innocent. The law does not nullify the covenant, but\nrestricts the remedy to damages.\n230 N.Y. 656 (1921).\n3.1.3. Discussion of Jacob & Youngs v. Kent\nSuppose that, contrary to fact, a rule of perfect tender applied to\nconstruction contracts. If you were negotiating an agreement on behalf of a\nbuilder, what risks would you anticipate? What contract terms might you\npropose to the owner in order to protect your client from those risks? How\nmight the owner\xe2\x80\x99s willingness to agree to vary the perfect tender rule affect\nthe price the builder should charge for the project?\nNow imagine how the same negotiation would proceed under the\nrule of substantial performance. Suppose that the owner cares deeply about\nhaving Reading rather than Cohoes or National pipe. Can you propose\ncontract language that would ensure that the builder must tear out and\nreplace any non-Reading pipe? Are there any additional terms that the parties\n\n52\n\n\x0ccould include in their contract to protect the builder from the special risks\nassociated with promising to use only Reading pipe?\nJudge Cardozo argues for a rule that permits the builder to avoid the\nhigh cost of tearing out and replacing nonconforming pipe because the\ndefect is \xe2\x80\x9cboth innocent and trivial.\xe2\x80\x9d The owner must be content with\nreceiving damages for the difference in market value between Reading and\nother brands of pipe. In his dissent, Judge McLaughlin casts the builder\xe2\x80\x99s\nconduct in a different light and advocates strict application of the contract\nspecifications. What incentives do these competing rules create for builders\nand owners? Could a court devise what we have called a \xe2\x80\x9ccompound liability\nrule\xe2\x80\x9d that polices potential misconduct by both parties?\n4. Exclusive Dealing Contracts\nA number of the contracts we have studied thus far involved a single\nexchange of payment for an easily defined performance. Thus, for example,\nBailey sought to collect for the cost of boarding Bascom\xe2\x80\x99s Folly; Lucy\nwanted Zehmer to convey title to the Ferguson farm; and Lefkowitz sought\nto enforce the Great Minneapolis Surplus Store\xe2\x80\x99s advertised deal on fur\npieces. Other cases concerned more complex disputes about whether the\npromisor completed performance satisfactorily, as in Stees v. Leonard and Jacob\n& Youngs v. Kent. Or the circumstances required a court to find an implied\nterm excusing performance, as in Taylor v. Caldwell, or to create (and then\nterminate) an option to accept a subcontractor\xe2\x80\x99s bid, as in Pavel Enterprises v.\nA.S. Johnson Co.\nIn this section, we introduce a new source of complexity to the\ncontracting process. Exclusive dealing contracts are one example of a\nbroader category of \xe2\x80\x9crelational contracts\xe2\x80\x9d that involve repeated occasions for\nperformance and payment. The familiar employment relationship exemplifies\nmany of the characteristic features of a relational contract. Performance\nordinarily occurs over a considerable length of time. Neither party can be\ncertain at the outset exactly what tasks the employee will undertake or what\nopportunities the employer will be able to offer in exchange. Many unknown\ncontingencies potentially affect both the cost of the parties\xe2\x80\x99 performance and\nthe alternative opportunities they have during the term of the contract.\nFinally, it is impossible to draft specific contract language that will adequately\naddress each of the innumerable contingencies that may arise.\n\n53\n\n\x0cCommercial parties confront these problems in long-term supply\ncontracts, in exclusive distributorship agreements, in some publishing\ncontracts, and in countless other situations. The Uniform Commercial Code\nprovides broad guidelines for certain relational contracts involving the sale of\ngoods. Please read UCC \xc2\xa7 2-306 Output, Requirements and Exclusive\nDealings.\nThis UCC section addresses both exclusive dealing and so-called\n\xe2\x80\x9coutput or requirements\xe2\x80\x9d contracts. An output contract commits the buyer\nto purchase and the seller to sell the entire output of a particular production\nfacility. A requirements contract similarly obligates one party to purchase the\nentire quantity of a particular good that it needs from the other party who\ncommits to supply those requirements.\nFor output and requirements contracts, an initial problem is to\nestablish that the promisors\xe2\x80\x99 commitments are sufficiently definite to warrant\nenforcement. The official comment 2 to U.C.C. \xc2\xa7 2-306 expressly rejects\ncases holding that the quantity term of an output or requirements contract is\ntoo indefinite. For exclusive dealing contracts, courts confront an analogous\nquestion of whether the recipient of exclusive rights has provided any\nconsideration. As you can see, UCC \xc2\xa7 2-306 answers this question in the\naffirmative. The first of the common law cases that follows, Wood v. Lucy,\nLady Duff-Gordon, shows how a noted jurist reasoned about consideration in\nan exclusive dealing contract. The second case, Bloor v. Falstaff, interprets\nspecific contractual language establishing a standard of performance quite\nsimilar to the implied \xe2\x80\x9cbest efforts\xe2\x80\x9d obligation of U.C.C. \xc2\xa7 2-306.\nAs you read both of these cases, consider first how the court\naddresses the problem of consideration and then what sort of guidance the\ndecision offers about the applicable performance standard.\n4.1. Principal Case \xe2\x80\x93 Wood v. Lucy, Lady Duff-Gordon\nWood v. Lucy, Lady Duff-Gordon\nCourt of Appeals of New York\n222 N.Y. 88, 118 N.E. 214 (1917)\nCARDOZO, J.\n1.\nThe defendant styles herself \xe2\x80\x9ca creator of fashions.\xe2\x80\x9d Her\nfavor helps a sale. Manufacturers of dresses, millinery and like articles are\n\n54\n\n\x0cglad to pay for a certificate of her approval. The things which she\ndesigns, fabrics, parasols and what not, have a new value in the public\nmind when issued in her name. She employed the plaintiff to help her to\nturn this vogue into money. He was to have the exclusive right, subject\nalways to her approval, to place her indorsements on the designs of\nothers. He was also to have the exclusive right to place her own designs\non sale, or to license others to market them. In return, she was to have\none-half of \xe2\x80\x9call profits and revenues\xe2\x80\x9d derived from any contracts he\nmight make. The exclusive right was to last at least one year from April 1,\n1915, and thereafter from year to year unless terminated by notice of\nninety days. The plaintiff says that he kept the contract on his part, and\nthat the defendant broke it. She placed her indorsement on fabrics,\ndresses and millinery without his knowledge, and withheld the profits. He\nsues her for the damages, and the case comes here on demurrer.\n2.\nThe agreement of employment is signed by both parties.\nIt has a wealth of recitals. The defendant insists, however, that it lacks the\nelements of a contract. She says that the plaintiff does not bind himself\nto anything. It is true that he does not promise in so many words that he\nwill use reasonable efforts to place the defendant\'s indorsements and\nmarket her designs.\n3.\nWe think, however, that such a promise is fairly to be\nimplied. The law has outgrown its primitive stage of formalism when the\nprecise word was the sovereign talisman, and every slip was fatal. It takes\na broader view to-day. A promise may be lacking, and yet the whole\nwriting may be \xe2\x80\x9cinstinct with an obligation,\xe2\x80\x9d imperfectly expressed\n(SCOTT, J., in McCall Co. v. Wright, 133 App. Div. 62; Moran v. Standard\nOil Co., 211 N. Y. 187, 198). If that is so, there is a contract.\n4.\nThe implication of a promise here finds support in many\ncircumstances. The defendant gave an exclusive privilege. She was to\nhave no right for at least a year to place her own indorsements or market\nher own designs except through the agency of the plaintiff. The\nacceptance of the exclusive agency was an assumption of its duties\n(Phoenix Hermetic Co. v. Filtrine Mfg. Co., 164 App. Div. 424; W. G. Taylor\nCo. v. Bannerman, 120 Wis. 189; Mueller v. Bethesda Mineral Spring Co., 88\nMich. 390). We are not to suppose that one party was to be placed at the\nmercy of the other (Hearn v. Stevens & Bro., 111 App. Div. 101, 106;\n\n55\n\n\x0cRussell v. Allerton, 108 N. Y. 288). Many other terms of the agreement\npoint the same way. We are told at the outset by way of recital that \xe2\x80\x9cthe\nsaid Otis F. Wood possesses a business organization adapted to the\nplacing of such indorsements as the said Lucy, Lady Duff-Gordon has\napproved.\xe2\x80\x9d The implication is that the plaintiff\'s business organization\nwill be used for the purpose for which it is adapted. But the terms of the\ndefendant\'s compensation are even more significant. Her sole\ncompensation for the grant of an exclusive agency is to be one-half of all\nthe profits resulting from the plaintiff\'s efforts. Unless he gave his\nefforts, she could never get anything. Without an implied promise, the\ntransaction cannot have such business \xe2\x80\x9cefficacy as both parties must\nhave intended that at all events it should have\xe2\x80\x9d (BOWEN, L. J., in The\nMoorcock, 14 P. D. 64, 68). But the contract does not stop there. The\nplaintiff goes on to promise that he will account monthly for all moneys\nreceived by him, and that he will take out all such patents and copyrights\nand trademarks as may in his judgment be necessary to protect the rights\nand articles affected by the agreement. It is true, of course, as the\nAppellate Division has said, that if he was under no duty to try to market\ndesigns or to place certificates of indorsement, his promise to account for\nprofits or take out copyrights would be valueless. But in determining the\nintention of the parties, the promise has a value. It helps to enforce the\nconclusion that the plaintiff had some duties. His promise to pay the\ndefendant one-half of the profits and revenues resulting from the\nexclusive agency and to render accounts monthly, was a promise to use\nreasonable efforts to bring profits and revenues into existence. For this\nconclusion, the authorities are ample (Wilson v. Mechanical Orguinette Co.,\n170 N. Y. 542; Phoenix Hermetic Co. v. Filtrine Mfg. Co., supra; Jacquin v.\nBoutard, 89 Hun, 437; 157 N. Y. 686; Moran v. Standard Oil Co., supra; City\nof N. Y. v. Paoli, 202 N. Y. 18; M\'Intyre v. Belcher, 14 C. B. [N. S.] 654;\nDevonald v. Rosser & Sons, 1906, 2 K. B. 728; W. G. Taylor Co. v. Bannerman,\nsupra; Mueller v. Bethesda Mineral Spring Co., supra; Baker Transfer Co. v.\nMerchants\' R. & I. Mfg. Co., 1 App. Div. 507).\n5.\nThe judgment of the Appellate Division should be\nreversed, and the order of the Special Term affirmed, with costs in the\nAppellate Division and in this court.\n\n56\n\n\x0cCUDDEBACK, MCLAUGHLIN AND ANDREWS,\nCONCUR; HISCOCK, CH. J., CHASE AND CRANE, JJ., DISSENT.\n\nJJ.,\n\n4.1.1. The Background of Wood v. Lucy, Lady Duff-Gordon\nAs her name suggests, Lady Duff-Gordon was a British clothing\ndesigner who had considerable success in England before attempting to enter\nthe American market with Wood\xe2\x80\x99s promotional assistance. Wood and Lucy\nhoped that her fame would lead American clothing makers to value her\nendorsement of their products. The litigation grew out of Lucy\xe2\x80\x99s decision to\nmake a separate deal with Sears, Roebuck and Company to sell a line of her\ndresses through the company\xe2\x80\x99s mail order catalogue. Wood objected that the\nSears deal violated his exclusive right to market her products in the United\nStates. Adding insult to injury, it appears that the \xe2\x80\x9cLucile\xe2\x80\x9d line was too\nexpensive for most Sears customers. The company evidently lost more than\n$26,000 and dropped the line from its catalogue.\nLucy was quite a celebrity in her day and even tasted some scandal\nfor her conduct as a survivor in the sinking of the Titanic. For more on the\nstory of Lucy and her dresses, see Walter Pratt, American Contract Law at the\nTurn of the Century, 39 S.C. L. REV. 415 (1988), and VICTOR GOLDBERG,\nFRAMING CONTRACT LAW: AN ECONOMIC PERSPECTIVE 57-58 (2007).\n4.1.2. Reading Wood v. Lucy, Lady Duff-Gordon\nAlthough judicial opinions often make one outcome appear\ninevitable, great legal advocates develop a creative ability to imagine how the\ncourt could have reached the opposite result. Professor Karl Llewellyn has\noffered this strikingly different reading of the situation in Wood:\nThe plaintiff in this action rests his case upon his own\ncarefully prepared form agreement, which has as its first essence\nhis own omission of any expression whatsoever of any obligation\nof any kind on the part of this same plaintiff. We thus have the\nfamiliar situation of a venture in which one party, here the\ndefendant, has an asset, with what is, in advance, purely\nspeculative value. The other party, the present plaintiff, who drew\nthe agreement, is a marketer eager for profit, but chary of risk.\nThe legal question presented is whether the plaintiff, while\ncarefully avoiding all risk in the event of failure, can nevertheless\nclaim full profit in the event that the market may prove favorable\n\n57\n\n\x0cin its response. The law of consideration joins with the principles\nof business decency in giving the answer. And the answer is no.\nKarl Llewellyn, A Lecture on Appellate Advocacy, 29 U. CHI. L. REV. 627,\n637-38 (1962).\n4.1.3. Discussion of Wood v. Lucy, Lady Duff-Gordon\nProfessor Karl Llewellyn offers a reading of the facts that raises grave\ndoubts about whether the agent, Wood, has provided any consideration for\nLady Duff-Gordon\xe2\x80\x99s promise to pay him a commission on all U.S. sales of\nher designs. How does Judge Cardozo avoid this problem and find an\nenforceable contract? What facts about the relationship of the parties does he\nuse to support this conclusion?\nTo what standard of performance does Judge Cardozo hold Wood?\nWhat exactly is Wood obliged to do under his contract with Lady DuffGordon?\n4.1.4. Hypo on Real Estate Sales\nSuppose that Bob is selling his house. He signs an exclusive listing\ncontract with Kay, a real estate broker. According to the terms of the\ncontract, Bob promises to pay Kay six percent of the selling price of his\nhome if she, or anyone else, sells the house during the next three months.\nIs Bob\xe2\x80\x99s promise to pay supported by consideration? If so, what is\nthe consideration and what argument justifies us in concluding that it exists?\nNow suppose that Kay, the agent, has found a buyer. The buyer, Sue,\nsigns a contract in which she agrees to buy the house for $250,000 but the\ndocument provides that \xe2\x80\x9cthis sale is conditional on the buyer obtaining a\nmortgage in the amount of $200,000 at an interest rate not to exceed seven\n(7) percent.\xe2\x80\x9d\nIs Sue\xe2\x80\x99s promise illusory? Could she simply sit on her hands and do\nnothing and then cancel the contract for failure of the financing contingency?\nAs an attorney for Bob, the seller, what would you tell him about his\nchances of succeeding in a suit to enforce any duties Sue might have to\nobtain a mortgage?\n\n58\n\n\x0cCan you think of any measures that Bob or his agent Kay could take\nto reduce the risk that Sue will avoid the contract by failing to obtain\nfinancing?\nFinally, suppose that Bob has similar concerns about how much\neffort Kay will expend promoting the sale of his house. He may worry, for\nexample, that Kay will simply list his property in the Multiple Listing Service\n(MLS) and then wait passively until another agent brings a prospective buyer\nto view the house. It is customary in such cases for the listing broker, Kay, to\nshare the sale commission with the other broker. However, Kay might\nreasonably believe that a low-effort promotional strategy will maximize her\nnet income.\nWhat sort of terms could Bob demand in a future listing contract to\naddress this possibility? Do you foresee any problems that might arise with\nspecific performance standards? Would a simpler contract, promising a\ncommission of six percent of the purchase price to anyone who sells the\nhouse, be more likely to achieve Bob\xe2\x80\x99s objectives?\n4.2. Principal Case \xe2\x80\x93 Bloor v. Falstaff Brewing Corp.\nBloor v. Falstaff Brewing Corp\nUnited States Court of Appeals, Second Circuit\n601 F.2d 609 (1979)\nFRIENDLY, CIRCUIT JUDGE:\n[1]\nThis action, wherein federal jurisdiction is predicated on\ndiversity of citizenship, 28 U.S.C. \xc2\xa7 1332, was brought in the District\nCourt for the Southern District of New York, by James Bloor,\nReorganization Trustee of Balco Properties Corporation, formerly named\nP. Ballantine & Sons (Ballantine), a venerable and once successful\nbrewery based in Newark, N. J. He sought to recover from Falstaff\nBrewing Corporation (Falstaff) for breach of a contract dated March 31,\n1972, wherein Falstaff bought the Ballantine brewing labels, trademarks,\naccounts receivable, distribution systems and other property except the\nbrewery. The price was $4,000,000 plus a royalty of fifty cents on each\nbarrel of the Ballantine brands sold between April 1, 1972 and March 31,\n1978. Although other issues were tried, the appeals concern only two\nprovisions of the contract. These are:\n\n59\n\n\x0c8. Certain Other Covenants of Buyer. (a) After the\nClosing Date the (Buyer) will use its best efforts to promote and\nmaintain a high volume of sales under the Proprietary Rights.\n2(a)(v) (The Buyer will pay a royalty of $.50 per barrel for\na period of 6 years), provided, however, that if during the Royalty\nPeriod the Buyer substantially discontinues the distribution of\nbeer under the brand name \xe2\x80\x9cBallantine\xe2\x80\x9d (except as the result of a\nrestraining order in effect for 30 days issued by a court of\ncompetent jurisdiction at the request of a governmental\nauthority), it will pay to the Seller a cash sum equal to the years\nand fraction thereof remaining in the Royalty Period times\n$1,100,000, payable in equal monthly installments on the first day\nof each month commencing with the first month following the\nmonth in which such discontinuation occurs\xe2\x80\xa6.\n[2]\nBloor claimed that Falstaff had breached the best efforts\nclause, 8(a), and indeed that its default amounted to the substantial\ndiscontinuance that would trigger the liquidated damage clause, 2(a)(v).\nIn an opinion that interestingly traces the history of beer back to\nDomesday Book and beyond, Judge Brieant upheld the first claim and\nawarded damages but dismissed the second. Falstaff appeals from the\nformer ruling, Bloor from the latter. Both sides also dispute the court\'s\nmeasurement of damages for breach of the best efforts clause.\n[3]\nWe shall assume familiarity with Judge Brieant\'s excellent\nopinion, 454 F. Supp. 258 (S.D.N.Y.1978), from which we have drawn\nheavily, and will state only the essentials. Ballantine had been a family\nowned business, producing low-priced beers primarily for the northeast\nmarket, particularly New York, New Jersey, Connecticut and\nPennsylvania. Its sales began to decline in 1961, and it lost money from\n1965 on. On June 1, 1969, Investors Funding Corporation (IFC), a real\nestate conglomerate with no experience in brewing, acquired substantially\nall the stock of Ballantine for $16,290,000. IFC increased advertising\nexpenditures, levelling off in 1971 at $1 million a year. This and other\npromotional practices, some of dubious legality, led to steady growth in\nBallantine\'s sales despite the increased activities in the northeast of the\n\xe2\x80\x9cnationals\xe2\x80\x9d1 which have greatly augmented their market shares at the\n1\n\nMiller\'s, Schlitz, Anheuser-Busch, Coors and Pabst.\n\n60\n\n\x0cexpense of smaller brewers. However, this was a profitless prosperity;\nthere was no month in which Ballantine had earnings and the total loss\nwas $15,500,000 for the 33 months of IFC ownership.\n[4]\nAfter its acquisition of Ballantine, Falstaff continued the\n$1 million a year advertising program, IFC\'s pricing policies, and also its\npolicy of serving smaller accounts not solely through sales to\nindependent distributors, the usual practice in the industry, but by use of\nits own warehouses and trucks the only change being a shift of the retail\ndistribution system from Newark to North Bergen, N.J., when brewing\nwas concentrated at Falstaff\'s Rhode Island brewery. However, sales\ndeclined and Falstaff claims to have lost $22 million in its Ballantine\nbrand operations from March 31, 1972 to June 1975. Its other activities\nwere also performing indifferently, although with no such losses as were\nbeing incurred in the sale of Ballantine products, and it was facing\ninability to meet payrolls and other debts. In March and April 1975\ncontrol of Falstaff passed to Paul Kalmanovitz, a businessman with 40\nyears experience in the brewing industry. After having first advanced $3\nmillion to enable Falstaff to meet its payrolls and other pressing debts, he\nlater supplied an additional $10 million and made loan guarantees, in\nreturn for which he received convertible preferred shares in an amount\nthat endowed him with 35% of the voting power and became the\nbeneficiary of a voting trust that gave him control of the board of\ndirectors.\n[5]\nMr. Kalmanovitz determined to concentrate on making\nbeer and cutting sales costs. He decreased advertising, with the result that\nthe Ballantine advertising budget shrank from $1 million to $115,000 a\nyear.2 In late 1975 he closed four of Falstaff\'s six retail distribution\ncenters, including the North Bergen, N.J. depot, which was ultimately\nreplaced by two distributors servicing substantially fewer accounts. He\nalso discontinued various illegal practices that had been used in selling\n\n2This\n\nwas for cooperative advertising with purchasers.\n\n61\n\n\x0cBallantine products.3 What happened in terms of sales volume is shown\nin plaintiff\'s exhibit 114 J, a chart which we reproduce in the margin.4\nWith 1974 as a base, Ballantine declined 29.72% in 1975 and 45.81% in\n1976 as compared with a 1975 gain of 2.24% and a 1976 loss of 13.08%\nfor all brewers excluding the top 15. Other comparisons are similarly\ndevastating, at least for 1976.5 Despite the decline in the sale of its own\nlabels as well as Ballantine\'s, Falstaff, however, made a substantial\nfinancial recovery. In 1976 it had net income of $8.7 million and its yearend working capital had increased from $8.6 million to $20.2 million and\nits cash and certificates of deposit from $2.2 million to $12.1 million.\n[6]\nSeizing upon remarks made by the judge during the trial\nthat Falstaff\'s financial standing in 1975 and thereafter \xe2\x80\x9cis probably not\nrelevant\xe2\x80\x9d and a footnote in the opinion, 454 F. Supp. at 267 n. 7,6\nappellate counsel for Falstaff contend that the judge read the best efforts\nclause as requiring Falstaff to maintain Ballantine\'s volume by any sales\nThere were two kinds of illegal practices, the testimony on both of which is,\nunsurprisingly, rather vague. Certain \xe2\x80\x9cnational accounts\xe2\x80\x9d, i. e. large draught beer\nbuyers, were gotten or retained by \xe2\x80\x9cblack bagging\xe2\x80\x9d, the trade term for commercial\nbribery. On a smaller scale, sales to taverns were facilitated by the salesman\'s\noffering a free round for the house of Ballantine if it was available (\xe2\x80\x9cretention\xe2\x80\x9d),\nor the customer\'s choice (\xe2\x80\x9csolicitation\xe2\x80\x9d). Both practices seem to have been\nindulged in by many brewers, including Falstaff before Kalmanovitz took control.\n3\n\n4[An\n\nincomprehensible graph comparing sales volumes is omitted. The text above\nably describes the distinctively bad performance of Ballantine brands.]\nFalstaff argues that a trend line projecting the declining volume of Ballantine\'s\nsales since 1966, before IFC\'s purchase, would show an even worse picture. We\nagree with plaintiff that the percentage figures since 1974 are more significant; at\nleast the judge was entitled to think so.\n5\n\n\xe2\x80\x9cEven if Falstaff\'s financial position had been worse in mid-1975 than it actually\nwas, and even if Falstaff had continued in that state of impecuniosity during the\nterm of the contract, performance of the contract is not excused where the\ndifficulty of performance arises from financial difficulty or economic hardship. As\nthe New York Court of Appeals stated in 407 E. 61st St. Garage, Inc. v. Savoy Corp.,\n244 N.E.2d 37, 41 (N.Y. 1968):\n6\n\n\xe2\x80\x98(W)here impossibility or difficulty of performance is occasioned only by financial\ndifficulty or economic hardship, even to the extent of insolvency or bankruptcy,\nperformance of a contract is not excused.\xe2\x80\x99 (Citations omitted.)\xe2\x80\x9d\n\n62\n\n\x0cmethods having a good prospect of increasing or maintaining sales or, at\nleast, to continue lawful methods in use at the time of purchase, no\nmatter what losses they would cause. Starting from this premise, counsel\nreason that the judge\'s conclusion was at odds with New York law,\nstipulated by the contract to be controlling, as last expressed by the Court\nof Appeals in Feld v. Henry S. Levy & Sons, Inc., 335 N.E.2d 320 (N.Y.\n1975). The court was there dealing with a contract whereby defendant\nagreed to sell and plaintiff to purchase all bread crumbs produced by\ndefendant at a certain factory. During the term of the agreement\ndefendant ceased producing bread crumbs because production with\nexisting facilities was \xe2\x80\x9cvery uneconomical\xe2\x80\x9d, and the plaintiff sued for\nbreach. The case was governed by \xc2\xa7 2-306 of the Uniform Commercial\nCode which provides:\n\xc2\xa7 2-306. Output, Requirements and Exclusive Dealings\n(1) A term which measures the quantity by the output of\nthe seller or the requirements of the buyer means such actual\noutput or requirements as may occur in good faith, except that no\nquantity unreasonably disproportionate to any stated estimate or\nin the absence of a stated estimate to any normal or otherwise\ncomparable prior output or requirements may be tendered or\ndemanded.\n(2) A lawful agreement by either the seller or the buyer\nfor exclusive dealing in the kind of goods concerned imposes\nunless otherwise agreed an obligation by the seller to use best\nefforts to supply the goods and by the buyer to use best efforts to\npromote their sale.\n[7]\nAffirming the denial of cross-motions for summary\njudgment, the court said that, absent a cancellation on six months\' notice\nfor which the contract provided:\n[D]efendant was expected to continue to perform in good\nfaith and could cease production of the bread crumbs, a single\nfacet of its operation, only in good faith. Obviously, a bankruptcy\nor genuine imperiling of the very existence of its entire business\ncaused by the production of the crumbs would warrant cessation\nof production of that item; the yield of less profit from its sale\nthan expected would not. Since bread crumbs were but a part of\ndefendant\'s enterprise and since there was a contractual right of\n\n63\n\n\x0ccancellation, good faith required continued production until\ncancellation, even if there be no profit. In circumstances such as\nthese and without more, defendant would be justified, in good\nfaith, in ceasing production of the single item prior to\ncancellation only if its losses from continuance would be more\nthan trivial, which, overall, is a question of fact.\n335 N.E.2d 323.7 Falstaff argues from this that it was not bound\nto do anything to market Ballantine products that would cause \xe2\x80\x9cmore\nthan trivial\xe2\x80\x9d losses.\n[8]\nOther cases suggest that under New York law a \xe2\x80\x9cbest\nefforts\xe2\x80\x9d clause imposes an obligation to act with good faith in light of\none\'s own capabilities. In Van Valkenburgh v. Hayden Publishing Co., 30\nN.Y.2d 34, 330 N.Y.S.2d 329, 281 N.E.2d 142 (1972), the court held a\npublisher liable to an author when, in clear bad faith after a contract\ndispute, he hired another to produce a book very similar to plaintiff\'s and\nthen promoted it to those who had been buying the latter. On the other\nhand, a defendant having the exclusive right to sell the plaintiff\'s product\nmay sell a similar product if necessary to meet outside competition, so\nlong as he accounts for any resulting losses the plaintiff can show in the\nsales of the licensed product. Parev Products Co. v. I. Rokeach & Sons, 124\nF.2d 147 (2 Cir. 1941). A summary definition of the best efforts\nobligation, cited by Judge Brieant, 454 F. Supp. at 266, is given in Arnold\nProductions, Inc. v. Favorite Films Corp., 176 F.Supp. 862, 866\n(S.D.N.Y.1959), aff\'d 298 F.2d 540 (2 Cir. 1962), to wit, performing as\nwell as \xe2\x80\x9cthe average prudent comparable\xe2\x80\x9d brewer.\n7The\n\ntext of the Feld opinion did not refer to the case cited by Judge Brieant in the\npreceding footnote, 407 East 61st Garage, Inc. v. Savoy Fifth Avenue Corporation, 244\nN.E.2d 37 (N.Y. 1968), which might suggest a more onerous obligation here. The\nCourt of Appeals there reversed a summary judgment in favor of the defendant,\nwhich had discontinued operating the Savoy Hilton Hotel because of substantial\nfinancial losses, in alleged breach of a five-year contract with plaintiff wherein the\ndefendant had agreed to use all reasonable efforts to provide the garage with\nexclusive opportunity for storage of the motor vehicles of hotel guests. Although\nthe court did use the language quoted by Judge Brieant, the actual holding was\nsimply that \xe2\x80\x9can issue of fact is presented whether the agreement did import an\nimplied promise by Savoy to fulfill its obligations for an entire five-year period.\xe2\x80\x9d\n244 N.E.2d at 41.\n\n64\n\n\x0c[9]\nThe net of all this is that the New York law is far from\nclear and it is unfortunate that a federal court must have to apply it.\n[10]\nWe do not think the judge imposed on Falstaff a standard\nas demanding as its appellate counsel argues that he did. Despite his\nfootnote 7, see note 6 supra, he did not in fact proceed on the basis that\nthe best efforts clause required Falstaff to bankrupt itself in promoting\nBallantine products or even to sell those products at a substantial loss.\nHe relied rather on the fact that Falstaff\'s obligation to \xe2\x80\x9cuse its best\nefforts to promote and maintain a high volume of sales\xe2\x80\x9d of Ballantine\nproducts was not fulfilled by a policy summarized by Mr. Kalmanovitz as\nbeing:\nWe sell beer and you pay for it\xe2\x80\xa6.We sell beer, F.O.B. the\nbrewery. You come and get it.\nhowever sensible such a policy may have been with respect to\nFalstaff\'s other products. Once the peril of insolvency8 had been averted,\nthe drastic percentage reductions in Ballantine sales as related to any\npossible basis of comparison, see fn. 5, required Falstaff at least to\nexplore whether steps not involving substantial losses could have been\ntaken to stop or at least lessen the rate of decline. The judge found that,\ninstead of doing this, Falstaff had engaged in a number of misfeasances\nand nonfeasances which could have accounted in substantial measure for\nthe catastrophic drop in Ballantine sales shown in the chart, see 454 F.\nSupp. at 267-72. These included the closing of the North Bergen depot\nwhich had serviced \xe2\x80\x9cMom and Pop\xe2\x80\x9d stores and bars in the New York\nmetropolitan area; Falstaff\'s choices of distributors for Ballantine\nproducts in the New Jersey and particularly the New York areas, where\nthe chosen distributor was the owner of a competing brand; its failure to\ntake advantage of a proffer from Guinness-Harp Corporation to\ndistribute Ballantine products in New York City through its Metrobeer\nDivision; Falstaff\'s incentive to put more effort into sales of its own\nThe judge may have unduly minimized this. We cannot agree with his statement,\n454 F. Supp. at 267, that even in the winter of 1975 Falstaff \xe2\x80\x9chad considerable\nborrowing capacity\xe2\x80\x9d and indeed \xe2\x80\x9cdid borrow successfully from Mr. Kalmanovitz.\xe2\x80\x9d\nThe latter was not making a commercial loan but was engaged in a program to\ntake control. However, nothing turns on this.\n8\n\n65\n\n\x0cbrands which sold at higher prices despite identity of the ingredients and\nwere free from the $0.50 a barrel royalty burden; its failure to treat\nBallantine products evenhandedly with Falstaff\'s; its discontinuing the\npractice of setting goals for salesmen; and the general Kalmanovitz policy\nof stressing profit at the expense of volume. In the court\'s judgment,\nthese misfeasances and nonfeasances warranted a conclusion that, even\ntaking account of Falstaff\'s right to give reasonable consideration to its\nown interests, Falstaff had breached its duty to use best efforts as stated\nin the Van Valkenburgh decision, supra, 30 N.Y.2d at 46, 330 N.Y.S.2d at\n334, 281 N.E.2d at 145.\n[11]\nFalstaff levels a barrage on these findings. The only attack\nwhich merits discussion is its criticism of the judge\'s conclusion that\nFalstaff did not treat its Ballantine brands evenhandedly with those under\nthe Falstaff name. We agree that the subsidiary findings \xe2\x80\x9cthat Falstaff but\nnot Ballantine had been advertised extensively in Texas and Missouri\xe2\x80\x9d\nand that \xe2\x80\x9c(i)n these same areas Falstaff, although a \xe2\x80\x98premium\xe2\x80\x99 beer, was\nsold for extended periods below the price of Ballantine,\xe2\x80\x9d while literally\ntrue, did not warrant the inference drawn from them. Texas was Falstaff\nterritory and, with advertising on a cooperative basis, it was natural that\nadvertising expenditures on Falstaff would exceed those on Ballantine.\nThe lower price for Falstaff was a particular promotion of a bicentennial\ncan in Texas, intended to meet a particular competitor.\n[12]\nHowever, we do not regard this error as undermining the\njudge\'s ultimate conclusion of breach of the best efforts clause. While\nthat clause clearly required Falstaff to treat the Ballantine brands as well\nas its own, it does not follow that it required no more. With respect to its\nown brands, management was entirely free to exercise its business\njudgment as to how to maximize profit even if this meant serious loss in\nvolume. Because of the obligation it had assumed under the sales\ncontract, its situation with respect to the Ballantine brands was quite\ndifferent. The royalty of $.50 a barrel on sales was an essential part of the\npurchase price. Even without the best efforts clause Falstaff would have\nbeen bound to make a good faith effort to see that substantial sales of\nBallantine products were made, unless it discontinued under clause\n2(a)(v) with consequent liability for liquidated damages. Cf. Wood v. DuffGordon, 222 N.Y. 88, 118 N.E. 214 (1917) (Cardozo, J.). Clause 8\n\n66\n\n\x0cimposed an added obligation to use \xe2\x80\x9cbest efforts to promote and\nmaintain a high volume of sales \xe2\x80\xa6.\xe2\x80\x9d (emphasis supplied). Although we\nagree that even this did not require Falstaff to spend itself into\nbankruptcy to promote the sales of Ballantine products, it did prevent the\napplication to them of Kalmanovitz\' philosophy of emphasizing profit\nuber alles without fair consideration of the effect on Ballantine volume.\nPlaintiff was not obliged to show just what steps Falstaff could\nreasonably have taken to maintain a high volume for Ballantine products.\nIt was sufficient to show that Falstaff simply didn\'t care about\nBallantine\'s volume and was content to allow this to plummet so long as\nthat course was best for Falstaff\'s overall profit picture, an inference\nwhich the judge permissibly drew. The burden then shifted to Falstaff to\nprove there was nothing significant it could have done to promote\nBallantine sales that would not have been financially disastrous.\n[13]\nHaving correctly concluded that Falstaff had breached its\nbest efforts covenant, the judge was faced with a difficult problem in\ncomputing what the royalties on the lost sales would have been. There is\nno need to rehearse the many decisions that, in a situation like this,\ncertainty is not required; \xe2\x80\x9c(t)he plaintiff need only show a \xe2\x80\x98stable\nfoundation for a reasonable estimate of royalties he would have earned\nhad defendant not breached\xe2\x80\x99 \xe2\x80\x9d. Contemporary Mission, Inc. v. Famous\nMusic Corp., 557 F.2d 918, 926 (2 Cir. 1977), quoting Freund v. Washington\nSquare Press, Inc., 34 N.Y.2d 379, 383, 357 N.Y.S.2d 857, 861, 314 N.E.2d\n419, 421 (1974). After carefully considering other possible bases, the\ncourt arrived at the seemingly sensible conclusion that the most nearly\naccurate comparison was with the combined sales of Rheingold and\nSchaefer beers, both, like Ballantine, being \xe2\x80\x9cprice\xe2\x80\x9d beers sold primarily in\nthe northeast, and computed what Ballantine sales would have been if its\nbrands had suffered only the same decline as a composite of Rheingold\nand Schaefer.\n[14]\nFalstaff\'s principal criticism of the method of\ncomparison, in addition to that noted in fn. 5, supra, was that the judge\nerred in saying, 454 F. Supp. at 279, that inclusion of Rheingold made\n\xe2\x80\x9cthe comparison a conservative one\xe2\x80\x9d since \xe2\x80\x9c(t)he brewery was closed in\nearly 1974 and production halted for a time.\xe2\x80\x9d Falstaff is right that the halt\nin Rheingold production works the other way since the lowered figure\n\n67\n\n\x0cfor the base year made the percentage decline in subsequent years appear\nto be less than it in fact was. Against this, however, is the fact that the\nRheingold 1977 figures do not include sales for the end of 1977 after the\nsale of Rheingold to Schmidt\'s Brewery, which counterbalances this error\nin some degree. In any event the Rheingold sales were only 25.7% of the\ncombined sales in 1974 and 16.8% In 1977. Another criticism is that the\ndeduction from the initial computation of lost royalties of $29,193.50 for\nthe period April 1976 to March 1978 as representing royalties lost\nthrough the cessation of illegal practices was insufficient; it may well have\nbeen but the judge used the best figures he had. A possible objection,\nnamely, that Schaefer maintained its sales only by incurring large losses, a\nfact now possibly subject to judicial notice, see The F. & M. Schaefer\nCorporation v. C. Schmidt & Sons, Inc., 597 F.2d 814, 817 (2d Cir. 1979), was\nnot advanced with sufficient specificity to have required consideration. It\nis true, more generally, that the award may overcompensate the plaintiff\nsince Falstaff was not necessarily required to do whatever Rheingold and\nSchaefer did. But that is the kind of uncertainty which is permissible in\nfavor of a plaintiff who has established liability in a case like this. As said\nin Wakeman v. Wheeler & Wilson Mfg. Co., 101 N.Y. 205, 209, 4 N.E. 264\n(1886):\n(W)hen it is certain that damages have been caused by a\nbreach of contract, and the only uncertainty is to their amount,\nthere can rarely be good reason for refusing on account of such\nuncertainty, any damages whatever for the breach. A person\nviolating his contract should not be permitted entirely to escape\nliability because the amount of damage which he caused is\nuncertain.\n[15]\nWe also reject plaintiff\'s complaint on his cross-appeal\nthat the court erred in not taking as its standard for comparison the\ngrouping of all but the top 15 brewers, Ballantine having ranked 16th in\n1971. The judge was entirely warranted in believing that the RheingoldSchaefer combination afforded a better standard of comparison.\n[16]\nWe can dispose quite briefly of the portion of the\nplaintiff\'s cross-appeal which claims error in the rejection of his\ncontention that Falstaff\'s actions triggered the liquidated damage clause.\nOne branch of this puts heavy weight on the word \xe2\x80\x9cdistribution\xe2\x80\x9d; the\n\n68\n\n\x0cclaim is that the closing of the North Bergen center and Mr.\nKalmanovitz\' general come-and-get-it philosophy was, without more, a\nsubstantial discontinuance of \xe2\x80\x9cdistribution\xe2\x80\x9d. On this basis plaintiff would\nbe entitled to invoke the liquidated damage clause even if Falstaff\'s new\nmethods had succeeded in checking the decline in Ballantine sales.\nAnother fallacy is that, country-wide, Falstaff substantially increased the\nnumber of distributors carrying Ballantine labels. Moreover the term\n\xe2\x80\x9cdistribution\xe2\x80\x9d, as used in the brewing industry, does not require\ndistribution by the brewer\'s own trucks and employees. The norm rather\nis distribution through independent wholesalers. Falstaff\'s default under\nthe best efforts clause was not in returning to that method simpliciter but\nin its failure to see to it that wholesale distribution approached in\neffectiveness what retail distribution had done.\n[17]\nPlaintiff contends more generally that permitting a decline\nof 63.12% In Ballantine sales from 1974 to 1977 was the equivalent of\nquitting the game. However, as Judge Brieant correctly pointed out, a\nlarge part of this drop was attributable \xe2\x80\x9cto the general decline of the\nmarket share of the smaller brewers\xe2\x80\x9d as against the \xe2\x80\x9cnationals\xe2\x80\x9d, 454 F.\nSupp. at 266, and even the 518,899 barrels sold in 1977 were not a\nnegligible amount of beer.\n[18]\nThe judgment is affirmed. Plaintiff may recover twothirds of his costs.\n4.2.1. \xe2\x80\x9cBest Efforts\xe2\x80\x9d as Joint Maximization\nAs you can see from the opinion in Bloor v. Falstaff, courts have\nstruggled to define what the vague \xe2\x80\x9cbest efforts\xe2\x80\x9d standard requires. At what\nlevel of output does the grantee of exclusive rights satisfy its contractual\nobligation? How much effort must an exclusive distributor expend to\npromote the grantor\xe2\x80\x99s product? When does promoting a competing product\nconstitute a violation of the best efforts duty?\nProfessors Charles Goetz and Robert Scott have argued that \xe2\x80\x9cbest\nefforts\xe2\x80\x9d should be understood to require an exclusive distributor to maximize\nthe joint gains of the parties. See Charles J. Goetz and Robert E. Scott,\nPrinciples of Relational Contracts, 67 VA. L. REV. 1089 (1981). They argue that\nthis joint maximization interpretation forces the distributor to choose an\nefficient level of effort. Goetz and Scott explain that both parties benefit\n\n69\n\n\x0cfrom maximizing the contractual pie available to be divided between them.\nThe decision rule they propose envisions the parties as a single firm with the\nmanufacturing costs of the principal and the distribution costs of the agent.\nAs a practical matter, the joint maximization standard requires the distributor\nto undertake any promotional effort that will yield a joint benefit greater than\nits joint cost.\n4.2.2. Discussion of Bloor v. Falstaff\nHow does Judge Friendly resolve Balco\xe2\x80\x99s claim for liquidated\ndamages?\nIf they did not substantially discontinue distribution of Ballantine\nbrands, what exactly did Falstaff do wrong?\nWhat did the \xe2\x80\x9cbest efforts\xe2\x80\x9d clause require?\nWith the many problems and uncertainties that they face in enforcing\nbest efforts obligations, why do parties enter exclusive dealing arrangements\nrather than simply selling to all comers?\nWhat is the central problem that parties who grant exclusive rights\nnormally encounter?\n4.2.3. Hypo on Joint Maximization\nA court is trying to decide whether Falstaff should have to spend an\nextra $100,000 on advertising Ballantine brands. Suppose that the following\ntable describes the expected returns from this additional investment in\nadvertising:\nNet Gains\nCase One\nCase Two\n\nFalstaff\n($50,000)\n($50,000)\n\nBalco\n$60,000\n$30,000\n\nJoint\n$10,000\n($20,000)\n\nIn each case, what will Falstaff want to do?\nWhat does Balco want Falstaff to do?\nWhat decision satisfies the joint maximization criterion?\n\n70\n\n\x0cThe Bloor v. Falstaff court emphatically does not analyze the case in\nthese terms. Would joint maximization be an improvement over the method\nthe court employs?\nUnder the joint maximization criterion, how would a court determine\nif there has been a breach of the best efforts obligation?\nHow do parties prove their case?\n\n71\n\n\x0c\x0cV. Regulating the Bargaining\nProcess\n1. Unconscionability\nConsider for a moment what might justify using the coercive power\nof the state to enforce private promises. From a moral perspective, we might\nthink that choosing to make a promise creates a duty to perform. Imagine\nthat Cheryl promises Albert that she will prepare his tax return in exchange\nfor $200. The promisor Cheryl exercises her autonomy to establish a new\nrelationship in which the promisee Albert can rely on her promise and adjust\nhis plans accordingly. We show respect for the autonomy of both parties by\nenforcing the promise. Enforcement enables Cheryl to bind herself to\nperform if she chooses to do so. At the same time, enforcement respects\nAlbert\xe2\x80\x99s autonomy by protecting his reliance on Cheryl\xe2\x80\x99s promise.\nAn alternative economic or \xe2\x80\x9cinstrumental\xe2\x80\x9d approach to enforcement\nalso focuses on the parties\xe2\x80\x99 choices and reliance. From an economic\nperspective, one goal of promise making is mutually beneficial trade. People\nmake promises to enable others to rely. Promises also allow parties to trade\nrisks. Thus, Cheryl assumes the risk that the market price for tax preparation\nwill rise or that she will find it inconvenient or difficult to fulfill her promise\nto complete Albert\xe2\x80\x99s tax return by the filing deadline. At the same time,\nAlbert accepts the risk that someone else will offer to do his taxes for less or\nthat he would prefer to prepare the return himself. Each party faces a\ndifferent bundle of risks than he or she did before making or receiving the\npromise. On this account, the purpose of promissory enforcement is to\nmaximize the social benefits that flow from these exchanges of risk.\nBoth justifications for enforcement have in common the assumption\nthat parties make promises and enter into bargains voluntarily. It follows that\nif Cheryl holds a gun to Albert\xe2\x80\x99s head and forces him to contract for her\nservices, then Albert should be free to disavow the deal and use H&R Block\ninstead. More difficult and subtle questions arise when a promisor claims that\nshe lacked essential information about the terms of a bargain or that she was\nfor some other reason unable to exercise a meaningful choice. Even more\n\n\x0ccontroversial are claims that the terms of the deal are so unfavorable that a\ncourt should simply refuse to enforce them.\nThe two opinions in the following case address some of these issues.\n1.1. Principal Case \xe2\x80\x93 Williams v. Walker-Thomas Furniture Co.\nI\nWilliams v. Walker-Thomas Furniture Co. I\nDistrict of Columbia Court of Appeals\n198 A.2d 914 (1964)\nQUINN, ASSOCIATE JUDGE.\n[1]\nAppellant, a person of limited education separated from\nher husband, is maintaining herself and her seven children by means of\npublic assistance. During the period 1957-1962 she had a continuous\ncourse of dealings with appellee from which she purchased many\nhousehold articles on the installment plan. These included sheets,\ncurtains, rugs, chairs, a chest of drawers, beds, mattresses, a washing\nmachine, and a stereo set. In 1963 appellee filed a complaint in replevin\nfor possession of all the items purchased by appellant, alleging that her\npayments were in default and that it retained title to the goods according\nto the sales contracts. By the writ of replevin appellee obtained a bed,\nchest of drawers, washing machine, and the stereo set. After hearing\ntestimony and examining the contracts, the trial court entered judgment\nfor appellee.\n[2]\nAppellant\'s principal contentions on appeal are (1) there\nwas a lack of meeting of the minds, and (2) the contracts were against\npublic policy.\n[3]\nAppellant signed fourteen contracts in all. They were\napproximately six inches in length and each contained a long paragraph\nin extremely fine print. One of the sentences in this paragraph provided\nthat payments, after the first purchase, were to be prorated on all\npurchases then outstanding. Mathematically, this had the effect of\nkeeping a balance due on all items until the time balance was completely\neliminated. It meant that title to the first purchase, remained in appellee\nuntil the fourteenth purchase, made some five years later, was fully paid.\n\n74\n\n\x0c[4]\nAt trial appellant testified that she understood the\nagreements to mean that when payments on the running account were\nsufficient to balance the amount due on an individual item, the item\nbecame hers. She testified that most of the purchases were made at her\nhome; that the contracts were signed in blank; that she did not read the\ninstruments; and that she was not provided with a copy. She admitted,\nhowever, that she did not ask anyone to read or explain the contracts to\nher.\n[5]\nWe have stated that \xe2\x80\x9cone who refrains from reading a\ncontract and in conscious ignorance of its terms voluntarily assents\nthereto will not be relieved from his bad bargain.\xe2\x80\x9d Bob Wilson, Inc. v.\nSwann, D.C.Mun.App., 168 A.2d 198, 199 (1961). \xe2\x80\x9cOne who signs a\ncontract has a duty to read it and is obligated according to its terms.\xe2\x80\x9d\nHollywood Credit Clothing Co. v. Gibson, D.C.App., 188 A.2d 348, 349\n(1963). \xe2\x80\x9cIt is as much the duty of a person who cannot read the language\nin which a contract is written to have someone read it to him before he\nsigns it, as it is the duty of one who can read to peruse it himself before\nsigning it.\xe2\x80\x9d Stern v. Moneyweight Scale Co., 42 App.D.C. 162, 165 (1914).\n[6]\nA careful review of the record shows that appellant\'s\nassent was not obtained \xe2\x80\x9cby fraud or even misrepresentation falling short\nof fraud.\xe2\x80\x9d Hollywood Credit Clothing Co. v. Gibson, supra. This is not a case of\nmutual misunderstanding but a unilateral mistake. Under these\ncircumstances, appellant\'s first contention is without merit.\n[7]\nAppellant\'s second argument presents a more serious\nquestion. The record reveals that prior to the last purchase appellant had\nreduced the balance in her account to $164. The last purchase, a stereo\nset, raised the balance due to $678. Significantly, at the time of this and\nthe preceding purchases, appellee was aware of appellant\'s financial\nposition. The reverse side of the stereo contract listed the name of\nappellant\'s social worker and her $218 monthly stipend from the\ngovernment. Nevertheless, with full knowledge that appellant had to\nfeed, clothe and support both herself and seven children on this amount,\nappellee sold her a $514 stereo set.\n[8]\nWe cannot condemn too strongly appellee\'s conduct. It\nraises serious questions of sharp practice and irresponsible business\n\n75\n\n\x0cdealings. A review of the legislation in the District of Columbia affecting\nretail sales and the pertinent decisions of the highest court in this\njurisdiction disclose, however, no ground upon which this court can\ndeclare the contracts in question contrary to public policy. We note that\nwere the Maryland Retail Installment Sales Act, Art. 83 \xc2\xa7\xc2\xa7 128-153, or its\nequivalent, in force in the District of Columbia, we could grant appellant\nappropriate relief. We think Congress should consider corrective\nlegislation to protect the public from such exploitive contracts as were\nutilized in the case at bar.\n1.2. Principal Case \xe2\x80\x93 Williams v. Walker-Thomas Furniture Co.\nII\nWilliams v. Walker-Thomas Furniture Co. II\nUnited States Court of Appeals, District of Columbia Circuit\n121 U.S. App. D.C. 315, 350 F.2d 445 (1965)\nWRIGHT, CIRCUIT JUDGE.\n[1]\nAppellee, Walker-Thomas Furniture Company, operates a\nretail furniture store in the District of Columbia. During the period from\n1957 to 1962 each appellant in these cases purchased a number of\nhousehold items from Walker-Thomas, for which payment was to be\nmade in installments. The terms of each purchase were contained in a\nprinted form contract which set forth the value of the purchased item\nand purported to lease the item to appellant for a stipulated monthly rent\npayment. The contract then provided, in substance, that title would\nremain in Walker-Thomas until the total of all the monthly payments\nmade equaled the stated value of the item, at which time appellants could\ntake title. In the event of a default in the payment of any monthly\ninstallment, Walker-Thomas could repossess the item.\n[2]\nThe contract further provided that \xe2\x80\x9cthe amount of each\nperiodical installment payment to be made by (purchaser) to the\nCompany under this present lease shall be inclusive of and not in\naddition to the amount of each installment payment to be made by\n(purchaser) under such prior leases, bills or accounts; and all payments\nnow and hereafter made by (purchaser) shall be credited pro rata on all\noutstanding leases, bills and accounts due the Company by (purchaser) at\nthe time each such payment is made.\xe2\x80\x9d The effect of this rather obscure\n\n76\n\n\x0cprovision was to keep a balance due on every item purchased until the\nbalance due on all items, whenever purchased, was liquidated. As a result,\nthe debt incurred at the time of purchase of each item was secured by the\nright to repossess all the items previously purchased by the same\npurchaser, and each new item purchased automatically became subject to\na security interest arising out of the previous dealings.\n[3]\nOn May 12, 1962, appellant Thorne purchased an item\ndescribed as a Daveno, three tables, and two lamps, having total stated\nvalue of $391.10. Shortly thereafter, he defaulted on his monthly\npayments and appellee sought to replevy all the items purchased since the\nfirst transaction in 1958. Similarly, on April 17, 1962, appellant Williams\nbought a stereo set of stated value of $514.95.1 She too defaulted shortly\nthereafter, and appellee sought to replevy all the items purchased since\nDecember, 1957. The Court of General Sessions granted judgment for\nappellee. The District of Columbia Court of Appeals affirmed, and we\ngranted appellants\' motion for leave to appeal to this court.\n[4]\nAppellants\' principal contention, rejected by both the trial\nand the appellate courts below, is that these contracts, or at least some of\nthem, are unconscionable and, hence, not enforceable. In its opinion in\nWilliams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964),\nthe District of Columbia Court of Appeals explained its rejection of this\ncontention as follows:\nAppellant\'s second argument presents a more serious\nquestion. The record reveals that prior to the last purchase\nappellant had reduced the balance in her account to $164. The\nlast purchase, a stereo set, raised the balance due to $678.\nSignificantly, at the time of this and the preceding purchases,\nappellee was aware of appellant\'s financial position. The reverse\nside of the stereo contract listed the name of appellant\'s social\nworker and her $218 monthly stipend from the government.\nNevertheless, with full knowledge that appellant had to feed,\nclothe and support both herself and seven children on this\namount, appellee sold her a $514 stereo set.\nAt the time of this purchase her account showed a balance of $164 still owing\nfrom her prior purchases. The total of all the purchases made over the years in\nquestion came to $1,800. The total payments amounted to $1,400.\n1\n\n77\n\n\x0cWe cannot condemn too strongly appellee\'s conduct. It\nraises serious questions of sharp practice and irresponsible\nbusiness dealings. A review of the legislation in the District of\nColumbia affecting retail sales and the pertinent decisions of the\nhighest court in this jurisdiction disclose, however, no ground\nupon which this court can declare the contracts in question\ncontrary to public policy. We note that were the Maryland Retail\nInstallment Sales Act, Art. 83 \xc2\xa7\xc2\xa7 128-153, or its equivalent, in\nforce in the District of Columbia, we could grant appellant\nappropriate relief. We think Congress should consider corrective\nlegislation to protect the public from such exploitive contracts as\nwere utilized in the case at bar.\n[5]\nWe do not agree that the court lacked the power to refuse\nenforcement to contracts found to be unconscionable. In other\njurisdictions, it has been held as a matter of common law that\nunconscionable contracts are not enforceable.2 While no decision of this\ncourt so holding has been found, the notion that an unconscionable\nbargain should not be given full enforcement is by no means novel. In\nScott v. United States, 79 U.S. (12 Wall.) 443, 445 (1870), the Supreme\nCourt stated:\n\xe2\x80\xa6If a contract be unreasonable and unconscionable, but\nnot void for fraud, a court of law will give to the party who sues\nfor its breach damages, not according to its letter, but only such\nas he is equitably entitled to\xe2\x80\xa6.3\n\nCampbell Soup Co. v. Wentz, 3 Cir., 172 F.2d 80 (1948); Indianapolis Morris Plan\nCorporation v. Sparks, 132 Ind.App. 145, 172 N.E.2d 899 (1961); Henningsen v.\nBloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69, 84-96, 75 A.L.R.2d 1 (1960). Cf. 1\nCORBIN, CONTRACTS \xc2\xa7 128 (1963).\n2\n\nSee Luing v. Peterson, 143 Minn. 6, 172 N.W. 692 (1919); Greer v. Tweed, N.Y.C.P.,\n13 Abb.Pr., N.S., 427 (1872); Schnell v. Nell, 17 Ind. 29 (1861); and see generally\nthe discussion of the English authorities in Hume v. United States, 132 U.S. 406\n(1889).\n3\n\n78\n\n\x0cSince we have never adopted or rejected such a rule,4 the question\nhere presented is actually one of first impression.\n[6]\nCongress has recently enacted the Uniform Commercial\nCode, which specifically provides that the court may refuse to enforce a\ncontract which it finds to be unconscionable at the time it was made. 28\nD.C.CODE \xc2\xa7 2-302 (Supp. IV 1965). The enactment of this section,\nwhich occurred subsequent to the contracts here in suit, does not mean\nthat the common law of the District of Columbia was otherwise at the\ntime of enactment, nor does it preclude the court from adopting a similar\nrule in the exercise of its powers to develop the common law for the\nDistrict of Columbia. In fact, in view of the absence of prior authority on\nthe point, we consider the congressional adoption of \xc2\xa7 2-302 persuasive\nauthority for following the rationale of the cases from which the section\nis explicitly derived.5 Accordingly, we hold that where the element of\nunconscionability is present at the time a contract is made, the contract\nshould not be enforced.\n[7]\nUnconscionability has generally been recognized to\ninclude an absence of meaningful choice on the part of one of the parties\ntogether with contract terms which are unreasonably favorable to the\nother party.6 Whether a meaningful choice is present in a particular case\ncan only be determined by consideration of all the circumstances\nWhile some of the statements in the court\'s opinion in District of Columbia v.\nHarlan & Hollingsworth Co., 30 App. D.C. 270 (1908), may appear to reject the rule,\nin reaching its decision upholding the liquidated damages clause in that case the\ncourt considered the circumstances existing at the time the contract was made, see\n30 App. D.C. at 279, and applied the usual rule on liquidated damages. See 5\nCORBIN, CONTRACTS \xc2\xa7\xc2\xa7 1054-1075 (1964); Note, 72 YALE L.J. 723, 746-755\n(1963). Compare Jaeger v. O\'Donoghue, 57 App.D.C. 191, 18 F.2d 1013 (1927).\n4\n\nSee Comment, \xc2\xa7 2-302, Uniform Commercial Code (1962). Compare Note, 45\nVA. L. REV. 583, 590 (1959), where it is predicted that the rule of \xc2\xa7 2-302 will be\nfollowed by analogy in cases which involve contracts not specifically covered by\nthe section. Cf. 1 STATE OF NEW YORK LAW REVISION COMMISSION, REPORT\nAND RECORD OF HEARINGS ON THE UNIFORM COMMERCIAL CODE 108-110\n(1954) (remarks of Professor Llewellyn).\n5\n\nSee Henningsen v. Bloomfield Motors, Inc., supra Note 2; Campbell Soup Co. v.\nWentz, supra Note 2.\n6\n\n79\n\n\x0csurrounding the transaction. In many cases the meaningfulness of the\nchoice is negated by a gross inequality of bargaining power.7 The manner\nin which the contract was entered is also relevant to this consideration.\nDid each party to the contract, considering his obvious education or lack\nof it, have a reasonable opportunity to understand the terms of the\ncontract, or were the important terms hidden in a maze of fine print and\nminimized by deceptive sales practices? Ordinarily, one who signs an\nagreement without full knowledge of its terms might be held to assume\nthe risk that he has entered a one-sided bargain.8 But when a party of\nlittle bargaining power, and hence little real choice, signs a commercially\nunreasonable contract with little or no knowledge of its terms, it is hardly\nlikely that his consent, or even an objective manifestation of his consent,\nwas ever given to all the terms. In such a case the usual rule that the\n\nSee Henningsen v. Bloomfield Motors, Inc., supra Note 2, 161 A.2d at 86,, and\nauthorities there cited. Inquiry into the relative bargaining power of the two\nparties is not an inquiry wholly divorced from the general question of\nunconscionability, since a one-sided bargain is itself evidence of the inequality of\nthe bargaining parties. This fact was vaguely recognized in the common law\ndoctrine of intrinsic fraud, that is, fraud which can be presumed from the grossly\nunfair nature of the terms of the contract. See the oft-quoted statement of Lord\nHardwicke in Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82, 100 (1751):\n\xe2\x80\x9c\xe2\x80\xa6(Fraud) may be apparent from the intrinsic nature and subject of the bargain\nitself; such as no man in his senses and not under delusion would make....\xe2\x80\x9d And cf.\nHume v. United States, supra Note 3, 132 U.S. at 413, where the Court characterized\nthe English cases as \xe2\x80\x98cases in which one party took advantage of the other\'s\nignorance of arithmetic to impose upon him, and the fraud was apparent from the\nface of the contracts.\xe2\x80\x99 See also Greer v. Tweed, supra Note 3.\n7\n\nSee RESTATEMENT, CONTRACTS \xc2\xa7 70 (1932); Note, 63 HARV. L. REV. 494\n(1950). See also Daley v. People\'s Building, Loan & Savings Ass\'n, 178 Mass. 13, 59\nN.E. 452, 453 (1901), in which Mr. Justice Holmes, while sitting on the Supreme\nJudicial Court of Massachusetts, made this observation: \xe2\x80\x9c\xe2\x80\xa6Courts are less and\nless disposed to interfere with parties making such contracts as they choose, so\nlong as they interfere with no one\'s welfare but their own\xe2\x80\xa6.It will be understood\nthat we are speaking of parties standing in an equal position where neither has any\noppressive advantage or power\xe2\x80\xa6.\xe2\x80\x9d\n8\n\n80\n\n\x0cterms of the agreement are not to be questioned9 should be abandoned\nand the court should consider whether the terms of the contract are so\nunfair that enforcement should be withheld.10\n[8]\nIn determining reasonableness or fairness, the primary\nconcern must be with the terms of the contract considered in light of the\ncircumstances existing when the contract was made. The test is not\nsimple, nor can it be mechanically applied. The terms are to be\nconsidered \xe2\x80\x9cin the light of the general commercial background and the\ncommercial needs of the particular trade or case.\xe2\x80\x9d11 Corbin suggests the\ntest as being whether the terms are \xe2\x80\x98so extreme as to appear\nunconscionable according to the mores and business practices of the\ntime and place.\xe2\x80\x9d12 We think this formulation correctly states the test to be\napplied in those cases where no meaningful choice was exercised upon\nentering the contract.\n[9]\nBecause the trial court and the appellate court did not feel\nthat enforcement could be refused, no findings were made on the\npossible unconscionability of the contracts in these cases. Since the\nrecord is not sufficient for our deciding the issue as a matter of law, the\ncases must be remanded to the trial court for further proceedings.\nSo ordered.\nDANAHER, CIRCUIT JUDGE (DISSENTING):\n\nThis rule has never been without exception. In cases involving merely the\ntransfer of unequal amounts of the same commodity, the courts have held the\nbargain unenforceable for the reason that \xe2\x80\x9cin such a case, it is clear, that the law\ncannot indulge in the presumption of equivalence between the consideration and\nthe promise.\xe2\x80\x9d 1 WILLISTON, CONTRACTS \xc2\xa7 115 (3d ed. 1957).\n9\n\nSee the general discussion of \xe2\x80\x98Boiler-Plate Agreements\' in LLEWELLYN, THE\nCOMMON LAW TRADITION 362-371 (1960).\n10\n\n11\n\nComment, Uniform Commercial Code \xc2\xa7 2-307.\n\nSee Henningsen v. Bloomfield Motors, Inc., supra Note 2; Mandel v. Liebman, 303 N.Y.\n88, 100 N.E.2d 149 (1951). The traditional test as stated in Greer v. Tweed, supra\nNote 3, 13 Abb. Pr., N.S., at 429, is \xe2\x80\x9csuch as no man in his senses and not under\ndelusion would make on the one hand, and as no honest or fair man would\naccept, on the other.\xe2\x80\x9d\n12\n\n81\n\n\x0c[10]\nThe District of Columbia Court of Appeals obviously was\nas unhappy about the situation here presented as any of us can possibly\nbe. Its opinion in the Williams case, quoted in the majority text,\nconcludes: \xe2\x80\x9cWe think Congress should consider corrective legislation to\nprotect the public from such exploitive contracts as were utilized in the\ncase at bar.\xe2\x80\x9d\n[11]\nMy view is thus summed up by an able court which made\nno finding that there had actually been sharp practice. Rather the\nappellant seems to have known precisely where she stood.\n[12]\nThere are many aspects of public policy here involved.\nWhat is a luxury to some may seem an outright necessity to others. Is\npublic oversight to be required of the expenditures of relief funds? A\nwashing machine, e.g., in the hands of a relief client might become a\nfruitful source of income. Many relief clients may well need credit, and\ncertain business establishments will take long chances on the sale of\nitems, expecting their pricing policies will afford a degree of protection\ncommensurate with the risk. Perhaps a remedy when necessary will be\nfound within the provisions of the \xe2\x80\x9cLoan Shark\xe2\x80\x9d law, D.C.Code \xc2\xa7\xc2\xa7 26601 et seq. (1961).\n[13]\nI mention such matters only to emphasize the desirability\nof a cautious approach to any such problem, particularly since the law for\nso long has allowed parties such great latitude in making their own\ncontracts. I dare say there must annually be thousands upon thousands of\ninstallment credit transactions in this jurisdiction, and one can only\nspeculate as to the effect the decision in these cases will have.13\n[14]\nI join the District of Columbia Court of Appeals in its\ndisposition of the issues.\n\nHowever the provision ultimately may be applied or in what circumstances,\nD.C. Code \xc2\xa7 28-2-301 (Supp. IV, 1965) it did not become effective until January\n1, 1965.\n13\n\n82\n\n\x0c1.2.1. Procedural and Substantive Unconscionability\nBoth judges and scholars ordinarily draw a distinction between\n\xe2\x80\x9csubstantive\xe2\x80\x9d\nand\n\xe2\x80\x9cprocedural\xe2\x80\x9d\nunconscionability.\nSubstantive\nunconscionability focuses on the contract terms themselves. This branch of\nthe doctrine asks whether the terms of the agreement are so unfavorable to\none of the parties that we should refuse enforcement. In this vein, courts\nmay find that a manufacturer\xe2\x80\x99s clause limiting remedies for breach is contrary\nto the \xe2\x80\x9cessence of the bargain\xe2\x80\x9d or that a price or warranty term in a\nconsumer contract is \xe2\x80\x9cunreasonable.\xe2\x80\x9d\nIn contrast, procedural unconscionability focuses on the circumstances\nsurrounding contract formation. Was there something about that process\nthat prevented one party from understanding the agreement? Most courts\nconsider a wide range of \xe2\x80\x9cfactors related to the bargaining power of each\nparty, including age, education, intelligence, business acumen, experience in\nsimilar transactions, whether the terms were explained to the weaker party,\nwho drafted the contract, whether alterations in the printed terms were\npossible, and whether the party claiming unconscionability was represented\nby counsel at the time the contract was executed.\xe2\x80\x9d Roe v. Rent-A-Center, Inc.,\nCA2007-09-224 (Ohio App. 2008). For example, a court might find an\nagreement procedurally unconscionable because a company\xe2\x80\x99s sales practices\ntended to obscure the true nature of the contract.\nEach strand of unconscionability doctrine stands in some tension\nwith other contract doctrines that favor the enforcement of all voluntary\nbargains. Thus, the \xe2\x80\x9cduty to read\xe2\x80\x9d doctrine holds that a person who signs a\ncontract without reading it will be bound despite his lack of knowledge of its\nterms. Courts have even refused to excuse illiterate and non-Englishspeaking promisors, explaining that they should have asked someone to read\nand explain the agreement before signing it. See, e.g. Morales v. Sun\nConstructors, Inc., No. 07-3806 (3d Cir. 2008); Upton v. Tribilcock, 91 U.S. 45\n(1875). As we saw in Williams I and Williams II, a procedural\nunconscionability claim must first overcome judicial reluctance to depart\nfrom the strict \xe2\x80\x9cduty to read\xe2\x80\x9d precedents.\nSimilarly, arguments about substantive unconscionability conflict\nwith the general contractual principle that courts should let the parties\xe2\x80\x99 judge\nfor themselves whether to accept a particular bargain. For example, courts do\n\n83\n\n\x0cnot scrutinize the adequacy of consideration. Each party is free to make a\ngood bargain or a bad bargain, and judges ordinarily respect the private\nordering these agreements seek to create. Finding a contract substantively\nunconscionable rejects the parties\xe2\x80\x99 bargain and prevents them from forming\nan enforceable agreement on those terms. Perhaps as a result of this\nfundamental tension, judicial decisions hardly ever invalidate an agreement\nsolely on grounds of substantive unconscionability. And many jurisdictions\nformally require courts to find an agreement both procedurally and\nsubstantively unconscionable before refusing to enforce it. See, e.g., Roe v.\nRent-A-Center, Inc., CA2007-09-224 (Ohio App. 2008).\n1.2.2. Rent-to-Own Industry and Consumer Protection Laws\nIn Williams I, the court concluded its opinion by calling attention to\nquestionable practices in the rent-to-own industry. Walker-Thomas\xe2\x80\x99s conduct\nevidently raised \xe2\x80\x9cserious questions of sharp practice and irresponsible\nbusiness dealings.\xe2\x80\x9d The court also issued a plea for \xe2\x80\x9ccorrective legislation\xe2\x80\x9d\nalong the lines of provisions contained in the Maryland Retail Installment\nSales Act.\nSome years later, The Wall Street Journal published a highly critical\nfeature story on the rent-to-own industry. In extensive interviews, former\nRent-A-Center managers described high-pressure sales tactics, misleading\npricing practices, and coercive methods of repossessing goods from\ndefaulting renters. Repo calls sometimes included demands for \xe2\x80\x9ccouch\npayments\xe2\x80\x9d \xe2\x80\x93 sexual favors extorted in lieu of cash. However, the article also\nrevealed that many renters could not afford to buy the items and had\n\xe2\x80\x9cnowhere else to go.\xe2\x80\x9d See Alix Freedman, Peddling Dreams: A Marketing Giant\nUses Its Sales Prowess to Profit on Poverty, THE WALL STREET JOURNAL A1 (Sept.\n22, 1993).\nMore recently the industry has fought off efforts to enact legislation\nclassifying rent-to-own transactions as credit sales. The typical \xe2\x80\x9crental\xe2\x80\x9d\nagreement provides for total payments several times the normal retail value\nof the goods, and thus an implied annual interest rate of 200-300 percent.\nRedefining these deals as credit transactions would make state usury laws\napplicable and prohibit firms from charging such a high implicit interest rate.\nThe industry argues, however, that rent-to-own customers assume no debt\nand always have an option to return the goods with no further obligation.\n\n84\n\n\x0cMoreover, a 1999 Federal Trade Commission customer survey found that\nmost are satisfied with their rent-to-own transactions. See John Seward, Tales\nof the Tape: Rent-To-Owns Seek Definition in Law, DOW JONES NEWSWIRES (Oct.\n17, 2003).\nIn one respect at least, the Williams I court\xe2\x80\x99s wish was fulfilled. The\nDistrict of Columbia Code now contains a provision prohibiting the sort of\npro-rata payment arrangement contained in Walker-Thomas Furniture\nCompany\xe2\x80\x99s contract. See D.C. Code \xc2\xa7 28-3805. Under the statute, payments\nmust be credited towards the first item purchased until that item has been\npaid off and the seller\xe2\x80\x99s security interest in that item is then extinguished.\n1.2.3. Uniform Commercial Code Unconscionability Provisions\nThe Uniform Commercial Code empowers a court to refuse to\nenforce unconscionable contracts in the following terms:\n\xc2\xa7 2-302. Unconscionable Contract or Clause\n(1) If the court as a matter of law finds the contract or any clause\nof the contract to have been unconscionable at the time it was made the\ncourt may refuse to enforce the contract, or it may enforce the remainder\nof the contract without the unconscionable clause, or it may so limit the\napplication of any unconscionable clause as to avoid any unconscionable\nresult.\n(2) When it is claimed or appears to the court that the contract or\nany clause thereof may be unconscionable the parties shall be afforded a\nreasonable opportunity to present evidence as to its commercial setting,\npurpose and effect to aid the court in making the determination.\nOfficial Comment\n1. This section is intended to make it possible for the courts\nto police explicitly against the contracts or clauses which they find\nto be unconscionable. In the past such policing has been\naccomplished by adverse construction of language, by\nmanipulation of the rules of offer and acceptance or by\ndeterminations that the clause is contrary to public policy or to the\ndominant purpose of the contract. This section is intended to allow\n\n85\n\n\x0cthe court to pass directly on the unconscionability of the contract\nor particular clause therein and to make a conclusion of law as to\nits unconscionability. The basic test is whether, in light of the\ngeneral commercial background and the commercial needs of the\nparticular trade or case, the clauses involved are so one-sided as to\nbe unconscionable under the circumstances existing at the time of\nthe making of the contract. Subsection (2) makes it clear that it is\nproper for the court to hear evidence on these questions. The\nprinciple is one of the prevention of oppression and unfair surprise.\n(Cf. Campbell Soup Co. v. Wentz, 172 F.2d 80, 3d Cir. 1948) and\nnot of disturbance of allocation of risks because of superior\nbargaining power.\n1.2.4. Discussion of Unconscionability\nWhy does the D.C. Court of Appeals (reluctantly) decide, in Williams\nI, to enforce the pro-rata payment clause in the Walker-Thomas Furniture\nCompany\xe2\x80\x99s form contract?\nThe D.C. Circuit reaches a decidedly different decision about the\nprevailing legal rule. Does that court hold that the pro-rata-payment clause is\nunconscionable? If not, then what doctrinal standard will determine whether\nthe clause is unconscionable?\nJudge Wright talks extensively about unequal bargaining power. What\ndo you suppose he means by that term?\nConsider the following language from the Uniform Commercial\nCode provision concerning unconscionability: \xe2\x80\x9cThe principle is one of the\nprevention of unfair surprise and not of disturbance of risks because of\nsuperior bargaining power.\xe2\x80\x9d U.C.C. \xc2\xa7 2-302 Comment 1. Can you reconcile\nthis comment with Judge Wright\xe2\x80\x99s discussion of bargaining power in Williams\nII?\nThe prospective effects of procedural and substantive\nunconscionability are likely to differ. How would you expect sellers to\nrespond to a ruling that the Walker-Thomas Furniture Company\xe2\x80\x99s form\ncontract is procedurally unconscionable? Suppose that a court instead holds\nthat pro-rata-payment clauses and cross-collateral clauses are substantively\nunconscionable. Will people in Ms. Williams\xe2\x80\x99s circumstances be able to\nobtain furniture on the same payment plan?\n\n86\n\n\x0c2. Modification\nIn this section, we examine the rules that apply when parties choose\nto modify existing contractual obligations. The traditional common law\napproach held that a modification would be ineffective without fresh\nconsideration\xe2\x80\x94some obligation beyond what the promisor was already\nobliged to perform under the prior contract. This \xe2\x80\x9cpre-existing duty rule\xe2\x80\x9d\nestablished a comparatively precise bright-line rule for evaluating attempted\nmodifications. The Alaska Packers case that follows arguably illustrates this\ntraditional approach.\nMore recent decisions, however, have shown a willingness to enforce\nmodifications even when a promisor assumes no new obligations. The\nRestatement (Second) embraces a rather open-ended standard incorporating\nboth reliance-based enforcement and general equitable principles.\n\xc2\xa7 89 Modification of Executory Contract\nA promise modifying a duty under a contract not fully performed\non either side is binding\n(a) if the modification is fair and equitable in view of\ncircumstances not anticipated by the parties when the contract was made;\nor\n(b) to the extent provided by statute; or\n(c) to the extent that justice requires enforcement in view of\nmaterial change of position in reliance on the promise.\nThe Uniform Commercial Code adopts a very similar standard\nbased on good faith. Please look at UCC \xc2\xa7 2-209. Modification,\nRescission and Waiver and the related Official Comments 1-4.\nBoth the Restatement (Second) and this UCC provision abandon\nthe comparatively precise pre-existing duty rule. They instead invite\nparties to present evidence about the circumstances surrounding their\nagreement to modify the prior contract and require courts to evaluate\nmodifications under relatively amorphous standards of equity and good\nfaith.\n\n87\n\n\x0cEven under the traditional pre-existing duty rule, one possible\nalternative was to rescind the existing contract and form a new one.\nTermed a \xe2\x80\x9csubstituted contract\xe2\x80\x9d or sometimes a \xe2\x80\x9cnovation,\xe2\x80\x9d the new\ncontract is enforceable because the parties have terminated the prior\ncontract and discharged any obligations that it imposed. If courts routinely\nenforced any agreement that parties denominated a substituted contract or\nnovation, the strict pre-existing duty rule would be eviscerated and\nreplaced with an equally clear rule allowing parties to modify existing\ncontractual obligations without any legal constraint. However, this\nstrategy must overcome judges\xe2\x80\x99 reluctance to permit a purely formal\ndevice to eliminate substantive doctrinal constraints. To prevent parties\nfrom elevating form over substance, courts may construe a purported\nsubstitution or novation as an attempt to modify the prior contract and then\napply the ordinary constraints on modification.\nAs you read the case that follows, consider whether the court\napplies the comparatively clear pre-existing duty rule. Or does the opinion\nexamine the surrounding circumstances to determine whether to enforce\nthe modified contract?\n2.1. Principal Case \xe2\x80\x93 Alaska Packers\xe2\x80\x99 Association v. Domenico\nAlaska Packers\xe2\x80\x99 Ass\xe2\x80\x99n v. Domenico\nUnited States Court of Appeals, Ninth Circuit\n117 F. 99 (1902)\nROSS, CIRCUIT JUDGE.\n[1]\nThe libel in this case was based upon a contract alleged to\nhave been entered into between the libelants and the appellant\ncorporation on the 22d day of May, 1900, at Pyramid Harbor, Alaska, by\nwhich it is claimed the appellant promised to pay each of the libelants,\namong other things, the sum of $100 for services rendered and to be\nrendered. In its answer the respondent denied the execution, on its part,\nof the contract sued upon, averred that it was without consideration, and\nfor a third defense alleged that the work performed by the libelants for it\nwas performed under other and different contracts than that sued on,\nand that, prior to the filing of the libel, each of the libelants was paid by\nthe respondent the full amount due him thereunder, in consideration of\n\n88\n\n\x0cwhich each of them executed a full release of all his claims and demands\nagainst the respondent.\n[2]\nThe evidence shows without conflict that on March 26,\n1900, at the city and county of San Francisco, the libelants entered into a\nwritten contract with the appellants, whereby they agreed to go from San\nFrancisco to Pyramid Harbor, Alaska, and return, on board such vessel as\nmight be designated by the appellant, and to work for the appellant\nduring the fishing season of 1900, at Pyramid Harbor, as sailors and\nfishermen, agreeing to do \xe2\x80\x9cregular ship\'s duty, both up and down,\ndischarging and loading; and to do any other work whatsoever when\nrequested to do so by the captain or agent of the Alaska Packers\'\nAssociation.\xe2\x80\x9d By the terms of this agreement, the appellant was to pay\neach of the libelants $50 for the season, and two cents for each red\nsalmon in the catching of which he took part.\n[3]\nOn the 15th day of April, 1900, 21 of the libelants signed\nshipping articles by which they shipped as seamen on the Two Brothers,\na vessel chartered by the appellant for the voyage between San Francisco\nand Pyramid Harbor, and also bound themselves to perform the same\nwork for the appellant provided for by the previous contract of March\n26th; the appellant agreeing to pay them therefor the sum of $60 for the\nseason, and two cents each for each red salmon in the catching of which\nthey should respectively take part. Under these contracts, the libelants\nsailed on board the Two Brothers for Pyramid Harbor, where the\nappellants had about $150,000 invested in a salmon cannery. The\nlibelants arrived there early in April of the year mentioned, and began to\nunload the vessel and fit up the cannery. A few days thereafter, to wit,\nMay 19th, they stopped work in a body, and demanded of the company\'s\nsuperintendent there in charge $100 for services in operating the vessel to\nand from Pyramid Harbor, instead of the sums stipulated for in and by\nthe contracts; stating that unless they were paid this additional wage they\nwould stop work entirely, and return to San Francisco. The evidence\nshowed, and the court below found, that it was impossible for the\nappellant to get other men to take the places of the libelants, the place\nbeing remote, the season short and just opening; so that, after\nendeavoring for several days without success to induce the libelants to\nproceed with their work in accordance with their contracts, the\n\n89\n\n\x0ccompany\'s superintendent, on the 22d day of May, so far yielded to their\ndemands as to instruct his clerk to copy the contracts executed in San\nFrancisco, including the words \xe2\x80\x98Alaska Packers\' Association\xe2\x80\x98 at the end,\nsubstituting, for the $50 and $60 payments, respectively, of those\ncontracts, the sum of $100, which document, so prepared, was signed by\nthe libelants before a shipping commissioner whom they had requested\nto be brought from Northeast Point; the superintendent, however,\ntestifying that he at the time told the libelants that he was without\nauthority to enter into any such contract, or to in any way alter the\ncontracts made between them and the company in San Francisco. Upon\nthe return of the libelants to San Francisco at the close of the fishing\nseason, they demanded pay in accordance with the terms of the alleged\ncontract of May 22d, when the company denied its validity, and refused\nto pay other than as provided for by the contracts of March 26th and\nApril 5th, respectively. Some of the libelants, at least, consulted counsel,\nand, after receiving his advice, those of them who had signed the\nshipping articles before the shipping commissioner at San Francisco went\nbefore that officer, and received the amount due them thereunder,\nexecuting in consideration thereof a release in full, and the others paid at\nthe office of the company, also receipting in full for their demands.\n[4]\nOn the trial in the court below, the libelants undertook to\nshow that the fishing nets provided by the respondent were defective,\nand that it was on that account that they demanded increased wages. On\nthat point, the evidence was substantially conflicting, and the finding of\nthe court was against the libelants the court saying:\nThe contention of libelants that the nets provided them\nwere rotten and unserviceable is not sustained by the evidence.\nThe defendants\' interest required that libelants should be\nprovided with every facility necessary to their success as\nfishermen, for on such success depended the profits defendant\nwould be able to realize that season from its packing plant, and\nthe large capital invested therein. In view of this self-evident fact,\nit is highly improbable that the defendant gave libelants rotten\nand unserviceable nets with which to fish. It follows from this\nfinding that libelants were not justified in refusing performance\nof their original contract.\n112 Fed. 554.\n\n90\n\n\x0c[5]\nThe evidence being sharply conflicting in respect to these\nfacts, the conclusions of the court, who heard and saw the witnesses, will\nnot be disturbed. The Alijandro, 6 C.C.A. 54, 56 Fed. 621; The Lucy, 20\nC.C.A. 660, 74 Fed. 572; The Glendale, 26 C.C.A. 500, 81 Fed. 633. The\nCoquitlam, 23 C.C.A. 438, 77 Fed. 744; Gorham Mfg. Co. v. Emery-BirdThayer Dry Goods Co., 43 C.C.A. 511, 104 Fed. 243.\n[6]\nThe real questions in the case as brought here are\nquestions of law, and, in the view that we take of the case, it will be\nnecessary to consider but one of those. Assuming that the appellant\'s\nsuperintendent at Pyramid Harbor was authorized to make the alleged\ncontract of May 22d, and that he executed it on behalf of the appellant,\nwas it supported by a sufficient consideration? From the foregoing\nstatement of the case, it will have been seen that the libelants agreed in\nwriting, for certain stated compensation, to render their services to the\nappellant in remote waters where the season for conducting fishing\noperations is extremely short, and in which enterprise the appellant had a\nlarge amount of money invested; and, after having entered upon the\ndischarge of their contract, and at a time when it was impossible for the\nappellant to secure other men in their places, the libelants, without any\nvalid cause, absolutely refused to continue the services they were under\ncontract to perform unless the appellant would consent to pay them\nmore money. Consent to such a demand, under such circumstances, if\ngiven, was, in our opinion, without consideration, for the reason that it\nwas based solely upon the libelants\' agreement to render the exact\nservices, and none other, that they were already under contract to render.\nThe case shows that they willfully and arbitrarily broke that obligation. As\na matter of course, they were liable to the appellant in damages, and it is\nquite probable, as suggested by the court below in its opinion, that they\nmay have been unable to respond in damages. But we are unable to agree\nwith the conclusions there drawn, from these facts, in these words:\nUnder such circumstances, it would be strange, indeed, if\nthe law would not permit the defendant to waive the damages\ncaused by the libelants\' breach, and enter into the contract sued\nupon\xe2\x80\x94a contract mutually beneficial to all the parties thereto, in\nthat it gave to the libelants reasonable compensation for their\n\n91\n\n\x0clabor, and enabled the defendant to employ to advantage the\nlarge capital it had invested in its canning and fishing plant.\n[7]\nCertainly, it cannot be justly held, upon the record in this\ncase, that there was any voluntary waiver on the part of the appellant of\nthe breach of the original contract. The company itself knew nothing of\nsuch breach until the expedition returned to San Francisco, and the\ntestimony is uncontradicted that its superintendent at Pyramid Harbor,\nwho, it is claimed, made on its behalf the contract sued on, distinctly\ninformed the libelants that he had no power to alter the original or to\nmake a new contract, and it would, of course, follow that, if he had no\npower to change the original, he would have no authority to waive any\nrights thereunder. The circumstances of the present case bring it, we\nthink, directly within the sound and just observations of the supreme\ncourt of Minnesota in the case of King v. Railway Co., 61 Minn. 482, 63\nN.W. 1105:\nNo astute reasoning can change the plain fact that the\nparty who refuses to perform, and thereby coerces a promise\nfrom the other party to the contract to pay him an increased\ncompensation for doing that which he is legally bound to do,\ntakes an unjustifiable advantage of the necessities of the other\nparty. Surely it would be a travesty on justice to hold that the\nparty so making the promise for extra pay was estopped from\nasserting that the promise was without consideration. A party\ncannot lay the foundation of an estoppel by his own wrong,\nwhere the promise is simply a repetition of a subsisting legal\npromise. There can be no consideration for the promise of the\nother party, and there is no warrant for inferring that the parties\nhave voluntarily rescinded or modified their contract. The\npromise cannot be legally enforced, although the other party has\ncompleted his contract in reliance upon it.\n[8]\nIn Lingenfelder v. Brewing Co., 103 Mo. 578, 15 S.W. 844, the\ncourt, in holding void a contract by which the owner of a building agreed\nto pay its architect an additional sum because of his refusal to otherwise\nproceed with the contract, said:\nIt is urged upon us by respondents that this was a new\ncontract. New in what? Jungenfeld was bound by his contract to\ndesign and supervise this building. Under the new promise, he\n\n92\n\n\x0cwas not to do anything more or anything different. What benefit\nwas to accrue to Wainwright? He was to receive the same service\nfrom Jungenfeld under the new, that Jungenfeld was bound to\ntender under the original, contract. What loss, trouble, or\ninconvenience could result to Jungenfeld that he had not already\nassumed? No amount of metaphysical reasoning can change the\nplain fact that Jungenfeld took advantage of Wainwright\'s\nnecessities, and extorted the promise of five per cent. on the\nrefrigerator plant as the condition of his complying with his\ncontract already entered into. Nor had he even the flimsy pretext\nthat Wainwright had violated any of the conditions of the\ncontract on his part. Jungenfeld himself put it upon the simple\nproposition that \xe2\x80\x9cif he, as an architect, put up the brewery, and\nanother company put up the refrigerating machinery, it would be\na detriment to the Empire Refrigerating Company,\xe2\x80\x9d of which\nJungenfeld was president.\nTo permit plaintiff to recover under such circumstances\nwould be to offer a premium upon bad faith, and invite men to\nviolate their most sacred contracts that they may profit by their\nown wrong. That a promise to pay a man for doing that which he\nis already under contract to do is without consideration is\nconceded by respondents. The rule has been so long imbedded in\nthe common law and decisions of the highest courts of the\nvarious states that nothing but the most cogent reasons ought to\nshake it. (Citing a long list of authorities.) But it is \xe2\x80\x9ccarrying coals\nto Newcastle\xe2\x80\x9d to add authorities on a proposition so universally\naccepted, and so inherently just and right in itself.\nThe learned counsel for respondents do not controvert\nthe general proposition. [Their] contention is, and the circuit\ncourt agreed with them, that, when Jungenfeld declined to go\nfurther on his contract, the defendant then had the right to sue\nfor damages, and not having elected to sue Jungenfeld, but\nhaving acceded to his demand for the additional compensation\ndefendant cannot now be heard to say his promise is without\nconsideration. While it is true Jungenfeld became liable in\ndamages for the obvious breach of his contract, we do not think\nit follows that defendant is estopped from showing its promise\nwas made without consideration. It is true that as eminent a jurist\nas Judge Cooley, in Goebel v. Linn, 47 Mich. 489, 11 N.W. 284,\n\n93\n\n\x0c41 Am.Rep. 723, held that an ice company which had agreed to\nfurnish a brewery with all the ice they might need for their\nbusiness from November 8, 1879, until January 1, 1881, at $1.75\nper ton, and afterwards in May, 1880, declined to deliver any\nmore ice unless the brewery would give it $3 per ton, could\nrecover on a promissory note given for the increased price.\nProfound as is our respect for the distinguished judge\nwho delivered the opinion, we are still of the opinion that his\ndecision is not in accord with the almost universally accepted\ndoctrine, and is not convincing; and certainly so much of the\nopinion as holds that the payment, by a debtor, of a part of his\ndebt then due, would constitute a defense to a suit for the\nremainder, is not the law of this state, nor, do we think, of any\nother where the common law prevails. \xe2\x80\xa6 What we hold is that,\nwhen a party merely does what he has already obligated himself\nto do, he cannot demand an additional compensation therefor;\nand although, by taking advantage of the necessities of his\nadversary, he obtains a promise for more, the law will regard it as\nnudum pactum, and will not lend its process to aid in the wrong.\n[9]\nThe case of Goebel v. Linn, 47 Mich. 489, 11 N.W. 284, is\none of the eight cases relied upon by the court below in support of its\njudgment in the present case, five of which are by the supreme court of\nMassachusetts, one by the supreme court of Vermont, and one other\nMichigan case, that of Moore v. Locomotive Works, 14 Mich. 266. The\nVermont case referred to is that of Lawrence v. Davey, 28 Vt. 264, which\nwas one of the three cases cited by the court in Moore v. Locomotive Works,\n14 Mich. 272, 273, as authority for its decision. In that case there was a\ncontract to deliver coal at specified terms and rates. A portion of it was\ndelivered, and plaintiff then informed the defendant that he could not\ndeliver at those rates, and, if the latter intended to take advantage of it, he\nshould not deliver any more; and that he should deliver no more unless\nthe defendant would pay for the coal independent of the contract. The\ndefendant agreed to do so, and the coal was delivered. On suit being\nbrought for the price, the court said:\nAlthough the promise to waive the contract was after\nsome portion of the coal sought to be recovered had been\ndelivered, and so delivered that probably the plaintiff, if the\n\n94\n\n\x0cdefendant had insisted upon strict performance of the contract,\ncould not have recovered anything for it, yet, nevertheless, the\nagreement to waive the contract, and the promise, and, above all,\nthe delivery of coal after this agreement to waive the contract,\nand upon the faith of it, will be a sufficient consideration to bind\nthe defendant to pay for the coal already received.\n[10]\nThe doctrine of that case was impliedly overruled by the\nsupreme court of Vermont in the subsequent case of Cobb v. Cowdery, 40\nVt. 25, where it was held that:\nA promise by a party to do what he is bound in law to do\nis not an illegal consideration, but is the same as no consideration\nat all, and is merely void; in other words, it is insufficient, but not\nillegal. Thus, if the master of a ship promise his crew an addition\nto their fixed wages in consideration for and as an incitement to,\ntheir extraordinary exertions during a storm, or in any other\nemergency of the voyage, this promise is nudum pactum; the\nvoluntary performance of an act which it was before legally\nincumbent on the party to perform being in law an insufficient\nconsideration; and so it would be in any other case where the\nonly consideration for the promise of one party was the promise\nof the other party to do, or his actual doing, something which he\nwas previously bound in law to do. Chit. Cont. (10th Am.Ed.) 51;\nSmith, Cont. 87; 3 Kent, Com.. 185.\n[11]\nThe Massachusetts cases cited by the court below in\nsupport of its judgment commence with the case of Munroe v. Perkins, 9\nPick. 305, 20 Am. Dec. 475, which really seems to be the foundation of\nall of the cases in support of that view. In that case, the plaintiff had\nagreed in writing to erect a building for the defendants. Finding his\ncontract a losing one, he had concluded to abandon it, and resumed work\non the oral contract of the defendants that, if he would do so, they would\npay him what the work was worth without regard to the terms of the\noriginal contract. The court said that whether the oral contract was\nwithout consideration:\n[d]epends entirely on the question whether the first\ncontract was waived. The plaintiff having refused to perform that\ncontract, as he might do, subjecting himself to such damages as\nthe other parties might show they were entitled to recover, he\n\n95\n\n\x0cafterward went on, upon the faith of the new promise, and\nfinished the work. This was a sufficient consideration. If Payne\nand Perkins were willing to accept his relinquishment of the old\ncontract, and proceed on a new agreement, the law, we think,\nwould not prevent it.\n[12]\nThe case of Goebel v. Linn, 47 Mich. 489, 11 N.W. 284,\npresented some unusual and extraordinary circumstances. But, taking it\nas establishing the precise rule adopted in the Massachusetts cases, we\nthink it not only contrary to the weight of authority, but wrong on\nprinciple.\n[13]\nIn addition to the Minnesota and Missouri cases above\ncited, the following are some of the numerous authorities holding the\ncontrary doctrine: Vanderbilt v. Schreyer, 91 N.Y. 392; Ayres v. Railroad Co.,\n52 Iowa, 478, 3 N.W. 522; Harris v. Carter, 3 Ellis & B. 559; Frazer v.\nHatton, 2 C.B.(N.S.) 512; Conover v. Stillwell, 34 N.J. Law, 54; Reynolds v.\nNugent, 25 Ind. 328; Spencer v. McLean (Ind. App.) 50 N.E. 769, 67\nAm.St.Rep. 271; Harris v. Harris (Colo. App.) 47 Pac. 841; Moran v. Peace,\n72 Ill.App. 139; Carpenter v. Taylor (N.Y.) 58 N.E. 53; Westcott v. Mitchell\n(Me.) 50 Atl. 21; Robinson v. Jewett, 116 N.Y. 40, 22 N.E. 224; Sullivan v.\nSullivan, 99 Cal. 187, 33 Pac. 862; Blyth v. Robinson, 104 Cal. 230, 37 Pac.\n904; Skinner v. Mining Co. (C.C.) 96 Fed. 735; 1 Beach, Cont. \xc2\xa7 166;\nLangd. Cont. \xc2\xa7 54; 1 Pars.Cont. (5th Ed.) 457; Ferguson v. Harris (S.C.) 17\nS.E. 782.\n[14]\nIt results from the views above expressed that the\njudgment must be reversed, and the cause remanded, with directions to\nthe court below to enter judgment for the respondent, with costs.\n[15]\n\nIt is so ordered.\n\n2.1.1. The Story of Alaska Packers Association v. Domenico\nAcademic commentary about Alaska Packers varies quite\nconsiderably. Professor (now Judge) Richard Posner sees a standard holdup\nstory:\nThis seems a clear case where the motive for the\nmodification was simply to exploit a monopoly position\nconferred on the promisors by the circumstances of the contract.\nIt might seem that the promisor would have been in worse shape\n\n96\n\n\x0cif the men had quit as they threatened to do. However, since their\nonly motive for threatening to quit was to extract a higher wage,\nthere was probably little danger of their actually quitting. The\ndanger would have been truly negligible had they known that they\ncould not extract an enforceable commitment to pay them a\nhigher wage.\nRichard Posner, Gratuitous Promises in Economics and Law, 6 J. LEGAL\nSTUD. 411 (1977).\nProfessor Debora Threedy identifies a different motivation entirely.\nShe describes the salmon fishing industry in some detail and points out that\nthe fisherman contended at trial that the company had supplied them with\nsubstandard nets, which would have made it more difficult to catch fish and\nthus to earn the piece rate compensation of $0.02 per salmon caught.\nAlthough the trial court ultimately rejected this allegation, Threedy suggests\nthat the fishermen may have believed the nets were substandard. This belief\ncould have justified their demand to renegotiate their contract. See Debora\nThreedy, A Fish Story: Alaska Packers\xe2\x80\x99 Association v. Domenico, 2000 UTAH L.\nREV. 185.\n2.1.2. Hypo on Modification\nConsider a contract under which a farmer promises to deliver 1,000\nbushels of wheat to a miller on November 1st at $15 per bushel. Imagine two\npossible modification scenarios:\nCase A \xe2\x80\x93 The farmer suffers a drought that diminishes and delays his\nharvest. He asks for a delay in the delivery date and an increase in the price\n(to $17/bushel) to cover his added costs.\nCase B \xe2\x80\x93 The spot price for wheat rises steadily. The farmer waits\nuntil just before the scheduled delivery date and then demands that the miller\nagree to pay the current spot price ($17/bushel) rather than the contract\nprice.\nIn which of these situations does the modification seem to be in\ngood faith?\n\n97\n\n\x0c2.1.3. Discussion of Alaska Packers Association v. Domenico\nNotice that the court in Alaska Packers repeatedly refers to the\nsubstantial investment that appellant had in its cannery facility. Why is this\ninformation relevant to determining whether the modification is enforceable?\nTry analyzing the facts of Alaska Packers under the standards of the\nRestatement and the UCC. Can you tell different stories about the case that\nmight lead to enforcement or non-enforcement of the modified contract?\nConsider the problem of modification as a game. Could a promisor\nbenefit from being unable to agree to an enforceable modification? Are there\nany circumstances in which this inability might harm the promisor?\n3. Rules Concerning Information\nRecall that contractual liability is consensual. We have seen that\ncourts sometimes refuse to enforce agreements because the contracting\nprocess deprived one party of the opportunity to understand the nature of\nthe contractual obligations that she or he has assumed. However, courts\ninvoke unconscionability doctrine only rarely because another group of legal\nrules regulates access to information more directly. In this section, we\nexamine these rules. After a brief introduction to fraud and\nmisrepresentation doctrine, we focus our attention on the subtle problems\nthat arise in cases of non-disclosure and concealment.\n3.1. Fraud and Affirmative Misrepresentation\nThe principal goal of misrepresentation doctrine is to deter people\nfrom providing false information. Suppose, for example, that Kathy has\noffered to sell her BMW Z3 roadster to Josh for $15,000. During a test drive,\nJosh notices that hard acceleration produces small puffs of white smoke\nfrom the car\xe2\x80\x99s exhaust. He asks Kathy about the smoke and she responds:\n\xe2\x80\x9cYes, it\xe2\x80\x99s always done that. About six months ago, I took it to the dealer and\ntheir shop tested the engine thoroughly. The mechanic said it\xe2\x80\x99s just a\nharmless puff of water vapor from the turbocharger.\xe2\x80\x9d It turns out, however,\nthat Kathy has never asked the dealer to check this problem. Instead, she\nused PhotoShop to prepare a fake invoice from the car dealer reporting that\nthe engine is in perfect condition. She hopes that her false statement and the\ninvoice will cause Josh to ignore the smoke and purchase her car.\n\n98\n\n\x0cThis hypothetical scenario illustrates how an affirmative\nmisrepresentation can undermine the contracting process. Kathy has invested\ntime and energy in producing a false impression about the condition of her\ncar. There is a real danger that her efforts will mislead Josh and distort his\nchoice among used vehicles. Courts would call Kathy\xe2\x80\x99s knowingly false\nrepresentation \xe2\x80\x9cfraudulent\xe2\x80\x9d because she knew that what she said was untrue\nand she intended for it to induce Josh to assent to a contract. A fraudulent\nmisrepresentation of this sort typically will allow its recipient to seek\nrescission of the resulting contract. See Restatement (Second) \xc2\xa7 164(1). Thus,\nJosh would have the option to void his obligation to purchase the car or he\ncould elect to go through with the deal.\nThe most practically significant limitation on a party\xe2\x80\x99s right to rescind\nfor a fraudulent misrepresentation is the requirement that the\nmisrepresentation actually induced assent to the contract. Imagine now that\nJosh only asked Kathy about the wisps of smoke after he had already signed\na bill of sale and paid for the car. The parties formed a contract when Josh\nassented to the sale. Kathy\xe2\x80\x99s subsequent misrepresentations thus could not\nhave induced his agreement. On this variation of the facts, Josh would be\nbound by the contract and unable to rescind the deal unless problems with\nthe car violated an express or implied warranty.\nAnother important doctrinal limitation on the right of rescission\narises from the requirement that the recipient of a misrepresentation be\njustified in relying. Courts occasionally find that even a fraudulent\nmisrepresentation does not warrant rescission because the recipient should\nhave known that the statement was false. Suppose, for example, that Josh is a\ncertified master mechanic and he knows that the BMW Z3 in question\ndoesn\xe2\x80\x99t have a turbocharger nor can a turbocharger emit water vapor. In\nthese circumstances, a court might condemn Kathy\xe2\x80\x99s untruthfulness but hold\nthat Josh was not justified in relying on her obviously false statements.\nThis limitation applies even more frequently to cases involving\nnegligent misrepresentations. As with knowingly false representations, a\nnegligent misrepresentation that induces assent will ordinarily warrant\nrescission. However, if Kathy was merely careless in reassuring Josh about\nthe condition of her car and Josh had good reason to doubt the accuracy of\nher statement, then courts tend to weigh the parties\xe2\x80\x99 relative degree of fault.\nDecisions often impose the loss on the party who was most negligent.\n\n99\n\n\x0cFinally, courts find even greater doctrinal flexibility when the\nrepresentation arguably expresses an opinion rather than asserting facts.\nSuppose that Kathy simply tells Josh that her car is in \xe2\x80\x9cgreat shape.\xe2\x80\x9d\nSometimes courts will interpret such statements as mere puffery without legal\nsignificance. In other situations, however, decisions have emphasized a\nspecial relationship of trust and confidence between the parties or focused\non the expertise of the party making the representation. Thus, if Kathy is the\nmaster mechanic and Josh a na\xc3\xafve consumer, some courts may be willing to\nfind in Kathy\xe2\x80\x99s statement an implied assertion that she is unaware of any\npresent mechanical problems with the car. If, in fact, she knew at the time\nthat the clutch was failing, her false statement could justify an action for\nrescission.\nThere are a number of Restatement (Second) sections (reprinted\nbelow) that address the problem of misrepresentations. As you read these\nsections, notice also how they incorporate rules for cases of concealment and\nnon-disclosure. We will focus most of our class discussion on the subtle\nissues that arise when one party fails to disclose information that would\nsurely affect the other party\xe2\x80\x99s decision about contracting.\n\xc2\xa7 160. When Action Is Equivalent to an Assertion (Concealment)\nAction intended or known to be likely to prevent another from\nlearning a fact is equivalent to an assertion that the fact does not exist.\n\xc2\xa7 161. When Non-Disclosure Is Equivalent To An Assertion\nA person\'s non-disclosure of a fact known to him is equivalent to\nan assertion that the fact does not exist in the following cases only:\n(a) where he knows that disclosure of the fact is necessary to\nprevent some previous assertion from being a misrepresentation or from\nbeing fraudulent or material.\n(b) where he knows that disclosure of the fact would correct a\nmistake of the other party as to a basic assumption on which that party is\nmaking the contract and if non-disclosure of the fact amounts to a failure\nto act in good faith and in accordance with reasonable standards of fair\ndealing.\n\n100\n\n\x0c(c) where he knows that disclosure of the fact would correct a\nmistake of the other party as to the contents or effect of a writing,\nevidencing or embodying an agreement in whole or in part.\n(d) where the other person is entitled to know the fact because of a\nrelation of trust and confidence between them.\n\xc2\xa7 162. When A Misrepresentation Is Fraudulent Or Material\n(1) A misrepresentation is fraudulent if the maker intends his\nassertion to induce a party to manifest his assent and the maker\n(a) knows or believes that the assertion is not in accord with the\nfacts, or\n(b) does not have the confidence that he states or implies in the\ntruth of the assertion, or\n(c) knows that he does not have the basis that he states or implies\nfor the assertion.\n(2) A misrepresentation is material if it would be likely to induce a\nreasonable person to manifest his assent, or if the maker knows that it\nwould be likely to induce the recipient to do so.\n\xc2\xa7 164. When a Misrepresentation Makes a Contract Voidable\n(1) If a party\'s manifestation of assent is induced by either a\nfraudulent or a material misrepresentation by the other party upon which\nthe recipient is justified in relying, the contract is voidable by the\nrecipient.\n(2) If a party\'s manifestation of assent is induced by either a\nfraudulent or a material misrepresentation by one who is not a party to the\ntransaction upon which the recipient is justified in relying, the contract is\nvoidable by the recipient, unless the other party to the transaction in good\nfaith and without reason to know of the misrepresentation either gives\nvalue or relies materially on the transaction.\n\xc2\xa7 167. When a Misrepresentation Is an Inducing Cause\n\n101\n\n\x0cA misrepresentation induces a party\xe2\x80\x99s manifestation of assent if it\nsubstantially contributes to his decision to manifest his assent.\n\xc2\xa7 168. Reliance on Assertions of Opinion\n(1) An assertion is one of opinion if it expresses only a belief,\nwithout certainty, as to the existence of a fact or expresses only a\njudgment as to quality, value, authenticity, or similar matters.\n(2) If it is reasonable to do so, the recipient of an assertion of a\nperson\xe2\x80\x99s opinion as to facts not disclosed and not otherwise known to the\nrecipient may properly interpret it as an assertion\n(a) that the facts known to that person are not incompatible with\nhis opinion, or\n(b) that he knows facts sufficient to justify him in forming it.\n\xc2\xa7 169. When Reliance on an Assertion of Opinion Is Not Justified\nTo the extent that an assertion is one of opinion only, the recipient\nis not justified in relying on it unless the recipient\n(a) stands in such a relation of trust and confidence to the person\nwhose opinion is asserted that the recipient is reasonable in relying on it,\nor\n(b) reasonably believes that, as compared with himself, the person\nwhose opinion is asserted has special skill, judgment or objectivity with\nrespect to the subject matter, or\n(c) is for some other special reason particularly susceptible to a\nmisrepresentation of the type involved.\n3.2. Non-Disclosure and Concealment\nNow we turn our attention to several real estate cases involving a\nfailure to disclose material information about the subject matter of the\ncontract. As you read these cases, try to discern the traditional common law\nrule governing information disclosure in the sale of real estate. Think\n\n102\n\n\x0ccarefully about how courts have adjusted the traditional rule and whether you\nthink that the benefits of those changes outweigh their costs.\n3.3. Principal Case \xe2\x80\x93 Reed v. King\nReed v. King\nCourt of Appeal of California\n145 Cal. App. 3d 261 (1983)\nBLEASE, J.\n[1]\nIn the sale of a house, must the seller disclose it was the\nsite of a multiple murder?\n[2]\nDorris Reed purchased a house from Robert King.\nNeither King nor his real estate agents (the other named defendants) told\nReed that a woman and her four children were murdered there 10 years\nearlier. However, it seems \xe2\x80\x9ctruth will come to light; murder cannot be hid\nlong.\xe2\x80\x9d (Shakespeare, Merchant of Venice, act II, scene II.) Reed learned\nof the gruesome episode from a neighbor after the sale. She sues seeking\nrescission and damages. King and the real estate agent defendants\nsuccessfully demurred to her first amended complaint for failure to state\na cause of action. Reed appeals the ensuing judgment of dismissal. We\nwill reverse the judgment.\nFacts\n[3]\nWe take all issuable facts pled in Reed\'s complaint as true.\n(See 3 WITKIN, CAL. PROCEDURE (2d ed. 1971) Pleading, \xc2\xa7 800.) King\nand his real estate agent knew about the murders and knew the event\nmaterially affected the market value of the house when they listed it for\nsale. They represented to Reed the premises were in good condition and\nfit for an \xe2\x80\x9celderly lady\xe2\x80\x9d living alone. They did not disclose the fact of the\nmurders. At some point King asked a neighbor not to inform Reed of\nthat event. Nonetheless, after Reed moved in neighbors informed her no\none was interested in purchasing the house because of the stigma. Reed\npaid $76,000, but the house is only worth $65,000 because of its past.\n[4]\nThe trial court sustained the demurrers to the complaint\non the ground it did not state a cause of action. The court concluded a\ncause of action could only be stated \xe2\x80\x9cif the subject property, by reason of\n\n103\n\n\x0cthe prior circumstances, were presently the object of community notoriety\n....\xe2\x80\x9d (Original italics.) Reed declined the offer of leave to amend.\nDiscussion\n[5]\nDoes Reed\'s pleading state a cause of action? Concealed\nwithin this question is the nettlesome problem of the duty of disclosure\nof blemishes on real property which are not physical defects or legal\nimpairments to use.\n[6]\nReed seeks to state a cause of action sounding in contract,\ni.e. rescission, or in tort, i.e., deceit. In either event her allegations must\nreveal a fraud. (See Civ. Code, \xc2\xa7\xc2\xa7 1571-1573, 1689, 1709-1710.) \xe2\x80\x9cThe\nelements of actual fraud, whether as the basis of the remedy in contract\nor tort, may be stated as follows: There must be (1) a false representation or\nconcealment of a material fact (or, in some cases, an opinion) susceptible\nof knowledge, (2) made with knowledge of its falsity or without sufficient\nknowledge on the subject to warrant a representation, (3) with the intent\nto induce the person to whom it is made to act upon it; and such person\nmust (4) act in reliance upon the representation (5) to his damage.\xe2\x80\x9d1\n(Original italics.) (1 WITKIN, SUMMARY OF CAL. LAW (8th ed. 1973)\nContracts, \xc2\xa7 315.)\n[7]\nThe trial court perceived the defect in Reed\'s complaint\nto be a failure to allege concealment of a material fact. \xe2\x80\x9cConcealment\xe2\x80\x9d\nand \xe2\x80\x9cmaterial\xe2\x80\x9d are legal conclusions concerning the effect of the issuable\nfacts pled. As appears, the analytic pathways to these conclusions are\nintertwined.\n[8]\nConcealment is a term of art which includes mere\nnondisclosure when a party has a duty to disclose. (See, e.g., Lingsch v.\nSavage (1963) 213 Cal.App.2d 729, 738 [29 Cal.Rptr. 201, 8 A.L.R.3d 537];\nRest.2d Contracts, \xc2\xa7 161; Rest.2d Torts, \xc2\xa7 551; Rest., Restitution, \xc2\xa7 8, esp.\ncom. b.) Reed\'s complaint reveals only nondisclosure despite the\nallegation King asked a neighbor to hold his peace. There is no allegation\n\nProof of damage, i.e. specific pecuniary loss, is not essential to obtain rescission\nalone. (See 1 WITKIN, op. cit. supra., \xc2\xa7\xc2\xa7 324-325; see also Earl v. Saks & Co. (1951)\n36 Cal.2d 602 [226 P.2d 340].)\n1\n\n104\n\n\x0cthe attempt at suppression was a cause in fact of Reed\'s ignorance.2 (See\nRest.2d Contracts, \xc2\xa7\xc2\xa7 160, 162-164; Rest.2d Torts, \xc2\xa7 550; Rest.,\nRestitution, \xc2\xa7 9.) Accordingly, the critical question is: does the seller have\na duty to disclose here? Resolution of this question depends on the\nmateriality of the fact of the murders.\n[9]\nSimilarly we do not view the statement the house was fit\nfor Reed to inhabit as transmuting her case from one of nondisclosure to\none of false representation. To view the representation as patently false is\nto find \xe2\x80\x9celderly ladies\xe2\x80\x9d uniformly susceptible to squeamishness. We\ndecline to indulge this stereotypical assumption. To view the\nrepresentation as misleading because it conflicts with a duty to disclose is\nto beg that question.\n[10]\nIn general, a seller of real property has a duty to disclose:\n\xe2\x80\x9cwhere the seller knows of facts materially affecting the value or\ndesirability of the property which are known or accessible only to him\nand also knows that such facts are not known to, or within the reach of\nthe diligent attention and observation of the buyer, the seller is under a\nduty to disclose them to the buyer.3 [Italics added, citations omitted.]\xe2\x80\x9d (\nLingsch v. Savage, supra., 213 Cal. App. 2d at p. 735.) This broad statement\nof duty has led one commentator to conclude: \xe2\x80\x9cThe ancient maxim caveat\nemptor (\'let the buyer beware.\') has little or no application to California\nreal estate transactions.\xe2\x80\x9d (1 Miller & Starr, Current Law of Cal. Real\nEstate (rev. ed. 1975) \xc2\xa7 1:80.)\n[11]\nWhether information \xe2\x80\x9cis of sufficient materiality to affect\nthe value or desirability of the property ... depends on the facts of the\nparticular case.\xe2\x80\x9d (Lingsch, supra., 213 Cal. App. 2d at p. 737.) Materiality\n\xe2\x80\x9cis a question of law, and is part of the concept of right to rely or\njustifiable reliance.\xe2\x80\x9d (3 WITKIN, CAL. PROCEDURE (2d ed. 1971) Pleading,\nReed elsewhere in the complaint asserts defendants \xe2\x80\x9cactively concealed\xe2\x80\x9d the fact\nof the murders and this in part misled her. However, no connection is made or\napparent between the legal conclusion of active concealment and any issuable fact\npled by Reed. Accordingly, the assertion is insufficient. (See Bacon v. Soule (1912)\n19 Cal. App. 428, 438 [126 P. 384].)\n2\n\nThe real estate agent or broker representing the seller is under the same duty of\ndisclosure. ( Lingsch v. Savage, supra., 213 Cal.App.2d at p. 736.)\n3\n\n105\n\n\x0c\xc2\xa7 578, p. 2217.) Accordingly, the term is essentially a label affixed to a\nnormative conclusion.4 Three considerations bear on this legal\nconclusion: the gravity of the harm inflicted by nondisclosure; the\nfairness of imposing a duty of discovery on the buyer as an alternative to\ncompelling disclosure, and the impact on the stability of contracts if\nrescission is permitted.\n[12]\nNumerous cases have found nondisclosure of physical\ndefects and legal impediments to use of real property are material. (See 1\nMiller & Starr, supra., \xc2\xa7 181.)5 However, to our knowledge, no prior real\nestate sale case has faced an issue of nondisclosure of the kind presented\nhere. (Compare Earl v. Saks & Co., supra., 36 Cal.2d 602; Kuhn v. Gottfried\n(1951) 103 Cal.App.2d 80, 85-86 [229 P.2d 137].) Should this variety of\nill-repute be required to be disclosed? Is this a circumstance where \xe2\x80\x9cnondisclosure of the fact amounts to a failure to act in good faith and in\naccordance with reasonable standards of fair dealing[?]\xe2\x80\x9d (Rest. 2d\nContracts, \xc2\xa7 161, subd. (b).)\nThis often subsumes a policy analysis of the effect of permitting rescission on\nthe stability of contracts. (See fn. 6, ante.) \xe2\x80\x9cIn the case law of fraud, the word\n\'material\' has become a sort of talisman. It is suggested that it has no meaning\nwhen undefined other than to the user since the word actually means no more\nthan that the fraud is the sort which will justify rescission or damages in deceit.\nHowever, courts continue to use materiality as a test without explanatory\nreference to the varying standards of reliance, damage, etc. they are following.\xe2\x80\x9d\n(Note, Rescission: Fraud as Ground: Contracts (1951) 39 Cal. L. Rev. 309, 310-311, fn.\n4.)\n4\n\nFor example, the following have been held of sufficient materiality to require\ndisclosure: the home sold was constructed on filled land (Burkett v. J.A. Thompson\n& Son (1957) 150 Cal.App.2d 523, 526 [310 P.2d 56]); improvements were added\nwithout a building permit and in violation of zoning regulations (Barder v. McClung\n(1949) 93 Cal.App.2d 692, 697 [209 P.2d 808]) or in violation of building codes\n(Curran v. Heslop (1953) 115 Cal.App.2d 476, 480-481 [252 P.2d 378]); the\nstructure was condemned (Katz v. Department of Real Estate (1979) 96 Cal.App.3d\n895, 900 [158 Cal.Rptr. 766]); the structure was termite-infested ( Godfrey v.\nSteinpress (1982) 128 Cal.App.3d 154 [180 Cal.Rptr. 95]); there was water\ninfiltration in the soil (Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 187188 [183 Cal.Rptr. 881]); the amount of net income a piece of property would\nyield was overstated (Ford v. Cournale (1973) 36 Cal.App.3d 172, 179-180 [111\nCal.Rptr. 334, 81 A.L.R.3d 704].)\n5\n\n106\n\n\x0c[13]\nThe paramount argument against an affirmative\nconclusion is it permits the camel\'s nose of unrestrained irrationality\nadmission to the tent. If such an \xe2\x80\x9cirrational\xe2\x80\x9d consideration is permitted as\na basis of rescission the stability of all conveyances will be seriously\nundermined. Any fact that might disquiet the enjoyment of some\nsegment of the buying public may be seized upon by a disgruntled\npurchaser to void a bargain.6 In our view, keeping this genie in the bottle\nis not as difficult a task as these arguments assume. We do not view a\ndecision allowing Reed to survive a demurrer in these unusual\ncircumstances as indorsing the materiality of facts predicating peripheral,\ninsubstantial, or fancied harms.\n[14]\nThe murder of innocents is highly unusual in its potential\nfor so disturbing buyers they may be unable to reside in a home where it\nhas occurred. This fact may foreseeably deprive a buyer of the intended\nuse of the purchase. Murder is not such a common occurrence that buyers\nshould be charged with anticipating and discovering this disquieting\npossibility. Accordingly, the fact is not one for which a duty of inquiry\nand discovery can sensibly be imposed upon the buyer.\n[15]\nReed alleges the fact of the murders has a quantifiable\neffect on the market value of the premises.7 We cannot say this allegation\nis inherently wrong and, in the pleading posture of the case, we assume it\nto be true. If information known or accessible only to the seller has a\nsignificant and measurable effect on market value and, as is alleged here,\nConcern for the effects of an overly indulgent rescission policy on the stability\nof bargains is not new. Our Supreme Court early on quoted with approval the\nsentiment: \xe2\x80\x9c\'The power to cancel a contract is a most extraordinary power. It is\none which should be exercised with great caution\xe2\x80\x94nay, I may say, with great\nreluctance\xe2\x80\x94unless in a clear case. A too free use of this power would render all\nbusiness uncertain, and, as has been said, make the length of a chancellor\'s foot\nthe measure of individual rights. The greatest liberty of making contracts is\nessential to the business interests of the country. In general, the parties must look\nout for themselves.\xe2\x80\x9d\' (Colton v. Stanford (1980) 82 Cal. 351, 398 [23 P. 16].)\n6\n\nSee Evidence Code section 810 et seq. We note the traditional formulation of\nmarket value assumes a buyer \xe2\x80\x9cwith knowledge of all the issues and purposes to\nwhich [the realty] is adapted.\xe2\x80\x9d (See e.g. South Bay Irr. Dist. v. California-American\nWater Co. (1976) 61 Cal. App. 3d 944, 961 and 970 [133 Cal. Rptr. 166].)\n7\n\n107\n\n\x0cthe seller is aware of this effect, we see no principled basis for making the\nduty to disclose turn upon the character of the information. Physical\nusefulness is not and never has been the sole criterion of valuation.\nStamp collections and gold speculation would be insane activities if\nutilitarian considerations were the sole measure of value. (See also Civ.\nCode, \xc2\xa7 3355 [deprivation of property of peculiar value to owner]; Annot.\n(1950) 12 A.L.R.2d 902 [Measure of Damages for Conversion or Loss of,\nor Damage to, Personal Property Having No Market Value].)\n[16]\nReputation and history can have a significant effect on\nthe value of realty. \xe2\x80\x9cGeorge Washington slept here\xe2\x80\x9d is worth something,\nhowever physically inconsequential that consideration may be. Ill-repute\nor \xe2\x80\x9cbad will\xe2\x80\x9d conversely may depress the value of property. Failure to\ndisclose such a negative fact where it will have a foreseeably depressing\neffect on income expected to be generated by a business is tortious. (See\nRest.2d Torts, \xc2\xa7 551, illus. 11.) Some cases have held that unreasonable\nfears of the potential buying public that a gas or oil pipeline may rupture\nmay depress the market value of land and entitle the owner to\nincremental compensation in eminent domain. (See Annot., Eminent\nDomain: Elements and Measure of Compensation for Oil or Gas\nPipeline Through Private Property (1954) 38 A.L.R.2d 788, 801-804.)\n[17]\nWhether Reed will be able to prove her allegation the\ndecade-old multiple murder has a significant effect on market value we\ncannot determine.8 If she is able to do so by competent evidence she is\nentitled to a favorable ruling on the issues of materiality and duty to\n\n[In ]determining what factors would motivate [buyers and sellers] in reaching an\nagreement as to price, and in weighing the effect of their motivation, [the trier of\nfact] may rely upon the opinion of experts in the field and also upon its\nknowledge and experience shared in common with people in general.\xe2\x80\x9c ( South Bay\nIrr. Dist., supra., 61 Cal.App.3d at p. 970; see also 3 Wigmore, Evidence\n(Chadbourn rev.ed. 1970) \xc2\xa7 711 et seq.)\n8\n\n108\n\n\x0cdisclose.9 Her demonstration of objective tangible harm would still the\nconcern that permitting her to go forward will open the floodgates to\nrescission on subjective and idiosyncratic grounds.\n[18]\nA more troublesome question would arise if a buyer in\nsimilar circumstances were unable to plead or establish a significant and\nquantifiable effect on market value. However, this question is not\npresented in the posture of this case. Reed has not alleged the fact of the\nmurders has rendered the premises useless to her as a residence. As\ncurrently pled, the gravamen of her case is pecuniary harm. We decline to\nspeculate on the abstract alternative.\n[19]\n\nThe judgment is reversed.\n\nThe ruling of the trial court requiring the additional element of notoriety, i.e.\nwidespread public knowledge, is unpersuasive. Lack of notoriety may facilitate\nresale to yet another unsuspecting buyer at the \xe2\x80\x9dmarket price\xe2\x80\x9c of a house with no\nill-repute. However, it appears the buyer will learn of the possibly unsettling\nhistory of the house soon after moving in. Those who suffer no discomfort from\nthe specter of residing in such quarters per se, will nonetheless be discomforted\nby the prospect they have bought a house that may be difficult to sell to less hardy\nsouls. Nondisclosure must be evaluated as fair or unfair regardless of the ease\nwith which a buyer may escape this discomfort by foisting it upon another.\n9\n\n109\n\n\x0c3.4. Principal Case \xe2\x80\x93 Stambovsky v. Ackley\nStambovsky v. Ackley\nNew York Supreme Court, Appellate Division\n169 A.D.2d 254 (1991)\nRUBIN, JUSTICE.\n[1]\nPlaintiff, to his horror, discovered that the house he had\nrecently contracted to purchase was widely reputed to be possessed by\npoltergeists, reportedly seen by defendant seller and members of her\nfamily on numerous occasions over the last nine years. Plaintiff promptly\ncommenced this action seeking rescission of the contract of sale.\nSupreme Court reluctantly dismissed the complaint, holding that plaintiff\nhas no remedy at law in this jurisdiction.\n[2]\nThe unusual facts of this case, as disclosed by the record,\nclearly warrant a grant of equitable relief to the buyer who, as a resident\nof New York City, cannot be expected to have any familiarity with the\nfolklore of the Village of Nyack. Not being a \xe2\x80\x9clocal,\xe2\x80\x9d plaintiff could not\nreadily learn that the home he had contracted to purchase is haunted.\nWhether the source of the spectral apparitions seen by defendant seller\nare parapsychic or psychogenic, having reported their presence in both a\nnational publication (\xe2\x80\x9cReaders\' Digest\xe2\x80\x9d) and the local press (in 1977 and\n1982, respectively), defendant is estopped to deny their existence and, as\na matter of law, the house is haunted. More to the point, however, no\ndivination is required to conclude that it is defendant\'s promotional\nefforts in publicizing her close encounters with these spirits which\nfostered the home\'s reputation in the community. In 1989, the house was\nincluded in a five-home walking tour of Nyack and described in a\nNovember 27th newspaper article as \xe2\x80\x9ca riverfront Victorian (with\nghost).\xe2\x80\x9d The impact of the reputation thus created goes to the very\nessence of the bargain between the parties, greatly impairing both the\nvalue of the property and its potential for resale. The extent of this\nimpairment may be presumed for the purpose of reviewing the\ndisposition of this motion to dismiss the cause of action for rescission\n(Harris v. City of New York, 147 A.D.2d 186, 188-189, 542 N.Y.S.2d 550)\nand represents merely an issue of fact for resolution at trial.\n\n110\n\n\x0c[3]\nWhile I agree with Supreme Court that the real estate\nbroker, as agent for the seller, is under no duty to disclose to a potential\nbuyer the phantasmal reputation of the premises and that, in his pursuit\nof a legal remedy for fraudulent misrepresentation against the seller,\nplaintiff hasn\'t a ghost of a chance, I am nevertheless moved by the spirit\nof equity to allow the buyer to seek rescission of the contract of sale and\nrecovery of his downpayment. New York law fails to recognize any\nremedy for damages incurred as a result of the seller\'s mere silence,\napplying instead the strict rule of caveat emptor. Therefore, the\ntheoretical basis for granting relief, even under the extraordinary facts of\nthis case, is elusive if not ephemeral.\n[4]\n\xe2\x80\x9cPity me not but lend thy serious hearing to what I shall\nunfold\xe2\x80\x9d (WILLIAM SHAKESPEARE, HAMLET, Act I, Scene V [Ghost] ).\n[5]\nFrom the perspective of a person in the position of\nplaintiff herein, a very practical problem arises with respect to the\ndiscovery of a paranormal phenomenon: \xe2\x80\x9cWho you gonna\' call?\xe2\x80\x9d as the\ntitle song to the movie \xe2\x80\x9cGhostbusters\xe2\x80\x9d asks. Applying the strict rule of\ncaveat emptor to a contract involving a house possessed by poltergeists\nconjures up visions of a psychic or medium routinely accompanying the\nstructural engineer and Terminix man on an inspection of every home\nsubject to a contract of sale. It portends that the prudent attorney will\nestablish an escrow account lest the subject of the transaction come back\nto haunt him and his client\xe2\x80\x94or pray that his malpractice insurance\ncoverage extends to supernatural disasters. In the interest of avoiding\nsuch untenable consequences, the notion that a haunting is a condition\nwhich can and should be ascertained upon reasonable inspection of the\npremises is a hobgoblin which should be exorcised from the body of\nlegal precedent and laid quietly to rest.\n[6]\nIt has been suggested by a leading authority that the\nancient rule which holds that mere non-disclosure does not constitute\nactionable misrepresentation \xe2\x80\x9cfinds proper application in cases where the\nfact undisclosed is patent, or the plaintiff has equal opportunities for\nobtaining information which he may be expected to utilize, or the\ndefendant has no reason to think that he is acting under any\nmisapprehension\xe2\x80\x9d (PROSSER, LAW OF TORTS \xc2\xa7 106, at 696 [4th ed., 1971]\n). However, with respect to transactions in real estate, New York adheres\n\n111\n\n\x0cto the doctrine of caveat emptor and imposes no duty upon the vendor\nto disclose any information concerning the premises (London v. Courduff,\n141 A.D.2d 803, 529 N.Y.S.2d 874) unless there is a confidential or\nfiduciary relationship between the parties (Moser v. Spizzirro, 31 A.D.2d\n537, 295 N.Y.S.2d 188, affd., 25 N.Y.2d 941, 305 N.Y.S.2d 153, 252\nN.E.2d 632; IBM Credit Fin. Corp. v. Mazda Motor Mfg. (USA) Corp., 152\nA.D.2d 451, 542 N.Y.S.2d 649) or some conduct on the part of the seller\nwhich constitutes \xe2\x80\x9cactive concealment\xe2\x80\x9d ( see, 17 East 80th Realty Corp. v.\n68th Associates, 173 A.D.2d 245, 569 N.Y.S.2d 647 [dummy ventilation\nsystem constructed by seller]; Haberman v. Greenspan, 82 Misc.2d 263, 368\nN.Y.S.2d 717 [foundation cracks covered by seller]). Normally, some\naffirmative misrepresentation ( e.g., Tahini Invs., Ltd. v. Bobrowsky, 99\nA.D.2d 489, 470 N.Y.S.2d 431 [industrial waste on land allegedly used\nonly as farm]; Jansen v. Kelly, 11 A.D.2d 587, 200 N.Y.S.2d 561 [land\ncontaining valuable minerals allegedly acquired for use as campsite] ) or\npartial disclosure (Junius Constr. Corp. v. Cohen, 257 N.Y. 393, 178 N.E.\n672 [existence of third unopened street concealed]; Noved Realty Corp. v.\nA.A.P. Co., 250 App.Div. 1, 293 N.Y.S. 336 [escrow agreements securing\nlien concealed] ) is required to impose upon the seller a duty to\ncommunicate undisclosed conditions affecting the premises (contra,\nYoung v. Keith, 112 A.D.2d 625, 492 N.Y.S.2d 489 [defective water and\nsewer systems concealed] ).\n[7]\nCaveat emptor is not so all-encompassing a doctrine of\ncommon law as to render every act of non-disclosure immune from\nredress, whether legal or equitable. \xe2\x80\x9cIn regard to the necessity of giving\ninformation which has not been asked, the rule differs somewhat at law\nand in equity, and while the law courts would permit no recovery of\ndamages against a vendor, because of mere concealment of facts under\ncertain circumstances, yet if the vendee refused to complete the contract\nbecause of the concealment of a material fact on the part of the other,\nequity would refuse to compel him so to do, because equity only compels\nthe specific performance of a contract which is fair and open, and in\nregard to which all material matters known to each have been\ncommunicated to the other\xe2\x80\x9d (Rothmiller v. Stein, 143 N.Y. 581, 591-592, 38\nN.E. 718 [emphasis added] ). Even as a principle of law, long before\nexceptions were embodied in statute law (see, e.g., UCC \xc2\xa7\xc2\xa7 2-312, 2-313,\n\n112\n\n\x0c2-314, 2-315; 3-417[2][e]), the doctrine was held inapplicable to contagion\namong animals, adulteration of food, and insolvency of a maker of a\npromissory note and of a tenant substituted for another under a lease\n(see, Rothmiller v. Stein, supra, at 592-593, 38 N.E. 718 and cases cited\ntherein). Common law is not moribund. Ex facto jus oritur (law arises\nout of facts). Where fairness and common sense dictate that an exception\nshould be created, the evolution of the law should not be stifled by rigid\napplication of a legal maxim.\n[8]\nThe doctrine of caveat emptor requires that a buyer act\nprudently to assess the fitness and value of his purchase and operates to\nbar the purchaser who fails to exercise due care from seeking the\nequitable remedy of rescission (see, e.g., Rodas v. Manitaras, 159 A.D.2d\n341, 552 N.Y.S.2d 618). For the purposes of the instant motion to\ndismiss the action pursuant to CPLR 3211(a)(7), plaintiff is entitled to\nevery favorable inference which may reasonably be drawn from the\npleadings (Arrington v. New York Times Co., 55 N.Y.2d 433, 442, 449\nN.Y.S.2d 941, 434 N.E.2d 1319; Rovello v. Orofino Realty Co., 40 N.Y.2d\n633, 634, 389 N.Y.S.2d 314, 357 N.E.2d 970), specifically, in this\ninstance, that he met his obligation to conduct an inspection of the\npremises and a search of available public records with respect to title. It\nshould be apparent, however, that the most meticulous inspection and\nthe search would not reveal the presence of poltergeists at the premises\nor unearth the property\'s ghoulish reputation in the community.\nTherefore, there is no sound policy reason to deny plaintiff relief for\nfailing to discover a state of affairs which the most prudent purchaser\nwould not be expected to even contemplate (see, Da Silva v. Musso, 53\nN.Y.2d 543, 551, 444 N.Y.S.2d 50, 428 N.E.2d 382).\n[9]\nThe case law in this jurisdiction dealing with the duty of a\nvendor of real property to disclose information to the buyer is\ndistinguishable from the matter under review. The most salient\ndistinction is that existing cases invariably deal with the physical\ncondition of the premises (e.g., London v. Courduff, supra [use as a landfill];\nPerin v. Mardine Realty Co., 5 A.D.2d 685, 168 N.Y.S.2d 647 aff\xe2\x80\x99d. 6 N.Y.2d\n920, 190 N.Y.S.2d 995, 161 N.E.2d 210 [sewer line crossing adjoining\nproperty without owner\'s consent]), defects in title (e.g., Sands v. Kissane,\n282 App. Div. 140, 121 N.Y.S.2d 634 [remainderman]), liens against the\n\n113\n\n\x0cproperty (e.g., Noved Realty Corp. v. A.A.P. Co., supra), expenses or income\n(e.g., Rodas v. Manitaras, supra [gross receipts]) and other factors affecting\nits operation. No case has been brought to this court\'s attention in which\nthe property value was impaired as the result of the reputation created by\ninformation disseminated to the public by the seller (or, for that matter,\nas a result of possession by poltergeists).\n[10]\nWhere a condition which has been created by the seller\nmaterially impairs the value of the contract and is peculiarly within the\nknowledge of the seller or unlikely to be discovered by a prudent\npurchaser exercising due care with respect to the subject transaction,\nnondisclosure constitutes a basis for rescission as a matter of equity. Any\nother outcome places upon the buyer not merely the obligation to\nexercise care in his purchase but rather to be omniscient with respect to\nany fact which may affect the bargain. No practical purpose is served by\nimposing such a burden upon a purchaser. To the contrary, it encourages\npredatory business practice and offends the principle that equity will\nsuffer no wrong to be without a remedy.\n[11]\nDefendant\'s contention that the contract of sale,\nparticularly the merger or \xe2\x80\x9cas is\xe2\x80\x9d clause, bars recovery of the buyer\'s\ndeposit is unavailing. Even an express disclaimer will not be given effect\nwhere the facts are peculiarly within the knowledge of the party invoking\nit (Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322, 184 N.Y.S.2d 599,\n157 N.E.2d 597; Tahini Invs., Ltd. v. Bobrowsky, supra). Moreover, a fair\nreading of the merger clause reveals that it expressly disclaims only\nrepresentations made with respect to the physical condition of the\npremises and merely makes general reference to representations\nconcerning \xe2\x80\x9cany other matter or things affecting or relating to the\naforesaid premises\xe2\x80\x9d. As broad as this language may be, a reasonable\ninterpretation is that its effect is limited to tangible or physical matters\nand does not extend to paranormal phenomena. Finally, if the language\nof the contract is to be construed as broadly as defendant urges to\nencompass the presence of poltergeists in the house, it cannot be said\nthat she has delivered the premises \xe2\x80\x9cvacant\xe2\x80\x9d in accordance with her\nobligation under the provisions of the contract rider.\n[12]\nTo the extent New York law may be said to require\nsomething more than \xe2\x80\x9cmere concealment\xe2\x80\x9d to apply even the equitable\n\n114\n\n\x0cremedy of rescission, the case of Junius Construction Corporation v. Cohen,\n257 N.Y. 393, 178 N.E. 672, supra, while not precisely on point, provides\nsome guidance. In that case, the seller disclosed that an official map\nindicated two as yet unopened streets which were planned for\nconstruction at the edges of the parcel. What was not disclosed was that\nthe same map indicated a third street which, if opened, would divide the\nplot in half. The court held that, while the seller was under no duty to\nmention the planned streets at all, having undertaken to disclose two of\nthem, he was obliged to reveal the third (see also, Rosenschein v. McNally, 17\nA.D.2d 834, 233 N.Y.S.2d 254).\n[13]\nIn the case at bar, defendant seller deliberately fostered\nthe public belief that her home was possessed. Having undertaken to\ninform the public at large, to whom she has no legal relationship, about\nthe supernatural occurrences on her property, she may be said to owe no\nless a duty to her contract vendee. It has been remarked that the\noccasional modern cases which permit a seller to take unfair advantage of\na buyer\'s ignorance so long as he is not actively misled are \xe2\x80\x9csingularly\nunappetizing\xe2\x80\x9d (PROSSER, LAW OF TORTS \xc2\xa7 106, at 696 [4th ed. 1971]).\nWhere, as here, the seller not only takes unfair advantage of the buyer\'s\nignorance but has created and perpetuated a condition about which he is\nunlikely to even inquire, enforcement of the contract (in whole or in part)\nis offensive to the court\'s sense of equity. Application of the remedy of\nrescission, within the bounds of the narrow exception to the doctrine of\ncaveat emptor set forth herein, is entirely appropriate to relieve the\nunwitting purchaser from the consequences of a most unnatural bargain.\n[14]\nAccordingly, the judgment of the Supreme Court, New\nYork County (Edward H. Lehner, J.), entered April 9, 1990, which\ndismissed the complaint pursuant to CPLR 3211(a)(7), should be\nmodified, on the law and the facts and in the exercise of discretion, and\nthe first cause of action seeking rescission of the contract reinstated,\nwithout costs.\nAll concur except MILONAS, J.P. and SMITH, J., who dissent in\nan opinion by SMITH, J.\nSMITH, JUSTICE (DISSENTING).\n\n115\n\n\x0c[15]\nI would affirm the dismissal of the complaint by the\nmotion court.\n[16]\nPlaintiff seeks to rescind his contract to purchase\ndefendant Ackley\'s residential property and recover his down payment.\nPlaintiff alleges that Ackley and her real estate broker, defendant Ellis\nRealty, made material misrepresentations of the property in that they\nfailed to disclose that Ackley believed that the house was haunted by\npoltergeists. Moreover, Ackley shared this belief with her community and\nthe general public through articles published in Reader\'s Digest (1977)\nand the local newspaper (1982). In November 1989, approximately two\nmonths after the parties entered into the contract of sale but subsequent\nto the scheduled October 2, 1989 closing, the house was included in a\nfive-house walking tour and again described in the local newspaper as\nbeing haunted.\n[17]\nPrior to closing, plaintiff learned of this reputation and\nunsuccessfully sought to rescind the $650,000 contract of sale and obtain\nreturn of his $32,500 down payment without resort to litigation. The\nplaintiff then commenced this action for that relief and alleged that he\nwould not have entered into the contract had he been so advised and that\nas a result of the alleged poltergeist activity, the market value and\nresaleability of the property was greatly diminished. Defendant Ackley\nhas counterclaimed for specific performance.\n[18]\n\xe2\x80\x9cIt is settled law in New York that the seller of real\nproperty is under no duty to speak when the parties deal at arm\'s length.\nThe mere silence of the seller, without some act or conduct which\ndeceived the purchaser, does not amount to a concealment that is\nactionable as a fraud (see Perin v. Mardine Realty Co., Inc., 5 A.D.2d 685,\n168 N.Y.S.2d 647, aff\'d., 6 N.Y.2d 920, 190 N.Y.S.2d 995, 161 N.E.2d\n210; Moser v. Spizzirro, 31 A.D.2d 537, 295 N.Y.S.2d 188, aff\'d., 25 N.Y.2d\n941, 305 N.Y.S.2d 153, 252 N.E.2d 632). The buyer has the duty to\nsatisfy himself as to the quality of his bargain pursuant to the doctrine of\ncaveat emptor, which in New York State still applies to real estate\ntransactions.\xe2\x80\x9d London v. Courduff, 141 A.D.2d 803, 804, 529 N.Y.S.2d 874,\napp. dism\'d., 73 N.Y.2d 809, 537 N.Y.S.2d 494, 534 N.E.2d 332 (1988).\n\n116\n\n\x0c[19]\nThe parties herein were represented by counsel and dealt\nat arm\'s length. This is evidenced by the contract of sale which, inter alia,\ncontained various riders and a specific provision that all prior\nunderstandings and agreements between the parties were merged into the\ncontract, that the contract completely expressed their full agreement and\nthat neither had relied upon any statement by anyone else not set forth in\nthe contract. There is no allegation that defendants, by some specific act,\nother than the failure to speak, deceived the plaintiff. Nevertheless, a\ncause of action may be sufficiently stated where there is a confidential or\nfiduciary relationship creating a duty to disclose and there was a failure to\ndisclose a material fact, calculated to induce a false belief. County of\nWestchester v. Welton Becket Assoc., 102 A.D.2d 34, 50-51, 478 N.Y.S.2d\n305, aff\'d., 66 N.Y.2d 642, 495 N.Y.S.2d 364, 485 N.E.2d 1029 (1985).\nHowever, plaintiff herein has not alleged and there is no basis for\nconcluding that a confidential or fiduciary relationship existed between\nthese parties to an arm\'s length transaction such as to give rise to a duty\nto disclose. In addition, there is no allegation that defendants thwarted\nplaintiff\'s efforts to fulfill his responsibilities fixed by the doctrine of\ncaveat emptor. See London v. Courduff, supra, 141 A.D.2d at 804, 529\nN.Y.S.2d 874.\n[20]\nFinally, if the doctrine of caveat emptor is to be discarded, it\nshould be for a reason more substantive than a poltergeist. The existence\nof a poltergeist is no more binding upon the defendants than it is upon\nthis court.\n[21]\nBased upon the foregoing, the motion court properly\ndismissed the complaint.\n3.4.1. Discussion of Reed v. King and Stambovsky v. Ackley\nWhat is the traditional common law rule governing the disclosure of\ninformation in connection with real estate sales?\nHow have the California courts sought to protect buyers?\nCompare the Stambovsky court\xe2\x80\x99s statement of New York law. Can you\nspecify precisely under what circumstances New York sellers of real estate\nhave a duty to disclose information to prospective buyers?\n\n117\n\n\x0cIs there any reason to believe that the rules announced in Reed and\nStambovsky might increase the costs associated with real estate transactions?\nFor an amusing take on Reed v. King, view THE SIMPSONS, episode\n#909, \xe2\x80\x9cReality Bites.\xe2\x80\x9d\n3.4.2. Kronman\xe2\x80\x99s Theory of Deliberately Acquired Information\nBefore we examine several more real estate cases, it will be helpful to\nthink more systematically about how disclosure obligations are likely to affect\nparties\xe2\x80\x99 incentives to obtain and use information. One of the most frequently\ncited approaches to this problem is Professor Anthony Kronman\xe2\x80\x99s theory\ndistinguishing deliberately and casually acquired information.\nThe centerpiece of Kronman\xe2\x80\x99s article is his discussion of a US\nSupreme Court decision concerning non-disclosure. In Laidlaw v. Organ, 15\nU.S. (2 Wheat.) 178 (1817), the Court confronted a case in which two parties\nhad been negotiating the purchase and sale of a large quantity of tobacco. On\nthe morning of the sale, news was publicly announced in a handbill that the\nWar of 1812 had ended, thus reopening the foreign tobacco market and\nincreasing by 30 to 50 percent the price of US tobacco. Organ, the buyer,\nsomehow learned this news before he went to close the deal, but Girault, the\nseller, was unaware of the change in market conditions. Girault even asked\nOrgan whether he had heard any news that might affect the price of tobacco.\nOrgan evidently declined to answer this question, and Girault decided to go\nahead with the contract anyhow. The Court ruled without much analysis or\nexplanation that Organ had no legal duty to inform Girault of such a change\nin \xe2\x80\x9cextrinsic circumstances\xe2\x80\x9d but also held that whether Organ had\naffirmatively misrepresented any facts was a jury question. The following\nexcerpt describes Kronman\xe2\x80\x99s analysis in greater detail:\nOne effective way of insuring that an individual will\nbenefit from the possession of information (or anything else for\nthat matter) is to assign him a property right in the information\nitself \xe2\x80\x94 a right or entitlement to invoke the coercive machinery\nof the state in order to exclude others from its use and\nenjoyment. The benefits of possession become secure only when\nthe state transforms the possessor of information into an owner\nby investing him with a legally enforceable property right of some\nsort or other. The assignment of property rights in information is\na familiar feature of our legal system. The legal protection\n\n118\n\n\x0caccorded patented inventions and certain trade secrets rights are\ntwo obvious examples.\nOne (seldom noticed) way in which the legal system can\nestablish property rights in information is by permitting an\ninformed party to enter \xe2\x80\x94 and enforce \xe2\x80\x94 contracts which his\ninformation suggests are profitable, without disclosing the\ninformation to the other party. Imposing a duty to disclose upon\nthe knowledgeable party deprives him of a private advantage\nwhich the information would otherwise afford. A duty to disclose\nis tantamount to a requirement that the benefit of the\ninformation be publicly shared and is thus antithetical to the\nnotion of a property right which \xe2\x80\x94 whatever else it may entail \xe2\x80\x94\nalways requires the legal protection of private appropriation.\nOf course, different sorts of property rights may be better\nsuited for protecting possessory interests in different sorts of\ninformation. It is unlikely, for example, that information of the\nkind involved in Laidlaw v. Organ could be effectively protected by\na patent system. The only feasible way of assigning property\nrights in short-lived market information is to permit those with\nsuch information to contract freely without disclosing what they\nknow.\nIt is unclear, from the report of the case, whether the\nbuyer in Laidlaw casually acquired his information or made a\ndeliberate investment in seeking it out (for example, by cultivating\na network of valuable commercial \xe2\x80\x9cfriendships\xe2\x80\x9d). If we assume\nthe buyer casually acquired his knowledge of the treaty, requiring\nhim to disclose the information to his seller (that is, denying him\na property right in the information) will have no significant effect\non his future behavior. Since one who casually acquires\ninformation makes no investment in its acquisition, subjecting\nhim to a duty to disclose is not likely to reduce the amount of\nsocially useful information which he actually generates. Of\ncourse, if the buyer in Laidlaw acquired his knowledge of the\ntreaty as the result of a deliberate and costly search, a disclosure\nrequirement will deprive him of any private benefit which he\nmight otherwise realize from possession of the information and\nshould discourage him from making similar investments in the\nfuture.\n\n119\n\n\x0cIn addition, since it would enable the seller to appropriate\nthe buyer\xe2\x80\x99s information without cost and would eliminate the\ndanger of his being lured unwittingly into a losing contract by one\npossessing superior knowledge, a disclosure requirement will also\nreduce the seller\xe2\x80\x99s incentive to search. Denying the buyer a\nproperty right in deliberately acquired information will therefore\ndiscourage both buyers and sellers from investing in the\ndevelopment of expertise and in the actual search for\ninformation. The assignment of such a right will not only protect\nthe investment of the party possessing the special knowledge, it\nwill also impose an opportunity cost on the other party and thus\ngive him an incentive to undertake a (cost-justified) search of his\nown.\nIf we assume that courts can easily discriminate between\nthose who have acquired information casually and those who\nhave acquired it deliberately, plausible economic considerations\nmight well justify imposing a duty to disclose on a case-by-case\nbasis (imposing it where the information has been casually\nacquired, refusing to impose it where the information is the fruit\nof a deliberate search). A party who has casually acquired\ninformation is, at the time of the transaction, likely to be a better\n(cheaper) mistake-preventer than the mistaken party with whom\nhe deals \xe2\x80\x94 regardless of the fact that both parties initially had\nequal access to the information in question. One who has\ndeliberately acquired information is also in a position to prevent\nthe other party\xe2\x80\x99s error. But in determining the cost to the\nknowledgeable party of preventing the mistake (by disclosure), we\nmust include whatever investment he has made in acquiring the\ninformation in the first place. This investment will represent a\nloss to him if the other party can avoid the contract on the\ngrounds that the party with the information owes him a duty of\ndisclosure.\nIf we take this cost into account, it is no longer clear that\nthe party with knowledge is the cheaper mistake-preventer when\nhis knowledge has been deliberately acquired. Indeed, the\nopposite conclusion seems more plausible. In this case, therefore,\na rule permitting nondisclosure (which has the effect of imposing\nthe risk of a mistake on the mistaken party) corresponds to the\narrangement the parties themselves would have been likely to\n\n120\n\n\x0cadopt if they had negotiated an explicit allocation of the risk at\nthe time they entered the contract. The parties to a contract are\nalways free to allocate this particular risk by including an\nappropriate disclaimer in the terms of their agreement. Where\nthey have failed to do so, however, the object of the law of\ncontracts should be (as it is elsewhere) to reduce transaction costs\nby providing a legal rule which approximates the arrangement the\nparties would have chosen for themselves if they had deliberately\naddressed the problem. This consideration, coupled with the\nreduction in the production of socially useful information which\nis likely to follow from subjecting him to a disclosure\nrequirement, suggests that allocative efficiency is best served by\npermitting one who possesses deliberately acquired information\nto enter and enforce favorable bargains without disclosing what\nhe knows.\nA rule which calls for case-by-case application of a\ndisclosure requirement is likely, however, to involve factual issues\nthat will be difficult (and expensive) to resolve. Laidlaw itself\nillustrates this point nicely. On the facts of the case, as we have\nthem, it is impossible to determine whether the buyer actually\nmade a deliberate investment in acquiring information regarding\nthe treaty. The cost of administering a disclosure requirement on\na case-by-case basis is likely to be substantial.\nAs an alternative, one might uniformly apply a blanket\nrule (of disclosure or nondisclosure) across each class of cases\ninvolving the same sort of information (for example, information\nabout market conditions or about defects in property held for\nsale). In determining the appropriate blanket rule for a particular\nclass of cases, it would first be necessary to decide whether the\nkind of information involved is (on the whole) more likely to be\ngenerated by chance or by deliberate searching. The greater the\nlikelihood that such information will be deliberately produced\nrather than casually discovered, the more plausible the\nassumption becomes that a blanket rule permitting nondisclosure\nwill have benefits that outweigh its costs.\nIn Laidlaw, for example, the information involved\nconcerned changing market conditions. The results in that case\nmay be justified (from the more general perspective just\ndescribed) on the grounds that information regarding the state of\n\n121\n\n\x0cthe market is typically (although not in every case) the product of\na deliberate search. The large number of individuals who are\nactually engaged in the production of such information lends\nsome empirical support to this proposition.\nAnthony Kronman, Mistake, Disclosure, Information, and the Law of\nContracts, 7 J. LEGAL STUD. (1978).\nWhat does Kronman\xe2\x80\x99s analysis imply about situations in which\nsomeone responds untruthfully to a question or takes other measures to\nconceal deliberately acquired information? In a footnote, Kronman appears\nto suggest that such a variation on the facts of Laidlaw would dictate an\nopposite result:\nIf Organ denied that he had heard any news of this sort\n[the treaty], he would have committed a fraud. It may even be, in\nlight of Laidlaw\xe2\x80\x99s direct question, that silence on Organ\xe2\x80\x99s part was\nfraudulent\xe2\x80\xa6. In my discussion of the case, \xe2\x80\xa6I have put aside\nany question of fraud on Organ\xe2\x80\x99s part.\nId. at note 27.\nYou should bear Kronman\xe2\x80\x99s approach in mind as you read the\nremaining cases on non-disclosure and concealment.\n3.5. Principal Case \xe2\x80\x93 Obde v. Schlemeyer\nObde v. Schlemeyer\n\nSupreme Court of Washington\n56 Wash. 2d 449, 353 P.2d 672\nFINLEY, JUDGE.\n[1]\nPlaintiffs, Mr. and Mrs. Fred Obde, brought this action to\nrecover damages for the alleged fraudulent concealment of termite\ninfestation in an apartment house purchased by them from the\ndefendants, Mr. and Mrs. Robert Schlemeyer. Plaintiffs assert that the\nbuilding was infested at the time of the purchase; that defendants were\nwell apprised of the termite condition, but fraudulently concealed it from\nthe plaintiffs.\n[2]\nAfter a trial on the merits, the trial court entered findings\nof fact and conclusions of law sustaining the plaintiffs\' claim, and\nawarded them a judgment for damages in the amount of $3,950. The\n\n122\n\n\x0cdefendants appealed. Their assignments of error may be\ncompartmentalized, roughly, into two categories: (1) those going to the\nquestion of liability, and (2) those relating to the amount of damages to\nbe awarded if liability is established.\n[3]\nFirst, as to the question of liability: The Schlemeyers\nconcede that, shortly after they purchased the property from a Mr. Ayars\non an installment contract in April 1954, they discovered substantial\ntermite infestation in the premises. The Schlemeyers contend, however,\nthat they immediately took steps to eradicate the termites, and that, at the\ntime of the sale to the Obdes in November 1954, they had no reason to\nbelieve that these steps had not completely remedied the situation. We\nare not convinced of the merit of this contention.\n[4]\nThe record reveals that when the Schlemeyers discovered\nthe termite condition they engaged the services of a Mr. Senske, a\nspecialist in pest control. He effected some measures to eradicate the\ntermites, and made some repairs in the apartment house. Thereafter,\nthere was no easily apparent or surface evidence of termite damage.\nHowever, portions of the findings of fact entered by the trial court read\nas follows:\nSenske had advised Schlemeyer that in order to obtain a\ncomplete job it would be necessary to drill the holes and pump\nthe fluid into all parts of the basement floors as well as the\nbasement walls. Part of the basement was used as a basement\napartment. Senske informed Schlemeyer that the floors should be\ntaken up in the apartment and the cement flooring under the\nwood floors should be treated in the same manner as the\nremainder of the basement. Schlemeyer did not care to go to the\nexpense of tearing up the floors to do this and therefore this\nportion of the basement was not treated.\nSenske also told Schlemeyer even though the job were\ndone completely, including treating the portion of the basement\nwhich was occupied by the apartment, to be sure of success, it\nwould be necessary to make inspections regularly for a period of\na year. Until these inspections were made for this period of time\nthe success of the process could not be determined. Considering\nthe job was not completed as mentioned, Senske would give\n\n123\n\n\x0cSchlemeyer no assurance of success and advised him that he\nwould make no guarantee under the circumstances.\n[5]\nNo error has been assigned to the above findings of fact.\nConsequently, they will be considered as the established facts of the case,\nLewis v. Scott, 1959, 154 Wash. Dec. 509, 341 P.2d 488. The pattern thus\nestablished is hardly compatible with the Schlemeyers\' claim that they had\nno reason to believe that their efforts to remedy the termite condition\nwere not completely successful.\n[6]\nThe Schlemeyers urge that, in any event, as sellers, they\nhad no duty to inform the Obdes of the termite condition. They\nemphasize that it is undisputed that the purchasers asked no questions\nrespecting the possibility of termites. They rely on a Massachusetts case\ninvolving a substantially similar factual situation, Swinton v. Whitinsville\nSavings Bank, 1942, 311 Mass. 677, 42 N.E.2d 808, 141 A.L.R. 965.\nApplying the traditional doctrine of caveat emptor\xe2\x80\x94namely, that, as\nbetween parties dealing at arms length (as vendor and purchaser), there is\nno duty to speak, in the absence of a request for information\xe2\x80\x94the\nMassachusetts court held that a vendor of real property has no duty to\ndisclose to a prospective purchaser the fact of a latent termite condition\nin the premises.\n[7]\nWithout doubt, the parties in the instant case were dealing\nat arms length. Nevertheless, and notwithstanding the reasoning of the\nMassachusetts court above noted, we are convinced that the defendants\nhad a duty to inform the plaintiffs of the termite condition. In Perkins v.\nMarsh, 1934, 179 Wash. 362, 37 P.2d 689, 690, a case involving parties\ndealing at arm\xe2\x80\x99s length as landlord and tenant, we held that,\nWhere there are concealed defects in demised premises,\ndangerous to the property, health, or life of the tenant, which\ndefects are known to the landlord when the lease is made, but\nunknown to the tenant, and which a careful examination on his\npart would not disclose, it is the landlord\'s duty to disclose them\nto the tenant before leasing, and his failure to do so amounts to a\nfraud.\n[8]\nWe deem this rule to be equally applicable to the vendorpurchaser relationship. See Keeton, Fraud-Concealment and Non-Disclosure,\n15 TEX. L. REV. 1, 14-16 (1936). In this article Professor Keeton also\n\n124\n\n\x0captly summarized the modern judicial trend away from a strict\napplication of caveat emptor by saying:\nIt is of course apparent that the content of the maxim\n\xe2\x80\x9ccaveat emptor,\xe2\x80\x9d used in its broader meaning of imposing risks\non both parties to a transaction, has been greatly limited since its\norigin. When Lord Cairns stated in Peek v. Gurney that there was\nno duty to disclose facts, however morally censurable their nondisclosure may be, he was stating the law as shaped by an\nindividualistic philosophy based upon freedom of contract. It was\nnot concerned with morals. In the present stage of the law, the\ndecisions show a drawing away from this idea, and there can be\nseen an attempt by many courts to reach a just result in so far as\npossible, but yet maintaining the degree of certainty which the\nlaw must have. The statement may often be found that if either\nparty to a contract of sale conceals or suppresses a material fact\nwhich he is in good faith bound to disclose then his silence is\nfraudulent.\nThe attitude of the courts toward non-disclosure is\nundergoing a change and contrary to Lord Cairns\' famous remark\nit would seem that the object of the law in these cases should be\nto impose on parties to the transaction a duty to speak whenever\njustice, equity, and fair dealing demand it.\n[9]\nA termite infestation of a frame building, such as that\ninvolved in the instant case, is manifestly a serious and dangerous\ncondition. One of the Schlemeyers\' own witnesses, Mr. Hoefer, who at\nthe time was a building inspector for the city of Spokane, testified that\n\xe2\x80\x9c\xe2\x80\xa6if termites are not checked in their damage, they can cause a complete\ncollapse of a building, \xe2\x80\xa6 they would simply eat up the wood.\xe2\x80\x9d Further,\nat the time of the sale of the premises, the condition was clearly latent\xe2\x80\x94\nnot readily observable upon reasonable inspection. As we have noted, all\nsuperficial or surface evidence of the condition had been removed by\nreason of the efforts of Senske, the pest control specialist. Under the\ncircumstances, we are satisfied that \xe2\x80\x9cjustice, equity, and fair dealing,\xe2\x80\x9d to\nuse Professor Keeton\'s language, demanded that the Schlemeyers speakthat they inform prospective purchasers, such as the Obdes, of the\ncondition, regardless of the latter\'s failure to ask any questions relative to\nthe possibility of termites.\n\n125\n\n\x0c[10]\nError has been assigned to the trial court\'s finding that\nMrs. Schlemeyer knew of the termite condition and participated with her\nhusband in the sale to the Obdes. However, this assignment of error has\nnot been argued in the appeal brief. Thus, it must be deemed to have\nbeen abandoned. Winslow v. Mell, 1956, 48 Wash.2d 581, 295 P.2d 319,\nand cases cited therein.\n[11]\nSchlemeyers\' final contentions, relating to the issue of\nliability, emphasize the Obdes\' conduct after they discovered the termite\ncondition. Under the purchase agreement with the Schlemeyers, the\nObdes paid $5,000 in cash, and gave their promissory note for $2,250 to\nthe Schlemeyers. In addition, they assumed the balance due on the\ninstallment contract, under which the Schlemeyers had previously\nacquired the property from Ayars. This amounted to $34,750. After they\ndiscovered the termites (some six weeks subsequent to taking possession\nof the premises in November 1954), the Obdes continued for a time to\nmake payments on the Ayars contract. They then called in Senske to\nexamine the condition\xe2\x80\x94not knowing that he had previously worked on\nthe premises at the instance of the Schlemeyers. From Senske the Obdes\nlearned for the first time that the Schlemeyers had known of the termite\ninfestation prior to the sale. Obdes then ceased performance of the Ayars\ncontract, and allowed the property to revert to Ayars under a forfeiture\nprovision in the installment contract.\n[12]\nThe Schlemeyers contend that by continuing to make\npayments on the Ayars contract after they discovered the termites the\nObdes waived any right to recovery for fraud. This argument might have\nsome merit if the Obdes were seeking to rescind the purchase contract.\nSalter v. Heiser, 1951, 39 Wash. 2d 826, 239 P.2d 327. However, this is not\nan action for rescission; it is a suit for damages, and thus is not barred by\nconduct constituting an affirmance of the contract. Salter v. Heiser, supra.\n[13]\nContrary to the Schlemeyers final argument relative to the\nquestion of liability, the Obdes\' ultimate default and forfeiture on the\nAyars contract does not constitute a bar to the present action. The rule\ngoverning this issue is well stated in 24 Am.Jur. 39, Fraud and Deceit, \xc2\xa7\n212, as follows:\n\n126\n\n\x0cSince the action of fraud or deceit in inducing the\nentering into a contract or procuring its execution is not based\nupon the contract, but is independent thereof, although it is\nregarded as an affirmance of the contract, it is a general rule that\na vendee is entitled to maintain an action against the vendor for\nfraud or deceit in the transaction even though he has not\ncomplied with all the duties imposed upon him by the contract.\nHis default is not a bar to an action by him for fraud or deceit\npracticed by the vendor in regard to some matter relative to the\ncontract.\nSee, also, Annotation, 74 A.L.R. 169; cf. Conaway v. Co-Operative\nHomebuilders, 1911, 65 Wash. 39, 117 P. 716.\n[14]\nFor the reasons hereinbefore set forth, we hold that the\ntrial court committed no error in determining that the respondents\n(Obdes) were entitled to recover damages against the appellants\n(Schlemeyers) upon the theory of fraudulent concealment. However,\nthere remains the question of the proper amount of damages to be\nawarded. The trial court found that,\n\xe2\x80\xa6because of the termite condition the value [of the\npremises] has been reduced to the extent of $3950.00 and the\nplaintiffs have been damaged to that extent, and in that amount.\n[15]\nAs hereinbefore noted, judgment was thereupon entered\nfor the respondents in that amount.\n[16]\nThe appellants concede that the measure of damages in a\ncase of this type is the difference between the actual value of the property\nand what the property would have been worth had the\nmisrepresentations been true. Salter v. Heiser, supra, and cases cited\ntherein. However, they urge that the only evidence introduced to show\nthe diminution in value of the premises on account of the termite\ncondition\xe2\x80\x94namely, the testimony of one Joseph P. Wieber\xe2\x80\x94was\nincompetent. Wieber qualified as an expert witness on the basis of\nsubstantial experience as a realtor and appraiser. He examined the\npremises in question, and estimated that the termite condition had\nreduced the value of the property by some thirty per cent. Applying this\nestimate to an assumption (as posed in a hypothetical question\npropounded by respondents\' counsel) that the property had been\n\n127\n\n\x0cpurchased twice during the year 1954 by persons who were unaware of\nthe termite condition for approximately $40,000, Wieber rendered an\nopinion that the actual value of the premises (taking into account the\ntermite condition) was about $25,000.\n[17]\nAppellants\' sole objection to Wieber\'s testimony is based\nupon a claim that the facts (two purchases in 1954 for approximately\n$40,000, by persons who were unaware of the termite condition)\nsupporting the hypothetical question were never supplied. We find no\nmerit in this claim. The record fully discloses the two purchases in\nquestion: namely, the Obdes\' purchase from the Schlemeyers in\nNovember 1954; and the Schlemeyers\' purchase from Ayars in April\n1954.\n[18]\nThe judgment awarding damages of $3,950 is well within\nthe limits of the testimony in the record relating to damages. The Obdes\nhave not cross-appealed. The judgment of the trial court should be\naffirmed in all respects. It is so ordered.\nWEAVER, C. J., AND ROSELLINI AND FOSTER, JJ., CONCUR. HILL,\nJ., CONCURS IN THE RESULT.\n3.5.1. Discussion of Obde v. Schlemeyer\nIn Obde, who has the comparative advantage in avoiding this mistake\nabout the existence of termites?\nWhat sort of investments would buyers need to make if they could\nnot rescind a contract in cases of concealment?\n3.6. Principal Case \xe2\x80\x93 L & N Grove, Inc. v. Chapman\nL&N Grove v. Chapman\nDistrict Court of Appeal of Florida\n291 So. 2d 217 (1974)\nBOARDMAN, JUDGE.\n[1]\nAppellants/defendants, Paul L. Curtis and his wife and L\n& N Grove, Inc. (hereinafter Curtis) seeks this timely review of an\nadverse final judgment of the trial judge in which Curtis was declared to\nbe constructive trustee of the real property in question for\nappellees/plaintiffs, Robert L. Chapman, Jr., et al. (hereinafter Chapman).\n\n128\n\n\x0c[2]\nThe second amended complaint was filed by Chapman on\nNovember 5, 1970, to rescind the contract and deed and to impose a\nconstructive trust on the property in favor of Chapman, alleging therein,\ninter alia, that Curtis was the real estate broker for Chapman and that he\nbreached the fiduciary relationship by failing to disclose certain material\nfacts, principally the impact of Walt Disney World on the value of the\nproperty involved here.\n[3]\nThe basic facts are not in serious dispute. During the\nsummer of 1966 Curtis, who was an active real estate broker with offices\nin Orlando, contacted Chapman concerning the purchase of a 10-acre\ntract of land located in Lake County and legally described as:\nThat part West of U.S. #27 of the South Half of the NE\n1/4 of the SE 1/4 of Section 35, Township 24 South Range 26\nEast, less the northerly 15 feet thereof, being 10 acres more or\nless.\nThe property is situated north of and contiguous to a 22-acre\ntract that Curtis had purchased previously. Both parcels of land are\nlocated on U.S. Highway 27 near what was designated as State Road\n#530, now U.S. Highway 192.\n[4]\nChapman is also a real estate broker with offices in St.\nPetersburg and was a member of the partnership that owned the subject\nproperty and spokesman for the partnership in this transaction.\n[5]\nAfter a period of negotiations between the parties\nconcerning the purchase of the real property, on or about August 1,\n1966, an agreement was reached and Chapman agreed, after submitting\nCurtis\' offer to the other members of the partnership, to sell the land\ninvolved to Curtis. The said agreement was confirmed by letter dated\nAugust 3, 1966, from Curtis to Dr. Pollard, a member of the partnership,\nwith copy of said letter being mailed to Chapman. In addition, the letter\nadvised that Curtis was acting \xe2\x80\x9c\xe2\x80\xa6as a Broker and a principal and would\nlook to (his) group for a commission compensation.\xe2\x80\x9d The contract for\nsale and purchase of the land was subsequently prepared and, in due\ncourse, executed by Chapman on August 23, 1966, and by Curtis on\nAugust 16, 1966. We call attention at this point to the fact that the buyer\ndesignated in the contract was Paul L. Curtis, or assigns.\n\n129\n\n\x0c[6]\nThe purchase price agreed upon was $47,500, which\nappears to have been one and one half times the then market value of the\nland for grove purposes. The contract provided that Chapman would\nmaintain the grove and be entitled to the fruit crop under the conditions\nset forth in \xe2\x80\x98SCHEDULE A\xe2\x80\x99 which was attached to the said contract.\n[7]\nIn August, 1966, Curtis had formed L & N Grove, Inc.,\nwith one other person named Odell Warren, each owning 50% of the\ncorporation. The corporation was organized for the purpose of acquiring\ntitle to the real property involved here and the 22-acre tract of land\nreferred to above. The corporation was dissolved on August 20, 1970.\nThe warranty deed, mortgage and note were recorded among the public\nrecords of Lake County on December 14, 1966. L & N Grove, Inc. was\nthe grantee named in the deed. The mortgage and note were signed by\nCurtis as president of the corporation.\n[8]\nThe complete terms and conditions of the sale are not\nnecessarily pertinent. We mention that the mortgage was payable\nannually, covering a period of seven years. The mortgage payments due\nin June of 1967, 1968, 1969, and 1970, were paid to Chapman or his\nassignee. The payment due in June of 1971 was refused by Chapman\'s\nassignee.\n[9]\nThis is the third appearance of this cause before this\ncourt. This appeal followed from entry of the final judgment.\n1\n\n[10]\nIt is, of course, necessary to prove the existence of a\nconstructive trust by clear and convincing evidence. Carberry v. Foley,\n1This\n\ncourt reversed the trial court\'s holding that a bond was required in\nconnection with the lis pendens because plaintiffs/appellees were claiming against\ntheir own deed stating that the claim was \xe2\x80\x98founded on a duly recorded\ninstrument.\xe2\x80\x99 244 So.2d 154. After trial, final judgment in favor of appellees was\nentered and appellants filed several post-trial motions, including a motion to\nvacate and set aside judgment for want of indispensible parties, which the trial\ncourt granted. This holding resulted in another interlocutory appeal wherein this\ncourt held that L & N Grove, Inc., was not dissolved until August 20, 1970, that\nthe cause did not abate, and that the trustees of the corporation were not\nindispensible parties and ordered the trial court to reinstate the final judgment and\nto hear and rule on the pending post-decretal motions. 265 So.2d 725. Thereafter,\nfinal judgment was entered and the post-decretal motions denied.\n\n130\n\n\x0cFla.App.3rd, 1968, 213 So.2d 635. The doctrine of constructive trust is\nwell established in Florida law and the courts of this state will impose the\nsame where \xe2\x80\xa6 through actual fraud, abuse of confidence reposed and\naccepted, to through other questionable means gains something for\nhimself which in equity and good conscience he should not be permitted\nto hold\xe2\x80\xa6.\xe2\x80\x99 Quinn v. Phipps, 93 Fla. 805, 113 So. 419, 422 (1927). We also\nare aware that it is not within the province of this court to substitute its\njudgment for that of the trier of the facts unless the record clearly reflects\nthat the findings and conclusions by the trial court are erroneous. Old\nEquity Life Insurance Co. v. Levenson, Fla.App.3rd, 1965, 177 So.2d 50; In re\nEstate of Hobein, Fla.App.1st, 1970, 238 So.2d 497; Griffith Services, Inc. v.\nWalter Kidde Constructors, Inc., Fla.App.1st, 1972, 262 So.2d 240. Against\nthis background of general and accepted principles, we turn then to the\nparticular situation presented in the case sub judice.\n[11]\nWe have carefully considered the records, briefs, the\nauthorities cited and discussed therein and arguments of respective\ncounsel and conclude, for reasons delineated hereinafter, that reversible\nerror has been demonstrated.\n[12]\nThe trial court made a finding of fact in the final\njudgment as follows:\nIt is beyond question that Paul Curtis had knowledge of\nthe impact which Walt Disney World would have on the value of\nthis property\xe2\x80\xa6\nThe trial court further found that Curtis failed to disclose that\nfact to Chapman. This is the finding of fact that has caused us great\nconcern. We submit that after many readings of the record this finding of\nfact is not supported by substantial competent evidence.\n[13]\nThe central and perhaps the sole question for our\ndecision is what inside information does the record disclose that Curtis\nhad that he did not disclose to Chapman and that he had a duty to\ndisclose to him. There is not a scintilla of evidence in the record that we\nhave been able to find that shows Curtis knew in 1966 what effect the\nDisney project would have on the value of the property. It is, of course,\nChapman\'s contention that Curtis knew said property was immediately\nadjacent to the proposed widening and reconstruction of U.S. Highway\n\n131\n\n\x0c27 and that a cloverleaf exchange was to be constructed on said highway\nwith its intersection with State Road #530.\n[14]\nIn 1966 it is extremely doubtful that anyone knew if Walt\nDisney World would ever be developed into a reality. It was only on the\ndrawing boards at that particular time. There can be no serious doubt\nthat the Walt Disney World project was announced sometime in the fall\nof 1965, many months prior to the sale of the property involved here.\nPerhaps it is not significant that Curtis testified that the Disney\nannouncement was the biggest announcement in the history of Florida\nreal estate and resounded around the world. We believe it highly plausible\nand reasonable to glean from the record that Chapman likewise had this\nknowledge, or by the exercise of reasonable diligence could have acquired\nit. We believe the announcement was one of general public knowledge.\nThe alleged information that Curtis is charged with having withheld was\nspeculative in nature and clearly available to the parties involved here.\n[15]\nIt was not until 1970 that construction of Walt Disney\nWorld had actually been commenced and the Central Florida real estate\nboom hit with full impact that this present action was filed by Chapman.\nIn the interim period of time the record shows that Chapman accepted\nthe terms of the mortgage and payments made thereon.\n[16]\nNotwithstanding the above-recited matters, the trial judge\nfound breach of duty even if the broker-employer relationship did not\nexist. In this connection, the trial court found that that relationship at\none time did exist between the parties. As Curtis concedes, this finding is\nnot assailable. We submit that the record definitely shows that at the time\nthe contract of sale was executed Chapman was advised of the fact that\nCurtis was acting as a principal in the transaction. The trial judge found,\nhowever:\nIrrespective of any technical brokerage relationship,\ndefendant Curtis, as a registered real estate broker, owed plaintiffs\nthe duty of acting honestly and fairly in his dealings with them.\n[17]\nIt is agreed that there is an abundance of case law\nsupporting this finding, as well as learned treatises, but, the question is, is\nthe finding supported by competent evidence. We cannot find wherein\nCurtis failed to act honestly and fairly with Chapman. Here the\n\n132\n\n\x0ctransaction from its conception to its consummation was negotiated\nbetween Curtis and Chapman. Both parties, as stated, are real estate\nbrokers and must be considered as being fully aware of the duties,\nresponsibilities and ethics of their time-honored profession.\n[18]\nLest it be overlooked, Chapman cannot be thought of as\na stranger to this area of the state. It would be naivet\xc3\xa9 to reach such a\nconclusion. The record shows that he has an interest in over 600 acres of\nland in the immediate vicinity of the subject property\xe2\x80\x94433 acres on the\nwest side of U.S. Highway 27, which lands had been in possession of\nChapman and relatives for approximately 20 years, about 180 acres of\nwhich have been used for citrus purposes and, additionally, had an\ninterest in approximately 178 acres immediately across the highway and\nwest of the 433 acres. The latter tract was purchased by the partnership,\nof which Chapman was a member, in 1962. Furthermore, Chapman is a\nreal estate broker and a housing consultant accredited by the U.S.\nDepartment of Housing and Urban Development.\n[19]\nThe remedy of rescisson requires that the reliance be\njustified. A representee who has expert knowledge of the general subject\nmatter, and is peculiarly fitted and qualified, by knowledge and\nexperience, to evaluate that which he sees and appreciate the obvious\nfalsity of the claimed representation does not have the right to rely on a\nrepresentation. Puget Sound National Bank v. McMahon, 53 Wash.2d 51, 330\nP.2d 559 (1958).\n[20]\nIn view of this fact, perhaps standing alone, it is difficult\nto reconcile the trial judge\'s finding that Curtis had all the alleged\ninformation and withheld it from Chapman, who is depicted as being\ncompletely ignorant and innocent of the land market in this area.\n[21]\nChapman asserts that he believed that Curtis purchased\nthe land for grove purposes. The testimony of the parties and the\ndocumentary evidence indicate to us that the land in issue was purchased\nfor speculative purposes and it is not unreasonable for us to conclude\nthat Chapman was aware of this fact. We point out again that the\ncontract documents provide that Chapman was to retain possession of\nthe fruit under the conditions provided in the contract.\n\n133\n\n\x0c[22]\nNow, it is true that during the negotiations for the\npurchase of this land Curtis had hoped that State Road #530 would be\nthe entrance to Walt Disney World and that he attempted to ascertain\nthis information. He had a dream and some five years later it became a\nreality. This case appears to be a classic example of the old cliche that\nhindsight is better than foresight. As Chapman testified on crossexamination:\n\xe2\x80\xa6 If I had fully realized the effect of Disney World on\nthat property, I would not have sold it. If I had had adequate\ninformation to make a judgment, we-I would not have been a\nparty to its sale.\n[23]\nChapman further testified that in 1968 he attempted to\nmake inquiries of the State Road Department, \xe2\x80\x9c\xe2\x80\xa6Smith, Reynolds &\nHill,\xe2\x80\x9d (sic) engineers, concerning a certain configuration taking place on\nthe highway and he got enough conflicting stories as to what was and\nwasn\'t planned to be at a loss to understand or even if anything was\ndefinite. It appears that Chapman was negotiating an option with\nHumble Oil Company for a lease on some other property Chapman\nowned and was attempting to find out if U.S. Highway 27 would be\nwidened and four-laned and the interchange constructed in the area. The\nproperty Chapman owned abutting U.S. Highway 27 is a relatively short\ndistance from the intersection of U.S. Highway 27 and State road #530.\n[24]\nThe case of Chisman v. Moylan, Fla. App. 2d, 1958, 105 So.\n2d 186, is cited in the final judgment and by both parties in their briefs.\nWe agree with that decision and the cases cited therein. We are impressed\nby the language in the court\'s opinion where it is held:\n\xe2\x80\xa6 Neither a judgment nor a decree, however, should be\nentered in favor of an employer or a principal who complains\nthat he has been injured by breach of duty by a broker where the\ncomplaint appears to be founded on conjecture, suspicion, or\nspeculation. (105 So. 2d 186, 189).\n[25]\nChapman\'s testimony amounts to just that, for he does\nnot testify or prove by other witnesses or documentary evidence that\nCurtis had specific inside information that State Road #530 would either\nbe four-laned or become the entrance to Walt Disney World. His\n\n134\n\n\x0ctestimony in this regard is based purely on conjecture, suspicion, or\nspeculation.\n[26]\nIn the light of our decision we do not think it necessary\nto discuss the remaining points raised by Curtis on appeal. We do\nmention that it is quite apparent from the record that cancellation and\nrescission, returning the parties to their original position, due to the\npassage of time, intervening probable equities, would make a just\nsettlement of the transaction a very difficult, if not an impossible task.\n[27]\nLastly, but importantly, the court truly expresses its\nappreciation to the trial judge and attorneys representing the parties\nlitigant for the exemplary manner in which this case was litigated in the\ntrial court. The briefs of counsel filed in support of their respective\ncontentions were superbly presented and oral argument to this court was\npresented most ably and was of invaluable assistance.\n[28]\nAccordingly, for the reasons above stated, the order\nappealed from is reversed and the trial court directed to enter judgment\nin favor of Curtis. Each party is required to bear his own cost and\nexpenses incurred in this litigation.\nReversed.\n3.6.1. Discussion of L&N Grove v. Chapman\nHow would you defend Curtis?\nWhat facts about the interaction between Curtis and Chapman make\nChapman\xe2\x80\x99s claim for rescission legally implausible?\n3.6.2. Hypo of Ivy Diamonds\nSuppose that an international diamond conglomerate uses satellite\nimaging to do a geological survey of some farmland that I own near my\nhome in Ivy, Virginia. The survey shows that there is a high likelihood (about\n90%) that diamonds (really big ones) lie under the farmland.\nWhat, if anything, should the diamond conglomerate have to disclose\nto me before they purchase the land?\nSuppose that the company also wishes to purchase similar farmland\nfrom my neighbor, an 85-year-old blind grandmother. Would you expect\ncourts to treat these two transactions in the same way?\n\n135\n\n\x0c3.6.3. Further Discussion of L&N Grove v. Chapman\nSuppose that Curtis tries subtly to conceal the purpose for which he\nis buying the land from Chapman (e.g., he talks about his interest in raising\noranges, or he buys under the name of \xe2\x80\x9cL&N Grove\xe2\x80\x9d). How would you\nexpect a court to react to this conduct?\nWhat if Chapman (and every other seller of property) asks the buyer:\n\xe2\x80\x9cDo you know anything about my property that could affect its value?\xe2\x80\x9d What\ncan the buyer say in response?\n4. The Statute of Frauds\nThe Statute of Frauds was originally enacted by Parliament in 1677\nunder the title \xe2\x80\x9cAn Act for Prevention of Frauds and Perjuries.\xe2\x80\x9d Section four\nprovided:\nAnd be it further enacted by the authority aforesaid, That\nfrom and after, the said four and twentieth day of June no action\nshall be brought (1) whereby to charge any executor or\nadministrator upon any special promise, to answer damages out\nof his own estate, (2) or whereby to charge the defendant upon\nany special promise to answer for the debt, default or\nmiscarriages of another person; (3) or to charge any person upon\nany agreement made upon consideration of marriage; (4) or upon\nany contract for sale of lands, tenements, or hereditaments, or\nany interest in or concerning them; (5) or upon any agreement\nthat is not to be performed within the space of one year from the\nmaking thereof; (6) unless the agreement upon which such action\nshall be brought, or some memorandum or note thereof, shall be\nin writing, and signed by the party to be charged therewith, or\nsome other person thereunto by him lawfully authorized.\nSection seventeen provided:\nAnd be it further enacted by the authority aforesaid, That\nfrom and after the said four and twentieth day of June no\ncontract for the sale of any goods, wares and merchandizes, for\nthe price of ten pounds sterling or upwards, shall be allowed to\nbe good, except the buyer shall accept part of the good so sold,\nand actually receive the same, or give something in earnest to\nbind the bargain, or in part payment, or that some note or\nmemorandum in writing of the said bargain be made and signed\n\n136\n\n\x0cby the parties to be charged by such contract, or their agents\nthereto lawfully authorized.\nThe legislatures of most U.S. states have enacted legislation that\nroughly duplicates the provisions of section four of the original Statute of\nFrauds. Similarly, U.C.C. \xc2\xa7 2-201 establishes a writing requirement for the\nsale of goods that parallels section seventeen. There has been some scholarly\ndebate about the precise historical circumstances that gave rise to the original\nstatute. However, most contemporary commentary condemns the Statute\xe2\x80\x99s\nwriting requirement as a trap for the unwary. Critics argue that this rule gives\nparties a technical defense to oral promises that they have come to regret. A\nsmaller group of defenders argue that the Statute sensibly encourages parties\nto make some written memorandum of their deal. On this view, the writing\nrequirement provides far more reliable evidence of the contract and prevents\nunscrupulous parties from using perjured testimony to obtain fraudulent\nenforcement of an invented oral promise.\nFor our present purposes, we will focus on the version of the Statute\nembodied in the contemporary Uniform Commercial Code. Please read UCC\n\xc2\xa7 2-201. Formal Requirements; Statute of Frauds and the related Official\nComment 1.\n4.1. Principal Case \xe2\x80\x93 Monetti, S.P.A. v. Anchor Hocking Corp.\nAs you read the following case, ask yourself whether Judge Posner\ncould have decided the case on narrower grounds. Consider also whether you\nagree with his resolution of the many fascinating legal questions that his\nopinion addresses.\nMonetti, S.P.A. v. Anchor Hocking Corporation\nUnited States Court of Appeals, Seventh Circuit\n931 F.2d 1178 (1991)\nPOSNER, CIRCUIT JUDGE.\n[1]\nThis is a diversity suit for breach of contract; the parties\nagree that Illinois law governs the substantive issues. The district judge\ndismissed the suit, on the defendant\'s motion for summary judgment, as\nbarred by the statute of frauds, and also refused to allow the plaintiffs to\namend their complaint to add a claim of promissory estoppel. The\nappeal, which challenges both rulings, presents difficult and important\n\n137\n\n\x0cquestions concerning both the general Illinois statute of frauds,\nIll.Rev.Stat. ch. 59, \xc2\xb6 1, and the statute of frauds in the Uniform\nCommercial Code, UCC \xc2\xa7 2-201, adopted by Illinois in Ill.Rev.Stat. ch.\n26, \xc2\xb6 2-201.\n[2]\nThe plaintiffs are Monetti, an Italian firm that makes\ndecorative plastic trays and related products for the food service industry,\nand a wholly owned subsidiary, Melform U.S.A., which Monetti set up in\n1981 to market its products in the U.S. In 1984, Monetti began\nnegotiations with a father-and-son team, the Schneiders, importers of\nfood service products, to grant the Schneiders the exclusive right to\ndistribute Monetti\'s products in the United States and in connection with\nthis grant to turn over to them Melform\'s tangible and intangible assets.\nWhile these negotiations were proceeding, the Schneiders sold their\nimporting firm to Anchor Hocking, the defendant, and their firm became\na division of Anchor Hocking, though\xe2\x80\x94at first\xe2\x80\x94the Schneiders\nremained in charge. In the fall of 1984, the younger Schneider, who was\nhandling the negotiations with Monetti for his father and himself, sent\nMonetti a telex requesting preparation of an agreement \xe2\x80\x9cformalizing our\n[i.e., Anchor Hocking\'s] exclusive for the United States.\xe2\x80\x9d In response,\nMonetti terminated all of Melform\'s distributors and informed all of\nMelform\'s customers that Anchor would become the exclusive U.S.\ndistributor of Monetti products on December 31, 1984.\n[3]\nOn December 18, the parties met, apparently for the\npurpose of making a final agreement. Monetti\xe2\x80\x94which incidentally was\nnot represented by counsel at the meeting\xe2\x80\x94submitted a draft the\nprincipal provisions of which were that Anchor Hocking would be the\nexclusive distributor of Monetti products in the U.S., the contract would\nlast for ten years, and during each of these years Anchor Hocking would\nmake specified minimum purchases of Monetti products, adding up to\n$27 million over the entire period. No one from Anchor Hocking signed\nthis or any other draft of the agreement. However, the record contains a\nmemo, apparently prepared for use at the December 18 meeting, entitled\n\xe2\x80\x9cTopics of Discussion With Monetti.\xe2\x80\x9d The memo\'s first heading is\n\xe2\x80\x9cExclusive Agreement-Attachment # 1\xe2\x80\x9d\xe2\x80\x94a reference to an attached\ndraft which is identical to the Monetti draft except for two additional,\nminor paragraphs added in handwriting. Under the heading appears the\n\n138\n\n\x0cnotation \xe2\x80\x9cAgree\xe2\x80\x9d beside each of the principal paragraphs of the\nagreement, with one exception: beside the first paragraph, the provision\nfor exclusivity, the notation is \xe2\x80\x9cWe want Canada\xe2\x80\x9d (i.e., exclusive\ndistribution rights in Canada as well as in the U.S.). On the bottom of the\nleft-hand side of the last page appears the legend \xe2\x80\x9cSS/mh\xe2\x80\x9d\xe2\x80\x94indicating\nthat the younger Schneider (Steve Schneider) had dictated the memo to a\nsecretary.\n[4]\nShortly after the December 18 meeting, Monetti\xe2\x80\x94which\nhad already, remember, terminated Melform\'s distributors and informed\nMelform\'s customers that Anchor Hocking would be the exclusive\ndistributor of Monetti products in the United States as of the last day of\n1984\xe2\x80\x94turned over to Anchor Hocking all of Melform\'s inventory,\nrecords, and other physical assets, together with Melform\'s trade secrets\nand know-how.\n[5]\nSeveral months later, in May 1985, Anchor Hocking\nabruptly fired the Schneiders. Concerned about the possible implications\nof this d\xc3\xa9marche for its relationship with Anchor Hocking, Monetti\nrequested a meeting between the parties, and it was held on May 19.\nReviewing the events up to and including that meeting, a memo dated\nJune 12, 1985, from Raymond Davis, marketing director of Anchor\nHocking\'s food services division, to the law department of Anchor\nHocking, states that \xe2\x80\x9cIn the middle to latter part of 1984 Irwin Schneider\nand his company were negotiating an agreement with [Monetti and\nMelform] to obtain exclusive distribution rights on Melform\'s plastic tray\nproduct line in the United States\xe2\x80\x9d; \xe2\x80\x9clater, this distribution agreement was\nexpanded to also include Canada, the Caribbean and Central and South\nAmerica\xe2\x80\x9d; there had been many meetings between the parties, including\nthe meeting of May 19 (at which Davis had been present); \xe2\x80\x9cExhibit A\n(attached) represents the summary agreement that was reached in the\nmeeting. You will notice that I have added some handwritten changes\nwhich I believe represents more clearly our current position regarding the\nagreement.... Now that we have had our \xe2\x80\x98New Management\xe2\x80\x99 [i.e., the\nmanagement team that had replaced the Schneiders] meeting with\nMonetti, both parties would like to have a written and signed agreement\nto guide this new relationship.\xe2\x80\x9d Exhibit A to the Davis memo is identical\nto Attachment # 1 to Steve Schneider\'s memo, except that it contains the\n\n139\n\n\x0chandwritten changes to which the Davis memo refers. Shortly after this\nmemo was written, the parties\' relationship began to deteriorate, and\neventually Monetti sued for breach of contract.\n[6]\nIllinois\' general statute of frauds forbids a suit upon an\nagreement that is not to be performed within a year \xe2\x80\x9cunless the promise\nor agreement upon which such action shall be brought, or some\nmemorandum or note thereof, shall be in writing, and signed by the party\nto be charged therewith, or some other person thereunto by him lawfully\nauthorized.\xe2\x80\x9d The statute of frauds in Article 2 of the Uniform\nCommercial Code makes a contract for the sale of goods worth at least\n$500 unenforceable \xe2\x80\x9cunless there is some writing sufficient to indicate\nthat a contract for sale has been made between the parties and signed by\nthe party against whom enforcement is sought or by his authorized agent\nor broker.\xe2\x80\x9d The differences between these formulations are subtle but\nimportant. The Illinois statute requires that the writing \xe2\x80\x9cexpress the\nsubstance of the contract with reasonable certainty.\xe2\x80\x9d Frazer v. Howe, 106\nIll. 564, 574 (1883); see also Holsz v. Stephen, 362 Ill. 527, 532, 200 N.E.\n601, 603 (1936); Mariani v. School Directors, 154 Ill.App.3d 404, 407, 107\nIll.Dec. 90, 92, 506 N.E.2d 981, 983 (1987). The UCC statute of frauds\ndoes not require that the writing contain the terms of the contract.\nIll.Code Comment 1 to UCC \xc2\xa7 2-201. In fact it requires no more than\nwritten corroboration of the alleged oral contract. Even if there is no\nsuch signed document, the contract may still be valid \xe2\x80\x9cwith respect to\ngoods ... which have been received and accepted.\xe2\x80\x9d \xc2\xa7 2-201(3)(c). This\nprovision may appear to narrow the statute of frauds still further, but if\nanything it curtails a traditional exception, and one applicable to Illinois\'\ngeneral statute: the exception for partial performance, on which see, for\nexample, Payne v. Mill Race Inn, 152 Ill.App.3d 269, 277-78, 105 Ill.Dec.\n324, 330-331, 504 N.E.2d 193, 199-200 (1987); Grundy County National\nBank v. Westfall, 13 Ill.App.3d 839, 845, 301 N.E.2d 28, 32 (1973). The\nUniform Commercial Code does not treat partial delivery by the party\nseeking to enforce an oral contract as a partial performance of the entire\ncontract, allowing him to enforce the contract with respect to the\nundelivered goods.\n[7]\nLet us postpone the question of partial performance for a\nmoment and focus on whether there was a signed document of the sort\n\n140\n\n\x0cthat the statutes of frauds require. The judge, over Monetti\'s objection,\nrefused to admit oral evidence on this question. He was right to refuse.\nThe use of oral evidence to get round the requirement of a writing would\nbe bootstrapping, would sap the statute of frauds of most of its force,\nand is therefore forbidden. Western Metals Co. v. Hartman Co., 303 Ill. 479,\n485, 135 N.E. 744, 746 (1922); R.S. Bennett & Co. v. Economy Mechanical\nIndustries, Inc., 606 F.2d 182, 186 n. 4 (7th Cir.1979); Bazak International\nCorp. v. Mast Industries, Inc., 73 N.Y.2d 113, 117-18, 538 N.Y.S.2d 503,\n505, 535 N.E.2d 633, 635 (1989). The Hip Pocket, Inc. v. Levi Strauss & Co.,\n144 Ga.App. 792, 793, 242 S.E.2d 305, 306 (1978), is contra, but does not\ndiscuss the question and is, we think, wrong; while Impossible Electronic\nTechniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d 1026, 1034 (5th\nCir.1982), on which Monetti also relies, is distinguishable from our case\nbecause there the writing was first held to satisfy the statute of frauds and\nonly then was oral evidence admitted to clear up a detail, albeit a vital\none\xe2\x80\x94the identity of one of the parties!\n[8]\nAlthough we have cited cases from different jurisdictions,\nthe question whether oral evidence is admissible to show that an\nambiguous document satisfies the requirements of the statute of frauds is\nultimately one of state law. So far as we have been able to discover, the\nquestion is uniformly assumed to be substantive rather than procedural\nfor purposes of determining, in accordance with the Erie doctrine,\nwhether state or federal law applies, though direct authority on the\nquestion is sparse. Lehman v. Dow, Jones & Co., 606 F. Supp. 1152, 1156\n(S.D.N.Y.1985); McInnis v. A.M.F., Inc., 765 F.2d 240, 245 (1st Cir. 1985)\n(dictum); 19 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper,\nFederal Practice and Procedure \xc2\xa7 4512, at pp. 194-95 (1982). We think the\nassumption is well founded, although the point is not crucial in this case\nbecause neither party questions the applicability of Illinois law. It is true\nthat a statute of frauds is procedural in form and that its main proximate\ngoal is evidentiary; it is largely based on distrust of the ability of juries to\ndetermine the truth of testimony that there was or was not a contract. 2\nE. Allan Farnsworth, Farnsworth on Contracts \xc2\xa7 6.1, at p. 85 (1990). But it is\nusually and we think correctly regarded as a part of contract law, not of\ngeneral procedural law. Cf. Harbor Ins. Co. v. Continental Bank Corp., 922\nF.2d 357, 364 (7th Cir.1990). It is designed to make the contractual\n\n141\n\n\x0cprocess cheaper and more certain by encouraging the parties to contracts\nto memorialize their agreement. The end of the statute of frauds thus is\nsubstantive (albeit the means is procedural), which makes essential\naspects of the administration of the statute, such as the admissibility of\noral evidence to disambiguate an ambiguous document that is contended\nto satisfy the statute of frauds, a matter of primary concern to the states\nrather than to the federal government. So Illinois law applies to the issue;\nand Western Metals indicates that Illinois courts would not allow oral\nevidence to be used to enable a vague document to satisfy the statute of\nfrauds.\n[9]\nBecause oral evidence was inadmissible on the question\nwhether the documents meet the requirements of the statutes of frauds,\nit was proper for the judge to resolve it on motion for summary\njudgment. The parties agree that, if this was proper, our review is plenary.\nThis does not follow, however, from the documentary character of the\nissue, Anderson v. City of Bessemer City, 470 U.S. 564, 105 S.Ct. 1504, 84\nL.Ed.2d 518 (1985), as the parties may believe. But in view of the parties\'\nagreement concerning the proper scope of our review, we need not\nresolve the matter, beyond noting that there is authority, illustrated by the\nBazak case, for regarding the issue as one of law, not fact\xe2\x80\x94and if it is an\nissue of law, then our review is indeed plenary.\n[10]\nWe have two documents (really, two pairs of documents)\nto consider. The first is Steve Schneider\'s \xe2\x80\x9cTopics for Discussion\xe2\x80\x9d memo\nwith its \xe2\x80\x9cAttachment ## 1.\xe2\x80\x9d Since \xe2\x80\x9csigned\xe2\x80\x9d in statute-of-frauds land is a\nterm of art, meaning executed or adopted by the defendant, Weston v.\nMyers, 33 Ill. 424, 433 (1864); UCC \xc2\xa7 1-201(39) and Ill.Code Comment\nthereto; 2 Farnsworth on Contracts, supra, \xc2\xa7 6.8, at p. 144, Schneider\'s typed\ninitials are sufficient. The larger objection is that the memo was written\nbefore the contract\xe2\x80\x94any contract\xe2\x80\x94was made. The memo indicates that\nSchneider (an authorized representative of the defendant) agrees to the\nprincipal provisions in the draft agreement prepared by Monetti, but not\nto all the provisions; further negotiations are envisaged. There was no\ncontract when the memo was prepared and signed, though it is fair to\ninfer from the memo that a contract much like the draft attached to it\nwould be agreed upon\xe2\x80\x94if Monetti agreed to Anchor Hocking\'s demand\nfor Canada, as Monetti concedes (and the Davis memo states) it did.\n\n142\n\n\x0c[11]\nCan a memo that precedes the actual formation of the\ncontract ever constitute the writing required by the statute of frauds?\nUnder the Uniform Commercial Code, why not? Its statute of frauds\ndoes not require that any contracts \xe2\x80\x9cbe in writing.\xe2\x80\x9d All that is required is\na document that provides solid evidence of the existence of a contract;\nthe contract itself can be oral. Three cases should be distinguished. In the\nfirst, the precontractual writing is merely one party\'s offer. We have held,\ninterpreting Illinois\' version of the Uniform Commercial Code, that an\noffer won\'t do. R.S. Bennett & Co. v. Economy Mechanical Industries, Inc.,\nsupra, 606 F.2d at 186. Otherwise there would be an acute danger that a\nparty whose offer had been rejected would nevertheless try to use it as\nthe basis for a suit. The second case is that of notes made in preparation\nfor a negotiating session, and this is another plausible case for holding\nthe statute unsatisfied, lest a breakdown of contract negotiations become\nthe launching pad for a suit on an alleged oral contract. Third is the\ncase\xe2\x80\x94arguably this case\xe2\x80\x94where the precontractual writing\xe2\x80\x94the\nSchneider memo and the attachment to it\xe2\x80\x94indicates the promisor\'s\n(Anchor Hocking\'s) acceptance of the promisee\'s (Monetti\'s) offer; the\ncase, in other words, where all the essential terms are stated in the writing\nand the only problem is that the writing was prepared before the contract\nbecame final. The only difficulty with holding that such a writing satisfies\nthe statute of frauds is the use of the perfect tense by the draftsmen of\nthe Uniform Commercial Code: the writing must be sufficient to\ndemonstrate that \xe2\x80\x9ca contract for sale has been made.... The \xe2\x80\x98futuristic\xe2\x80\x99\nnature of the writing disqualifies it.\xe2\x80\x9d Micromedia v. Automated Broadcast\nControls, 799 F.2d 230, 234 (5th Cir.1986) (emphasis in original); see also\nAmerican Web Press, Inc. v. Harris Corp., 596 F. Supp. 1089, 1093\n(D.Colo.1983). Yet under a general statute of frauds, \xe2\x80\x9cit is well settled\nthat a memorandum satisfying the Statute may be made before the\ncontract is concluded.\xe2\x80\x9d Farrow v. Cahill, 663 F.2d 201, 209 (D.C.Cir.1980)\n(footnote omitted). And while merely because the UCC\'s draftsmen\nrelaxed one requirement of the statute of frauds-that there be a writing\ncontaining all the essential terms of the contract\xe2\x80\x94doesn\'t exclude the\npossibility that they wanted to stiffen another, by excluding writings\nmade before the contract itself was made, the choice of tenses is weak\nevidence. No doubt they had in mind, as the typical case to be governed\nby section 2-201, a deal made over the phone and evidenced by a\n\n143\n\n\x0cconfirmation slip. They may not have foreseen a case like the present, or\nprovided for it. The distinction between what is assumed and what is\nprescribed is critical in interpretation generally.\n[12]\nIn both of the decisions that we cited for the narrow\ninterpretation, the judges\' concern was with our first two classes of case;\nand judicial language, like other language, should be read in context.\nMicromedia involved an offer; in American Web, negotiations were\ncontinuing. We agree with Professor Farnsworth that in appropriate\ncircumstances a memorandum made before the contract is formed can\nsatisfy the statute of frauds, 2 Farnsworth on Contracts, supra, \xc2\xa7 6.7, at p. 132\nand n. 16, including the UCC statute of frauds. This case illustrates why a\nrule of strict temporal priority is unnecessary to secure the purposes of\nthe statute of frauds. Farnsworth goes further. He would allow a written\noffer to satisfy the statute, provided of course that there is oral evidence it\nwas accepted. Id., n. 16. We needn\'t decide in this case how far we would\ngo with him, and therefore needn\'t reexamine Bennett.\n[13]\nNor need we decide whether the first memo (Schneider\'s)\ncan be linked with the second (Davis\'s) \xe2\x80\x94probably not, since they don\'t\nrefer to each other, Poulos v. Reda, 165 Ill.App.3d 793, 800, 117 Ill.Dec.\n465, 471, 520 N.E.2d 816, 822 (1987); Southmark Corp. v. Life Investors, Inc.,\n851 F.2d 763, 767 n. 5 (5th Cir.1988) \xe2\x80\x94to constitute a post-contract\nwriting and eliminate the issue just discussed. For, shortly after the\nSchneider memo was prepared, Monetti gave dramatic evidence of the\nexistence of a contract by turning over its entire distribution operation in\nthe United States to Anchor Hocking. (In fact it had started to do this\neven earlier.) Monetti was hardly likely to do that without a contract\xe2\x80\x94\nwithout in fact a contract requiring Anchor Hocking to purchase a\nminimum of $27 million worth of Monetti\'s products over the next ten\nyears, for that was a provision to which Schneider in the memo had\nindicated agreement, and it is the only form of compensation to Monetti\nfor abandoning its distribution business that the various drafts make\nreference to and apparently the only one the parties ever discussed.\n[14]\nThis partial performance took the contract out of the\ngeneral Illinois statute of frauds. Unilateral performance is pretty solid\nevidence that there really was a contract\xe2\x80\x94for why else would the party\nhave performed unilaterally? Almost the whole purpose of contracts is to\n\n144\n\n\x0cprotect the party who performs first from being taken advantage of by\nthe other party, so if a party performs first there is some basis for\ninferring that he had a contract. The inference of contract from partial\nperformance is especially powerful in a case such as this, since while the\nnonenforcement of an oral contract leaves the parties free to pursue their\nnoncontractual remedies, such as a suit for quantum meruit (a form of\nrestitution), Farash v. Sykes Datatronics, Inc., 59 N.Y.2d 500, 503, 465\nN.Y.S.2d 917, 918, 452 N.E.2d 1245, 1246 (1983); Robertus v. Candee, 205\nMont. 403, 407, 670 P.2d 540, 542 (1983); 2 Farnsworth on Contracts, supra,\n\xc2\xa7 6.11, at p. 171, once Monetti turned over its trade secrets and other\nintangible assets to Anchor Hocking it had no way of recovering these\nthings. (Of course, Monetti may just have been foolish.) The partialperformance exception to the statute of frauds is often explained (and its\nboundaries fixed accordingly) as necessary to protect the reliance of the\nperforming party, so that if he can be made whole by restitution the oral\ncontract will not be enforced. This is the Illinois rationale, Payne v. Mill\nRace Inn, supra, 152 Ill.App.3d at 277-78, 105 Ill.Dec. at 330-331, 504\nN.E.2d at 199-200, and it is not limited to Illinois. 2 Farnsworth on\nContracts, supra, \xc2\xa7 6.9. It supports enforcement of the oral contract in this\ncase.\n[15]\nThis discussion assumes, however, that the contract is\ngoverned by the general Illinois statute of frauds rather than, as the\ndistrict judge believed, by the UCC\'s statute of frauds (or in addition to\nit\xe2\x80\x94for both might apply, as we shall see), with its arguably narrower\nexception for partial performance. The UCC statute of frauds at issue in\nthis case appears in Article 2, the sale of goods article of the Code, and,\nnaturally therefore, is expressly limited to contracts for the sale of goods.\nThat is a type of transaction in which a partial performance exception to\na writing requirement would make no sense if the seller were seeking\npayment for more than the goods he had actually delivered. Suppose A\ndelivers 1,000 widgets to B, and later sues B for breach of an alleged oral\ncontract for 100,000 widgets and argues that the statute of frauds is not a\nbar because he performed his part of the contract in part. In such a case\npartial performance just is not indicative of the existence of an oral\ncontract for any quantity greater than that already delivered, so it is no\nsurprise that the statute of frauds provides that an oral contract cannot\n\n145\n\n\x0cbe enforced in a quantity greater than that received and accepted by the\nbuyer. \xc2\xa7 2-201(3)(c); cf. \xc2\xa7 2-201(1). The present case is different. The\npartial performance here consisted not of a delivery of goods alleged to\nbe part of a larger order but the turning over of an entire business. That\nkind of partial performance is evidence of an oral contract and also\nshows that this is not the pure sale of goods to which the UCC\'s statute\nof frauds was intended to apply.\n[16]\nThis is not to say that the contract is outside the Uniform\nCommercial Code. It is a contract for the sale of goods plus a contract\nfor the sale of distribution rights and of the assets associated with those\nrights. Courts forced to classify a mixed contract of this sort ask,\nsomewhat unhelpfully perhaps, what the predominant purpose of the\ncontract is. Yorke v. B.F. Goodrich Co., 130 Ill.App.3d 220, 223, 85 Ill.Dec.\n606, 608, 474 N.E.2d 20, 22 (1985), and cases cited there. And, no doubt,\nthey would classify this contract as one for the sale of goods, therefore\ngoverned by the UCC, because the $27 million in sales contemplated by\nthe contract (if there was a contract, as we are assuming) swamped the\ngoodwill and other intangibles associated with Melform\'s very new, very\nsmall operation. Distributorship agreements, such as this one was in part,\nand even sales of businesses as going concerns, are frequently though not\nalways classified as UCC contracts under the predominant-purpose test.\nCompare De Filippo v. Ford Motor Co., 516 F.2d 1313, 1323 (3d Cir.1975);\nHudson v. Town & Country True Value Hardware, Inc., 666 S.W.2d 51, 53\n(Tenn.1984); Cavalier Mobile Homes, Inc. v. Liberty Homes, Inc., 53 Md.App.\n379, 394, 454 A.2d 367, 376 (1983); and WICO Corp. v. Willis Industries,\n567 F. Supp. 352, 355 (N.D.Ill.1983) (applying Illinois law), with Lorenz\nSupply Co. v. American Standard, Inc., 419 Mich. 610, 615, 358 N.W.2d 845,\n847 (1984).\n[17]\nWe may assume that the UCC applies to this contract; but\nmust all of the UCC apply? We have difficulty seeing why. It is not a\nmatter of holding the contract partly enforceable and partly\nunenforceable, a measure disapproved in Distribu-Dor, Inc. v. Karadanis, 11\nCal.App.3d 463, 468, 90 Cal.Rptr. 231, 234 (1970). Because of the\ncontract\'s mixed character, the UCC statute of frauds doesn\'t make a nice\nfit; it\'s designed for a pure sale of goods. The general statute works\nbetter. The fact that Article 2, which we have been loosely referring to as\n\n146\n\n\x0cthe sale of goods article, in fact applies not to the sale of goods as such\nbut rather to \xe2\x80\x9ctransactions in goods,\xe2\x80\x9d \xc2\xa7 2-102, while its statute of frauds\nis limited to \xe2\x80\x9ccontract[s] for the sale of goods,\xe2\x80\x9d \xc2\xa7 2-201(1), could be\nthought to imply that the statute of frauds does not cover every\ntransaction that is otherwise within the scope of Article 2. 2 Farnsworth on\nContracts, supra, \xc2\xa7 6.6, at p. 126 and n. 5. Perhaps the contract in this case\nis better described as a transaction in goods than as a contract for the sale\nof goods, since so much more than a mere sale of goods was\ncontemplated.\n[18]\nAnother possibility is to interpret the UCC statute of\nfrauds flexibly (an approach endorsed in Meyer v. Logue, 100 Ill.App.3d\n1039, 1044-46, 56 Ill.Dec. 707, 710-12, 427 N.E.2d 1253, 1256-58 (1981))\nin consideration of the special circumstances of the class of cases\nrepresented by this case, so that it does make a smooth fit. There is\nprecedent for doing this. When the partial performance is not the\ndelivery of some of the goods but part payment for all the goods, most\ncourts will enforce oral contracts under the UCC. Sedmak v. Charlie\'s\nChevrolet, Inc., 622 S.W.2d 694, 698-99 (Mo.App.1981); W.I. Snyder Corp. v.\nCaracciolo, 373 Pa. Super. 486, 494-95, 541 A.2d 775, 779 (1988); The Press,\nInc. v. Fins & Feathers Publishing Co., 361 N.W.2d 171, 174\n(Minn.App.1985). Such cases do not present the danger at which the\nlimitation on using partial performance to take the entire contract outside\nof the statute of frauds was aimed, that of the seller\'s unilaterally altering\nthe quantity ordered by the buyer, although they could be thought to\npresent the analogous danger of the seller\'s unilaterally altering the price\nthe buyer had agreed to pay\xe2\x80\x94by claiming that full payment was actually\npart payment. This case, at all events, presents no dangers of the sort the\nprovision in question was designed to eliminate. The semantic lever for\nthe interpretation we are proposing is that the UCC does not abolish the\npartial-performance exception. It merely limits the use of partial delivery\nas a ground for insisting on the full delivery allegedly required by the oral\ncontract. That is not what Monetti is trying to do.\n[19]\nWe need not pursue these interesting questions about the\napplicability and scope of the UCC statute of frauds any further in this\ncase, because our result would be unchanged no matter how they were\nanswered. For we have said nothing yet about the second writing in the\n\n147\n\n\x0ccase, the Davis memorandum of June 12. It was a writing on Anchor\nHocking\'s letterhead, so satisfied the writing and signature requirements\nof the UCC statute of frauds, and it was a writing sufficient to evidence\nthe existence of the contract upon which Anchor Hocking is being sued.\nIt is true that \xe2\x80\x9cExhibit A\xe2\x80\x9d does not contain all the terms of the contract;\nit makes no reference to the handing over of Melform\'s assets. But,\nespecially taken together with the Davis memo itself (and we are\npermitted to connect them provided that the connections are \xe2\x80\x9capparent\nfrom a comparison of the writings themselves,\xe2\x80\x9d Western Metals Co. v.\nHartman Co., supra, 303 Ill. at 483, 135 N.E. at 746, and they are, since the\nDavis memo refers explicitly to Exhibit A), Exhibit A is powerful\nevidence that there was a contract and that its terms were as Monetti\nrepresents. Remember that the UCC\'s statute of frauds does not require\nthat the contract be in writing, but only that there be a sufficient\nmemorandum to indicate that there really was a contract. The Davis\nmemorandum fits this requirement to a t. So even if the partialperformance doctrine is not available to Monetti, the UCC\'s statute of\nfrauds was satisfied. And since the general Illinois statute was satisfied as\nwell, we need not decide whether, since the contract in this case both was\n(we are assuming) within the UCC and could not be performed within\none year, it had to satisfy both statutes of frauds. 2 Farnsworth on Contracts,\nsupra, \xc2\xa7 6.2, at pp. 90-91.\n[20]\nOur conclusion that Monetti\'s suit for breach of contract\nis not barred by the statute(s) of frauds makes the district judge\'s second\nruling, refusing to allow Monetti to add a claim for promissory estoppel,\nacademic. The only reason Monetti wanted to add the claim was as a\nbackstop should it lose on the statute of frauds. In light of our decision\ntoday, he does not need a backstop.\n[21]\nCan promissory estoppel be used to avoid the limitations\nthat the statute of frauds places on the enforcement of oral promises? It\ncan be argued that a party to a contract for the sale of goods should not\nbe allowed to get around the statute of frauds merely by alleging\npromissory estoppel and using partial performance to establish the\nnecessary reliance in circumstances in which the requirements for the\nexception in the statute of frauds for partial performance would for one\nreason or another not be satisfied. It can further be argued that since\n\n148\n\n\x0cpromissory estoppel unlike equitable estoppel is a method of establishing\ncontractual liability, the statute of frauds should be no less applicable\nthan if the contract were supported by consideration or a seal rather than\nby promissory estoppel. A/S Apothekernes Laboratorium for\nSpecialpraeparater v. I.M.C. Chemical Group, Inc., 725 F.2d 1140, 1142 (7th\nCir.1984). On the other side it can be argued that promissory estoppel is\ndeliberately open-ended, and should therefore remain available to\novercome, in appropriate cases, possible rigidities in the statute of frauds.\nHoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965).\nConsistent with this counterargument, we held in R.S. Bennett & Co. v.\nEconomy Mechanical Industries, Inc., supra, 606 F.2d at 187-89, that Illinois\'\nversion of the UCC statute of frauds was inapplicable to promissory\nestoppel cases. Janke Construction Co. v. Vulcan Materials Co., 386 F. Supp.\n687, 697 (W.D.Wis.1974), aff\'d, 527 F.2d 772 (7th Cir.1976), reached a\nsimilar conclusion under Wisconsin\'s general statute of frauds, and in\naffirming we cut loose promissory estoppel from contract law, thus\nanswering the second argument in favor of applying the statute of frauds\nin promissory estoppel cases. Id. at 777. See also 2 Farnsworth on Contracts,\nsupra, \xc2\xa7 6.12, at p. 185 n. 26. We have been having second thoughts lately.\nGoldstick v. ICM Realty, 788 F.2d 456, 464-66 (7th Cir.1986); Evans v. Fluor\nDistribution Cos., 799 F.2d 364, 367-68 (7th Cir.1986). But as in Goldstick\nand Evans, so in this case, we need not and do not decide whether Bennett\nwas an accurate forecast of Illinois law. Not only is the issue moot in\nview of our decision that the statute of frauds does not bar Monetti from\nenforcing the contract, but Bennett was not a case in which the plaintiff\nwas using promissory estoppel to avoid the UCC\'s provision disallowing\na defense to the statute of frauds for partial performance consisting of\nthe delivery of some but not all of the quantity allegedly contracted for\norally. It is in such a case that the \xe2\x80\x9cend run\xe2\x80\x9d character of promissory\nestoppel appears most strongly; yet we need not and do not decide\nwhether the appearance is so strong as to preclude resort to promissory\nestoppel.\nReversed and Remanded.\n4.1.1. Applying the UCC or Common Law Statute of Frauds\nJudge Posner discusses at some length the issue of whether U.C.C. \xc2\xa7\n2-201 or the common law statute of frauds should apply to the transaction in\n\n149\n\n\x0cMonetti. These boundary wars between different legal regimes occur in other\ntransactional settings as well. As we have seen for some other issues like\nindefiniteness doctrine, U.S. jurisdictions sometimes adopt conflicting\nsolutions to these problems.\nConsider, for example, a contract to install a swimming pool. In\nKentucky, the UCC applies because a contract to install a swimming pool \xe2\x80\x9cis\nprimarily one [for the sale] of goods and the services are necessary to insure\nthat those goods are merchantable\xe2\x80\xa6.\xe2\x80\x9d Riffe v. Black, 548 S.W.2d 175, 177\n(Ky. App. 1977). In contrast, Connecticut treats the same transaction as a\ncontract for services governed by the common law. Gulosh v. Stylarama, Inc.,\n33 Conn. Supp. 108, 364 A.2d 1221 (1975). In some other jurisdictions,\ncourts treat the same deal as a mixed contract and apply different rules to\ndifferent parts of the transaction.\n4.1.2. Discussion of Monetti v. Anchor Hocking\nHow could Judge Posner have decided Monetti on far narrower\ngrounds?\nConsider whether you agree with Posner\xe2\x80\x99s resolution of the many\nother issues he addresses including:\n(1) Whether the trial judge should have refused to admit oral\nevidence about the memos.\n(2) Whether the UCC statute of frauds can be satisfied by a writing\nthat precedes the parties\xe2\x80\x99 agreement.\n(3) Whether the UCC\xe2\x80\x99s limits on enforcement for partial\nperformance apply to mixed contracts of this sort, including the clever\ntextual argument about the difference between \xe2\x80\x9ctransactions in goods\xe2\x80\x9d and\n\xe2\x80\x9ccontracts for the sale of goods,\xe2\x80\x9d and the distinction between partial delivery\nand partial payment.\n4.1.3. Hypo on the UCC Statute of Frauds\nOn September 1, Bob Byar phones Sally Starbuck, the owner of a\nlocal microbrewery, to order a special holiday edition of her Starbuck Ale. At\nthe conclusion of their conversation, Bob and Sally agree that Starbuck will\nproduce and deliver 100 cases at a unit price of $20 per case. On September\n7, Starbuck sends Byar the following note:\n\n150\n\n\x0cStarbuck Brewery, LLC\nJust a quick note to confirm your September 1st order for\n50 cases of our holiday edition of Starbuck Ale at a unit cost of\n$20 per case to be delivered no later than November 1st.\nOn September 14, Byar discovers that he can obtain a similar holiday\nproduct from another local brewery for only $15 per case. The next day, he\nresponds to Starbuck with the following note:\nSally,\nI thought that we had agreed on 75 cases, but never mind\nbecause I\xe2\x80\x99ve decided that I no longer want any at all this year.\nHope though that we can do business in the future.\nBest,\n/s/ Bob Byar\nNow imagine that Starbuck has consulted you about her legal\noptions. She wants to know whether she can bring a suit against Byar for\nbreach of contract. Do the writings in this case satisfy the applicable statute\nof frauds?\nConsider also the following variations on the quantities described\nabove:\nCase\nOriginal\nDifferent Quantity\nDenies Agreement\n\nOral\n100\n50\n100\n\nConfirm\n50\n50\n50\n\nRescind\n75\n75\n0\n\n4.1.4. Proposed Amendments to U.C.C. \xc2\xa7 2-201\nMany commentators have raised questions about whether the UCC\nstatute of frauds is compatible with modern business methods. The following\nexcerpt describes the commercial norms and practices in the global currency\nmarket:\nThere is an uneasy tension between the technology and\nbusiness practices of the foreign exchange market on the one\nhand, and the demands of contract enforceability rules in sales\nlaw on the other hand. The technology is telephonic. It expands\nthe ways in which market participants negotiate and execute\n\n151\n\n\x0ccurrency trades. Communications between [currency traders] are\nnot face-to-face meetings in which written draft contracts are\nexchanged and marked up by lawyers representing the parties\nduring endless rounds of coffee and take-out sandwiches. The\ntrading floors of [currency traders] are entirely different from the\nconventional lawyers\xe2\x80\x99 conference room; traders often\ncommunicate by telephone. In sum, the deals made in the\ncurrency bazaar are oral and are concluded rapidly and informally.\nThe statute of frauds must adapt to this telephonic\ntechnology\xe2\x80\xa6. Foreign exchange market participants might not\nreduce their agreements to writing for good reason. Because bidask spreads are thin for trading in liquid currencies, profits are\nmade through a high volume of trading. To maximize profits,\nmarket participants seek to conclude as many transactions as\ncheaply and quickly as possible. Outdated legal formalities like\nthe statute of frauds requirements lead to higher transaction costs\nand delay the completion of transactions. Not surprisingly, many\nmarket participants prefer tape recordings of conversations\namong traders instead of written agreements.\nThe law also must account for the culture of the currency\nbazaar. Trust among participants in the foreign exchange market\nis high. Perhaps this aspect of business culture also distinguishes\nthe trading floor from the conference room. The participants\nrepeatedly deal with one another. To engage in fraudulent or\ndeceptive practices is to invite ostracism: a trader\xe2\x80\x99s unctuous\nbehavior quickly becomes widely known and other traders decide\nit is risky and imprudent to deal with the rogue trader.\nRaj Bhala, A Pragmatic Strategy for the Scope of Sales Law, the Statute of\nFrauds, and the Global Currency Bazaar, 72 Denv. U. L. Rev. 1, 27\xe2\x80\x9328 (1994).\nProposed amendments to Article 2 of the UCC include the following\nrevisions to the statute of frauds:\n\xc2\xa7 2-201. Formal Requirements; Statute of Frauds\n(1) A contract for the sale of goods for the price of $5,000 or more\nis not enforceable by way of action or defense unless there is some record\nsufficient to indicate that a contract for sale has been made between the\nparties and signed by the party against which enforcement is sought or by\n\n152\n\n\x0cthe party\'s authorized agent or broker. A record is not insufficient because\nit omits or incorrectly states a term agreed upon but the contract is not\nenforceable under this subsection beyond the quantity of goods shown in\nthe record.\n(2) Between merchants if within a reasonable time a record in\nconfirmation of the contract and sufficient against the sender is received\nand the party receiving it has reason to know its contents, it satisfies the\nrequirements of subsection (1) against the recipient unless notice of\nobjection to its contents is given in a record within 10 days after it is\nreceived.\n(3) A contract that does not satisfy the requirements of subsection\n(1) but which is valid in other respects is enforceable:\n(a) if the goods are to be specially manufactured for the buyer and\nare not suitable for sale to others in the ordinary course of the seller\'s\nbusiness and the seller, before notice of repudiation is received and under\ncircumstances which reasonably indicate that the goods are for the buyer,\nhas made either a substantial beginning of their manufacture or\ncommitments for their procurement; or\n(b) if the party against whom enforcement is sought admits in his\npleading, or in the party\'s testimony or otherwise in court that a contract\nfor sale was made, but the contract is not enforceable under this provision\nbeyond the quantity of goods admitted; or\n(c) with respect to goods for which payment has been made and\naccepted or which have been received and accepted (Sec. 2-606).\n(4) A contract that is enforceable under this section is not\nunenforceable merely because it is not capable of being performed within\none year or any other period after its making.\nUniform Commercial Code \xc2\xa7 2-103(1)(m) defines a \xe2\x80\x9crecord\xe2\x80\x9d in the\nfollowing terms:\n\n153\n\n\x0c(m) "Record" means information that is inscribed on a tangible\nmedium or that is stored in an electronic or other medium and is\nretrievable in perceivable form.\n\n154\n\n\x0c'