Contract Doctrine,
Theory & Practice
Volume Two

J.H. Verkerke

CALI eLangdell Press 2012

Notices
This work by J.H. Verkerke is licensed and
published by CALI eLangdell Press under a Creative
Commons Attribution-Non Commercial-ShareAlike 3.0 Unported License.
CALI and CALI eLangdell Press reserve under copyright all rights not
expressly granted by this Creative Commons license. CALI and CALI
eLangdell Press do not assert copyright in US Government works or other
public domain material included herein. Permissions beyond the scope of
this license may be available through feedback@cali.org.
In brief, the terms of that license are that you may copy, distribute,
and display this work, or make derivative works, so long as


you give CALI eLangdell Press and the author credit;



you do not use this work for commercial purposes; and


you distribute any works derived from this one under the
same licensing terms as this.
Suggested attribution format for original work:
J.H. Verkerke, Contract Doctrine, Theory & Practice, Published by
CALI eLangdell Press. Available under a Creative Commons BY-NC-SA 3.0
License.
Permission for the Restatement of Contracts, copyright 2012 by The
American Law Institute. Reproduced with permission. All rights reserved.
CALI® and eLangdell® are United States federally registered
trademarks owned by the Center for Computer-Assisted Legal Instruction.
The cover art design is a copyrighted work of CALI, all rights reserved. The
CALI graphical logo is a trademark and may not be used without permission.
Should you create derivative works based on the text of this book or
other Creative Commons materials therein, you may not use this book’s
cover art and the aforementioned logos, or any derivative thereof, to imply
endorsement or otherwise without written permission from CALI.
This material does not contain nor is intended to be legal advice.
Users seeking legal advice should consult with a licensed attorney in their

iii

jurisdiction. The editors have endeavored to provide complete and accurate
information in this book. However, CALI does not warrant that the
information provided is complete and accurate. CALI disclaims all liability to
any person for any loss caused by errors or omissions in this collection of
information.

iv

About the Author
Before he received his law degree from Yale in 1990, J. H. (Rip)
Verkerke earned a master's of philosophy in economics. Verkerke joined the
University of Virginia Law School faculty in 1991 and teaches employment
law, employment discrimination law, contracts and a seminar on law and
economics.
While at Yale, Verkerke was articles editor and articles administrator
for the Yale Law Journal and held a number of fellowships, including the John
M. Olin Fellowship in Law, Economics, and Public Policy. After graduation,
he clerked for Judge Ralph K. Winter Jr. of the U.S. Court of Appeals for the
Second Circuit.
In June 1996 Verkerke received a three-year grant from the
University of Virginia's Academic Enhancement Program to establish the
Program for Employment and Labor Law Studies at the Law School. He
served as visiting professor of law at the University of Texas at Austin in the
fall of 1997. Verkerke also participated in an ABA project to draft a new
labor code for the transitional government of Afghanistan. In 2007, Verkerke
received an All-University Teaching Award from UVA, and in 2011, he was
selected as an inaugural member of the University Academy of Teaching.

v

About CALI eLangdell Press
The Center for Computer-Assisted Legal Instruction (CALI®) is: a
nonprofit organization with over 200 member US law schools, an innovative
force pushing legal education toward change for the better. There are
benefits to CALI membership for your school, firm, or organization.
eLangdell® is our electronic press with a mission to publish more open
books for legal education.
How do we define "open?"

Compatibility with devices like smartphones, tablets, and ereaders; as well as print.

The right for educators to remix the materials through more
lenient copyright policies.

for free.

The ability for educators and students to adopt the materials

Find available and upcoming eLangdell titles at elangdell.cali.org.
Show support for CALI by following us on Facebook and Twitter, and by
telling your friends and colleagues where you received your free book.

vi

Summary of Contents
IV. Defining the Obligation to Perform .......................................... 1
1. Excuse .................................................................................................................. 1
2. Mistake ............................................................................................................... 16
3. Substantial Performance .................................................................................. 44
4. Exclusive Dealing Contracts ........................................................................... 53

V. Regulating the Bargaining Process .......................................... 73
1. Unconscionability ............................................................................................. 73
2. Modification ...................................................................................................... 87
3. Rules Concerning Information ....................................................................... 98
4. The Statute of Frauds..................................................................................... 136

vii

Table of Contents
Notices ......................................................................................................... iii
About the Author ........................................................................................ v
About CALI eLangdell Press ....................................................................vi
Summary of Contents ...............................................................................vii
Table of Contents .....................................................................................viii
Preface .......................................................................................................... xi
Why study contract law? ........................................................................... xi
Why collaborative teaching materials? .................................................... xi
IV. Defining the Obligation to Perform ...................................... 1
1. Excuse ...................................................................................................... 1
1.1. Principal Case – Stees v. Leonard .......................................................... 2
1.1.1. Discussion of Stees v. Leonard ........................................................... 8
1.2. Principal Case – Taylor v. Caldwell ....................................................... 9
1.2.1. Paradine v. Jane ..................................................................................15
1.2.2. Analyzing Risk .................................................................................15
1.2.3. Discussion of Taylor v. Caldwell ......................................................16
2. Mistake ................................................................................................... 16
2.1. Principal Case – Sherwood v. Walker ..................................................19
2.1.1 The Story of Sherwood v. Walker ......................................................32
2.1.2. Lenawee County Bd. of Health v. Messerly ..........................................33
2.1.3. Discussion of Sherwood v. Walker ...................................................35
2.2. Principal Case – Anderson v. O’Meara ...............................................35
2.2.1. Discussion of Anderson v. O’Meara ................................................43
2.2.2. Hypo of the Sterile Calf .................................................................43
3. Substantial Performance ...................................................................... 44
3.1. Principal Case – Jacob & Youngs v. Kent ...........................................44
3.1.1. Perfect Tender and Substantial Performance .............................51

viii

3.1.2. Motion for Rehearing in Jacob & Youngs v. Kent ..........................52
3.1.3. Discussion of Jacob & Youngs v. Kent.............................................52
4. Exclusive Dealing Contracts ............................................................... 53
4.1. Principal Case – Wood v. Lucy, Lady Duff-Gordon ....................54
4.1.1. The Background of Wood v. Lucy, Lady Duff-Gordon ...................57
4.1.2. Reading Wood v. Lucy, Lady Duff-Gordon .......................................57
4.1.3. Discussion of Wood v. Lucy, Lady Duff-Gordon .............................58
4.1.4. Hypo on Real Estate Sales .............................................................58
4.2. Principal Case – Bloor v. Falstaff Brewing Corp. .........................59
4.2.1. “Best Efforts” as Joint Maximization ..........................................69
4.2.2. Discussion of Bloor v. Falstaff .........................................................70
4.2.3. Hypo on Joint Maximization .........................................................70
V. Regulating the Bargaining Process ...................................... 73
1. Unconscionability ................................................................................. 73
1.1. Principal Case – Williams v. Walker-Thomas Furniture Co. I............74
1.2. Principal Case – Williams v. Walker-Thomas Furniture Co. II ..........76
1.2.1. Procedural and Substantive Unconscionability ..........................83
1.2.2. Rent-to-Own Industry and Consumer Protection Laws ...........84
1.2.3. Uniform Commercial Code Unconscionability Provisions ......85
1.2.4. Discussion of Unconscionability ..................................................86
2. Modification .......................................................................................... 87
2.1. Principal Case – Alaska Packers’ Association v. Domenico ........88
2.1.1. The Story of Alaska Packers Association v. Domenico .....................96
2.1.2. Hypo on Modification ....................................................................97
2.1.3. Discussion of Alaska Packers Association v. Domenico ...................98
3. Rules Concerning Information ........................................................... 98
3.1. Fraud and Affirmative Misrepresentation ......................................98
3.2. Non-Disclosure and Concealment ............................................... 102
3.3. Principal Case – Reed v. King ........................................................... 103
3.4. Principal Case – Stambovsky v. Ackley ............................................ 110
3.4.1. Discussion of Reed v. King and Stambovsky v. Ackley ................. 117

ix

3.4.2. Kronman’s Theory of Deliberately Acquired Information ... 118
3.5. Principal Case – Obde v. Schlemeyer ................................................. 122
3.5.1. Discussion of Obde v. Schlemeyer .................................................. 128
3.6. Principal Case – L & N Grove, Inc. v. Chapman ........................... 128
3.6.1. Discussion of L&N Grove v. Chapman ...................................... 135
3.6.2. Hypo of Ivy Diamonds ............................................................... 135
3.6.3. Further Discussion of L&N Grove v. Chapman ........................ 136
4. The Statute of Frauds ........................................................................ 136
4.1. Principal Case – Monetti, S.P.A. v. Anchor Hocking Corp. ..... 137
4.1.1. Applying the UCC or Common Law Statute of Frauds ......... 149
4.1.2. Discussion of Monetti v. Anchor Hocking..................................... 150
4.1.3. Hypo on the UCC Statute of Frauds ........................................ 150
4.1.4. Proposed Amendments to U.C.C. § 2-201............................... 151

x

Preface
Our reading assignments this semester will include all of the elements
that make up a conventional casebook. You will read judicial opinions,
statutory provisions, academic essays, and hypotheticals. You will puzzle over
common law doctrines and carefully parse statutes. We will try to develop
theories that can predict and justify the patterns of judicial decisions we
observe.
Why study contract law?
The first semester of law school is mostly about learning to speak a
new legal language (but emphatically not “legalese”), to formulate and
evaluate legal arguments, to become comfortable with the distinctive style of
legal analysis. We could teach these skills using almost any legal topic. But we
begin the first-year curriculum with subjects that pervade the entire field of
law. Contract principles have a long history and they form a significant part
of the way that lawyers think about many legal problems. As you will
discover when you study insurance law, employment law, family law, and
dozens of other practice areas, your knowledge of contract doctrine and
theory will be invaluable.
Why collaborative teaching materials?
The ultimate goal of this project is to involve many professors in
producing a library of materials for teaching contracts (and other subjects).
For the moment, I will be solely responsible for collecting public domain
content and generating problems and explanatory essays. These embryonic
reading materials will grow and evolve as I use and expand them and as other
professors join in producing additional content. I gratefully acknowledge the
extraordinary work of my talented research assistants who have been
instrumental in helping me to put these materials together. Thanks to Sarah
Bryan, Mario Lorello, Elizabeth Young, Vishal Phalgoo, Valerie Barker and
Jim Sherwood.
I believe that it is equally important to involve students in the
ongoing process of refining and improving how we teach legal subjects. Our
collaboration site will provide a platform for student-generated content and
lively dialogue. With your enthusiastic engagement, we will finish the
semester with an excellent understanding of contracts and a useful collection

xi

of reference materials. I invite each of you to join us for what will be a
challenging, sometimes frustrating, but ultimately rewarding, intellectual
journey.

xii

IV. Defining the Obligation
to Perform
We have thus far focused on the rules that determine whether the
parties have made an enforceable contract. Our attention now shifts to the
question of performance. What conduct will be sufficient to fulfill each
party’s obligation under the contract? Are there circumstances that might
excuse performance?
1. Excuse
When we make or receive promises, we understand that there are at
least some circumstances that will extinguish the resulting obligation to
perform. In social settings, a “good excuse” exists whenever an unexpected
contingency prevents someone from fulfilling her promise. If Sharon has
agreed to give several friends a ride to a concert, mechanical trouble with her
car excuses her from a duty to drive, but not from a duty to tell her friends
promptly about her inability to drive. If, however, Sharon is seriously injured
in a car accident on the way to pick up her friends, no one would condemn
her for failing to call.
What is it about our understanding of Sharon’s promise that allows
us to make these nuanced judgments about responsibility? Notice first that
the words of the promise itself play no role in establishing that mechanical
trouble would excuse performance or in distinguishing between the
consequences of mechanical trouble and personal injury. Sharon made an
unqualified promise to drive her friends to the concert, and no one expects
her to recite a litany of circumstances in which she will be unable to perform.
Instead, we rely on a shared understanding about what events justify
nonperformance.
Commercial agreements ordinarily involve comparatively complex
obligations. Their express terms likewise cover a wider array of
contingencies. However, no contract can possibly provide for every event
that might occur between the execution of the contract and the time for
performance. In the two cases that follow, consider carefully the role of
contractual language in allocating the risks of unexpected contingencies. Try

to develop a theory that can explain and perhaps justify the results in these
cases.
1.1. Principal Case – Stees v. Leonard
Stees v. Leonard
Supreme Court of Minnesota
20 Minn. 494 (1874)
[1]
Appeal by defendants from an order of the district court,
Ramsey county, denying a new trial.
[2]
The action was brought to recover damages for a failure
of defendants to erect and complete a building on a lot of plaintiffs, on
Minnesota street, between Third and Fourth streets, in the city of St.
Paul, which, by an agreement under seal between them and plaintiffs, the
defendants had agreed to build, erect, and complete, according to plans
and specifications annexed to and made part of the agreement. The
defendants commenced the construction of the building, and had carried
it to the height of three stories, when it fell to the ground. The next year,
1869, they began again and carried it to the same height as before, when
it again fell to the ground, whereupon defendants refused to perform the
contract. They claimed that in their attempts to erect the building they
did the work in all respects according to the plans and specifications, and
that the failure to complete the building and its fall on the two occasions
was due to the fact that the soil upon which it was to be constructed was
composed of quicksand, and when water flowed into it, was incapable of
sustaining the building. The offers of proof by defendants, and the
character of the allegations in the answer, under which the court held
some of the offers inadmissible, are sufficiently indicated in the opinion.
YOUNG, J.
[3]
The general principle of law which underlies this case is
well established. If a man bind himself, by a positive, express contract, to
do an act in itself possible, he must perform his engagement, unless
prevented by the act of God, the law, or the other party to the contract.
No hardship, no unforeseen hindrance, no difficulty short of absolute
impossibility, will excuse him from doing what he has expressly agreed to
do. This doctrine may sometimes seem to bear heavily upon contractors;
but, in such cases, the hardship is attributable, not to the law, but to the

2

contractor himself, who has improvidently assumed an absolute, when he
might have undertaken only a qualified, liability. The law does no more
than enforce the contract as the parties themselves have made it. Many
cases illustrating the application of the doctrine to every variety of
contract are collected in the note to Cutter v. Powell, 2 Smith, Lead. Cas. 1.
[4]
The rule has been applied in several recent cases, closely
analogous to the present in their leading facts. In Adams v. Nichols, 19
Pick. 275, the defendant, Nichols, contracted to erect a dwelling-house
for plaintiff on plaintiff's land. The house was nearly completed, when it
was destroyed by accidental fire. It was held that the casualty did not
relieve the contractor from his obligation to perform the contract he had
deliberately entered into. The court clearly state and illustrate the rule, as
laid down in the note to Walton v. Waterhouse, 2 Wms. Saunders, 422, and
add: “In these and similar cases, which seem hard and oppressive, the law
does no more than enforce the exact contract entered into. If there be
any hardship, it arises from the indiscretion or want of foresight of the
suffering party. It is not the province of the law to relieve persons from
the improvidence of their own acts.”
[5]
In School District v. Dauchy, 25 Conn. 530, the defendant
contracted to build and complete a school-house. When nearly finished,
the building was struck by lightning, and consumed by the consequent
fire, and the defendant refused to rebuild, although plaintiffs offered to
allow him such further time as should be necessary. It was held that this
non-performance was not excused by the destruction of the building.
The court thus state the rule: “If a person promise absolutely, without
exception or qualification, that a certain thing shall be done by a given
time, or that a certain event shall take place, and the thing to be done, or
the event, is neither impossible nor unlawful at the time of the promise,
he is bound by his promise, unless the performance, before that time,
becomes unlawful.”
[6]
School Trustees v. Bennett, 3 Dutcher, 513, is almost
identical, in its material facts, with the present case. The contractors
agreed to build and complete a school-house, and find all materials
therefor, according to specifications annexed to the contract; the building
to be located on a lot owned by plaintiff, and designated in the contract.
When the building was nearly completed it was blown down by a sudden

3

and violent gale of wind. The contractors again began to erect the
building, when it fell, solely on account of the soil on which it stood
having become soft and miry, and unable to sustain the weight of the
building; although, when the foundations were laid, the soil was so hard
as to be penetrated with difficulty by a pickax, and its defects were latent.
The plaintiff had a verdict for the amount of the installments paid under
the contract as the work progressed. The verdict was sustained by the
supreme court, which held that the loss, although arising solely from a
latent defect in the soil, and not from a faulty construction of the
building, must fall on the contractor.
[7]
In the opinion of the court, the question is fully
examined, many cases are cited, and the rule is stated “that where a party
by his own contract creates a duty or charge upon himself he is bound to
make it good if he may, notwithstanding any accident by inevitable
necessity, because he might have provided against it by his contract…. If,
before the building is completed or accepted, it is destroyed by fire or
other casualty, the loss falls upon the builder; he must rebuild. The thing
may be done, and he has contracted to do it….No matter how harsh and
apparently unjust in its operation the rule may occasionally be, it cannot
be denied that it has its foundations in good sense and inflexible honesty.
He that agrees to do an act should do it, unless absolutely impossible. He
should provide against contingencies in his contract. Where one of two
innocent persons must sustain a loss, the law casts it upon him who has
agreed to sustain it; or, rather, the law leaves it where the agreement of
the parties has put it….Neither the destruction of the incomplete
building by a tornado, nor its falling by a latent softness of the soil, which
rendered the foundation insecure, necessarily prevented the performance
of the contract to build, erect, and complete this building for the
specified price. It can still be done, for aught that was opened to the jury
as a defense, and overruled by the court.”
[8]
In Dermott v. Jones, 2 Wall. 1, the foundation of the
building sank, owing to a latent defect in the soil, and the owner was
compelled to take down and rebuild a portion of the work. The
contractor having sued for his pay, it was held that the owner might
recoup the damages sustained by his deviation from the contract. The
court refer with approval to the cases cited, and say: “The principle

4

which controlled them rests upon a solid foundation of reason and
justice. It regards the sanctity of contracts. It requires a party to do what
he has agreed to do. If unexpected impediments lie in the way, and a loss
ensue, it leaves the loss where the contract places it. If the parties have
made no provision for a dispensation, the rule of law gives none. It does
not allow a contract fairly made to be annulled, and it does not permit to
be interpolated what the parties themselves have not stipulated.”
[9]
Nothing can be added to the clear and cogent arguments
we have quoted in vindication of the wisdom and justice of the rule
which must govern this case, unless it is in some way distinguishable
from the cases cited.
[10]
It is argued that the spot on which the building is to be
erected is not designated with precision in the contract, but is left to be
selected by the owner; that, under the contract, the right to designate the
particular spot being reserved to plaintiffs, they must select one that will
sustain the building described in the specifications, and if the spot they
select is not, in its natural state, suitable, they must make it so; that in this
respect the present case differs from School Trustees v. Bennett.
[11]
The contract does not, perhaps, designate the site of the
proposed building with absolute certainty; but in this particular it is aided
by the pleadings. The complaint states that defendants contracted to
erect the proposed building on “ a certain piece of land, of which the
plaintiffs then were, and now are, the owners in fee, fronting on
Minnesota street, between Third and Fourth streets, in the city of St.
Paul.” The answer expressly admits that the defendants entered into a
contract to erect the building, according to the plans, etc., “on that
certain piece of land in said complaint described,” and that they “entered
upon the performance of said contract, and proceeded with the erection
of said building,” etc. This is an express admission that the contract was
made with reference to the identical piece of land on which the
defendants afterwards attempted to perform it, and leaves no foundation
in fact for the defendants' argument.
[12]
It is no defense to the action that the specifications
directed that “footings” should be used as the foundation of the building,
and that the defendants, in the construction of these footings, as well as

5

in all other particulars, conformed to the specifications. The defendants
contracted to ““erect and complete the building.” Whatever was
necessary to be done in order to complete the building, they were bound
by the contract to do. If the building could not be completed without
other or stronger foundations than the footings specified, they were
bound to furnish such other foundations. If the building could not be
erected without draining the land, then they must drain the land,
“because they have agreed to do everything necessary to erect and
complete the building.” 3 Dutcher 520; and, see Dermott v. Jones, supra,
where the same point was made by the contractor, but ruled against him
by the court.
[13]
As the draining of the land was, in fact, necessary to the
erection and completion of the building, it was a thing to be done, under
the contract, by the defendants. The prior parol agreement that plaintiffs
should drain the land, related, therefore, to a matter embraced within the
terms of the written contract, and was not, as claimed by defendants'
counsel, collateral thereto. It was, accordingly, under the familiar rule,
inadmissible in evidence to vary the terms of the written contract, and
was properly excluded.
[14]
In their second and third offers the defendants proposed
to prove that after the making of the written contract, and when the
defendants, in the course of their excavation for the cellar and
foundation, first discovered that the soil, being porous and spongy,
would not sustain the building, unless drained, the plaintiffs proposed
and promised to keep the soil well drained during the construction of the
building; that, in consequence, the defendants did not drain the same;
that plaintiffs for a time kept the soil drained, but afterwards, and just
before the fall of the building, they neglected to drain, in consequence of
which neglect the soil became saturated with water, and the building fell;
and that a like promise was made by defendants at the beginning of the
erection of the second building, followed by like part performance and
neglect, and subsequent, and consequent, fall of the building.
[15]
The rule that a sealed contract cannot be varied by a
subsequent parol agreement, is of great antiquity, the maxim on which it
rests, unumquodque dissolvitur eodem modo, quo ligatur, being one of the most
ancient in our law. Broom, Leg. Max. 877; 5 Rep. 26 a, citing Bracton, lib.

6

2, fol. 28; and, see Bracton, fol. 101. In early days the rigor with which it
was enforced in the courts of law, led to the interference of chancery to
prevent injustice. Per Lord ELLESMERE, Earl of Oxford's Case, 2 Lead.
Cas. in Eq. 508*; 1 Spence, Eq. Jur. 636. In later times that rigor has
become much relaxed, although the English courts of law have refused
to permit sealed contracts to be varied by parol in cases of great hardship.
Littler v. Holland, 3 Term R. 590; Gwynne v. Davy, 1 Man. & Gr. 857; West
v. Blakeway, 2 Man. & Gr. 729; and, see Albert v. Grosvenor Investment Co. L.
R. 3 Q. B. 123.
[16]
But, in this country, it has become a well-settled
exception to the rule, that a sealed contract may be modified by a
subsequent parol agreement, if the latter has been executed, or has been
so acted on that the enforcing of the original contract would be
inequitable. Munroe v. Perkins, 9 Pick. 298; Mill-dam Foundry v. Hovey, 21
Pick. 417; Blasdell v. Souther, 6 Gray 149; Foster v. Dawber, 6 Exch. 854,
and note; Thurston v. Ludwig, 6 Ohio St. 1; Delacroix v. Bulkley, 13 Wend.
71; Allen v. Jaquish, 21 Wend. 628; Vicary v. Moore, 2 Watts, 451; Lawall v.
Rader, 24 Pa. St. 283; Carrier v. Dilworth, 59 Pa. St. 406; Richardson v.
Cooper, 25 Me. 450; Lawrence v. Dole, 11 Vt. 549; Patrick v. Adams, 29 Vt.
376; Seibert v. Leonard, 17 Minn. 436, (Gil. 410;) Very v. Levy, 13 How.
345; 1 Smith, Lead. Cas. (6th Ed.) 576.
[17]
Whether the evidence offered shows a valid consideration
for the plaintiff's promise, or whether it shows that such promise, though
without consideration, has been so acted on as to inure, by way of
estoppel or otherwise, to release defendants from their obligation to
drain, are questions that were fully discussed at the bar, but which we are
not called upon to determine; for the objection is well taken by counsel
for the plaintiffs, that the evidence embraced in the second and third
offers is inadmissible under the pleadings.
[18]
In their answer, the defendants allege an offer and
promise by plaintiffs (made after the defendants had commenced work
under the contract) to keep the land drained during the erection of the
building. No consideration is alleged for this promise, and, as nudum
pactum, it could of itself have no effect to vary the obligations imposed on
the defendants by the sealed contract. The answer proceeds to allege
“that the plaintiffs wholly and wrongfully failed and neglected to drain or

7

cause to be drained the said piece of land, or any part of the same.” It is
clear that the defendants would have no right to rely on this naked
promise, followed by no acts of plaintiffs in part performance. If the
defendants went on with the building, without taking the precaution to
drain the land, they proceeded at their own risk. The answer sets up no
facts on which an estoppel can be founded, and shows no defense to the
action.
[19]
But the defendants, at the trial, offered to prove, not only
that the plaintiffs offered to drain the land, but also “that the plaintiffs
did, for a time, keep the same drained,…but afterwards they neglected to
do so,” etc. Assuming that the facts offered to be proved would
constitute a defense, (and we are not prepared to say they would not,) no
such defense is pleaded in the answer.
[20]
The tendency of this proof was to establish a new
defense, not pleaded, and to contradict, rather than to sustain, the
allegations of the answer. For this reason it was inadmissible, even if the
facts offered to be proved would, if admissible constitute a defense to the
action. If the proof offered would have no such tendency, it was
immaterial, and for this reason also was rightly excluded. And as all the
evidence embraced in each offer was offered as a whole, and a part
thereof was inadmissible, the entire offers were properly rejected.
[21]
The objection that the evidence offered was
“incompetent, irrelevant, and immaterial,” was sufficiently specific. The
defendants' counsel must know the contents of the answer, and that
evidence inconsistent therewith is inadmissible, if objected to.
[22]
There was, therefore, no error in the exclusion of the
evidence offered, and the order appealed from is affirmed.
1.1.1. Discussion of Stees v. Leonard
The owners allegedly promised but failed to keep the soil drained.
Why did the Stees court refuse to entertain the argument that the owners’
promise had modified the original contract or that the builder had relied on
that promise to its detriment?
What exactly did the contract in this case require the builder to do?

8

Did the parties discuss or negotiate over the possibility that the soil
might be unable to support the building?
Try applying the comparative advantage criterion to this situation.
Can you think of arguments that would support imposing the risk of poor
soil conditions on the owner? On the builder?
1.2. Principal Case – Taylor v. Caldwell
Taylor v. Caldwell
King’s Bench
3 B. & S. 826, 112 Eng. Rep. 309 (1863)
BLACKBURN J.
[1]
In this case the plaintiffs and defendants had, on the 27th
May, 1861, entered into a contract by which the defendants agreed to let
the plaintiffs have the use of The Surrey Gardens and Music Hall on four
days then to come, viz., the 17th June, 15th July, 5th August and 19th
August, for the purpose of giving a series of four grand concerts, and day
and night fetes at the Gardens and Hall on those days respectively; and
the plaintiffs agreed to take the Gardens and Hall on those days, and pay
100£ for each day. The parties inaccurately call this a "letting," and the
money to be paid a "rent;" but the whole agreement is such as to shew
that the defendants were to retain the possession of the Hall and
Gardens so that there was to be no demise of them, and that the contract
was merely to give the plaintiffs the use of them on those days. Nothing
however, in our opinion, depends on this. The agreement then proceeds
to set out various stipulations between the parties as to what each was to
supply for these concerts and entertainments, and as to the manner in
which they should be carried on. The effect of the whole is to shew that
the existence of the Music Hall in the Surrey Gardens in a state fit for a
concert was essential for the fulfilment of the contract—such
entertainments as the parties contemplated in their agreement could not
be given without it. After the making of the agreement, and before the
first day on which a concert was to be given, the Hall was destroyed by
fire. This destruction, we must take it on the evidence, was without the
fault of either party, and was so complete that in consequence the
concerts could not be given as intended. And the question we have to
decide is whether, under these circumstances, the loss which the plaintiffs

9

have sustained is to fall upon the defendants. The parties when framing
their agreement evidently had not present to their minds the possibility of
such a disaster, and have made no express stipulation with reference to it,
so that the answer to the question must depend upon the general rules of
law applicable to such a contract.
[2]
There seems no doubt that where there is a positive
contract to do a thing, not in itself unlawful, the contractor must perform
it or pay damages for not doing it, although in consequence of
unforeseen accidents, the performance of his contract has become
unexpectedly burthensome or even impossible. The law is so laid down
in 1 Roll. Abr. 450, Condition (G), and in the note (2) to Walton v.
Waterhouse (2 Wms. Saund. 421 a. 6th ed.), and is recognised as the
general rule by all the Judges in the much discussed case of Hall v.
Wright (E. B. & E. 746). But this rule is only applicable when the
contract is positive and absolute, and not subject to any condition either
express or implied: and there are authorities which, as we think, establish
the principle that where, from the nature of the contract, it appears that
the parties must from the beginning have known that it could not be
fulfilled unless when the time for the fulfilment of the contract arrived
some particular specified thing continued to exist, so that, when entering
into the contract, they must have contemplated such continuing existence
as the foundation of what was to be done; there, in the absence of any
express or implied warranty that the thing shall exist, the contract is not
to be construed as a positive contract, but as subject to an implied
condition that the parties shall be excused in case, before breach,
performance becomes impossible from the perishing of the thing without
default of the contractor. There seems little doubt that this implication
tends to further the great object of making the legal construction such as
to fulfil the intention of those who entered into the contract. For in the
course of affairs men in making such contracts in general would, if it
were brought to their minds, say that there should be such a condition.
Accordingly, in the Civil law, such an exception is implied in every
obligation of the class which they call obligatio de certo corpore. The rule
is laid down in the Digest, lib. xLv., tit. l, de verborum obligationibus, 1.
33. "Si Stichus certo die dari promissus, ante diem moriatur: non tenetur
promissor." The principle is more fully developed in l. 23. "Si ex legati

10

causa, aut ex stipulatii hominem certum mihi debeas: non aliter post
mortem ejus tenearis mihi, quam si per te steterit, quominus vivo eo eum
mihi dares: quod ita fit, si aut interpellatus non dedisti, aut occidisti eum."
The examples are of contracts respecting a slave, which was the common
illustration of a certain subject used by the Roman lawyers, just as we are
apt to take a horse; and no doubt the propriety, one might almost say
necessity, of the implied condition is more obvious when the contract
relates to a living animal, whether man or brute, than when it relates to
some inanimate thing (such as in the present case a theatre) the existence
of which is not so obviously precarious as that of the live animal, but the
principle is adopted in the Civil law as applicable to every obligation of
which the subject is a certain thing. The general subject is treated of by
Pothier, who in his Traite des Obligations, partie 3, chap. 6, art. 3, § 668
states the result to be that the debtor corporis certi is freed from his
obligation when the thing has perished, neither by his act, nor his neglect,
and before he is in default, unless by some stipulation he has taken on
himself the risk of the particular misfortune which has occurred.
[3]
Although the Civil law is not of itself authority in an
English Court, it affords great assistance in investigating the principles on
which the law is grounded. And it seems to us that the common law
authorities establish that in such a contract the same condition of the
continued existence of the thing is implied by English law.
[4]
There is a class of contracts in which a person binds
himself to do something which requires to be performed by him in
person; and such promises, e.g. promises to marry, or promises to serve
for a certain time, are never in practice qualified by an express exception
of the death of the party; and therefore in such cases the contract is in
terms broken if the promisor dies before fulfilment. Yet it was very early
determined that, if the performance is personal, the executors are not
liable; Hyde v. The Dean of Windsor (Cro. Eliz. 552, 553). See 2 Wms.
Exors. 1560, 5th ed., where a very apt illustration is given. "Thus," says
the learned author, "if an author undertakes to compose a work, and dies
before completing it, his executors are discharged from this contract: for
the undertaking is merely personal in its nature, and, by the intervention
of the contractor's death, has become impossible to be performed." For
this he cites a dictum of Lord Lyndhurst in Marshall v. Broadhurst (1 Tyr.

11

348, 349), and a case mentioned by Patteson J. in Wentworth v. Cock (10
A. & E. 42, 45-46). In Hall v. Wright (E. B. & E. 746, 749), Crompton J.,
in his judgment, puts another case. "Where a contract depends upon
personal skill, and the act of God renders it impossible, as, for instance,
in the case of a painter employed to paint a picture who is struck blind, it
may be that the performance might be excused."
[5]
It seems that in those cases the only ground on which the
parties or their executors, can be excused from the consequences of the
breach of the contract is, that from the nature of the contract there is an
implied condition of the continued existence of the life of the contractor,
and, perhaps in the case of the painter of his eyesight. In the instances
just given, the person, the continued existence of whose life is necessary
to the fulfilment of the contract, is himself the contractor, but that does
not seem in itself to be necessary to the application of the principle; as is
illustrated by the following example. In the ordinary form of an
apprentice deed the apprentice binds himself in unqualified terms to
"serve until the full end and term of seven years to be fully complete and
ended," during which term it is covenanted that the apprentice his master
"faithfully shall serve," and the father of the apprentice in equally
unqualified terms binds himself for the performance by the apprentice of
all and every covenant on his part. (See the form, 2 Chitty on Pleading,
370, 7th ed. by Greening.) It is undeniable that if the apprentice dies
within the seven years, the covenant of the father that he shall perform
his covenant to serve for seven years is not fulfilled, yet surely it cannot
be that an action would lie against the father? Yet the only reason why it
would not is that he is excused because of the apprentice's death.
[6]
These are instances where the implied condition is of the
life of a human being, but there are others in which the same implication
is made as to the continued existence of a thing. For example, where a
contract of sale is made amounting to a bargain and sale, transferring
presently the property in specific chattels, which are to be delivered by
the vendor at a future day; there, if the chattels, without the fault of the
vendor, perish in the interval, the purchaser must pay the price and the
vendor is excused from performing his contract to deliver, which has
thus become impossible.

12

[7]
That this is the rule of the English law is established by
the case of Rugg v. Minett (11 East, 210), where the article that perished
before delivery was turpentine, and it was decided that the vendor was
bound to refund the price of all those lots in which the property had not
passed; but was entitled to retain without deduction the price of those
lots in which the property had passed, though they were not delivered,
and though in the conditions of sale, which are set out in the report,
there was no express qualification of the promise to deliver on payment.
It seems in that case rather to have been taken for granted than decided
that the destruction of the thing sold before delivery excused the vendor
from fulfilling his contract to deliver on payment.
[8]
This also is the rule in the Civil law, and it is worth
noticing that Pothier, in his celebrated Traite du Contrat de Vente (see
Part. 4, § 307, etc.; and Part. 2, ch. 1, sect. 1, art. 4, § 1), treats this as
merely an example of the more general rule that every obligation de certo
corpore is extinguished when the thing ceases to exist. See Blackburn on
the Contract of Sale, p. 173.
[9]
The same principle seems to be involved in the decision
of Sparrow v. Sowyate (W. Jones, 29), where, to an action of debt on an
obligation by bail, conditioned for the payment of the debt or the render
of the debtor, it was held a good plea that before any default in rendering
him the principal debtor died. It is true that was the case of a bond with a
condition, and a distinction is sometimes made in this respect between a
condition and a contract. But this observation does not apply to Williams
v. Lloyd (W. Jones, 179). In that case the count, which was in assumpsit,
alleged that the plaintiff had delivered a horse to the defendant, who
promised to redeliver it on request. Breach, that though requested to
redeliver the horse he refused. Plea, that the horse was sick and died, and
the plaintiff made the request after its death; and on demurrer it was held
a good plea, as the bailee was discharged from his promise by the death
of the horse without default or negligence on the part of the defendant.
"Let it be admitted," say the Court, "that he promised to deliver it on
request, if the horse die before, that is become impossible by the act of
God, so the party shall be discharged, as much as if an obligation were
made conditioned to deliver the horse on request, and he died before it."
And Jones, adds the report, cited 22 Ass. 41, in which it was held that a

13

ferryman who had promised to carry a horse safe across the ferry was
held chargeable for the drowning of the animal only because he had
overloaded the boat, and it was agreed, that notwithstanding the promise
no action would have lain had there been no neglect or default on his
part. It may, we think, be safely asserted to be now English law, that in all
contracts of loan of chattels or bailments if the performance of the
promise of the borrower or bailee to return the things lent or bailed,
becomes impossible because it has perished, this impossibility (if not
arising from the fault of the borrower or bailee from some risk which he
has taken upon himself) excuses the borrower or bailee from the
performance of his promise to redeliver the chattel. The great case of
Coggs v. Bernard (1 Smith's L. C. 171, 5th ed.; 2 L. Raym. 909) is now the
leading case on the law of bailments, and Lord Holt, in that case, referred
so much to the Civil law that it might perhaps be thought that this
principle was there derived direct from the civilians, and was not
generally applicable in English law except in the ease of bailments; but
the case of Williams v. Lloyd (W. Jones, 179), above cited, shews that the
same law had been already adopted by the English law as early as The
Book of Assizes. The principle seems to us to be that, in contracts in
which the performance depends on the continued existence of a given
person or thing, a condition is implied that the impossibility of
performance arising from the perishing of the person or thing shall
excuse the performance. In none of these cases is the promise in words
other than positive, nor is there any express stipulation that the
destruction of the person or thing shall excuse the performance; but that
excuse is by law implied, because from the nature of the contract it is
apparent that the parties contracted on the basis of the continued
existence of the particular person or chattel. In the present case, looking
at the whole contract, we find that the parties contracted on the basis of
the continued existence of the Music Hall at the time when the concerts
were to be given; that being essential to their performance.
[10]
We think, therefore, that the Music Hall having ceased to
exist, without fault of either party, both parties are excused, the plaintiffs
from taking the gardens and paying the money, the defendants from
performing their promise to give the use of the Hall and Gardens and

14

other things. Consequently the rule must be absolute to enter the verdict
for the defendants.
[11]

Rule absolute.

1.2.1. Paradine v. Jane
Suppose that a rich Englishman rents a castle from a neighboring
lord. Their brief lease agreement specifies a four-year term and a rental rate.
It also makes the lessee responsible for ordinary maintenance during the term
of the lease. Imagine now that the armies of Prince Rupert occupy the region
and force the lessee to leave the property. Would the lessee be excused from
paying rent during the occupation? Or is the lessor entitled to receive rental
payments until the end of the lease term?
Here is what one court had to say about these questions:
[I]f a house be destroyed by tempest, or by enemies, the
lessee is excused.… [W]hen the party by his own contract creates
a duty or charge upon himself, he is bound to make it good, if he
may, notwithstanding any accident by inevitable necessity,
because he might have provided against it by his contract. And
therefore if the lessee covenant to repair a house, though it be
burnt by lightning, or thrown down by enemies, yet he ought to
repair it. Dyer 33.a. 40 E.3. 6.h. … Another reason was added,
that as the lessee is to have the advantage of casual profits, so he
must run the hazard of casual losses, and not lay the whole of the
burthen of them upon his lessor; and Dyer 56.6 was cited for this
purpose, that though the land be surrounded, or gained by the
sea, or made barren by wildfire, yet the lessor shall have his whole
rent: and judgment was given for the plaintiff.
Paradine v. Jane, Aleyn 26, 82 Eng. Rep. 897 (K.B. 1647).
1.2.2. Analyzing Risk
Economists and businesspeople often analyze contingencies using
the framework of expected value. According to this approach, the magnitude
of a risk (R) equals the product of its impact (I) and the probability (P) that
the particular risk will materialize. The formula R = I · P summarizes this
relationship and suggests the analytic usefulness of identifying these distinct
components of risk.

15

Legal analysis of risk allocation often requires even more detailed
attention to each party’s relationship with a particular risk. Consider, for
example, the risk discussed in Taylor v. Caldwell that a shipment of turpentine
will be burned at the docks before it reaches the purchaser. It may be helpful
to think of three broad factors affecting the optimal allocation of this risk
between the parties. First, which one of the parties is best able to assess the
risk of fire? Who has better access to information or can gather relevant
information at lower cost? Second, which party is best positioned to avoid the
risk? Who can more cheaply take precautions to reduce the impact or
probability of harm? Finally, which party could most easily insure against the
risk?
1.2.3. Discussion of Taylor v. Caldwell
On what basis does the Taylor court decide to excuse Caldwell from
performing his contractual obligation to provide the Surrey Gardens and
Music Hall to Taylor? The court must decide how to allocate the risk that the
music hall would be burned down before the first concert. Does the contract
language play any role in the court’s decision? If not the contract language,
then what is the source of the court’s rule for allocating this risk?
Suppose that one of your talented classmates contracts with you to
provide high quality class notes covering each meeting of all of your firstsemester courses. Tragically, this classmate dies before she has an
opportunity to perform. How might the risk analysis framework outlined
above apply to this risk? Are you or your classmate in a better position to
assess, avoid or insure against the risk of her untimely demise? Is it helpful to
consider separately the impact and probability of her death?
Does a similar analysis shed any light on how to allocate the risk that
materialized in Taylor v. Caldwell? Can we draw any conclusions from this
analysis about how to choose the socially optimal legal rule to govern excuse?
2. Mistake
We have already encountered contract doctrines that excuse
performance when certain contingencies arise. In Stees v. Leonard, for
example, the court observes that performance would have been excused if it
were physically impossible to complete the building. Similarly, the court in
Taylor v. Caldwell finds that the destruction of property necessary for
performance excuses both parties’ duties under the contract. The doctrine of

16

commercial impracticability modestly extends these principles to excuse a
promisor when performance “has been made impracticable by the
occurrence of a contingency the non-occurrence of which was a basic
assumption on which the contract was made.” U.C.C. § 2-615. See also
Restatement (Second) of Contracts (1981) § 261 (“Discharge by Supervening
Impracticability”) [hereinafter Restatement (Second)]. Finally, the common
law also excuses performance when “a party’s principal purpose is
substantially frustrated without his fault by the occurrence of an event the
non-occurrence of which was a basic assumption on which the contract was
made.” Restatement (Second) § 265. Taken together, these doctrines
establish a set of default rules for allocating the risk of events that make
performance more difficult or impair the value of performance. However,
the parties remain free to opt out of this default risk allocation by including
appropriate language in their contract.
The rules governing unilateral and mutual mistake that we examine in
this section are another example of default risk allocations. In these cases,
one or both of the parties has made a contract based on a mistaken belief
about important facts. As with the excuse doctrines, the parties may opt out
with express language allocating the risk. Disputes most often arise, however,
when neither party has anticipated the particular mistake and provided for it
in the contract. As you read the cases that follow, try to determine what
policy concerns affect the structure of these default rules.
The Restatement (Second) describes the mistake doctrines in the
following terms:
§ 151 Mistake Defined
A mistake is a belief that is not in accord with the facts.
§ 152 When Mistake of Both Parties Makes a Contract
Voidable
(1) Where a mistake of both parties at the time a contract
was made as to a basic assumption on which the contract was made
has a material effect on the agreed exchange of performances, the

17

contract is voidable by the adversely affected party unless he bears
the risk of the mistake under the rule stated in § 154.
(2) In determining whether the mistake has a material effect
on the agreed exchange of performances, account is taken of any
relief by way of reformation, restitution, or otherwise.
§ 153 When Mistake of One Party Makes a Contract
Voidable
Where a mistake of one party at the time a contract was
made as to a basic assumption on which he made the contract has a
material effect on the agreed exchange of performances that is
adverse to him, the contract is voidable by him if he does not bear
the risk of the mistake under the rule stated in § 154, and
(a) the effect of the mistake is such that enforcement of the
contract would be unconscionable, or
(b) the other party had reason to know of the mistake or his
fault caused the mistake.
§ 154 When a Party Bears the Risk of a Mistake
A party bears the risk of a mistake when
(a) the risk is allocated to him by agreement of the parties,
or
(b) he is aware, at the time the contract is made, that he has
only limited knowledge with respect to the facts to which the
mistake relates but treats his limited knowledge as sufficient, or
(c) the risk is allocated to him by the court on the ground
that it is reasonable in the circumstances to do so.

18

2.1. Principal Case – Sherwood v. Walker

MORSE, J.

Sherwood v. Walker
Supreme Court of Michigan
66 Mich. 568, 33 N.W. 919 (1887)

[1]
Replevin for a cow. Suit commenced in justice's court;
judgment for plaintiff; appealed to circuit court of Wayne county, and
verdict and judgment for plaintiff in that court. The defendants bring
error, and set out 25 assignments of the same.
[2]
The main controversy depends upon the construction of
a contract for the sale of the cow. The plaintiff claims that the title
passed, and bases his action upon such claim. The defendants contend
that the contract was executory, and by its terms no title to the animal
was acquired by plaintiff. The defendants reside at Detroit, but are in
business at Walkerville, Ontario, and have a farm at Greenfield, in Wayne
county, upon which were some blooded cattle supposed to be barren as
breeders. The Walkers are importers and breeders of polled Angus cattle.
The plaintiff is a banker living at Plymouth, in Wayne county. He called
upon the defendants at Walkerville for the purchase of some of their
stock, but found none there that suited him. Meeting one of the
defendants afterwards, he was informed that they had a few head upon
their Greenfield farm. He was asked to go out and look at them, with the
statement at the time that they were probably barren, and would not
breed. May 5, 1886, plaintiff went out to Greenfield, and saw the cattle. A
few days thereafter, he called upon one of the defendants with the view
of purchasing a cow, known as “Rose 2d of Aberlone.” After
considerable talk, it was agreed that defendants would telephone
Sherwood at his home in Plymouth in reference to the price. The second
morning after this talk he was called up by telephone, and the terms of
the sale were finally agreed upon. He was to pay five and one-half cents
per pound, live weight, fifty pounds shrinkage. He was asked how he
intended to take the cow home, and replied that he might ship her from
King's cattle-yard. He requested defendants to confirm the sale in
writing, which they did by sending him the following letter:
WALKERVILLE, May 15, 1886.

19

T.C. Sherwood, President, etc.-DEAR SIR: We confirm
sale to you of the cow Rose 2d of Aberlone, lot 56 of our
catalogue, at five and half cents per pound, less fifty pounds
shrink. We inclose herewith order on Mr. Graham for the cow.
You might leave check with him, or mail to us here, as you
prefer.
Yours, truly, HIRAM WALKER & SONS.
The order upon Graham inclosed in the letter read as follows:
WALKERVILLE, May 15, 1886.
George Graham: You will please deliver at King's cattleyard to Mr. T.C. Sherwood, Plymouth, the cow Rose 2d of
Aberlone, lot 56 of our catalogue. Send halter with the cow, and
have her weighed.
Yours truly, HIRAM WALKER & SONS.
[3]
On the twenty-first of the same month the plaintiff went
to defendants' farm at Greenfield, and presented the order and letter to
Graham, who informed him that the defendants had instructed him not
to deliver the cow. Soon after, the plaintiff tendered to Hiram Walker,
one of the defendants, $80, and demanded the cow. Walker refused to
take the money or deliver the cow. The plaintiff then instituted this suit.
After he had secured possession of the cow under the writ of replevin,
the plaintiff caused her to be weighed by the constable who served the
writ, at a place other than King's cattle-yard. She weighed 1,420 pounds.
[4]
When the plaintiff, upon the trial in the circuit court, had
submitted his proofs showing the above transaction, defendants moved
to strike out and exclude the testimony from the case, for the reason that
it was irrelevant and did not tend to show that the title to the cow passed,
and that it showed that the contract of sale was merely executory. The
court refused the motion, and an exception was taken. The defendants
then introduced evidence tending to show that at the time of the alleged
sale it was believed by both the plaintiff and themselves that the cow was
barren and would not breed; that she cost $850, and if not barren would
be worth from $750 to $1,000; that after the date of the letter, and the
order to Graham, the defendants were informed by said Graham that in
his judgment the cow was with calf, and therefore they instructed him

20

not to deliver her to plaintiff, and on the twentieth of May, 1886,
telegraphed plaintiff what Graham thought about the cow being with
calf, and that consequently they could not sell her. The cow had a calf in
the month of October following. On the nineteenth of May, the plaintiff
wrote Graham as follows:
PLYMOUTH, May 19, 1886.
Mr. George Graham, Greenfield-DEAR SIR: I have
bought Rose or Lucy from Mr. Walker, and will be there for her
Friday morning, nine or ten o'clock. Do not water her in the
morning.
Yours, etc., T.C. SHERWOOD.
[5]
Plaintiff explained the mention of the two cows in this
letter by testifying that, when he wrote this letter, the order and letter of
defendants was at his home, and, writing in a hurry, and being uncertain
as to the name of the cow, and not wishing his cow watered, he thought
it would do no harm to name them both, as his bill of sale would show
which one he had purchased. Plaintiff also testified that he asked
defendants to give him a price on the balance of their herd at Greenfield,
as a friend thought of buying some, and received a letter dated May 17,
1886, in which they named the price of five cattle, including Lucy, at $90,
and Rose 2d at $80. When he received the letter he called defendants up
by telephone, and asked them why they put Rose 2d in the list, as he had
already purchased her. They replied that they knew he had, but thought it
would make no difference if plaintiff and his friend concluded to take the
whole herd.
[6]

The foregoing is the substance of all the testimony in the

case.
[7]
The circuit judge instructed the jury that if they believed
the defendants, when they sent the order and letter to plaintiff, meant to
pass the title to the cow, and that the cow was intended to be delivered to
plaintiff, it did not matter whether the cow was weighed at any particular
place, or by any particular person; and if the cow was weighed afterwards,
as Sherwood testified, such weighing would be a sufficient compliance
with the order. If they believed that defendants intended to pass the title
by writing, it did not matter whether the cow was weighed before or after

21

suit brought, and the plaintiff would be entitled to recover. The
defendants submitted a number of requests which were refused. The
substance of them was that the cow was never delivered to plaintiff, and
the title to her did not pass by the letter and order; and that under the
contract, as evidenced by these writings, the title did not pass until the
cow was weighed and her price thereby determined; and that, if the
defendants only agreed to sell a cow that would not breed, then the
barrenness of the cow was a condition precedent to passing title, and
plaintiff cannot recover. The court also charged the jury that it was
immaterial whether the cow was with calf or not. It will therefore be seen
that the defendants claim that, as a matter of law, the title of this cow did
not pass, and that the circuit judge erred in submitting the case to the
jury, to be determined by them, upon the intent of the parties as to
whether or not the title passed with the sending of the letter and order by
the defendants to the plaintiff.
[Paragraphs 8-13 discuss the comparatively arcane (and now
archaic) issue of passing legal title to the cow. This portion of the opinion
is not central to understanding mistake doctrine and thus you may feel
free to skim until you reach paragraph 14.]
[8]
This question as to the passing of title is fraught with
difficulties, and not always easy of solution. An examination of the
multitude of cases bearing upon this subject, with their infinite variety of
facts, and at least apparent conflict of law, ofttimes tends to confuse
rather than to enlighten the mind of the inquirer. It is best, therefore, to
consider always, in cases of this kind, the general principles of the law,
and then apply them as best we may to the facts of the case in hand.
[9]
The cow being worth over $50, the contract of sale, in
order to be valid, must be one where the purchaser has received or
accepted part of the goods, or given something in earnest, or in part
payment, or where the seller has signed some note or memorandum in
writing. How.St. § 6186. Here there was no actual delivery, nor anything
given in payment or in earnest, but there was a sufficient memorandum
signed by the defendants to take the case out of the statute, if the matter
contained in such memorandum is sufficient to constitute a completed
sale. It is evident from the letter that the payment of the purchase price
was not intended as a condition precedent to the passing of the title. Mr.

22

Sherwood is given his choice to pay the money to Graham at King's
cattle-yards, or to send check by mail.
[10]
Nor can there be any trouble about the delivery. The
order instructed Graham to deliver the cow, upon presentation of the
order, at such cattle-yards. But the price of the cow was not determined
upon to a certainty. Before this could be ascertained, from the terms of
the contract, the cow had to be weighed; and, by the order inclosed with
the letter, Graham was instructed to have her weighed. If the cow had
been weighed, and this letter had stated, upon such weight, the express
and exact price of the animal, there can be no doubt but the cow would
have passed with the sending and receipt of the letter and order by the
plaintiff. Payment was not to be a concurrent act with the delivery, and
therein this case differs from Case v. Dewey, 55 Mich. 116, 20 N.W.Rep.
817, and 21 N.W.Rep. 911. Also, in that case, there was no written
memorandum of the sale, and a delivery was necessary to pass the title of
the sheep; and it was held that such delivery could only be made by a
surrender of the possession to the vendee, and an acceptance by him.
Delivery by an actual transfer of the property from the vendor to the
vendee, in a case like the present, where the article can easily be so
transferred by a manual act, is usually the most significant fact in the
transaction to show the intent of the parties to pass the title, but it never
has been held conclusive. Neither the actual delivery, nor the absence of
such delivery, will control the case, where the intent of the parties is clear
and manifest that the matter of delivery was not a condition precedent to
the passing of the title, or that the delivery did not carry with it the
absolute title. The title may pass, if the parties so agree, where the statute
of frauds does not interpose without delivery, and property may be
delivered with the understanding that the title shall not pass until some
condition is performed.
[11]
And whether the parties intended the title should pass
before delivery or not is generally a question of fact to be determined by
a jury. In the case at bar the question of the intent of the parties was
submitted to the jury. This submission was right, unless from the reading
of the letter and the order, and all the facts of the oral bargaining of the
parties, it is perfectly clear, as a matter of law, that the intent of the
parties was that the cow should be weighed, and the price thereby

23

accurately determined, before she should become the property of the
plaintiff. I do not think that the intent of the parties in this case is a
matter of law, but one of fact. The weighing of the cow was not a matter
that needed the presence or any act of the defendants, or any agent of
theirs, to be well or accurately done. It could make no difference where
or when she was weighed, if the same was done upon correct scales, and
by a competent person. There is no pretense but what her weight was
fairly ascertained by the plaintiff. The cow was specifically designated by
this writing, and her delivery ordered, and it cannot be said, in my
opinion, that the defendants intended that the weighing of the animal
should be done before the delivery even, or the passing of title. The
order to Graham is to deliver her, and then follows the instruction, not
that he shall weigh her himself, or weigh her, or even have her weighed,
before delivery, but simply, “Send halter with the cow, and have her
weighed.”
[12]
It is evident to my mind that they had perfect confidence
in the integrity and responsibility of the plaintiff, and that they
considered the sale perfected and completed when they mailed the letter
and order to plaintiff. They did not intend to place any conditions
precedent in the way, either of payment of the price, or the weighing of
the cow, before the passing of the title. They cared not whether the
money was paid to Graham, or sent to them afterwards, or whether the
cow was weighed before or after she passed into the actual manual grasp
of the plaintiff. The refusal to deliver the cow grew entirely out of the
fact that, before the plaintiff called upon Graham for her, they
discovered she was not barren, and therefore of greater value than they
had sold her for.
[13]
The following cases in this court support the instruction
of the court below as to the intent of the parties governing and
controlling the question of a completed sale, and the passing of title:
Lingham v. Eggleston, 27 Mich. 324; Wilkinson v. Holiday, 33 Mich. 386;
Grant v. Merchants' & Manufacturers' Bank, 35 Mich. 527; Carpenter v.
Graham, 42 Mich. 194, 3 N.W.Rep. 974; Brewer v. Michigan Salt Ass'n, 47
Mich. 534, 11 N.W.Rep. 370; Whitcomb v. Whitney, 24 Mich. 486; Byles v.
Colier, 54 Mich. 1, 19 N.W.Rep. 565; Scotten v. Sutter, 37 Mich. 527, 532;

24

Ducey Lumber Co. v. Lane, 58 Mich. 520, 525, 25 N.W.Rep. 568; Jenkinson v.
Monroe, 28 N.W.Rep. 663.
[14]
It appears from the record that both parties supposed this
cow was barren and would not breed, and she was sold by the pound for
an insignificant sum as compared with her real value if a breeder. She was
evidently sold and purchased on the relation of her value for beef, unless
the plaintiff had learned of her true condition, and concealed such
knowledge from the defendants. Before the plaintiff secured the
possession of the animal, the defendants learned that she was with calf,
and therefore of great value, and undertook to rescind the sale by
refusing to deliver her. The question arises whether they had a right to do
so. The circuit judge ruled that this fact did not avoid the sale and it made
no difference whether she was barren or not. I am of the opinion that the
court erred in this holding. I know that this is a close question, and the
dividing line between the adjudicated cases is not easily discerned. But it
must be considered as well settled that a party who has given an apparent
consent to a contract of sale may refuse to execute it, or he may avoid it
after it has been completed, if the assent was founded, or the contract
made, upon the mistake of a material fact—such as the subject-matter of
the sale, the price, or some collateral fact materially inducing the
agreement; and this can be done when the mistake is mutual. 1 Benj.
Sales, §§ 605, 606; Leake, Cont. 339; Story, Sales, (4th Ed.) §§ 377, 148.
See, also, Cutts v. Guild, 57 N.Y. 229; Harvey v. Harris, 112 Mass. 32;
Gardner v. Lane, 9 Allen, 492, 12 Allen, 44; Huthmacher v. Harris' Adm'rs, 38
Pa.St. 491; Byers v. Chapin, 28 Ohio St. 300; Gibson v. Pelkie, 37 Mich. 380,
and cases cited; Allen v. Hammond, 11 Pet. 63-71.
[15]
If there is a difference or misapprehension as to the
substance of the thing bargained for; if the thing actually delivered or
received is different in substance from the thing bargained for, and
intended to be sold—then there is no contract; but if it be only a
difference in some quality or accident, even though the mistake may have
been the actuating motive to the purchaser or seller, or both of them, yet
the contract remains binding. “The difficulty in every case is to determine
whether the mistake or misapprehension is as to the substance of the
whole contract, going, as it were, to the root of the matter, or only to
some point, even though a material point, an error as to which does not

25

affect the substance of the whole consideration.” Kennedy v. Panama, etc.,
Mail Co., L.R. 2 Q.B. 580, 587. It has been held, in accordance with the
principles above stated, that where a horse is bought under the belief that
he is sound, and both vendor and vendee honestly believe him to be
sound, the purchaser must stand by his bargain, and pay the full price,
unless there was a warranty.
[16]
It seems to me, however, in the case made by this record,
that the mistake or misapprehension of the parties went to the whole
substance of the agreement. If the cow was a breeder, she was worth at
least $750; if barren, she was worth not over $80. The parties would not
have made the contract of sale except upon the understanding and belief
that she was incapable of breeding, and of no use as a cow. It is true she
is now the identical animal that they thought her to be when the contract
was made; there is no mistake as to the identity of the creature. Yet the
mistake was not of the mere quality of the animal, but went to the very
nature of the thing. A barren cow is substantially a different creature than
a breeding one. There is as much difference between them for all
purposes of use as there is between an ox and a cow that is capable of
breeding and giving milk. If the mutual mistake had simply related to the
fact whether she was with calf or not for one season, then it might have
been a good sale, but the mistake affected the character of the animal for
all time, and for its present and ultimate use. She was not in fact the
animal, or the kind of animal, the defendants intended to sell or the
plaintiff to buy. She was not a barren cow, and, if this fact had been
known, there would have been no contract. The mistake affected the
substance of the whole consideration, and it must be considered that
there was no contract to sell or sale of the cow as she actually was. The
thing sold and bought had in fact no existence. She was sold as a beef
creature would be sold; she is in fact a breeding cow, and a valuable one.
The court should have instructed the jury that if they found that the cow
was sold, or contracted to be sold, upon the understanding of both
parties that she was barren, and useless for the purpose of breeding, and
that in fact she was not barren, but capable of breeding, then the
defendants had a right to rescind, and to refuse to deliver, and the verdict
should be in their favor.

26

[17]
The judgment of the court below must be reversed, and a
new trial granted, with costs of this court to defendants.
CAMPBELL, C.J., AND CHAMPLIN, J., CONCURRED.
SHERWOOD, J., [WHO, DESPITE HIS NAME, IS UNRELATED TO THE
PLAINTIFF] (DISSENTING)
[18]
I do not concur in the opinion given by my brethren in
this case. I think the judgments before the justice and at the circuit were
right. I agree with my Brother MORSE that the contract made was not
within the statute of frauds, and the payment for the property was not a
condition precedent to the passing of the title from the defendants to the
plaintiff. And I further agree with him that the plaintiff was entitled to a
delivery of the property to him when the suit was brought, unless there
was a mistake made which would invalidate the contract, and I can find
no such mistake. There is no pretense there was any fraud or
concealment in the case, and an intimation or insinuation that such a
thing might have existed on the part of either of the parties would
undoubtedly be a greater surprise to them than anything else that has
occurred in their dealings or in the case.
[19]
As has already been stated by my brethren, the record
shows that the plaintiff is a banker and farmer as well, carrying on a farm,
and raising the best breeds of stock, and lived in Plymouth, in the county
of Wayne, 23 miles from Detroit; that the defendants lived in Detroit,
and were also dealers in stock of the higher grades; that they had a farm
at Walkerville, in Canada, and also one in Greenfield in said county of
Wayne, and upon these farms the defendants kept their stock. The
Greenfield farm was about 15 miles from the plaintiff's. In the spring of
1886 the plaintiff, learning that the defendants had some “polled Angus
cattle” for sale, was desirous of purchasing some of that breed, and
meeting the defendants, or some of them, at Walkerville, inquired about
them, and was informed that they had none at Walkerville, “but had a
few head left on their farm in Greenfield, and asked the plaintiff to go
and see them, stating that in all probability they were sterile and would
not breed.” In accordance with said request, the plaintiff, on the fifth day
of May, went out and looked at the defendants' cattle at Greenfield, and
found one called “Rose, Second,” which he wished to purchase, and the

27

terms were finally agreed upon at five and a half cents per pound, live
weight, 50 pounds to be deducted for shrinkage. The sale was in writing,
and the defendants gave an order to the plaintiff directing the man in
charge of the Greenfield farm to deliver the cow to plaintiff. This was
done on the fifteenth of May. On the twenty-first of May plaintiff went
to get his cow, and the defendants refused to let him have her; claiming
at the time that the man in charge at the farm thought the cow was with
calf, and, if such was the case, they would not sell her for the price agreed
upon. The record further shows that the defendants, when they sold the
cow, believed the cow was not with calf, and barren; that from what the
plaintiff had been told by defendants (for it does not appear he had any
other knowledge or facts from which he could form an opinion) he
believed the cow was farrow, but still thought she could be made to
breed. The foregoing shows the entire interview and treaty between the
parties as to the sterility and qualities of the cow sold to the plaintiff. The
cow had a calf in the month of October.
[20]
There is no question but that the defendants sold the cow
representing her of the breed and quality they believed the cow to be, and
that the purchaser so understood it. And the buyer purchased her
believing her to be of the breed represented by the sellers, and possessing
all the qualities stated, and even more. He believed she would breed.
There is no pretense that the plaintiff bought the cow for beef, and there
is nothing in the record indicating that he would have bought her at all
only that he thought she might be made to breed. Under the foregoing
facts—and these are all that are contained in the record material to the
contract—it is held that because it turned out that the plaintiff was more
correct in his judgment as to one quality of the cow than the defendants,
and a quality, too, which could not by any possibility be positively known
at the time by either party to exist, the contract may be annulled by the
defendants at their pleasure. I know of no law, and have not been
referred to any, which will justify any such holding, and I think the circuit
judge was right in his construction of the contract between the parties.
[21]
It is claimed that a mutual mistake of a material fact was
made by the parties when the contract of sale was made. There was no
warranty in the case of the quality of the animal. When a mistaken fact is
relied upon as ground for rescinding, such fact must not only exist at the

28

time the contract is made, but must have been known to one or both of
the parties. Where there is no warranty, there can be no mistake of fact
when no such fact exists, or, if in existence, neither party knew of it, or
could know of it; and that is precisely this case. If the owner of a
Hambletonian horse had speeded him, and was only able to make him go
a mile in three minutes, and should sell him to another, believing that was
his greatest speed, for $300, when the purchaser believed he could go
much faster, and made the purchase for that sum, and a few days
thereafter, under more favorable circumstances, the horse was driven a
mile in 2 min. 16 sec., and was found to be worth $20,000, I hardly think
it would be held, either at law or in equity, by any one, that the seller in
such case could rescind the contract. The same legal principles apply in
each case.
[22]
In this case neither party knew the actual quality and
condition of this cow at the time of the sale. The defendants say, or
rather said, to the plaintiff, “they had a few head left on their farm in
Greenfield, and asked plaintiff to go and see them, stating to plaintiff that
in all probability they were sterile and would not breed.” Plaintiff did go
as requested, and found there these cows, including the one purchased,
with a bull. The cow had been exposed, but neither knew she was with
calf or whether she would breed. The defendants thought she would not,
but the plaintiff says that he thought she could be made to breed, but
believed she was not with calf. The defendants sold the cow for what
they believed her to be, and the plaintiff bought her as he believed she
was, after the statements made by the defendants. No conditions
whatever were attached to the terms of sale by either party. It was in fact
as absolute as it could well be made, and I know of no precedent as
authority by which this court can alter the contract thus made by these
parties in writing—interpolate in it a condition by which, if the
defendants should be mistaken in their belief that the cow was barren,
she could be returned to them and their contract should be annulled. It is
not the duty of courts to destroy contracts when called upon to enforce
them, after they have been legally made. There was no mistake of any
material fact by either of the parties in the case as would license the
vendors to rescind. There was no difference between the parties, nor
misapprehension, as to the substance of the thing bargained for, which

29

was a cow supposed to be barren by one party, and believed not to be by
the other. As to the quality of the animal, subsequently developed, both
parties were equally ignorant, and as to this each party took his chances.
If this were not the law, there would be no safety in purchasing this kind
of stock.
[23]
I entirely agree with my brethren that the right to rescind
occurs whenever “the thing actually delivered or received is different in
substance from the thing bargained for, and intended to be sold; but if it
be only a difference in some quality or accident, even though the
misapprehension may have been the actuating motive” of the parties in
making the contract, yet it will remain binding. In this case the cow sold
was the one delivered. What might or might not happen to her after the
sale formed no element in the contract. The case of Kennedy v. Panama
Mail Co., L.R. 2 Q.B. 587, and the extract cited therefrom in the opinion
of my brethren, clearly sustains the views I have taken. See, also, Smith v.
Hughes, L.R. 6 Q.B. 597; Carter v. Crick, 4 Hurl. & N. 416.
[24]
According to this record, whatever the mistake was, if
any, in this case, it was upon the part of the defendants, and while acting
upon their own judgment. It is, however, elementary law, and very
elementary, too, “that the mistaken party, without any common
understanding with the other party in the premises as to the quality of an
animal, is remediless if he is injured through his own mistake.” Leake,
Cont. 338; Torrance v. Bolton, L.R. 8 Ch. 118; Smith v. Hughes, L.R. 6 Q.B.
597.
[25]
The case cited by my brethren from 37 Mich. I do not
think sustains the conclusion reached by them. In that case the subjectmatter about which the contract was made had no existence, and in such
case Mr. Justice GRAVES held there was no contract; and to the same
effect are all the authorities cited in the opinion. That is certainly not this
case. Here the defendants claim the subject-matter not only existed, but
was worth about $800 more than the plaintiff paid for it.
[26]
The case of Huthmacher v. Harris, 38 Pa. St. 491, is this: A
party purchased at an administrator's sale a drill-machine, which had hid
away in it by the deceased a quantity of notes, to the amount of $3,000,
money to the amount of over $500, and two silver watches and a pocket

30

compass of the value of $60.25. In an action of trover for the goods, it
was held that nothing but the machine was sold or passed to the
purchasers, neither party knowing that the machine contained any such
articles.
[27]
In Cutts v. Guild, 57 N.Y. 229, the defendant, as assignee,
recovered a judgment against D. & H. He also recovered several
judgments in his own name on behalf of the T. Co. The defendant made
an assignment of and transferred the first judgment to an assignee of the
plaintiff—both parties supposing and intending to transfer one of the T.
Co. judgments—and it was held that such contract of assignment was
void, because the subject-matter contained in the assignment was not
contracted for.
[28]
In the case of Byers v. Chapin, 28 Ohio St. 300, the
defendant sold the plaintiffs 5,000 oil barrels. The plaintiffs paid $5,000
upon their purchase, and took some of the barrels. The barrels proved to
be unfit for use, and the contract was rescinded by consent of the parties.
The defendant, instead of returning all the money paid to the purchaser,
retained a portion and gave plaintiffs his note for the remainder. The
plaintiffs brought suit upon this note. The defendant claimed that, under
the contract of sale of the barrels, they were to be glued by the plaintiffs,
which the plaintiffs properly failed to do, and this fact was not known to
defendant when he agreed to rescind, and gave the note, and therefore
the note was given upon a mistaken state of facts, falsely represented to
the defendant, and which were known to the plaintiffs. On the proofs,
the jury found for the defendant, and the verdict was affirmed.
[29]
In Gardner v. Lane, 9 Mass. 492, it is decided that if, upon
a sale of No. 1 mackerel, the vendor delivers No. 3 mackerel, and some
barrels of salt, no title to the articles thus delivered passes.
[30]
Allen v. Hammond, 11 Pet. 63, decides that if a life-estate in
land is sold, and at the time of the sale the estate is terminated by the
death of the person in whom the right vested, a court of equity will
rescind the purchase.
[31]
In Harvey v. Harris, 112 Mass. 32, at an auction, two
different grades of flour were sold, and a purchaser of the second
claimed to have bought a quantity of the first grade, under a sale made of

31

the second, and this he was not allowed to do, because of the mutual
mistake; the purchaser had not in fact bought the flour he claimed. In
this case, however, it is said it is true that, if there is a mutual agreement
of the parties for the sale of particular articles of property, a mistake of
misapprehension as to the quality of the articles will not enable the
vendor to repudiate the sale.
[32]
The foregoing are all the authorities relied on as
supporting the positions taken by my brethren in this case. I fail to
discover any similarity between them and the present case; and I must
say, further, in such examination as I have been able to make, I have
found no adjudicated case going to the extent, either in law or equity, that
has been held in this case. In this case, if either party had superior
knowledge as to the qualities of this animal to the other, certainly the
defendants had such advantage. I understand the law to be well settled
that “there is no breach of any implied confidence that one party will not
profit by his superior knowledge as to facts and circumstances” actually
within the knowledge of both, because neither party reposes in any such
confidence unless it be specially tendered or required, and that a general
sale does not imply warranty of any quality, or the absence of any; and if
the seller represents to the purchaser what he himself believes as to the
qualities of an animal, and the purchaser buys relying upon his own
judgment as to such qualities, there is no warranty in the case, and neither
has a cause of action against the other if he finds himself to have been
mistaken in judgment.
[33]
The only pretense for avoiding this contract by the
defendants is that they erred in judgment as to the qualities and value of
the animal. I think the principles adopted by Chief Justice CAMPBELL
in Williams v. Spurr completely cover this case, and should have been
allowed to control in its decision. See 24 Mich. 335. See, also, Story,
Sales, §§ 174, 175, 382, and Benj. Sales, § 430. The judgment should be
affirmed.
2.1.1 The Story of Sherwood v. Walker
A recently published law review article provides a wealth of
background information about the parties (and the cow) involved in Sherwood
v. Walker. It appears that Hiram Walker, the seller, was the moving force

32

behind the famous brand of Canadian Club Whiskey, and the buyer
Theodore Clark Sherwood was a prominent banker who went on to found a
financial institution that eventually became a part of Bank One. We also learn
from the article that after losing in the Michigan Supreme Court, Sherwood
purchased Rose the 2d from Walker for an undisclosed price. See Norman
Otto Stockmeyer, To Err Is Human, To Moo Bovine: The Rose of Aberlone Story,
24 THOMAS COOLEY L. REV. 491 (2007).
2.1.2. Lenawee County Bd. of Health v. Messerly
In a subsequent case, Lewanee County Bd. of Health v. Messerly, 331
N.W.2d 203 (Mich. 1982), the Michigan Supreme Court had occasion to
revisit the Sherwood v. Walker decision and expressed its frustration with the
distinction the earlier case had drawn between mistakes that go to the
“essence of the consideration” from those affecting merely its “quality or
value.” The court had this to say about the Sherwood opinion:
[Sherwood] arguably distinguishes mistakes affecting the
essence of the consideration from those which go to its quality or
value, affording relief on a per se basis for the former but not the
latte…. However, the distinctions which may be drawn from
Sherwood … do not provide a satisfactory analysis of the nature of
a mistake sufficient to invalidate a contract. Often, a mistake
relates to an underlying factual assumption which, when
discovered, directly affects value, but simultaneously and
materially affects the essence of the contractual consideration. It
is disingenuous to label such a mistake collateral…. [The parties
in this case] both mistakenly believed that the property which was
the subject of their land contract would generate income as rental
property. The fact that it could not be used for human habitation
deprived the property of its income earning potential and
rendered it less valuable. However, this mistake, while directly
and dramatically affecting the property’s value, cannot accurately
be characterized as collateral because it affects the very essence of
the consideration…. We find that the inexact and confusing
distinction between contractual mistakes running to value and
those touching the substance of the consideration serves only as
an impediment to a clear and helpful analysis for the equitable
resolution of cases in which mistake is alleged and proven.
Accordingly, the [holding of Sherwood is limited to the facts of that
case.]

33

In Messerly, the parties’ contract included an express “as is” clause.
The following passage shows how such a clause is relevant to analyzing
under Restatement (Second) § 154 whether the risk of mistake has been
allocated to one of the parties.
In cases of mistake by two equally blameless parties, we
are required, in the exercise of our equitable powers, to determine
which blameless party should assume the loss resulting from the
misapprehension they shared. Normally that can only be done by
drawing upon our “own notions of what is reasonable and just
under all the surrounding circumstances….” Equity suggests that,
in this case, the risk should be allocated to the purchasers. We are
guided to that conclusion, in part, by the standards announced in
§ 154 of the Restatement of Contracts, [Second], for determining
when a party bears the risk of mistake…. Section 154(a) suggests
that the court should look first to whether the parties have agreed
to the allocation of the risk between themselves. While there is
no express assumption in the contract by either party of the risk
of the property becoming uninhabitable, there was indeed some
agreed allocation of the risk to the vendees by the incorporation
of an “as is” clause into the contract…. [The incorporation] of
this clause is a persuasive indication that, as between them, such
risk as related to the “present condition” of the property should
lie with the purchaser. If the “as is” clause is to have any meaning
at all, it must be interpreted to refer to those defects which were
unknown at the time that contract was executed.
Id. at 31–32.
Despite the Messerly court’s disapproval of the reasoning in Sherwood,
Professor Stockmeyer notes that Sherwood remains a staple of Contracts
casebooks and treatises. He also defends the case’s vitality as legal authority
in Michigan. Stockmeyer concludes:
Perhaps most tellingly of all, in a 2006 mutual mistake
case, Ford Motor Co. v. Woodhaven, a unanimous Michigan Supreme
Court discussed Sherwood at length, ignored [Messerly] completely,
and announced that Rose’s case was still viable: “Our review of
our precedents involving the law of mistake indicates that the
peculiar and appropriate meaning that the term ‘mutual mistake’
has acquired in our law has not changed since Sherwood.”

34

Stockmeyer, supra, at 501-02.
Although Stockmeyer’s account is correct as far as it goes, Ford Motor
Co. v. Woodhaven may tell us less about the law of mistake in Michigan than he
supposes. The Ford Motor court relies explicitly on the Sherwood majority’s
understanding of the facts—particularly their highly questionable assertion
that neither of the parties to the sale contract thought that Rose could be
made to breed. With this important limitation in mind, it is perhaps more
accurate to say that Ford Motor reaffirmed an uncontroversial proposition—If
two parties are both mistaken about a fundamental attribute of the good they
are exchanging, then the doctrine of mutual mistake makes it possible to
argue for rescission. As our discussion of Sherwood v. Walker will reveal,
however, the majority’s opinion also makes far less defensible claims about
the parties’ beliefs and about the importance of a distinction between the
“substance” and a mere “quality” of the item being exchanged. The Ford
Motor court has nothing whatsoever to say about these more controversial
aspects of Sherwood.
2.1.3. Discussion of Sherwood v. Walker
What is the best argument that you could make on behalf of Walker
(the seller)?
How would you argue the case for Sherwood?
Was this case correctly decided?
2.2. Principal Case – Anderson v. O’Meara
Anderson Brothers Corp. v. O’Meara
United States Court of Appeals, Fifth Circuit
306 F.2d 672 (1962)
JONES, CIRCUIT JUDGE.
[1]
The appellant, Anderson Brothers Corporation, a Texas
corporation engaged in the business of constructing pipelines, sold a
barge dredge to the appellee, Robert W. O'Meara, a resident of Illinois
who is an oil well driller doing business in several states and Canada. The
appellee brought this suit seeking rescission of the sale or, in the
alternative, damages. After trial without a jury, the appellee's prayer of
rescission was denied, but damages were awarded. The court denied the
appellant's counterclaim for the unpaid purchase price of the dredge.

35

Both parties have appealed.1 Appellant contends that no relief should
have been given to the appellee, and the appellee contends that the
damages awarded to him were insufficient.
[2]
The dredge which the appellant sold to the appellee was
specially designed to perform the submarine trenching necessary for
burying a pipeline under water. In particular it was designed to cut a
relatively narrow trench in areas where submerged rocks, stumps and
logs might be encountered. The dredge could be disassembled into its
larger component parts, moved over land by truck, and reassembled at
the job site. The appellant built the dredge from new and used parts in its
own shop. The design was copied from a dredge which appellant had
leased and successfully used in laying a pipeline across the Mississippi
River. The appellant began fabrication of the dredge in early 1955,
intending to use it in performing a contract for laying a pipeline across
the Missouri River. A naval architect testified that the appellant was
following customary practice in pipeline operations by designing a dredge
for a specific use. Dredges so designed can be modified, if necessary, to
meet particular situations. For some reason construction of the dredge
was not completed in time for its use on the job for which it was
intended, and the dredge was never used by the appellant. After it was
completed, the dredge was advertised for sale in a magazine. This
advertisement came to the appellee's attention in early December, 1955.
The appellee wanted to acquire a dredge capable of digging canals fifty to
seventy-five or eighty feet wide and six to twelve feet deep to provide
access to off-shore oil well sites in southern Louisiana.
[3]
On December 8, 1955, the appellee or someone
employed by him contacted the appellant's Houston, Texas, office by
telephone and learned that the price of the dredge was $45,000. Terms of
sale were discussed, and later that day the appellant sent a telegram to the
appellee who was then in Chicago, saying it accepted the appellee's offer
of $35,000 for the dredge to be delivered in Houston. The appellee's
offer was made subject to an inspection. The next day Kennedy, one of
the appellee's employees, went to Houston from New Orleans and
1 Anderson Brothers Corporation will be referred to as the appellant and O'Meara

as the appellee.

36

inspected the dredge. Kennedy, it appears, knew nothing about dredges
but was familiar with engines. After inspecting the engines of the dredge,
Kennedy reported his findings to the appellee by telephone and then
signed an agreement with the appellant on behalf of the appellee. In the
agreement, the appellant acknowledged receipt of $17,500. The
agreement made provision for payment of the remaining $17,500 over a
period of seventeen months. The dredge was delivered to the appellee at
Houston on December 11, 1955, and from there transported by the
appellee to his warehouse in southern Louisiana. The barge was
transported by water, and the ladder, that part of the dredge which
extends from the barge to the stream bed and to which the cutting
devices are attached, was moved by truck. After the dredge arrived at his
warehouse the appellee executed a chattel mortgage in favor of the
appellant and a promissory note payable to the order of the appellant. A
bill of sale dated December 17, 1955, was given the appellee in which the
appellant warranted only title and freedom from encumbrances. Both the
chattel mortgage and the bill of sale described the dredge and its
component parts in detail.
[4]
The record contains much testimony concerning the
design and capabilities of the dredge including that of a naval architect
who, after surveying the dredge, reported “I found that the subject
dredge…had been designed for the purpose of dredging a straight trench
over a river, lake or other body of water.” The testimony shows that a
dredge designed to perform sweep dredging, the term used to describe
the dredging of a wide channel, must be different in several respects from
one used only for trenching operations. The naval architect's report listed
at least five major items to be replaced, modified, or added before the
dredge would be suited to the appellee's intended use. It is clear that the
appellee bought a dredge which, because of its design, was incapable,
without modification, of performing sweep dredging.
[5]
On July 10, 1956, about seven months after the sale and
after the appellee had made seven monthly payments pursuant to the
agreement between the parties, the appellee's counsel wrote the appellant
stating in part that “Mr. O'Meara has not been able to put this dredge in
service and it is doubtful that it will ever be usable in its present
condition.” After quoting at length from the naval architect's report,

37

which was dated January 28, 1956, the letter suggested that the
differences between the parties could be settled amicably by the
appellant's contributing $10,000 toward the estimated $12,000 to $15,000
cost of converting the trenching dredge into a sweep dredge. The
appellant rejected this offer and on July 23, 1956, the appellee's counsel
wrote the appellant tendering return of the dredge and demanding full
restitution of the purchase price. This suit followed the appellant's
rejection of the tender and demand.
[6]
In his complaint the appellee alleged breaches of
expressed and implied warranty and fraudulent representations as to the
capabilities of the dredge. By an amendment he alleged as an alternative
to the fraud count that the parties had been mistaken in their belief as to
the operations of which the dredge was capable, and thus there was a
mutual mistake which prevented the formation of a contract. The
appellee sought damages of over $29,000, representing the total of
principal and interest paid the appellant and expenses incurred in
attempting to operate the dredge. In the alternative, the appellee asked
for rescission and restitution of all money expended by him in reliance on
the contract. The appellant answered denying the claims of the appellee
and counterclaiming for the unpaid balance.
[7]

The district court found that:

At the time the dredge was sold by the defendant to the
plaintiff, the dredge was not capable for performing sweep
dredging operations in shallow water, unless it was modified
extensively. Defendant had built the dredge and knew the
purpose for which it was designed and adapted. None of the
defendant's officers or employees knew that plaintiff intended to
use the dredge for shallow sweep dredging operations. Gier (an
employee of the appellant who talked with the appellee or one of
his employees by telephone) mistakenly assumed that O'Meara
intended to use the dredge within its designed capabilities.
At the time the plaintiff purchased this dredge he
mistakenly believed that the dredge was capable without
modification of performing sweep dredging operations in shallow
water.

38

[8]
The court further found that the market value of the
dredge on the date of sale was $24,000, and that the unpaid balance on
the note given for part of the purchase price was $10,500. Upon its
findings the court concluded that:
The mistake that existed on the part of both plaintiff and
defendant with respect to the capabilities of the subject dredge is
sufficient to and does constitute mutual mistake, and the plaintiff
is entitled to recover the damages he has suffered as a result
thereof.
[9]
These damages were found to be “equal to the balance
due on the purchase price” plus interest, and were assessed by
cancellation of the note and chattel mortgage and vesting title to the
barge in the appellee free from any encumbrance in favor of the
appellant. The court also concluded that the appellee was “not entitled to
rescission of this contract.” Further findings and conclusions, which are
not challenged in this Court, eliminate any considerations of fraud or
breach of expressed or implied warranties. The judgment for damages
rests entirely upon the conclusion of mutual mistake.2 The district court's
conclusion that the parties were mutually mistaken “with respect to the
capabilities of the subject dredge” is not supported by its findings. “A
mutual mistake is one common to both parties to the contract, each
laboring under the same misconception.” St. Paul Fire & Marine Insurance
Co. v. Culwell, Tex.Com.App., 62 S.W.2d 100; Hayman v. Dowda,
Tex.Civ.App., 233 S.W.2d 466; Bryan v. Dallas National Bank,
Tex.Civ.App., 135 S.W.2d 249; 58 C.J.S. Mistake, p. 832. The appellee's
mistake in believing that the dredge was capable, without modification, of
performing sweep dredging was not a mistake shared by the appellant,
who had designed and built the dredge for use in trenching operations
and knew its capabilities. The mistake on the part of the appellant's
employee in assuming that the appellee intended to use the dredge within
its designed capabilities was certainly not one shared by the appellee, who
acquired the dredge for use in sweep dredging operations. The appellee

2 The disposition of this appeal does not require a review of the district court's

action in awarding damages as a remedy for mutual mistake rather than granting
rescission and attempting restoration of the status quo ante

39

alone was mistaken in assuming that the dredge was adapted, without
modification, to the use he had in mind.
[10]
The appellee insists that even if the findings do not
support a conclusion of mutual mistake, he is entitled to relief under the
well-established doctrine that knowledge by one party to a contract that
the other is laboring under a mistake concerning the subject matter of the
contract renders it voidable by the mistaken party.3 See 3 Corbin,
Contracts 692, § 610. As a predicate to this contention, the appellee urges
that the trial court erred in finding that “None of defendant's officers or
employees knew that plaintiff intended to use the dredge for shallow
sweep dredging operations.” Moreover, the appellee contends that the
appellant's knowledge of his intended use of the dredge was conclusively
established by the testimony of two of the appellant's employees,
because, on the authority of Griffin v. Superior Insurance Co., 161 Tex. 195,
338 S.W.2d 415, this testimony constitutes admissions, conclusive against
the appellant. In the Griffin case, it was held that a party's testimony must
be “deliberate, clear and unequivocal” before it is conclusive against him.
The testimony on which the appellee relies falls short of being “clear and
unequivocal.” If the statement of one witness were taken as conclusive, it
would not establish that he knew the appellee intended to use the dredge
as a sweep dredge,4and the other witness spoke with incertitude.5 The
3 The appellee does not complain of the district court's conclusion that he was not

entitled to rescission. He urges, without citation of authority, that the relief to
which he is entitled is by way of damages.
4 Gier, the appellant's shop foreman, testified:

Q. Did Mr. O'Meara in the telephone conversation tell
you what business he was in?
A. No, he didn't.
Q. He didn't. Mr. Gier, I suppose you have already
answered this. Did he say what he wanted that dredge for?
Q. Now, did he (Kennedy) discuss with you what the
dredge was going to be used for?
A. Other than he just said they was going to pump some
channels out for some oil wells. That's all he said. He
didn't tell me how deep or how wide or anything
5 Smith, the appellant's office manager, testified:

Q. ….Did you all discuss anything about the dredge itself?

40

testimony is not conclusive and is only one factor to be considered by the
finder of facts. See 9 Wigmore, Evidence (3d Ed.) 397, 2594a.
[11]
There is a conflict in the evidence on the question of the
appellant's knowledge of the appellee's intended use, and it cannot be
held that the district court's finding is clearly erroneous. Smith v. United
States, 5th Cir. 1961, 287 F.2d 299; Levine v. Johnson, 5th Cir. 1961, 287
F.2d 623; Horton v. U.S. Steel Corp., 5th Cir. 1961, 286 F.2d 710. It is to be
noted that the trial court before whom the appellee testified, did not
credit his testimony that he had made a telephone call in which, he said,
he personally informed an employee of the appellant of his plans for the
use of the dredge.
[12]
The appellee makes a further contention that when he
purchased the dredge he was laboring under a mistake so grave that
allowing the sale to stand would be unconscionable. The ground urged is
one which has apparently been recognized in some circumstances.
Edwards v. Trinity & B.V.R. Co., 54 Tex. Civ.App. 334, 118 S.W. 572; 13
Tex.Jur.2d 481, Contracts § 257; Annot., 59 A.L.R. 809. However, the
Texas courts have held that when unilateral mistake is asserted as a
ground for relief, the care which the mistaken complainant exercised or
failed to exercise in connection with the transaction sought to be avoided
is a factor for consideration. Wheeler v. Holloway, Tex.Com.App. 276 S.W.
A. No, not that I recall.
Q. In other wordsA. I do vaguely remember him (Kennedy) mentioning to
me that O'Meara had an island over there and had some
oil wells on it. He was going to use this dredge to- they
had been hiring someone else to do the dredging into well
locations, and that's what he intended using this one for,
to dredge into his well locations, and I don't remember
now how much he said it cost, but as well as I remember,
it was rather expensive for a subcontractor just to dredge
back to one well location, but by owning their own dredge
they would have a considerable saving there.
Q. In other words, he said they had to dredge out a
channel so their drilling barge could get by?
A. Yes. So they could get the drilling barge or equipment
in there. There wasn't any roads there. That's the
impression I got.

41

653; Ebberts v. Carpenter Production Co., Tex.Civ.App., 256 S.W.2d 601;
American Maid Flour Mills v. Lucia, Tex.Civ.App., 285 S.W. 641; Cole v.
Kjellberg, Tex.Civ.App., 141 S.W. 120; Edwards v. Trinity & B.V.R. Co.,
supra; 13 Tex.Jur.2d 482, Contracts § 258. It has been stated that
“though a court of equity will relieve against mistake, it will not assist a
man whose condition is attributable to the want of due diligence which
may be fairly expected from a reasonable person.” American Maid Flour
Mills v. Lucia, supra. This is consistent with the general rule of equity that
when a person does not avail himself of an opportunity to gain
knowledge of the facts, he will not be relieved of the consequences of
acting upon supposition. Annot., 1 A.L.R.2d 9, 89; see 30 C.J.S. Equity §
47, p. 376. Whether the mistaken party's negligence will preclude relief
depends to a great extent upon the circumstances in each instance.
Edwards v. Trinity & B.V.R. Co., supra.
[13]
The appellee saw fit to purchase the dredge subject to
inspection, yet he sent an employee to inspect it who he knew had no
experience with or knowledge of dredging equipment. It was found that
someone familiar with such equipment could have seen that the dredge
was then incapable of performing channel type dredging. Although,
according to his own testimony, the appellee was conscious of his own
lack of knowledge concerning dredges, he took no steps, prior to
purchase, to learn if the dredge which he saw pictured and described in
some detail in the advertisement, was suited to his purpose. Admittedly
he did not even inquire as to the use the appellant had made or intended
to make of the dredge, and the district court found that he did not
disclose to the appellant the use he intended to make of the dredge. The
finding is supported by evidence. The appellee did not attempt to obtain
any sort of warranty as to the dredge's capabilities. The only conclusion
possible is that the appellee exercised no diligence, prior to the purchase,
in determining the uses to which the dredge might be put. Had he sent a
qualified person, such as the naval architect whom he later employed, to
inspect the dredge he would have learned that it was not what he wanted,
or had even made inquiry, he would have been informed as to the truth
or have had a cause of action for misrepresentation if he had been given
misinformation and relied upon it. The appellee chose to act on
assumption rather than upon inquiry or information obtained by

42

investigation, and, having learned his assumption was wrong, he asks to
be released from the resulting consequences on the ground that, because
of his mistaken assumption, it would be unconscionable to allow the sale
to stand. The appellee seeks this, although the court has found that the
appellant was not guilty of any misrepresentation or fault in connection
with the transaction.
[14]
The appellant is in the same position as the party seeking
relief on the grounds of mistake in Wheeler v. Holloway, supra, and the same
result must follow. In the Wheeler case it was held that relief should be
denied where the mistaken party exercised ‘no diligence whatever’ in
ascertaining the readily accessible facts before he entered into a contract.
[15]
The appellee should have taken nothing on his claim;
therefore, it is unnecessary to consider the question raised by the crossappeal. The other questions raised by the appellant need not be
considered. The case must be reversed and remanded for further
proceeding consistent with what we have here held.
Reversed and remanded.
2.2.1. Discussion of Anderson v. O’Meara
What is the best way to frame the case for Anderson (the seller)?
Does the testimony recounted in footnotes 4 and 5 present any
problem for your argument?
How might you respond to the buyer’s reliance on this testimony?
How do the relevant Restatement (Second) sections apply to this
case?
Are there any provisions of the Restatement (Second) that permit a
court to use a comparative advantage analysis in this situation?
2.2.2. Hypo of the Sterile Calf
Suppose that Max Backus, a Texas cattle breeder attends an auction
in search of promising breeding stock. He purchases one Rob of Aberdeen, a
16-day old bull calf for a price of $5,000. The minimum age at which the
fertility of a bull can be determined is about one year. When the calf is 18
months old, veterinary tests establish conclusively that the calf was incurably

43

sterile at birth. If the parties had known about the calf’s condition, Rob
would have been worth only $30 at the time of the auction.
Backus now seeks rescission of the sale contract. What arguments
would you expect the parties to make and what is the most likely outcome of
the case?
3. Substantial Performance
3.1. Principal Case – Jacob & Youngs v. Kent
The following case involves a dispute about the brand of pipe
installed in the defendant’s newly constructed “country residence.” As you
read the case, consider what the defendant might have done differently to
ensure that the court would respect his professed desire for Reading pipe.
Jacob & Youngs v. Kent
Court of Appeals of New York
230 N.Y. 239, 129 N.E. 889 (1921)
CARDOZO, J.
[1]
The plaintiff built a country residence for the defendant
at a cost of upwards of $77,000, and now sues to recover a balance of
$3,483.46, remaining unpaid. The work of construction ceased in June,
1914, and the defendant then began to occupy the dwelling. There was
no complaint of defective performance until March, 1915. One of the
specifications for the plumbing work provides that” 'all wrought iron
pipe must be well galvanized, lap welded pipe of the grade known as
'standard pipe' of Reading manufacture.” The defendant learned in
March, 1915, that some of the pipe, instead of being made in Reading,
was the product of other factories. The plaintiff was accordingly directed
by the architect to do the work anew. The plumbing was then encased
within the walls except in a few places where it had to be exposed.
Obedience to the order meant more than the substitution of other pipe.
It meant the demolition at great expense of substantial parts of the
completed structure. The plaintiff left the work untouched, and asked for
a certificate that the final payment was due. Refusal of the certificate was
followed by this suit.
[2]
The evidence sustains a finding that the omission of the
prescribed brand of pipe was neither fraudulent nor willful. It was the

44

result of the oversight and inattention of the plaintiff's subcontractor.
Reading pipe is distinguished from Cohoes pipe and other brands only by
the name of the manufacturer stamped upon it at intervals of between six
and seven feet. Even the defendant's architect, though he inspected the
pipe upon arrival, failed to notice the discrepancy. The plaintiff tried to
show that the brands installed, though made by other manufacturers,
were the same in quality, in appearance, in market value and in cost as the
brand stated in the contract—that they were, indeed, the same thing,
though manufactured in another place. The evidence was excluded, and a
verdict directed for the defendant. The Appellate Division reversed, and
granted a new trial.
[3]
We think the evidence, if admitted, would have supplied
some basis for the inference that the defect was insignificant in its
relation to the project. The courts never say that one who makes a
contract fills the measure of his duty by less than full performance. They
do say, however, that an omission, both trivial and innocent, will
sometimes be atoned for by allowance of the resulting damage, and will
not always be the breach of a condition to be followed by a forfeiture
(Spence v. Ham, 163 N. Y. 220; Woodward v. Fuller, 80 N. Y. 312; Glacius v.
Black, 67 N. Y. 563, 566; Bowen v. Kimbell, 203 Mass. 364, 370). The
distinction is akin to that between dependent and independent promises,
or between promises and conditions (Anson on Contracts [Corbin's ed.],
sec. 367; 2 Williston on Contracts, sec. 842). Some promises are so
plainly independent that they can never by fair construction be
conditions of one another. (Rosenthal Paper Co. v. Nat. Folding Box & Paper
Co., 226 N. Y. 313; Bogardus v. N. Y. Life Ins. Co., 101 N. Y. 328). Others
are so plainly dependent that they must always be conditions. Others,
though dependent and thus conditions when there is departure in point
of substance, will be viewed as independent and collateral when the
departure is insignificant (2 Williston on Contracts, secs. 841, 842; Eastern
Forge Co. v. Corbin, 182 Mass. 590, 592; Robinson v. Mollett, L. R., 7 Eng. &
Ir. App. 802, 814; Miller v. Benjamin, 142 N. Y. 613). Considerations partly
of justice and partly of presumable intention are to tell us whether this or
that promise shall be placed in one class or in another. The simple and
the uniform will call for different remedies from the multifarious and the
intricate. The margin of departure within the range of normal expectation

45

upon a sale of common chattels will vary from the margin to be expected
upon a contract for the construction of a mansion or a “skyscraper.”
There will be harshness sometimes and oppression in the implication of a
condition when the thing upon which labor has been expended is
incapable of surrender because united to the land, and equity and reason
in the implication of a like condition when the subject-matter, if
defective, is in shape to be returned. From the conclusion that promises
may not be treated as dependent to the extent of their uttermost minutiae
without a sacrifice of justice, the progress is a short one to the conclusion
that they may not be so treated without a perversion of intention.
Intention not otherwise revealed may be presumed to hold in
contemplation the reasonable and probable. If something else is in view,
it must not be left to implication. There will be no assumption of a
purpose to visit venial faults with oppressive retribution.
[4]
Those who think more of symmetry and logic in the
development of legal rules than of practical adaptation to the attainment
of a just result will be troubled by a classification where the lines of
division are so wavering and blurred. Something, doubtless, may be said
on the score of consistency and certainty in favor of a stricter standard.
The courts have balanced such considerations against those of equity and
fairness, and found the latter to be the weightier. The decisions in this
state commit us to the liberal view, which is making its way, nowadays, in
jurisdictions slow to welcome it (Dakin & Co. v. Lee, 1916, 1 K. B. 566,
579). Where the line is to be drawn between the important and the trivial
cannot be settled by a formula. “In the nature of the case precise
boundaries are impossible” (2 Williston on Contracts, sec. 841). The
same omission may take on one aspect or another according to its
setting. Substitution of equivalents may not have the same significance in
fields of art on the one side and in those of mere utility on the other.
Nowhere will change be tolerated, however, if it is so dominant or
pervasive as in any real or substantial measure to frustrate the purpose of
the contract (Crouch v. Gutmann, 134 N. Y. 45, 51). There is no general
license to install whatever, in the builder's judgment, may be regarded as
“just as good” (Easthampton L. & C. Co., Ltd., v. Worthington, 186 N. Y.
407, 412). The question is one of degree, to be answered, if there is
doubt, by the triers of the facts (Crouch v. Gutmann; Woodward v. Fuller,

46

supra), and, if the inferences are certain, by the judges of the law
(Easthampton L. & C. Co., Ltd., v. Worthington, supra). We must weigh the
purpose to be served, the desire to be gratified, the excuse for deviation
from the letter, the cruelty of enforced adherence. Then only can we tell
whether literal fulfilment is to be implied by law as a condition. This is
not to say that the parties are not free by apt and certain words to
effectuate a purpose that performance of every term shall be a condition
of recovery. That question is not here. This is merely to say that the law
will be slow to impute the purpose, in the silence of the parties, where
the significance of the default is grievously out of proportion to the
oppression of the forfeiture. The willful transgressor must accept the
penalty of his transgression (Schultze v. Goodstein, 180 N. Y. 248, 251;
Desmond-Dunne Co. v. Friedman-Doscher Co., 162 N. Y. 486, 490). For him
there is no occasion to mitigate the rigor of implied conditions. The
transgressor whose default is unintentional and trivial may hope for
mercy if he will offer atonement for his wrong (Spence v. Ham, supra).
[5]
In the circumstances of this case, we think the measure of
the allowance is not the cost of replacement, which would be great, but
the difference in value, which would be either nominal or nothing. Some
of the exposed sections might perhaps have been replaced at moderate
expense. The defendant did not limit his demand to them, but treated the
plumbing as a unit to be corrected from cellar to roof. In point of fact,
the plaintiff never reached the stage at which evidence of the extent of
the allowance became necessary. The trial court had excluded evidence
that the defect was unsubstantial, and in view of that ruling there was no
occasion for the plaintiff to go farther with an offer of proof. We think,
however, that the offer, if it had been made, would not of necessity have
been defective because directed to difference in value. It is true that in
most cases the cost of replacement is the measure (Spence v. Ham, supra).
The owner is entitled to the money which will permit him to complete,
unless the cost of completion is grossly and unfairly out of proportion to
the good to be attained. When that is true, the measure is the difference
in value. Specifications call, let us say, for a foundation built of granite
quarried in Vermont. On the completion of the building, the owner
learns that through the blunder of a subcontractor part of the foundation
has been built of granite of the same quality quarried in New Hampshire.

47

The measure of allowance is not the cost of reconstruction. “There may
be omissions of that which could not afterwards be supplied exactly as
called for by the contract without taking down the building to its
foundations, and at the same time the omission may not affect the value
of the building for use or otherwise, except so slightly as to be hardly
appreciable.” (Handy v. Bliss, 204 Mass. 513, 519. Cf. Foeller v. Heintz, 137
Wis. 169, 178; Oberlies v. Bullinger, 132 N. Y. 598, 601; 2 Williston on
Contracts, sec. 805, p. 1541) The rule that gives a remedy in cases of
substantial performance with compensation for defects of trivial or
inappreciable importance, has been developed by the courts as an
instrument of justice. The measure of the allowance must be shaped to
the same end.
[6]
The order should be affirmed, and judgment absolute
directed in favor of the plaintiff upon the stipulation, with costs in all
courts.
MCLAUGHLIN, J. (DISSENTING).
[7]
I dissent. The plaintiff did not perform its contract. Its
failure to do so was either intentional or due to gross neglect which,
under the uncontradicted facts, amounted to the same thing, nor did it
make any proof of the cost of compliance, where compliance was
possible.
[8]
Under its contract it obligated itself to use in the
plumbing only pipe (between 2,000 and 2,500 feet) made by the Reading
Manufacturing Company. The first pipe delivered was about 1,000 feet
and the plaintiff's superintendent then called the attention of the foreman
of the subcontractor, who was doing the plumbing, to the fact that the
specifications annexed to the contract required all pipe used in the
plumbing to be of the Reading Manufacturing Company. They then
examined it for the purpose of ascertaining whether this delivery was of
that manufacture and found it was. Thereafter, as pipe was required in
the progress of the work, the foreman of the subcontractor would leave
word at its shop that he wanted a specified number of feet of pipe,
without in any way indicating of what manufacture. Pipe would thereafter
be delivered and installed in the building, without any examination
whatever. Indeed, no examination, so far as appears, was made by the

48

plaintiff, the subcontractor, defendant's architect, or any one else, of any
of the pipe except the first delivery, until after the building had been
completed. Plaintiff's architect then refused to give the certificate of
completion, upon which the final payment depended, because all of the
pipe used in the plumbing was not of the kind called for by the contract.
After such refusal, the subcontractor removed the covering or insulation
from about 900 feet of pipe which was exposed in the basement, cellar
and attic, and all but 70 feet was found to have been manufactured, not
by the Reading Company, but by other manufacturers, some by the
Cohoes Rolling Mill Company, some by the National Steel Works, some
by the South Chester Tubing Company, and some which bore no
manufacturer's mark at all. The balance of the pipe had been so installed
in the building that an inspection of it could not be had without
demolishing, in part at least, the building itself.
[9]
I am of the opinion the trial court was right in directing a
verdict for the defendant. The plaintiff agreed that all the pipe used
should be of the Reading Manufacturing Company. Only about twofifths of it, so far as appears, was of that kind. If more were used, then
the burden of proving that fact was upon the plaintiff, which it could
easily have done, since it knew where the pipe was obtained. The
question of substantial performance of a contract of the character of the
one under consideration depends in no small degree upon the good faith
of the contractor. If the plaintiff had intended to, and had complied with
the terms of the contract except as to minor omissions, due to
inadvertence, then he might be allowed to recover the contract price, less
the amount necessary to fully compensate the defendant for damages
caused by such omissions. (Woodward v. Fuller, 80 N. Y. 312; Nolan v.
Whitney, 88 N. Y. 648.) But that is not this case. It installed between 2,000
and 2,500 feet of pipe, of which only 1,000 feet at most complied with
the contract. No explanation was given why pipe called for by the
contract was not used, nor was any effort made to show what it would
cost to remove the pipe of other manufacturers and install that of the
Reading Manufacturing Company. The defendant had a right to contract
for what he wanted. He had a right before making payment to get what
the contract called for. It is no answer to this suggestion to say that the
pipe put in was just as good as that made by the Reading Manufacturing

49

Company, or that the difference in value between such pipe and the pipe
made by the Reading Manufacturing Company would be either “nominal
or nothing.” Defendant contracted for pipe made by the Reading
Manufacturing Company. What his reason was for requiring this kind of
pipe is of no importance. He wanted that and was entitled to it. It may
have been a mere whim on his part, but even so, he had a right to this
kind of pipe, regardless of whether some other kind, according to the
opinion of the contractor or experts, would have been “just as good,
better, or done just as well.” He agreed to pay only upon condition that
the pipe installed were made by that company and he ought not to be
compelled to pay unless that condition be performed. (Schultze v.
Goodstein, 180 N. Y. 248; Spence v. Ham, supra; Steel S. & E. C. Co. v. Stock,
225 N. Y. 173; Van Clief v. Van Vechten, 130 N. Y. 571; Glacius v. Black, 50
N. Y. 145; Smith v. Brady, 17 N. Y. 173, and authorities cited on p. 185.)
The rule, therefore, of substantial performance, with damages for
unsubstantial omissions, has no application. (Crouch v. Gutmann, 134 N. Y.
45; Spence v. Ham, 163 N. Y. 220.)
What was said by this court in Smith v. Brady (supra) is quite
applicable here:
I suppose it will be conceded that everyone has a right to
build his house, his cottage or his store after such a model and in
such style as shall best accord with his notions of utility or be
most agreeable to his fancy. The specifications of the contract
become the law between the parties until voluntarily changed. If
the owner prefers a plain and simple Doric column, and has so
provided in the agreement, the contractor has no right to put in
its place the more costly and elegant Corinthian. If the owner,
having regard to strength and durability, has contracted for walls
of specified materials to be laid in a particular manner, or for a
given number of joists and beams, the builder has no right to
substitute his own judgment or that of others. Having departed
from the agreement, if performance has not been waived by the
other party, the law will not allow him to allege that he has made
as good a building as the one he engaged to erect. He can
demand payment only upon and according to the terms of his
contract, and if the conditions on which payment is due have not
been performed, then the right to demand it does not exist. To
hold a different doctrine would be simply to make another

50

contract, and would be giving to parties an encouragement to
violate their engagements, which the just policy of the law does
not permit.
[10]
I am of the opinion the trial court did not err in ruling on
the admission of evidence or in directing a verdict for the defendant.
[11]
For the foregoing reasons I think the judgment of the
Appellate Division should be reversed and the judgment of the Trial
Term affirmed.
3.1.1. Perfect Tender and Substantial Performance
Under the Uniform Commercial Code, the standard for performance
is “perfect tender” rather than “substantial performance.”
§ 2-601. Buyer’s Rights on Improper Delivery
Subject to the provisions of this Article on installment contracts
(Section 2-612) and on shipment by seller (Section 2-504), and unless
otherwise agreed under the sections on contractual limitations of remedy
(Sections 2-718 and 2-719), if the goods or the tender of delivery fail in
any respect to conform to the contract, the buyer may
(a) reject the whole; or
(b) accept the whole; or
(c) accept any commercial unit or units and reject the rest.
This rule applies to contracts for the sale of “goods” as defined in
the UCC. Thus, with the exception of the seller’s limited right to “cure” a
defective tender under U.C.C. § 2-508, buyers of goods may reject a
seller’s performance for even a minor failure to conform to the description
or quality of the goods specified in the contract.
In contrast, the doctrine enunciated in Jacob & Youngs v. Kent,
allows a promisor to provide “substantial performance” and pay damages
for any “trivial and innocent defects.” Courts ordinarily apply this doctrine
to complex service and construction contracts.

51

3.1.2. Motion for Rehearing in Jacob & Youngs v. Kent
According to the record on appeal in Jacob & Youngs v. Kent, the
contract with the builder included the following language:
Any work furnished by the Contractor, the material or
workmanship of which is defective or which is not fully in
accordance with the drawings or specifications, in every respect,
will be rejected and is to be immediately torn down, removed and
remade or replaced in accordance with the drawings and
specifications, whenever discovered…. The Owner shall have the
option at all times to allow the defective or improper work to
stand and to receive from the Contractor a sum of money
equivalent to the difference in value of the work as performed
and as herein specified.
After losing on appeal, Kent filed a motion for rehearing and called
the court’s attention to this clause. The New York Court of Appeals
responded with a brief per curiam opinion:
The court did not overlook the specification which
provides that defective work shall be replaced. The promise to
replace, like the promise to install, is to be viewed, not as a
condition, but as independent and collateral, when the defect is
trivial and innocent. The law does not nullify the covenant, but
restricts the remedy to damages.
230 N.Y. 656 (1921).
3.1.3. Discussion of Jacob & Youngs v. Kent
Suppose that, contrary to fact, a rule of perfect tender applied to
construction contracts. If you were negotiating an agreement on behalf of a
builder, what risks would you anticipate? What contract terms might you
propose to the owner in order to protect your client from those risks? How
might the owner’s willingness to agree to vary the perfect tender rule affect
the price the builder should charge for the project?
Now imagine how the same negotiation would proceed under the
rule of substantial performance. Suppose that the owner cares deeply about
having Reading rather than Cohoes or National pipe. Can you propose
contract language that would ensure that the builder must tear out and
replace any non-Reading pipe? Are there any additional terms that the parties

52

could include in their contract to protect the builder from the special risks
associated with promising to use only Reading pipe?
Judge Cardozo argues for a rule that permits the builder to avoid the
high cost of tearing out and replacing nonconforming pipe because the
defect is “both innocent and trivial.” The owner must be content with
receiving damages for the difference in market value between Reading and
other brands of pipe. In his dissent, Judge McLaughlin casts the builder’s
conduct in a different light and advocates strict application of the contract
specifications. What incentives do these competing rules create for builders
and owners? Could a court devise what we have called a “compound liability
rule” that polices potential misconduct by both parties?
4. Exclusive Dealing Contracts
A number of the contracts we have studied thus far involved a single
exchange of payment for an easily defined performance. Thus, for example,
Bailey sought to collect for the cost of boarding Bascom’s Folly; Lucy
wanted Zehmer to convey title to the Ferguson farm; and Lefkowitz sought
to enforce the Great Minneapolis Surplus Store’s advertised deal on fur
pieces. Other cases concerned more complex disputes about whether the
promisor completed performance satisfactorily, as in Stees v. Leonard and Jacob
& Youngs v. Kent. Or the circumstances required a court to find an implied
term excusing performance, as in Taylor v. Caldwell, or to create (and then
terminate) an option to accept a subcontractor’s bid, as in Pavel Enterprises v.
A.S. Johnson Co.
In this section, we introduce a new source of complexity to the
contracting process. Exclusive dealing contracts are one example of a
broader category of “relational contracts” that involve repeated occasions for
performance and payment. The familiar employment relationship exemplifies
many of the characteristic features of a relational contract. Performance
ordinarily occurs over a considerable length of time. Neither party can be
certain at the outset exactly what tasks the employee will undertake or what
opportunities the employer will be able to offer in exchange. Many unknown
contingencies potentially affect both the cost of the parties’ performance and
the alternative opportunities they have during the term of the contract.
Finally, it is impossible to draft specific contract language that will adequately
address each of the innumerable contingencies that may arise.

53

Commercial parties confront these problems in long-term supply
contracts, in exclusive distributorship agreements, in some publishing
contracts, and in countless other situations. The Uniform Commercial Code
provides broad guidelines for certain relational contracts involving the sale of
goods. Please read UCC § 2-306 Output, Requirements and Exclusive
Dealings.
This UCC section addresses both exclusive dealing and so-called
“output or requirements” contracts. An output contract commits the buyer
to purchase and the seller to sell the entire output of a particular production
facility. A requirements contract similarly obligates one party to purchase the
entire quantity of a particular good that it needs from the other party who
commits to supply those requirements.
For output and requirements contracts, an initial problem is to
establish that the promisors’ commitments are sufficiently definite to warrant
enforcement. The official comment 2 to U.C.C. § 2-306 expressly rejects
cases holding that the quantity term of an output or requirements contract is
too indefinite. For exclusive dealing contracts, courts confront an analogous
question of whether the recipient of exclusive rights has provided any
consideration. As you can see, UCC § 2-306 answers this question in the
affirmative. The first of the common law cases that follows, Wood v. Lucy,
Lady Duff-Gordon, shows how a noted jurist reasoned about consideration in
an exclusive dealing contract. The second case, Bloor v. Falstaff, interprets
specific contractual language establishing a standard of performance quite
similar to the implied “best efforts” obligation of U.C.C. § 2-306.
As you read both of these cases, consider first how the court
addresses the problem of consideration and then what sort of guidance the
decision offers about the applicable performance standard.
4.1. Principal Case – Wood v. Lucy, Lady Duff-Gordon
Wood v. Lucy, Lady Duff-Gordon
Court of Appeals of New York
222 N.Y. 88, 118 N.E. 214 (1917)
CARDOZO, J.
1.
The defendant styles herself “a creator of fashions.” Her
favor helps a sale. Manufacturers of dresses, millinery and like articles are

54

glad to pay for a certificate of her approval. The things which she
designs, fabrics, parasols and what not, have a new value in the public
mind when issued in her name. She employed the plaintiff to help her to
turn this vogue into money. He was to have the exclusive right, subject
always to her approval, to place her indorsements on the designs of
others. He was also to have the exclusive right to place her own designs
on sale, or to license others to market them. In return, she was to have
one-half of “all profits and revenues” derived from any contracts he
might make. The exclusive right was to last at least one year from April 1,
1915, and thereafter from year to year unless terminated by notice of
ninety days. The plaintiff says that he kept the contract on his part, and
that the defendant broke it. She placed her indorsement on fabrics,
dresses and millinery without his knowledge, and withheld the profits. He
sues her for the damages, and the case comes here on demurrer.
2.
The agreement of employment is signed by both parties.
It has a wealth of recitals. The defendant insists, however, that it lacks the
elements of a contract. She says that the plaintiff does not bind himself
to anything. It is true that he does not promise in so many words that he
will use reasonable efforts to place the defendant's indorsements and
market her designs.
3.
We think, however, that such a promise is fairly to be
implied. The law has outgrown its primitive stage of formalism when the
precise word was the sovereign talisman, and every slip was fatal. It takes
a broader view to-day. A promise may be lacking, and yet the whole
writing may be “instinct with an obligation,” imperfectly expressed
(SCOTT, J., in McCall Co. v. Wright, 133 App. Div. 62; Moran v. Standard
Oil Co., 211 N. Y. 187, 198). If that is so, there is a contract.
4.
The implication of a promise here finds support in many
circumstances. The defendant gave an exclusive privilege. She was to
have no right for at least a year to place her own indorsements or market
her own designs except through the agency of the plaintiff. The
acceptance of the exclusive agency was an assumption of its duties
(Phoenix Hermetic Co. v. Filtrine Mfg. Co., 164 App. Div. 424; W. G. Taylor
Co. v. Bannerman, 120 Wis. 189; Mueller v. Bethesda Mineral Spring Co., 88
Mich. 390). We are not to suppose that one party was to be placed at the
mercy of the other (Hearn v. Stevens & Bro., 111 App. Div. 101, 106;

55

Russell v. Allerton, 108 N. Y. 288). Many other terms of the agreement
point the same way. We are told at the outset by way of recital that “the
said Otis F. Wood possesses a business organization adapted to the
placing of such indorsements as the said Lucy, Lady Duff-Gordon has
approved.” The implication is that the plaintiff's business organization
will be used for the purpose for which it is adapted. But the terms of the
defendant's compensation are even more significant. Her sole
compensation for the grant of an exclusive agency is to be one-half of all
the profits resulting from the plaintiff's efforts. Unless he gave his
efforts, she could never get anything. Without an implied promise, the
transaction cannot have such business “efficacy as both parties must
have intended that at all events it should have” (BOWEN, L. J., in The
Moorcock, 14 P. D. 64, 68). But the contract does not stop there. The
plaintiff goes on to promise that he will account monthly for all moneys
received by him, and that he will take out all such patents and copyrights
and trademarks as may in his judgment be necessary to protect the rights
and articles affected by the agreement. It is true, of course, as the
Appellate Division has said, that if he was under no duty to try to market
designs or to place certificates of indorsement, his promise to account for
profits or take out copyrights would be valueless. But in determining the
intention of the parties, the promise has a value. It helps to enforce the
conclusion that the plaintiff had some duties. His promise to pay the
defendant one-half of the profits and revenues resulting from the
exclusive agency and to render accounts monthly, was a promise to use
reasonable efforts to bring profits and revenues into existence. For this
conclusion, the authorities are ample (Wilson v. Mechanical Orguinette Co.,
170 N. Y. 542; Phoenix Hermetic Co. v. Filtrine Mfg. Co., supra; Jacquin v.
Boutard, 89 Hun, 437; 157 N. Y. 686; Moran v. Standard Oil Co., supra; City
of N. Y. v. Paoli, 202 N. Y. 18; M'Intyre v. Belcher, 14 C. B. [N. S.] 654;
Devonald v. Rosser & Sons, 1906, 2 K. B. 728; W. G. Taylor Co. v. Bannerman,
supra; Mueller v. Bethesda Mineral Spring Co., supra; Baker Transfer Co. v.
Merchants' R. & I. Mfg. Co., 1 App. Div. 507).
5.
The judgment of the Appellate Division should be
reversed, and the order of the Special Term affirmed, with costs in the
Appellate Division and in this court.

56

CUDDEBACK, MCLAUGHLIN AND ANDREWS,
CONCUR; HISCOCK, CH. J., CHASE AND CRANE, JJ., DISSENT.

JJ.,

4.1.1. The Background of Wood v. Lucy, Lady Duff-Gordon
As her name suggests, Lady Duff-Gordon was a British clothing
designer who had considerable success in England before attempting to enter
the American market with Wood’s promotional assistance. Wood and Lucy
hoped that her fame would lead American clothing makers to value her
endorsement of their products. The litigation grew out of Lucy’s decision to
make a separate deal with Sears, Roebuck and Company to sell a line of her
dresses through the company’s mail order catalogue. Wood objected that the
Sears deal violated his exclusive right to market her products in the United
States. Adding insult to injury, it appears that the “Lucile” line was too
expensive for most Sears customers. The company evidently lost more than
$26,000 and dropped the line from its catalogue.
Lucy was quite a celebrity in her day and even tasted some scandal
for her conduct as a survivor in the sinking of the Titanic. For more on the
story of Lucy and her dresses, see Walter Pratt, American Contract Law at the
Turn of the Century, 39 S.C. L. REV. 415 (1988), and VICTOR GOLDBERG,
FRAMING CONTRACT LAW: AN ECONOMIC PERSPECTIVE 57-58 (2007).
4.1.2. Reading Wood v. Lucy, Lady Duff-Gordon
Although judicial opinions often make one outcome appear
inevitable, great legal advocates develop a creative ability to imagine how the
court could have reached the opposite result. Professor Karl Llewellyn has
offered this strikingly different reading of the situation in Wood:
The plaintiff in this action rests his case upon his own
carefully prepared form agreement, which has as its first essence
his own omission of any expression whatsoever of any obligation
of any kind on the part of this same plaintiff. We thus have the
familiar situation of a venture in which one party, here the
defendant, has an asset, with what is, in advance, purely
speculative value. The other party, the present plaintiff, who drew
the agreement, is a marketer eager for profit, but chary of risk.
The legal question presented is whether the plaintiff, while
carefully avoiding all risk in the event of failure, can nevertheless
claim full profit in the event that the market may prove favorable

57

in its response. The law of consideration joins with the principles
of business decency in giving the answer. And the answer is no.
Karl Llewellyn, A Lecture on Appellate Advocacy, 29 U. CHI. L. REV. 627,
637-38 (1962).
4.1.3. Discussion of Wood v. Lucy, Lady Duff-Gordon
Professor Karl Llewellyn offers a reading of the facts that raises grave
doubts about whether the agent, Wood, has provided any consideration for
Lady Duff-Gordon’s promise to pay him a commission on all U.S. sales of
her designs. How does Judge Cardozo avoid this problem and find an
enforceable contract? What facts about the relationship of the parties does he
use to support this conclusion?
To what standard of performance does Judge Cardozo hold Wood?
What exactly is Wood obliged to do under his contract with Lady DuffGordon?
4.1.4. Hypo on Real Estate Sales
Suppose that Bob is selling his house. He signs an exclusive listing
contract with Kay, a real estate broker. According to the terms of the
contract, Bob promises to pay Kay six percent of the selling price of his
home if she, or anyone else, sells the house during the next three months.
Is Bob’s promise to pay supported by consideration? If so, what is
the consideration and what argument justifies us in concluding that it exists?
Now suppose that Kay, the agent, has found a buyer. The buyer, Sue,
signs a contract in which she agrees to buy the house for $250,000 but the
document provides that “this sale is conditional on the buyer obtaining a
mortgage in the amount of $200,000 at an interest rate not to exceed seven
(7) percent.”
Is Sue’s promise illusory? Could she simply sit on her hands and do
nothing and then cancel the contract for failure of the financing contingency?
As an attorney for Bob, the seller, what would you tell him about his
chances of succeeding in a suit to enforce any duties Sue might have to
obtain a mortgage?

58

Can you think of any measures that Bob or his agent Kay could take
to reduce the risk that Sue will avoid the contract by failing to obtain
financing?
Finally, suppose that Bob has similar concerns about how much
effort Kay will expend promoting the sale of his house. He may worry, for
example, that Kay will simply list his property in the Multiple Listing Service
(MLS) and then wait passively until another agent brings a prospective buyer
to view the house. It is customary in such cases for the listing broker, Kay, to
share the sale commission with the other broker. However, Kay might
reasonably believe that a low-effort promotional strategy will maximize her
net income.
What sort of terms could Bob demand in a future listing contract to
address this possibility? Do you foresee any problems that might arise with
specific performance standards? Would a simpler contract, promising a
commission of six percent of the purchase price to anyone who sells the
house, be more likely to achieve Bob’s objectives?
4.2. Principal Case – Bloor v. Falstaff Brewing Corp.
Bloor v. Falstaff Brewing Corp
United States Court of Appeals, Second Circuit
601 F.2d 609 (1979)
FRIENDLY, CIRCUIT JUDGE:
[1]
This action, wherein federal jurisdiction is predicated on
diversity of citizenship, 28 U.S.C. § 1332, was brought in the District
Court for the Southern District of New York, by James Bloor,
Reorganization Trustee of Balco Properties Corporation, formerly named
P. Ballantine & Sons (Ballantine), a venerable and once successful
brewery based in Newark, N. J. He sought to recover from Falstaff
Brewing Corporation (Falstaff) for breach of a contract dated March 31,
1972, wherein Falstaff bought the Ballantine brewing labels, trademarks,
accounts receivable, distribution systems and other property except the
brewery. The price was $4,000,000 plus a royalty of fifty cents on each
barrel of the Ballantine brands sold between April 1, 1972 and March 31,
1978. Although other issues were tried, the appeals concern only two
provisions of the contract. These are:

59

8. Certain Other Covenants of Buyer. (a) After the
Closing Date the (Buyer) will use its best efforts to promote and
maintain a high volume of sales under the Proprietary Rights.
2(a)(v) (The Buyer will pay a royalty of $.50 per barrel for
a period of 6 years), provided, however, that if during the Royalty
Period the Buyer substantially discontinues the distribution of
beer under the brand name “Ballantine” (except as the result of a
restraining order in effect for 30 days issued by a court of
competent jurisdiction at the request of a governmental
authority), it will pay to the Seller a cash sum equal to the years
and fraction thereof remaining in the Royalty Period times
$1,100,000, payable in equal monthly installments on the first day
of each month commencing with the first month following the
month in which such discontinuation occurs….
[2]
Bloor claimed that Falstaff had breached the best efforts
clause, 8(a), and indeed that its default amounted to the substantial
discontinuance that would trigger the liquidated damage clause, 2(a)(v).
In an opinion that interestingly traces the history of beer back to
Domesday Book and beyond, Judge Brieant upheld the first claim and
awarded damages but dismissed the second. Falstaff appeals from the
former ruling, Bloor from the latter. Both sides also dispute the court's
measurement of damages for breach of the best efforts clause.
[3]
We shall assume familiarity with Judge Brieant's excellent
opinion, 454 F. Supp. 258 (S.D.N.Y.1978), from which we have drawn
heavily, and will state only the essentials. Ballantine had been a family
owned business, producing low-priced beers primarily for the northeast
market, particularly New York, New Jersey, Connecticut and
Pennsylvania. Its sales began to decline in 1961, and it lost money from
1965 on. On June 1, 1969, Investors Funding Corporation (IFC), a real
estate conglomerate with no experience in brewing, acquired substantially
all the stock of Ballantine for $16,290,000. IFC increased advertising
expenditures, levelling off in 1971 at $1 million a year. This and other
promotional practices, some of dubious legality, led to steady growth in
Ballantine's sales despite the increased activities in the northeast of the
“nationals”1 which have greatly augmented their market shares at the
1 Miller's, Schlitz, Anheuser-Busch, Coors and Pabst.

60

expense of smaller brewers. However, this was a profitless prosperity;
there was no month in which Ballantine had earnings and the total loss
was $15,500,000 for the 33 months of IFC ownership.
[4]
After its acquisition of Ballantine, Falstaff continued the
$1 million a year advertising program, IFC's pricing policies, and also its
policy of serving smaller accounts not solely through sales to
independent distributors, the usual practice in the industry, but by use of
its own warehouses and trucks the only change being a shift of the retail
distribution system from Newark to North Bergen, N.J., when brewing
was concentrated at Falstaff's Rhode Island brewery. However, sales
declined and Falstaff claims to have lost $22 million in its Ballantine
brand operations from March 31, 1972 to June 1975. Its other activities
were also performing indifferently, although with no such losses as were
being incurred in the sale of Ballantine products, and it was facing
inability to meet payrolls and other debts. In March and April 1975
control of Falstaff passed to Paul Kalmanovitz, a businessman with 40
years experience in the brewing industry. After having first advanced $3
million to enable Falstaff to meet its payrolls and other pressing debts, he
later supplied an additional $10 million and made loan guarantees, in
return for which he received convertible preferred shares in an amount
that endowed him with 35% of the voting power and became the
beneficiary of a voting trust that gave him control of the board of
directors.
[5]
Mr. Kalmanovitz determined to concentrate on making
beer and cutting sales costs. He decreased advertising, with the result that
the Ballantine advertising budget shrank from $1 million to $115,000 a
year.2 In late 1975 he closed four of Falstaff's six retail distribution
centers, including the North Bergen, N.J. depot, which was ultimately
replaced by two distributors servicing substantially fewer accounts. He
also discontinued various illegal practices that had been used in selling

2This was for cooperative advertising with purchasers.

61

Ballantine products.3 What happened in terms of sales volume is shown
in plaintiff's exhibit 114 J, a chart which we reproduce in the margin.4
With 1974 as a base, Ballantine declined 29.72% in 1975 and 45.81% in
1976 as compared with a 1975 gain of 2.24% and a 1976 loss of 13.08%
for all brewers excluding the top 15. Other comparisons are similarly
devastating, at least for 1976.5 Despite the decline in the sale of its own
labels as well as Ballantine's, Falstaff, however, made a substantial
financial 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
its cash and certificates of deposit from $2.2 million to $12.1 million.
[6]
Seizing upon remarks made by the judge during the trial
that Falstaff's financial standing in 1975 and thereafter “is probably not
relevant” and a footnote in the opinion, 454 F. Supp. at 267 n. 7,6
appellate counsel for Falstaff contend that the judge read the best efforts
clause as requiring Falstaff to maintain Ballantine's volume by any sales
3 There were two kinds of illegal practices, the testimony on both of which is,

unsurprisingly, rather vague. Certain “national accounts”, i. e. large draught beer
buyers, were gotten or retained by “black bagging”, the trade term for commercial
bribery. On a smaller scale, sales to taverns were facilitated by the salesman's
offering a free round for the house of Ballantine if it was available (“retention”),
or the customer's choice (“solicitation”). Both practices seem to have been
indulged in by many brewers, including Falstaff before Kalmanovitz took control.
4[An incomprehensible graph comparing sales volumes is omitted. The text above

ably describes the distinctively bad performance of Ballantine brands.]
5 Falstaff argues that a trend line projecting the declining volume of Ballantine's

sales since 1966, before IFC's purchase, would show an even worse picture. We
agree with plaintiff that the percentage figures since 1974 are more significant; at
least the judge was entitled to think so.
6 “Even if Falstaff's financial position had been worse in mid-1975 than it actually

was, and even if Falstaff had continued in that state of impecuniosity during the
term of the contract, performance of the contract is not excused where the
difficulty of performance arises from financial difficulty or economic hardship. As
the New York Court of Appeals stated in 407 E. 61st St. Garage, Inc. v. Savoy Corp.,
244 N.E.2d 37, 41 (N.Y. 1968):
‘(W)here impossibility or difficulty of performance is occasioned only by financial
difficulty or economic hardship, even to the extent of insolvency or bankruptcy,
performance of a contract is not excused.’ (Citations omitted.)”

62

methods having a good prospect of increasing or maintaining sales or, at
least, to continue lawful methods in use at the time of purchase, no
matter what losses they would cause. Starting from this premise, counsel
reason that the judge's conclusion was at odds with New York law,
stipulated by the contract to be controlling, as last expressed by the Court
of Appeals in Feld v. Henry S. Levy & Sons, Inc., 335 N.E.2d 320 (N.Y.
1975). The court was there dealing with a contract whereby defendant
agreed to sell and plaintiff to purchase all bread crumbs produced by
defendant at a certain factory. During the term of the agreement
defendant ceased producing bread crumbs because production with
existing facilities was “very uneconomical”, and the plaintiff sued for
breach. The case was governed by § 2-306 of the Uniform Commercial
Code which provides:
§ 2-306. Output, Requirements and Exclusive Dealings
(1) A term which measures the quantity by the output of
the seller or the requirements of the buyer means such actual
output or requirements as may occur in good faith, except that no
quantity unreasonably disproportionate to any stated estimate or
in the absence of a stated estimate to any normal or otherwise
comparable prior output or requirements may be tendered or
demanded.
(2) A lawful agreement by either the seller or the buyer
for exclusive dealing in the kind of goods concerned imposes
unless otherwise agreed an obligation by the seller to use best
efforts to supply the goods and by the buyer to use best efforts to
promote their sale.
[7]
Affirming the denial of cross-motions for summary
judgment, the court said that, absent a cancellation on six months' notice
for which the contract provided:
[D]efendant was expected to continue to perform in good
faith and could cease production of the bread crumbs, a single
facet of its operation, only in good faith. Obviously, a bankruptcy
or genuine imperiling of the very existence of its entire business
caused by the production of the crumbs would warrant cessation
of production of that item; the yield of less profit from its sale
than expected would not. Since bread crumbs were but a part of
defendant's enterprise and since there was a contractual right of

63

cancellation, good faith required continued production until
cancellation, even if there be no profit. In circumstances such as
these and without more, defendant would be justified, in good
faith, in ceasing production of the single item prior to
cancellation only if its losses from continuance would be more
than trivial, which, overall, is a question of fact.
335 N.E.2d 323.7 Falstaff argues from this that it was not bound
to do anything to market Ballantine products that would cause “more
than trivial” losses.
[8]
Other cases suggest that under New York law a “best
efforts” clause imposes an obligation to act with good faith in light of
one's own capabilities. In Van Valkenburgh v. Hayden Publishing Co., 30
N.Y.2d 34, 330 N.Y.S.2d 329, 281 N.E.2d 142 (1972), the court held a
publisher liable to an author when, in clear bad faith after a contract
dispute, he hired another to produce a book very similar to plaintiff's and
then promoted it to those who had been buying the latter. On the other
hand, a defendant having the exclusive right to sell the plaintiff's product
may sell a similar product if necessary to meet outside competition, so
long as he accounts for any resulting losses the plaintiff can show in the
sales of the licensed product. Parev Products Co. v. I. Rokeach & Sons, 124
F.2d 147 (2 Cir. 1941). A summary definition of the best efforts
obligation, cited by Judge Brieant, 454 F. Supp. at 266, is given in Arnold
Productions, Inc. v. Favorite Films Corp., 176 F.Supp. 862, 866
(S.D.N.Y.1959), aff'd 298 F.2d 540 (2 Cir. 1962), to wit, performing as
well as “the average prudent comparable” brewer.
7The text of the Feld opinion did not refer to the case cited by Judge Brieant in the

preceding footnote, 407 East 61st Garage, Inc. v. Savoy Fifth Avenue Corporation, 244
N.E.2d 37 (N.Y. 1968), which might suggest a more onerous obligation here. The
Court of Appeals there reversed a summary judgment in favor of the defendant,
which had discontinued operating the Savoy Hilton Hotel because of substantial
financial losses, in alleged breach of a five-year contract with plaintiff wherein the
defendant had agreed to use all reasonable efforts to provide the garage with
exclusive opportunity for storage of the motor vehicles of hotel guests. Although
the court did use the language quoted by Judge Brieant, the actual holding was
simply that “an issue of fact is presented whether the agreement did import an
implied promise by Savoy to fulfill its obligations for an entire five-year period.”
244 N.E.2d at 41.

64

[9]
The net of all this is that the New York law is far from
clear and it is unfortunate that a federal court must have to apply it.
[10]
We do not think the judge imposed on Falstaff a standard
as demanding as its appellate counsel argues that he did. Despite his
footnote 7, see note 6 supra, he did not in fact proceed on the basis that
the best efforts clause required Falstaff to bankrupt itself in promoting
Ballantine products or even to sell those products at a substantial loss.
He relied rather on the fact that Falstaff's obligation to “use its best
efforts to promote and maintain a high volume of sales” of Ballantine
products was not fulfilled by a policy summarized by Mr. Kalmanovitz as
being:
We sell beer and you pay for it….We sell beer, F.O.B. the
brewery. You come and get it.
however sensible such a policy may have been with respect to
Falstaff's other products. Once the peril of insolvency8 had been averted,
the drastic percentage reductions in Ballantine sales as related to any
possible basis of comparison, see fn. 5, required Falstaff at least to
explore whether steps not involving substantial losses could have been
taken to stop or at least lessen the rate of decline. The judge found that,
instead of doing this, Falstaff had engaged in a number of misfeasances
and nonfeasances which could have accounted in substantial measure for
the catastrophic drop in Ballantine sales shown in the chart, see 454 F.
Supp. at 267-72. These included the closing of the North Bergen depot
which had serviced “Mom and Pop” stores and bars in the New York
metropolitan area; Falstaff's choices of distributors for Ballantine
products in the New Jersey and particularly the New York areas, where
the chosen distributor was the owner of a competing brand; its failure to
take advantage of a proffer from Guinness-Harp Corporation to
distribute Ballantine products in New York City through its Metrobeer
Division; Falstaff's incentive to put more effort into sales of its own
8 The judge may have unduly minimized this. We cannot agree with his statement,

454 F. Supp. at 267, that even in the winter of 1975 Falstaff “had considerable
borrowing capacity” and indeed “did borrow successfully from Mr. Kalmanovitz.”
The latter was not making a commercial loan but was engaged in a program to
take control. However, nothing turns on this.

65

brands which sold at higher prices despite identity of the ingredients and
were free from the $0.50 a barrel royalty burden; its failure to treat
Ballantine products evenhandedly with Falstaff's; its discontinuing the
practice of setting goals for salesmen; and the general Kalmanovitz policy
of stressing profit at the expense of volume. In the court's judgment,
these misfeasances and nonfeasances warranted a conclusion that, even
taking account of Falstaff's right to give reasonable consideration to its
own interests, Falstaff had breached its duty to use best efforts as stated
in the Van Valkenburgh decision, supra, 30 N.Y.2d at 46, 330 N.Y.S.2d at
334, 281 N.E.2d at 145.
[11]
Falstaff levels a barrage on these findings. The only attack
which merits discussion is its criticism of the judge's conclusion that
Falstaff did not treat its Ballantine brands evenhandedly with those under
the Falstaff name. We agree that the subsidiary findings “that Falstaff but
not Ballantine had been advertised extensively in Texas and Missouri”
and that “(i)n these same areas Falstaff, although a ‘premium’ beer, was
sold for extended periods below the price of Ballantine,” while literally
true, did not warrant the inference drawn from them. Texas was Falstaff
territory and, with advertising on a cooperative basis, it was natural that
advertising expenditures on Falstaff would exceed those on Ballantine.
The lower price for Falstaff was a particular promotion of a bicentennial
can in Texas, intended to meet a particular competitor.
[12]
However, we do not regard this error as undermining the
judge's ultimate conclusion of breach of the best efforts clause. While
that clause clearly required Falstaff to treat the Ballantine brands as well
as its own, it does not follow that it required no more. With respect to its
own brands, management was entirely free to exercise its business
judgment as to how to maximize profit even if this meant serious loss in
volume. Because of the obligation it had assumed under the sales
contract, its situation with respect to the Ballantine brands was quite
different. The royalty of $.50 a barrel on sales was an essential part of the
purchase price. Even without the best efforts clause Falstaff would have
been bound to make a good faith effort to see that substantial sales of
Ballantine products were made, unless it discontinued under clause
2(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

66

imposed an added obligation to use “best efforts to promote and
maintain a high volume of sales ….” (emphasis supplied). Although we
agree that even this did not require Falstaff to spend itself into
bankruptcy to promote the sales of Ballantine products, it did prevent the
application to them of Kalmanovitz' philosophy of emphasizing profit
uber alles without fair consideration of the effect on Ballantine volume.
Plaintiff was not obliged to show just what steps Falstaff could
reasonably have taken to maintain a high volume for Ballantine products.
It was sufficient to show that Falstaff simply didn't care about
Ballantine's volume and was content to allow this to plummet so long as
that course was best for Falstaff's overall profit picture, an inference
which the judge permissibly drew. The burden then shifted to Falstaff to
prove there was nothing significant it could have done to promote
Ballantine sales that would not have been financially disastrous.
[13]
Having correctly concluded that Falstaff had breached its
best efforts covenant, the judge was faced with a difficult problem in
computing what the royalties on the lost sales would have been. There is
no need to rehearse the many decisions that, in a situation like this,
certainty is not required; “(t)he plaintiff need only show a ‘stable
foundation for a reasonable estimate of royalties he would have earned
had defendant not breached’ ”. Contemporary Mission, Inc. v. Famous
Music Corp., 557 F.2d 918, 926 (2 Cir. 1977), quoting Freund v. Washington
Square Press, Inc., 34 N.Y.2d 379, 383, 357 N.Y.S.2d 857, 861, 314 N.E.2d
419, 421 (1974). After carefully considering other possible bases, the
court arrived at the seemingly sensible conclusion that the most nearly
accurate comparison was with the combined sales of Rheingold and
Schaefer beers, both, like Ballantine, being “price” beers sold primarily in
the northeast, and computed what Ballantine sales would have been if its
brands had suffered only the same decline as a composite of Rheingold
and Schaefer.
[14]
Falstaff's principal criticism of the method of
comparison, in addition to that noted in fn. 5, supra, was that the judge
erred in saying, 454 F. Supp. at 279, that inclusion of Rheingold made
“the comparison a conservative one” since “(t)he brewery was closed in
early 1974 and production halted for a time.” Falstaff is right that the halt
in Rheingold production works the other way since the lowered figure

67

for the base year made the percentage decline in subsequent years appear
to be less than it in fact was. Against this, however, is the fact that the
Rheingold 1977 figures do not include sales for the end of 1977 after the
sale of Rheingold to Schmidt's Brewery, which counterbalances this error
in some degree. In any event the Rheingold sales were only 25.7% of the
combined sales in 1974 and 16.8% In 1977. Another criticism is that the
deduction from the initial computation of lost royalties of $29,193.50 for
the period April 1976 to March 1978 as representing royalties lost
through the cessation of illegal practices was insufficient; it may well have
been but the judge used the best figures he had. A possible objection,
namely, that Schaefer maintained its sales only by incurring large losses, a
fact now possibly subject to judicial notice, see The F. & M. Schaefer
Corporation v. C. Schmidt & Sons, Inc., 597 F.2d 814, 817 (2d Cir. 1979), was
not advanced with sufficient specificity to have required consideration. It
is true, more generally, that the award may overcompensate the plaintiff
since Falstaff was not necessarily required to do whatever Rheingold and
Schaefer did. But that is the kind of uncertainty which is permissible in
favor of a plaintiff who has established liability in a case like this. As said
in Wakeman v. Wheeler & Wilson Mfg. Co., 101 N.Y. 205, 209, 4 N.E. 264
(1886):
(W)hen it is certain that damages have been caused by a
breach of contract, and the only uncertainty is to their amount,
there can rarely be good reason for refusing on account of such
uncertainty, any damages whatever for the breach. A person
violating his contract should not be permitted entirely to escape
liability because the amount of damage which he caused is
uncertain.
[15]
We also reject plaintiff's complaint on his cross-appeal
that the court erred in not taking as its standard for comparison the
grouping of all but the top 15 brewers, Ballantine having ranked 16th in
1971. The judge was entirely warranted in believing that the RheingoldSchaefer combination afforded a better standard of comparison.
[16]
We can dispose quite briefly of the portion of the
plaintiff's cross-appeal which claims error in the rejection of his
contention that Falstaff's actions triggered the liquidated damage clause.
One branch of this puts heavy weight on the word “distribution”; the

68

claim is that the closing of the North Bergen center and Mr.
Kalmanovitz' general come-and-get-it philosophy was, without more, a
substantial discontinuance of “distribution”. On this basis plaintiff would
be entitled to invoke the liquidated damage clause even if Falstaff's new
methods had succeeded in checking the decline in Ballantine sales.
Another fallacy is that, country-wide, Falstaff substantially increased the
number of distributors carrying Ballantine labels. Moreover the term
“distribution”, as used in the brewing industry, does not require
distribution by the brewer's own trucks and employees. The norm rather
is distribution through independent wholesalers. Falstaff's default under
the best efforts clause was not in returning to that method simpliciter but
in its failure to see to it that wholesale distribution approached in
effectiveness what retail distribution had done.
[17]
Plaintiff contends more generally that permitting a decline
of 63.12% In Ballantine sales from 1974 to 1977 was the equivalent of
quitting the game. However, as Judge Brieant correctly pointed out, a
large part of this drop was attributable “to the general decline of the
market share of the smaller brewers” as against the “nationals”, 454 F.
Supp. at 266, and even the 518,899 barrels sold in 1977 were not a
negligible amount of beer.
[18]
The judgment is affirmed. Plaintiff may recover twothirds of his costs.
4.2.1. “Best Efforts” as Joint Maximization
As you can see from the opinion in Bloor v. Falstaff, courts have
struggled to define what the vague “best efforts” standard requires. At what
level of output does the grantee of exclusive rights satisfy its contractual
obligation? How much effort must an exclusive distributor expend to
promote the grantor’s product? When does promoting a competing product
constitute a violation of the best efforts duty?
Professors Charles Goetz and Robert Scott have argued that “best
efforts” should be understood to require an exclusive distributor to maximize
the joint gains of the parties. See Charles J. Goetz and Robert E. Scott,
Principles of Relational Contracts, 67 VA. L. REV. 1089 (1981). They argue that
this joint maximization interpretation forces the distributor to choose an
efficient level of effort. Goetz and Scott explain that both parties benefit

69

from maximizing the contractual pie available to be divided between them.
The decision rule they propose envisions the parties as a single firm with the
manufacturing costs of the principal and the distribution costs of the agent.
As a practical matter, the joint maximization standard requires the distributor
to undertake any promotional effort that will yield a joint benefit greater than
its joint cost.
4.2.2. Discussion of Bloor v. Falstaff
How does Judge Friendly resolve Balco’s claim for liquidated
damages?
If they did not substantially discontinue distribution of Ballantine
brands, what exactly did Falstaff do wrong?
What did the “best efforts” clause require?
With the many problems and uncertainties that they face in enforcing
best efforts obligations, why do parties enter exclusive dealing arrangements
rather than simply selling to all comers?
What is the central problem that parties who grant exclusive rights
normally encounter?
4.2.3. Hypo on Joint Maximization
A court is trying to decide whether Falstaff should have to spend an
extra $100,000 on advertising Ballantine brands. Suppose that the following
table describes the expected returns from this additional investment in
advertising:
Net Gains
Case One
Case Two

Falstaff
($50,000)
($50,000)

Balco
$60,000
$30,000

Joint
$10,000
($20,000)

In each case, what will Falstaff want to do?
What does Balco want Falstaff to do?
What decision satisfies the joint maximization criterion?

70

The Bloor v. Falstaff court emphatically does not analyze the case in
these terms. Would joint maximization be an improvement over the method
the court employs?
Under the joint maximization criterion, how would a court determine
if there has been a breach of the best efforts obligation?
How do parties prove their case?

71

V. Regulating the Bargaining
Process
1. Unconscionability
Consider for a moment what might justify using the coercive power
of the state to enforce private promises. From a moral perspective, we might
think that choosing to make a promise creates a duty to perform. Imagine
that Cheryl promises Albert that she will prepare his tax return in exchange
for $200. The promisor Cheryl exercises her autonomy to establish a new
relationship in which the promisee Albert can rely on her promise and adjust
his plans accordingly. We show respect for the autonomy of both parties by
enforcing the promise. Enforcement enables Cheryl to bind herself to
perform if she chooses to do so. At the same time, enforcement respects
Albert’s autonomy by protecting his reliance on Cheryl’s promise.
An alternative economic or “instrumental” approach to enforcement
also focuses on the parties’ choices and reliance. From an economic
perspective, one goal of promise making is mutually beneficial trade. People
make promises to enable others to rely. Promises also allow parties to trade
risks. Thus, Cheryl assumes the risk that the market price for tax preparation
will rise or that she will find it inconvenient or difficult to fulfill her promise
to complete Albert’s tax return by the filing deadline. At the same time,
Albert accepts the risk that someone else will offer to do his taxes for less or
that he would prefer to prepare the return himself. Each party faces a
different bundle of risks than he or she did before making or receiving the
promise. On this account, the purpose of promissory enforcement is to
maximize the social benefits that flow from these exchanges of risk.
Both justifications for enforcement have in common the assumption
that parties make promises and enter into bargains voluntarily. It follows that
if Cheryl holds a gun to Albert’s head and forces him to contract for her
services, then Albert should be free to disavow the deal and use H&R Block
instead. More difficult and subtle questions arise when a promisor claims that
she lacked essential information about the terms of a bargain or that she was
for some other reason unable to exercise a meaningful choice. Even more

controversial are claims that the terms of the deal are so unfavorable that a
court should simply refuse to enforce them.
The two opinions in the following case address some of these issues.
1.1. Principal Case – Williams v. Walker-Thomas Furniture Co.
I
Williams v. Walker-Thomas Furniture Co. I
District of Columbia Court of Appeals
198 A.2d 914 (1964)
QUINN, ASSOCIATE JUDGE.
[1]
Appellant, a person of limited education separated from
her husband, is maintaining herself and her seven children by means of
public assistance. During the period 1957-1962 she had a continuous
course of dealings with appellee from which she purchased many
household articles on the installment plan. These included sheets,
curtains, rugs, chairs, a chest of drawers, beds, mattresses, a washing
machine, and a stereo set. In 1963 appellee filed a complaint in replevin
for possession of all the items purchased by appellant, alleging that her
payments were in default and that it retained title to the goods according
to the sales contracts. By the writ of replevin appellee obtained a bed,
chest of drawers, washing machine, and the stereo set. After hearing
testimony and examining the contracts, the trial court entered judgment
for appellee.
[2]
Appellant's principal contentions on appeal are (1) there
was a lack of meeting of the minds, and (2) the contracts were against
public policy.
[3]
Appellant signed fourteen contracts in all. They were
approximately six inches in length and each contained a long paragraph
in extremely fine print. One of the sentences in this paragraph provided
that payments, after the first purchase, were to be prorated on all
purchases then outstanding. Mathematically, this had the effect of
keeping a balance due on all items until the time balance was completely
eliminated. It meant that title to the first purchase, remained in appellee
until the fourteenth purchase, made some five years later, was fully paid.

74

[4]
At trial appellant testified that she understood the
agreements to mean that when payments on the running account were
sufficient to balance the amount due on an individual item, the item
became hers. She testified that most of the purchases were made at her
home; that the contracts were signed in blank; that she did not read the
instruments; and that she was not provided with a copy. She admitted,
however, that she did not ask anyone to read or explain the contracts to
her.
[5]
We have stated that “one who refrains from reading a
contract and in conscious ignorance of its terms voluntarily assents
thereto will not be relieved from his bad bargain.” Bob Wilson, Inc. v.
Swann, D.C.Mun.App., 168 A.2d 198, 199 (1961). “One who signs a
contract has a duty to read it and is obligated according to its terms.”
Hollywood Credit Clothing Co. v. Gibson, D.C.App., 188 A.2d 348, 349
(1963). “It is as much the duty of a person who cannot read the language
in which a contract is written to have someone read it to him before he
signs it, as it is the duty of one who can read to peruse it himself before
signing it.” Stern v. Moneyweight Scale Co., 42 App.D.C. 162, 165 (1914).
[6]
A careful review of the record shows that appellant's
assent was not obtained “by fraud or even misrepresentation falling short
of fraud.” Hollywood Credit Clothing Co. v. Gibson, supra. This is not a case of
mutual misunderstanding but a unilateral mistake. Under these
circumstances, appellant's first contention is without merit.
[7]
Appellant's second argument presents a more serious
question. The record reveals that prior to the last purchase appellant had
reduced the balance in her account to $164. The last purchase, a stereo
set, raised the balance due to $678. Significantly, at the time of this and
the preceding purchases, appellee was aware of appellant's financial
position. The reverse side of the stereo contract listed the name of
appellant's social worker and her $218 monthly stipend from the
government. Nevertheless, with full knowledge that appellant had to
feed, clothe and support both herself and seven children on this amount,
appellee sold her a $514 stereo set.
[8]
We cannot condemn too strongly appellee's conduct. It
raises serious questions of sharp practice and irresponsible business

75

dealings. A review of the legislation in the District of Columbia affecting
retail sales and the pertinent decisions of the highest court in this
jurisdiction disclose, however, no ground upon which this court can
declare the contracts in question contrary to public policy. We note that
were the Maryland Retail Installment Sales Act, Art. 83 §§ 128-153, or its
equivalent, in force in the District of Columbia, we could grant appellant
appropriate relief. We think Congress should consider corrective
legislation to protect the public from such exploitive contracts as were
utilized in the case at bar.
1.2. Principal Case – Williams v. Walker-Thomas Furniture Co.
II
Williams v. Walker-Thomas Furniture Co. II
United States Court of Appeals, District of Columbia Circuit
121 U.S. App. D.C. 315, 350 F.2d 445 (1965)
WRIGHT, CIRCUIT JUDGE.
[1]
Appellee, Walker-Thomas Furniture Company, operates a
retail furniture store in the District of Columbia. During the period from
1957 to 1962 each appellant in these cases purchased a number of
household items from Walker-Thomas, for which payment was to be
made in installments. The terms of each purchase were contained in a
printed form contract which set forth the value of the purchased item
and purported to lease the item to appellant for a stipulated monthly rent
payment. The contract then provided, in substance, that title would
remain in Walker-Thomas until the total of all the monthly payments
made equaled the stated value of the item, at which time appellants could
take title. In the event of a default in the payment of any monthly
installment, Walker-Thomas could repossess the item.
[2]
The contract further provided that “the amount of each
periodical installment payment to be made by (purchaser) to the
Company under this present lease shall be inclusive of and not in
addition to the amount of each installment payment to be made by
(purchaser) under such prior leases, bills or accounts; and all payments
now and hereafter made by (purchaser) shall be credited pro rata on all
outstanding leases, bills and accounts due the Company by (purchaser) at
the time each such payment is made.” The effect of this rather obscure

76

provision was to keep a balance due on every item purchased until the
balance due on all items, whenever purchased, was liquidated. As a result,
the debt incurred at the time of purchase of each item was secured by the
right to repossess all the items previously purchased by the same
purchaser, and each new item purchased automatically became subject to
a security interest arising out of the previous dealings.
[3]
On May 12, 1962, appellant Thorne purchased an item
described as a Daveno, three tables, and two lamps, having total stated
value of $391.10. Shortly thereafter, he defaulted on his monthly
payments and appellee sought to replevy all the items purchased since the
first transaction in 1958. Similarly, on April 17, 1962, appellant Williams
bought a stereo set of stated value of $514.95.1 She too defaulted shortly
thereafter, and appellee sought to replevy all the items purchased since
December, 1957. The Court of General Sessions granted judgment for
appellee. The District of Columbia Court of Appeals affirmed, and we
granted appellants' motion for leave to appeal to this court.
[4]
Appellants' principal contention, rejected by both the trial
and the appellate courts below, is that these contracts, or at least some of
them, are unconscionable and, hence, not enforceable. In its opinion in
Williams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964),
the District of Columbia Court of Appeals explained its rejection of this
contention as follows:
Appellant's second argument presents a more serious
question. The record reveals that prior to the last purchase
appellant had reduced the balance in her account to $164. The
last purchase, a stereo set, raised the balance due to $678.
Significantly, at the time of this and the preceding purchases,
appellee was aware of appellant's financial position. The reverse
side of the stereo contract listed the name of appellant's social
worker and her $218 monthly stipend from the government.
Nevertheless, with full knowledge that appellant had to feed,
clothe and support both herself and seven children on this
amount, appellee sold her a $514 stereo set.
1 At the time of this purchase her account showed a balance of $164 still owing

from her prior purchases. The total of all the purchases made over the years in
question came to $1,800. The total payments amounted to $1,400.

77

We cannot condemn too strongly appellee's conduct. It
raises serious questions of sharp practice and irresponsible
business dealings. A review of the legislation in the District of
Columbia affecting retail sales and the pertinent decisions of the
highest court in this jurisdiction disclose, however, no ground
upon which this court can declare the contracts in question
contrary to public policy. We note that were the Maryland Retail
Installment Sales Act, Art. 83 §§ 128-153, or its equivalent, in
force in the District of Columbia, we could grant appellant
appropriate relief. We think Congress should consider corrective
legislation to protect the public from such exploitive contracts as
were utilized in the case at bar.
[5]
We do not agree that the court lacked the power to refuse
enforcement to contracts found to be unconscionable. In other
jurisdictions, it has been held as a matter of common law that
unconscionable contracts are not enforceable.2 While no decision of this
court so holding has been found, the notion that an unconscionable
bargain should not be given full enforcement is by no means novel. In
Scott v. United States, 79 U.S. (12 Wall.) 443, 445 (1870), the Supreme
Court stated:
…If a contract be unreasonable and unconscionable, but
not void for fraud, a court of law will give to the party who sues
for its breach damages, not according to its letter, but only such
as he is equitably entitled to….3

2 Campbell Soup Co. v. Wentz, 3 Cir., 172 F.2d 80 (1948); Indianapolis Morris Plan

Corporation v. Sparks, 132 Ind.App. 145, 172 N.E.2d 899 (1961); Henningsen v.
Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69, 84-96, 75 A.L.R.2d 1 (1960). Cf. 1
CORBIN, CONTRACTS § 128 (1963).
3 See Luing v. Peterson, 143 Minn. 6, 172 N.W. 692 (1919); Greer v. Tweed, N.Y.C.P.,

13 Abb.Pr., N.S., 427 (1872); Schnell v. Nell, 17 Ind. 29 (1861); and see generally
the discussion of the English authorities in Hume v. United States, 132 U.S. 406
(1889).

78

Since we have never adopted or rejected such a rule,4 the question
here presented is actually one of first impression.
[6]
Congress has recently enacted the Uniform Commercial
Code, which specifically provides that the court may refuse to enforce a
contract which it finds to be unconscionable at the time it was made. 28
D.C.CODE § 2-302 (Supp. IV 1965). The enactment of this section,
which occurred subsequent to the contracts here in suit, does not mean
that the common law of the District of Columbia was otherwise at the
time of enactment, nor does it preclude the court from adopting a similar
rule in the exercise of its powers to develop the common law for the
District of Columbia. In fact, in view of the absence of prior authority on
the point, we consider the congressional adoption of § 2-302 persuasive
authority for following the rationale of the cases from which the section
is explicitly derived.5 Accordingly, we hold that where the element of
unconscionability is present at the time a contract is made, the contract
should not be enforced.
[7]
Unconscionability has generally been recognized to
include an absence of meaningful choice on the part of one of the parties
together with contract terms which are unreasonably favorable to the
other party.6 Whether a meaningful choice is present in a particular case
can only be determined by consideration of all the circumstances
4 While some of the statements in the court's opinion in District of Columbia v.

Harlan & Hollingsworth Co., 30 App. D.C. 270 (1908), may appear to reject the rule,
in reaching its decision upholding the liquidated damages clause in that case the
court considered the circumstances existing at the time the contract was made, see
30 App. D.C. at 279, and applied the usual rule on liquidated damages. See 5
CORBIN, CONTRACTS §§ 1054-1075 (1964); Note, 72 YALE L.J. 723, 746-755
(1963). Compare Jaeger v. O'Donoghue, 57 App.D.C. 191, 18 F.2d 1013 (1927).
5 See Comment, § 2-302, Uniform Commercial Code (1962). Compare Note, 45

VA. L. REV. 583, 590 (1959), where it is predicted that the rule of § 2-302 will be
followed by analogy in cases which involve contracts not specifically covered by
the section. Cf. 1 STATE OF NEW YORK LAW REVISION COMMISSION, REPORT
AND RECORD OF HEARINGS ON THE UNIFORM COMMERCIAL CODE 108-110
(1954) (remarks of Professor Llewellyn).
6 See Henningsen v. Bloomfield Motors, Inc., supra Note 2; Campbell Soup Co. v.

Wentz, supra Note 2.

79

surrounding the transaction. In many cases the meaningfulness of the
choice is negated by a gross inequality of bargaining power.7 The manner
in which the contract was entered is also relevant to this consideration.
Did each party to the contract, considering his obvious education or lack
of it, have a reasonable opportunity to understand the terms of the
contract, or were the important terms hidden in a maze of fine print and
minimized by deceptive sales practices? Ordinarily, one who signs an
agreement without full knowledge of its terms might be held to assume
the risk that he has entered a one-sided bargain.8 But when a party of
little bargaining power, and hence little real choice, signs a commercially
unreasonable contract with little or no knowledge of its terms, it is hardly
likely that his consent, or even an objective manifestation of his consent,
was ever given to all the terms. In such a case the usual rule that the

See Henningsen v. Bloomfield Motors, Inc., supra Note 2, 161 A.2d at 86,, and
authorities there cited. Inquiry into the relative bargaining power of the two
parties is not an inquiry wholly divorced from the general question of
unconscionability, since a one-sided bargain is itself evidence of the inequality of
the bargaining parties. This fact was vaguely recognized in the common law
doctrine of intrinsic fraud, that is, fraud which can be presumed from the grossly
unfair nature of the terms of the contract. See the oft-quoted statement of Lord
Hardwicke in Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82, 100 (1751):
“…(Fraud) may be apparent from the intrinsic nature and subject of the bargain
itself; such as no man in his senses and not under delusion would make....” And cf.
Hume v. United States, supra Note 3, 132 U.S. at 413, where the Court characterized
the English cases as ‘cases in which one party took advantage of the other's
ignorance of arithmetic to impose upon him, and the fraud was apparent from the
face of the contracts.’ See also Greer v. Tweed, supra Note 3.
7

See RESTATEMENT, CONTRACTS § 70 (1932); Note, 63 HARV. L. REV. 494
(1950). See also Daley v. People's Building, Loan & Savings Ass'n, 178 Mass. 13, 59
N.E. 452, 453 (1901), in which Mr. Justice Holmes, while sitting on the Supreme
Judicial Court of Massachusetts, made this observation: “…Courts are less and
less disposed to interfere with parties making such contracts as they choose, so
long as they interfere with no one's welfare but their own….It will be understood
that we are speaking of parties standing in an equal position where neither has any
oppressive advantage or power….”
8

80

terms of the agreement are not to be questioned9 should be abandoned
and the court should consider whether the terms of the contract are so
unfair that enforcement should be withheld.10
[8]
In determining reasonableness or fairness, the primary
concern must be with the terms of the contract considered in light of the
circumstances existing when the contract was made. The test is not
simple, nor can it be mechanically applied. The terms are to be
considered “in the light of the general commercial background and the
commercial needs of the particular trade or case.”11 Corbin suggests the
test as being whether the terms are ‘so extreme as to appear
unconscionable according to the mores and business practices of the
time and place.”12 We think this formulation correctly states the test to be
applied in those cases where no meaningful choice was exercised upon
entering the contract.
[9]
Because the trial court and the appellate court did not feel
that enforcement could be refused, no findings were made on the
possible unconscionability of the contracts in these cases. Since the
record is not sufficient for our deciding the issue as a matter of law, the
cases must be remanded to the trial court for further proceedings.
So ordered.
DANAHER, CIRCUIT JUDGE (DISSENTING):

This rule has never been without exception. In cases involving merely the
transfer of unequal amounts of the same commodity, the courts have held the
bargain unenforceable for the reason that “in such a case, it is clear, that the law
cannot indulge in the presumption of equivalence between the consideration and
the promise.” 1 WILLISTON, CONTRACTS § 115 (3d ed. 1957).
9

10 See the general discussion of ‘Boiler-Plate Agreements' in LLEWELLYN, THE

COMMON LAW TRADITION 362-371 (1960).
11 Comment, Uniform Commercial Code § 2-307.
12 See Henningsen v. Bloomfield Motors, Inc., supra Note 2; Mandel v. Liebman, 303 N.Y.

88, 100 N.E.2d 149 (1951). The traditional test as stated in Greer v. Tweed, supra
Note 3, 13 Abb. Pr., N.S., at 429, is “such as no man in his senses and not under
delusion would make on the one hand, and as no honest or fair man would
accept, on the other.”

81

[10]
The District of Columbia Court of Appeals obviously was
as unhappy about the situation here presented as any of us can possibly
be. Its opinion in the Williams case, quoted in the majority text,
concludes: “We think Congress should consider corrective legislation to
protect the public from such exploitive contracts as were utilized in the
case at bar.”
[11]
My view is thus summed up by an able court which made
no finding that there had actually been sharp practice. Rather the
appellant seems to have known precisely where she stood.
[12]
There are many aspects of public policy here involved.
What is a luxury to some may seem an outright necessity to others. Is
public oversight to be required of the expenditures of relief funds? A
washing machine, e.g., in the hands of a relief client might become a
fruitful source of income. Many relief clients may well need credit, and
certain business establishments will take long chances on the sale of
items, expecting their pricing policies will afford a degree of protection
commensurate with the risk. Perhaps a remedy when necessary will be
found within the provisions of the “Loan Shark” law, D.C.Code §§ 26601 et seq. (1961).
[13]
I mention such matters only to emphasize the desirability
of a cautious approach to any such problem, particularly since the law for
so long has allowed parties such great latitude in making their own
contracts. I dare say there must annually be thousands upon thousands of
installment credit transactions in this jurisdiction, and one can only
speculate as to the effect the decision in these cases will have.13
[14]
I join the District of Columbia Court of Appeals in its
disposition of the issues.

13 However the provision ultimately may be applied or in what circumstances,

D.C. Code § 28-2-301 (Supp. IV, 1965) it did not become effective until January
1, 1965.

82

1.2.1. Procedural and Substantive Unconscionability
Both judges and scholars ordinarily draw a distinction between
“substantive”
and
“procedural”
unconscionability.
Substantive
unconscionability focuses on the contract terms themselves. This branch of
the doctrine asks whether the terms of the agreement are so unfavorable to
one of the parties that we should refuse enforcement. In this vein, courts
may find that a manufacturer’s clause limiting remedies for breach is contrary
to the “essence of the bargain” or that a price or warranty term in a
consumer contract is “unreasonable.”
In contrast, procedural unconscionability focuses on the circumstances
surrounding contract formation. Was there something about that process
that prevented one party from understanding the agreement? Most courts
consider a wide range of “factors related to the bargaining power of each
party, including age, education, intelligence, business acumen, experience in
similar transactions, whether the terms were explained to the weaker party,
who drafted the contract, whether alterations in the printed terms were
possible, and whether the party claiming unconscionability was represented
by counsel at the time the contract was executed.” Roe v. Rent-A-Center, Inc.,
CA2007-09-224 (Ohio App. 2008). For example, a court might find an
agreement procedurally unconscionable because a company’s sales practices
tended to obscure the true nature of the contract.
Each strand of unconscionability doctrine stands in some tension
with other contract doctrines that favor the enforcement of all voluntary
bargains. Thus, the “duty to read” doctrine holds that a person who signs a
contract without reading it will be bound despite his lack of knowledge of its
terms. Courts have even refused to excuse illiterate and non-Englishspeaking promisors, explaining that they should have asked someone to read
and explain the agreement before signing it. See, e.g. Morales v. Sun
Constructors, Inc., No. 07-3806 (3d Cir. 2008); Upton v. Tribilcock, 91 U.S. 45
(1875). As we saw in Williams I and Williams II, a procedural
unconscionability claim must first overcome judicial reluctance to depart
from the strict “duty to read” precedents.
Similarly, arguments about substantive unconscionability conflict
with the general contractual principle that courts should let the parties’ judge
for themselves whether to accept a particular bargain. For example, courts do

83

not scrutinize the adequacy of consideration. Each party is free to make a
good bargain or a bad bargain, and judges ordinarily respect the private
ordering these agreements seek to create. Finding a contract substantively
unconscionable rejects the parties’ bargain and prevents them from forming
an enforceable agreement on those terms. Perhaps as a result of this
fundamental tension, judicial decisions hardly ever invalidate an agreement
solely on grounds of substantive unconscionability. And many jurisdictions
formally require courts to find an agreement both procedurally and
substantively unconscionable before refusing to enforce it. See, e.g., Roe v.
Rent-A-Center, Inc., CA2007-09-224 (Ohio App. 2008).
1.2.2. Rent-to-Own Industry and Consumer Protection Laws
In Williams I, the court concluded its opinion by calling attention to
questionable practices in the rent-to-own industry. Walker-Thomas’s conduct
evidently raised “serious questions of sharp practice and irresponsible
business dealings.” The court also issued a plea for “corrective legislation”
along the lines of provisions contained in the Maryland Retail Installment
Sales Act.
Some years later, The Wall Street Journal published a highly critical
feature story on the rent-to-own industry. In extensive interviews, former
Rent-A-Center managers described high-pressure sales tactics, misleading
pricing practices, and coercive methods of repossessing goods from
defaulting renters. Repo calls sometimes included demands for “couch
payments” – sexual favors extorted in lieu of cash. However, the article also
revealed that many renters could not afford to buy the items and had
“nowhere else to go.” See Alix Freedman, Peddling Dreams: A Marketing Giant
Uses Its Sales Prowess to Profit on Poverty, THE WALL STREET JOURNAL A1 (Sept.
22, 1993).
More recently the industry has fought off efforts to enact legislation
classifying rent-to-own transactions as credit sales. The typical “rental”
agreement provides for total payments several times the normal retail value
of the goods, and thus an implied annual interest rate of 200-300 percent.
Redefining these deals as credit transactions would make state usury laws
applicable and prohibit firms from charging such a high implicit interest rate.
The industry argues, however, that rent-to-own customers assume no debt
and always have an option to return the goods with no further obligation.

84

Moreover, a 1999 Federal Trade Commission customer survey found that
most are satisfied with their rent-to-own transactions. See John Seward, Tales
of the Tape: Rent-To-Owns Seek Definition in Law, DOW JONES NEWSWIRES (Oct.
17, 2003).
In one respect at least, the Williams I court’s wish was fulfilled. The
District of Columbia Code now contains a provision prohibiting the sort of
pro-rata payment arrangement contained in Walker-Thomas Furniture
Company’s contract. See D.C. Code § 28-3805. Under the statute, payments
must be credited towards the first item purchased until that item has been
paid off and the seller’s security interest in that item is then extinguished.
1.2.3. Uniform Commercial Code Unconscionability Provisions
The Uniform Commercial Code empowers a court to refuse to
enforce unconscionable contracts in the following terms:
§ 2-302. Unconscionable Contract or Clause
(1) If the court as a matter of law finds the contract or any clause
of the contract to have been unconscionable at the time it was made the
court may refuse to enforce the contract, or it may enforce the remainder
of the contract without the unconscionable clause, or it may so limit the
application of any unconscionable clause as to avoid any unconscionable
result.
(2) When it is claimed or appears to the court that the contract or
any clause thereof may be unconscionable the parties shall be afforded a
reasonable opportunity to present evidence as to its commercial setting,
purpose and effect to aid the court in making the determination.
Official Comment
1. This section is intended to make it possible for the courts
to police explicitly against the contracts or clauses which they find
to be unconscionable. In the past such policing has been
accomplished by adverse construction of language, by
manipulation of the rules of offer and acceptance or by
determinations that the clause is contrary to public policy or to the
dominant purpose of the contract. This section is intended to allow

85

the court to pass directly on the unconscionability of the contract
or particular clause therein and to make a conclusion of law as to
its unconscionability. The basic test is whether, in light of the
general commercial background and the commercial needs of the
particular trade or case, the clauses involved are so one-sided as to
be unconscionable under the circumstances existing at the time of
the making of the contract. Subsection (2) makes it clear that it is
proper for the court to hear evidence on these questions. The
principle is one of the prevention of oppression and unfair surprise.
(Cf. Campbell Soup Co. v. Wentz, 172 F.2d 80, 3d Cir. 1948) and
not of disturbance of allocation of risks because of superior
bargaining power.
1.2.4. Discussion of Unconscionability
Why does the D.C. Court of Appeals (reluctantly) decide, in Williams
I, to enforce the pro-rata payment clause in the Walker-Thomas Furniture
Company’s form contract?
The D.C. Circuit reaches a decidedly different decision about the
prevailing legal rule. Does that court hold that the pro-rata-payment clause is
unconscionable? If not, then what doctrinal standard will determine whether
the clause is unconscionable?
Judge Wright talks extensively about unequal bargaining power. What
do you suppose he means by that term?
Consider the following language from the Uniform Commercial
Code provision concerning unconscionability: “The principle is one of the
prevention of unfair surprise and not of disturbance of risks because of
superior bargaining power.” U.C.C. § 2-302 Comment 1. Can you reconcile
this comment with Judge Wright’s discussion of bargaining power in Williams
II?
The prospective effects of procedural and substantive
unconscionability are likely to differ. How would you expect sellers to
respond to a ruling that the Walker-Thomas Furniture Company’s form
contract is procedurally unconscionable? Suppose that a court instead holds
that pro-rata-payment clauses and cross-collateral clauses are substantively
unconscionable. Will people in Ms. Williams’s circumstances be able to
obtain furniture on the same payment plan?

86

2. Modification
In this section, we examine the rules that apply when parties choose
to modify existing contractual obligations. The traditional common law
approach held that a modification would be ineffective without fresh
consideration—some obligation beyond what the promisor was already
obliged to perform under the prior contract. This “pre-existing duty rule”
established a comparatively precise bright-line rule for evaluating attempted
modifications. The Alaska Packers case that follows arguably illustrates this
traditional approach.
More recent decisions, however, have shown a willingness to enforce
modifications even when a promisor assumes no new obligations. The
Restatement (Second) embraces a rather open-ended standard incorporating
both reliance-based enforcement and general equitable principles.
§ 89 Modification of Executory Contract
A promise modifying a duty under a contract not fully performed
on either side is binding
(a) if the modification is fair and equitable in view of
circumstances not anticipated by the parties when the contract was made;
or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of
material change of position in reliance on the promise.
The Uniform Commercial Code adopts a very similar standard
based on good faith. Please look at UCC § 2-209. Modification,
Rescission and Waiver and the related Official Comments 1-4.
Both the Restatement (Second) and this UCC provision abandon
the comparatively precise pre-existing duty rule. They instead invite
parties to present evidence about the circumstances surrounding their
agreement to modify the prior contract and require courts to evaluate
modifications under relatively amorphous standards of equity and good
faith.

87

Even under the traditional pre-existing duty rule, one possible
alternative was to rescind the existing contract and form a new one.
Termed a “substituted contract” or sometimes a “novation,” the new
contract is enforceable because the parties have terminated the prior
contract and discharged any obligations that it imposed. If courts routinely
enforced any agreement that parties denominated a substituted contract or
novation, the strict pre-existing duty rule would be eviscerated and
replaced with an equally clear rule allowing parties to modify existing
contractual obligations without any legal constraint. However, this
strategy must overcome judges’ reluctance to permit a purely formal
device to eliminate substantive doctrinal constraints. To prevent parties
from elevating form over substance, courts may construe a purported
substitution or novation as an attempt to modify the prior contract and then
apply the ordinary constraints on modification.
As you read the case that follows, consider whether the court
applies the comparatively clear pre-existing duty rule. Or does the opinion
examine the surrounding circumstances to determine whether to enforce
the modified contract?
2.1. Principal Case – Alaska Packers’ Association v. Domenico
Alaska Packers’ Ass’n v. Domenico
United States Court of Appeals, Ninth Circuit
117 F. 99 (1902)
ROSS, CIRCUIT JUDGE.
[1]
The libel in this case was based upon a contract alleged to
have been entered into between the libelants and the appellant
corporation on the 22d day of May, 1900, at Pyramid Harbor, Alaska, by
which it is claimed the appellant promised to pay each of the libelants,
among other things, the sum of $100 for services rendered and to be
rendered. In its answer the respondent denied the execution, on its part,
of the contract sued upon, averred that it was without consideration, and
for a third defense alleged that the work performed by the libelants for it
was performed under other and different contracts than that sued on,
and that, prior to the filing of the libel, each of the libelants was paid by
the respondent the full amount due him thereunder, in consideration of

88

which each of them executed a full release of all his claims and demands
against the respondent.
[2]
The evidence shows without conflict that on March 26,
1900, at the city and county of San Francisco, the libelants entered into a
written contract with the appellants, whereby they agreed to go from San
Francisco to Pyramid Harbor, Alaska, and return, on board such vessel as
might be designated by the appellant, and to work for the appellant
during the fishing season of 1900, at Pyramid Harbor, as sailors and
fishermen, agreeing to do “regular ship's duty, both up and down,
discharging and loading; and to do any other work whatsoever when
requested to do so by the captain or agent of the Alaska Packers'
Association.” By the terms of this agreement, the appellant was to pay
each of the libelants $50 for the season, and two cents for each red
salmon in the catching of which he took part.
[3]
On the 15th day of April, 1900, 21 of the libelants signed
shipping articles by which they shipped as seamen on the Two Brothers,
a vessel chartered by the appellant for the voyage between San Francisco
and Pyramid Harbor, and also bound themselves to perform the same
work for the appellant provided for by the previous contract of March
26th; the appellant agreeing to pay them therefor the sum of $60 for the
season, and two cents each for each red salmon in the catching of which
they should respectively take part. Under these contracts, the libelants
sailed on board the Two Brothers for Pyramid Harbor, where the
appellants had about $150,000 invested in a salmon cannery. The
libelants arrived there early in April of the year mentioned, and began to
unload the vessel and fit up the cannery. A few days thereafter, to wit,
May 19th, they stopped work in a body, and demanded of the company's
superintendent there in charge $100 for services in operating the vessel to
and from Pyramid Harbor, instead of the sums stipulated for in and by
the contracts; stating that unless they were paid this additional wage they
would stop work entirely, and return to San Francisco. The evidence
showed, and the court below found, that it was impossible for the
appellant to get other men to take the places of the libelants, the place
being remote, the season short and just opening; so that, after
endeavoring for several days without success to induce the libelants to
proceed with their work in accordance with their contracts, the

89

company's superintendent, on the 22d day of May, so far yielded to their
demands as to instruct his clerk to copy the contracts executed in San
Francisco, including the words ‘Alaska Packers' Association‘ at the end,
substituting, for the $50 and $60 payments, respectively, of those
contracts, the sum of $100, which document, so prepared, was signed by
the libelants before a shipping commissioner whom they had requested
to be brought from Northeast Point; the superintendent, however,
testifying that he at the time told the libelants that he was without
authority to enter into any such contract, or to in any way alter the
contracts made between them and the company in San Francisco. Upon
the return of the libelants to San Francisco at the close of the fishing
season, they demanded pay in accordance with the terms of the alleged
contract of May 22d, when the company denied its validity, and refused
to pay other than as provided for by the contracts of March 26th and
April 5th, respectively. Some of the libelants, at least, consulted counsel,
and, after receiving his advice, those of them who had signed the
shipping articles before the shipping commissioner at San Francisco went
before that officer, and received the amount due them thereunder,
executing in consideration thereof a release in full, and the others paid at
the office of the company, also receipting in full for their demands.
[4]
On the trial in the court below, the libelants undertook to
show that the fishing nets provided by the respondent were defective,
and that it was on that account that they demanded increased wages. On
that point, the evidence was substantially conflicting, and the finding of
the court was against the libelants the court saying:
The contention of libelants that the nets provided them
were rotten and unserviceable is not sustained by the evidence.
The defendants' interest required that libelants should be
provided with every facility necessary to their success as
fishermen, for on such success depended the profits defendant
would be able to realize that season from its packing plant, and
the large capital invested therein. In view of this self-evident fact,
it is highly improbable that the defendant gave libelants rotten
and unserviceable nets with which to fish. It follows from this
finding that libelants were not justified in refusing performance
of their original contract.
112 Fed. 554.

90

[5]
The evidence being sharply conflicting in respect to these
facts, the conclusions of the court, who heard and saw the witnesses, will
not be disturbed. The Alijandro, 6 C.C.A. 54, 56 Fed. 621; The Lucy, 20
C.C.A. 660, 74 Fed. 572; The Glendale, 26 C.C.A. 500, 81 Fed. 633. The
Coquitlam, 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.
[6]
The real questions in the case as brought here are
questions of law, and, in the view that we take of the case, it will be
necessary to consider but one of those. Assuming that the appellant's
superintendent at Pyramid Harbor was authorized to make the alleged
contract of May 22d, and that he executed it on behalf of the appellant,
was it supported by a sufficient consideration? From the foregoing
statement of the case, it will have been seen that the libelants agreed in
writing, for certain stated compensation, to render their services to the
appellant in remote waters where the season for conducting fishing
operations is extremely short, and in which enterprise the appellant had a
large amount of money invested; and, after having entered upon the
discharge of their contract, and at a time when it was impossible for the
appellant to secure other men in their places, the libelants, without any
valid cause, absolutely refused to continue the services they were under
contract to perform unless the appellant would consent to pay them
more money. Consent to such a demand, under such circumstances, if
given, was, in our opinion, without consideration, for the reason that it
was based solely upon the libelants' agreement to render the exact
services, and none other, that they were already under contract to render.
The case shows that they willfully and arbitrarily broke that obligation. As
a matter of course, they were liable to the appellant in damages, and it is
quite probable, as suggested by the court below in its opinion, that they
may have been unable to respond in damages. But we are unable to agree
with the conclusions there drawn, from these facts, in these words:
Under such circumstances, it would be strange, indeed, if
the law would not permit the defendant to waive the damages
caused by the libelants' breach, and enter into the contract sued
upon—a contract mutually beneficial to all the parties thereto, in
that it gave to the libelants reasonable compensation for their

91

labor, and enabled the defendant to employ to advantage the
large capital it had invested in its canning and fishing plant.
[7]
Certainly, it cannot be justly held, upon the record in this
case, that there was any voluntary waiver on the part of the appellant of
the breach of the original contract. The company itself knew nothing of
such breach until the expedition returned to San Francisco, and the
testimony is uncontradicted that its superintendent at Pyramid Harbor,
who, it is claimed, made on its behalf the contract sued on, distinctly
informed the libelants that he had no power to alter the original or to
make a new contract, and it would, of course, follow that, if he had no
power to change the original, he would have no authority to waive any
rights thereunder. The circumstances of the present case bring it, we
think, directly within the sound and just observations of the supreme
court of Minnesota in the case of King v. Railway Co., 61 Minn. 482, 63
N.W. 1105:
No astute reasoning can change the plain fact that the
party who refuses to perform, and thereby coerces a promise
from the other party to the contract to pay him an increased
compensation for doing that which he is legally bound to do,
takes an unjustifiable advantage of the necessities of the other
party. Surely it would be a travesty on justice to hold that the
party so making the promise for extra pay was estopped from
asserting that the promise was without consideration. A party
cannot lay the foundation of an estoppel by his own wrong,
where the promise is simply a repetition of a subsisting legal
promise. There can be no consideration for the promise of the
other party, and there is no warrant for inferring that the parties
have voluntarily rescinded or modified their contract. The
promise cannot be legally enforced, although the other party has
completed his contract in reliance upon it.
[8]
In Lingenfelder v. Brewing Co., 103 Mo. 578, 15 S.W. 844, the
court, in holding void a contract by which the owner of a building agreed
to pay its architect an additional sum because of his refusal to otherwise
proceed with the contract, said:
It is urged upon us by respondents that this was a new
contract. New in what? Jungenfeld was bound by his contract to
design and supervise this building. Under the new promise, he

92

was not to do anything more or anything different. What benefit
was to accrue to Wainwright? He was to receive the same service
from Jungenfeld under the new, that Jungenfeld was bound to
tender under the original, contract. What loss, trouble, or
inconvenience could result to Jungenfeld that he had not already
assumed? No amount of metaphysical reasoning can change the
plain fact that Jungenfeld took advantage of Wainwright's
necessities, and extorted the promise of five per cent. on the
refrigerator plant as the condition of his complying with his
contract already entered into. Nor had he even the flimsy pretext
that Wainwright had violated any of the conditions of the
contract on his part. Jungenfeld himself put it upon the simple
proposition that “if he, as an architect, put up the brewery, and
another company put up the refrigerating machinery, it would be
a detriment to the Empire Refrigerating Company,” of which
Jungenfeld was president.
To permit plaintiff to recover under such circumstances
would be to offer a premium upon bad faith, and invite men to
violate their most sacred contracts that they may profit by their
own wrong. That a promise to pay a man for doing that which he
is already under contract to do is without consideration is
conceded by respondents. The rule has been so long imbedded in
the common law and decisions of the highest courts of the
various states that nothing but the most cogent reasons ought to
shake it. (Citing a long list of authorities.) But it is “carrying coals
to Newcastle” to add authorities on a proposition so universally
accepted, and so inherently just and right in itself.
The learned counsel for respondents do not controvert
the general proposition. [Their] contention is, and the circuit
court agreed with them, that, when Jungenfeld declined to go
further on his contract, the defendant then had the right to sue
for damages, and not having elected to sue Jungenfeld, but
having acceded to his demand for the additional compensation
defendant cannot now be heard to say his promise is without
consideration. While it is true Jungenfeld became liable in
damages for the obvious breach of his contract, we do not think
it follows that defendant is estopped from showing its promise
was made without consideration. It is true that as eminent a jurist
as Judge Cooley, in Goebel v. Linn, 47 Mich. 489, 11 N.W. 284,

93

41 Am.Rep. 723, held that an ice company which had agreed to
furnish a brewery with all the ice they might need for their
business from November 8, 1879, until January 1, 1881, at $1.75
per ton, and afterwards in May, 1880, declined to deliver any
more ice unless the brewery would give it $3 per ton, could
recover on a promissory note given for the increased price.
Profound as is our respect for the distinguished judge
who delivered the opinion, we are still of the opinion that his
decision is not in accord with the almost universally accepted
doctrine, and is not convincing; and certainly so much of the
opinion as holds that the payment, by a debtor, of a part of his
debt then due, would constitute a defense to a suit for the
remainder, is not the law of this state, nor, do we think, of any
other where the common law prevails. … What we hold is that,
when a party merely does what he has already obligated himself
to do, he cannot demand an additional compensation therefor;
and although, by taking advantage of the necessities of his
adversary, he obtains a promise for more, the law will regard it as
nudum pactum, and will not lend its process to aid in the wrong.
[9]
The case of Goebel v. Linn, 47 Mich. 489, 11 N.W. 284, is
one of the eight cases relied upon by the court below in support of its
judgment in the present case, five of which are by the supreme court of
Massachusetts, one by the supreme court of Vermont, and one other
Michigan case, that of Moore v. Locomotive Works, 14 Mich. 266. The
Vermont case referred to is that of Lawrence v. Davey, 28 Vt. 264, which
was one of the three cases cited by the court in Moore v. Locomotive Works,
14 Mich. 272, 273, as authority for its decision. In that case there was a
contract to deliver coal at specified terms and rates. A portion of it was
delivered, and plaintiff then informed the defendant that he could not
deliver at those rates, and, if the latter intended to take advantage of it, he
should not deliver any more; and that he should deliver no more unless
the defendant would pay for the coal independent of the contract. The
defendant agreed to do so, and the coal was delivered. On suit being
brought for the price, the court said:
Although the promise to waive the contract was after
some portion of the coal sought to be recovered had been
delivered, and so delivered that probably the plaintiff, if the

94

defendant had insisted upon strict performance of the contract,
could not have recovered anything for it, yet, nevertheless, the
agreement to waive the contract, and the promise, and, above all,
the delivery of coal after this agreement to waive the contract,
and upon the faith of it, will be a sufficient consideration to bind
the defendant to pay for the coal already received.
[10]
The doctrine of that case was impliedly overruled by the
supreme court of Vermont in the subsequent case of Cobb v. Cowdery, 40
Vt. 25, where it was held that:
A promise by a party to do what he is bound in law to do
is not an illegal consideration, but is the same as no consideration
at all, and is merely void; in other words, it is insufficient, but not
illegal. Thus, if the master of a ship promise his crew an addition
to their fixed wages in consideration for and as an incitement to,
their extraordinary exertions during a storm, or in any other
emergency of the voyage, this promise is nudum pactum; the
voluntary performance of an act which it was before legally
incumbent on the party to perform being in law an insufficient
consideration; and so it would be in any other case where the
only consideration for the promise of one party was the promise
of the other party to do, or his actual doing, something which he
was previously bound in law to do. Chit. Cont. (10th Am.Ed.) 51;
Smith, Cont. 87; 3 Kent, Com.. 185.
[11]
The Massachusetts cases cited by the court below in
support of its judgment commence with the case of Munroe v. Perkins, 9
Pick. 305, 20 Am. Dec. 475, which really seems to be the foundation of
all of the cases in support of that view. In that case, the plaintiff had
agreed in writing to erect a building for the defendants. Finding his
contract a losing one, he had concluded to abandon it, and resumed work
on the oral contract of the defendants that, if he would do so, they would
pay him what the work was worth without regard to the terms of the
original contract. The court said that whether the oral contract was
without consideration:
[d]epends entirely on the question whether the first
contract was waived. The plaintiff having refused to perform that
contract, as he might do, subjecting himself to such damages as
the other parties might show they were entitled to recover, he

95

afterward went on, upon the faith of the new promise, and
finished the work. This was a sufficient consideration. If Payne
and Perkins were willing to accept his relinquishment of the old
contract, and proceed on a new agreement, the law, we think,
would not prevent it.
[12]
The case of Goebel v. Linn, 47 Mich. 489, 11 N.W. 284,
presented some unusual and extraordinary circumstances. But, taking it
as establishing the precise rule adopted in the Massachusetts cases, we
think it not only contrary to the weight of authority, but wrong on
principle.
[13]
In addition to the Minnesota and Missouri cases above
cited, the following are some of the numerous authorities holding the
contrary doctrine: Vanderbilt v. Schreyer, 91 N.Y. 392; Ayres v. Railroad Co.,
52 Iowa, 478, 3 N.W. 522; Harris v. Carter, 3 Ellis & B. 559; Frazer v.
Hatton, 2 C.B.(N.S.) 512; Conover v. Stillwell, 34 N.J. Law, 54; Reynolds v.
Nugent, 25 Ind. 328; Spencer v. McLean (Ind. App.) 50 N.E. 769, 67
Am.St.Rep. 271; Harris v. Harris (Colo. App.) 47 Pac. 841; Moran v. Peace,
72 Ill.App. 139; Carpenter v. Taylor (N.Y.) 58 N.E. 53; Westcott v. Mitchell
(Me.) 50 Atl. 21; Robinson v. Jewett, 116 N.Y. 40, 22 N.E. 224; Sullivan v.
Sullivan, 99 Cal. 187, 33 Pac. 862; Blyth v. Robinson, 104 Cal. 230, 37 Pac.
904; Skinner v. Mining Co. (C.C.) 96 Fed. 735; 1 Beach, Cont. § 166;
Langd. Cont. § 54; 1 Pars.Cont. (5th Ed.) 457; Ferguson v. Harris (S.C.) 17
S.E. 782.
[14]
It results from the views above expressed that the
judgment must be reversed, and the cause remanded, with directions to
the court below to enter judgment for the respondent, with costs.
[15]

It is so ordered.

2.1.1. The Story of Alaska Packers Association v. Domenico
Academic commentary about Alaska Packers varies quite
considerably. Professor (now Judge) Richard Posner sees a standard holdup
story:
This seems a clear case where the motive for the
modification was simply to exploit a monopoly position
conferred on the promisors by the circumstances of the contract.
It might seem that the promisor would have been in worse shape

96

if the men had quit as they threatened to do. However, since their
only motive for threatening to quit was to extract a higher wage,
there was probably little danger of their actually quitting. The
danger would have been truly negligible had they known that they
could not extract an enforceable commitment to pay them a
higher wage.
Richard Posner, Gratuitous Promises in Economics and Law, 6 J. LEGAL
STUD. 411 (1977).
Professor Debora Threedy identifies a different motivation entirely.
She describes the salmon fishing industry in some detail and points out that
the fisherman contended at trial that the company had supplied them with
substandard nets, which would have made it more difficult to catch fish and
thus to earn the piece rate compensation of $0.02 per salmon caught.
Although the trial court ultimately rejected this allegation, Threedy suggests
that the fishermen may have believed the nets were substandard. This belief
could have justified their demand to renegotiate their contract. See Debora
Threedy, A Fish Story: Alaska Packers’ Association v. Domenico, 2000 UTAH L.
REV. 185.
2.1.2. Hypo on Modification
Consider a contract under which a farmer promises to deliver 1,000
bushels of wheat to a miller on November 1st at $15 per bushel. Imagine two
possible modification scenarios:
Case A – The farmer suffers a drought that diminishes and delays his
harvest. He asks for a delay in the delivery date and an increase in the price
(to $17/bushel) to cover his added costs.
Case B – The spot price for wheat rises steadily. The farmer waits
until just before the scheduled delivery date and then demands that the miller
agree to pay the current spot price ($17/bushel) rather than the contract
price.
In which of these situations does the modification seem to be in
good faith?

97

2.1.3. Discussion of Alaska Packers Association v. Domenico
Notice that the court in Alaska Packers repeatedly refers to the
substantial investment that appellant had in its cannery facility. Why is this
information relevant to determining whether the modification is enforceable?
Try analyzing the facts of Alaska Packers under the standards of the
Restatement and the UCC. Can you tell different stories about the case that
might lead to enforcement or non-enforcement of the modified contract?
Consider the problem of modification as a game. Could a promisor
benefit from being unable to agree to an enforceable modification? Are there
any circumstances in which this inability might harm the promisor?
3. Rules Concerning Information
Recall that contractual liability is consensual. We have seen that
courts sometimes refuse to enforce agreements because the contracting
process deprived one party of the opportunity to understand the nature of
the contractual obligations that she or he has assumed. However, courts
invoke unconscionability doctrine only rarely because another group of legal
rules regulates access to information more directly. In this section, we
examine these rules. After a brief introduction to fraud and
misrepresentation doctrine, we focus our attention on the subtle problems
that arise in cases of non-disclosure and concealment.
3.1. Fraud and Affirmative Misrepresentation
The principal goal of misrepresentation doctrine is to deter people
from providing false information. Suppose, for example, that Kathy has
offered to sell her BMW Z3 roadster to Josh for $15,000. During a test drive,
Josh notices that hard acceleration produces small puffs of white smoke
from the car’s exhaust. He asks Kathy about the smoke and she responds:
“Yes, it’s always done that. About six months ago, I took it to the dealer and
their shop tested the engine thoroughly. The mechanic said it’s just a
harmless puff of water vapor from the turbocharger.” It turns out, however,
that Kathy has never asked the dealer to check this problem. Instead, she
used PhotoShop to prepare a fake invoice from the car dealer reporting that
the engine is in perfect condition. She hopes that her false statement and the
invoice will cause Josh to ignore the smoke and purchase her car.

98

This hypothetical scenario illustrates how an affirmative
misrepresentation can undermine the contracting process. Kathy has invested
time and energy in producing a false impression about the condition of her
car. There is a real danger that her efforts will mislead Josh and distort his
choice among used vehicles. Courts would call Kathy’s knowingly false
representation “fraudulent” because she knew that what she said was untrue
and she intended for it to induce Josh to assent to a contract. A fraudulent
misrepresentation of this sort typically will allow its recipient to seek
rescission of the resulting contract. See Restatement (Second) § 164(1). Thus,
Josh would have the option to void his obligation to purchase the car or he
could elect to go through with the deal.
The most practically significant limitation on a party’s right to rescind
for a fraudulent misrepresentation is the requirement that the
misrepresentation actually induced assent to the contract. Imagine now that
Josh only asked Kathy about the wisps of smoke after he had already signed
a bill of sale and paid for the car. The parties formed a contract when Josh
assented to the sale. Kathy’s subsequent misrepresentations thus could not
have induced his agreement. On this variation of the facts, Josh would be
bound by the contract and unable to rescind the deal unless problems with
the car violated an express or implied warranty.
Another important doctrinal limitation on the right of rescission
arises from the requirement that the recipient of a misrepresentation be
justified in relying. Courts occasionally find that even a fraudulent
misrepresentation does not warrant rescission because the recipient should
have known that the statement was false. Suppose, for example, that Josh is a
certified master mechanic and he knows that the BMW Z3 in question
doesn’t have a turbocharger nor can a turbocharger emit water vapor. In
these circumstances, a court might condemn Kathy’s untruthfulness but hold
that Josh was not justified in relying on her obviously false statements.
This limitation applies even more frequently to cases involving
negligent misrepresentations. As with knowingly false representations, a
negligent misrepresentation that induces assent will ordinarily warrant
rescission. However, if Kathy was merely careless in reassuring Josh about
the condition of her car and Josh had good reason to doubt the accuracy of
her statement, then courts tend to weigh the parties’ relative degree of fault.
Decisions often impose the loss on the party who was most negligent.

99

Finally, courts find even greater doctrinal flexibility when the
representation arguably expresses an opinion rather than asserting facts.
Suppose that Kathy simply tells Josh that her car is in “great shape.”
Sometimes courts will interpret such statements as mere puffery without legal
significance. In other situations, however, decisions have emphasized a
special relationship of trust and confidence between the parties or focused
on the expertise of the party making the representation. Thus, if Kathy is the
master mechanic and Josh a naïve consumer, some courts may be willing to
find in Kathy’s statement an implied assertion that she is unaware of any
present mechanical problems with the car. If, in fact, she knew at the time
that the clutch was failing, her false statement could justify an action for
rescission.
There are a number of Restatement (Second) sections (reprinted
below) that address the problem of misrepresentations. As you read these
sections, notice also how they incorporate rules for cases of concealment and
non-disclosure. We will focus most of our class discussion on the subtle
issues that arise when one party fails to disclose information that would
surely affect the other party’s decision about contracting.
§ 160. When Action Is Equivalent to an Assertion (Concealment)
Action intended or known to be likely to prevent another from
learning a fact is equivalent to an assertion that the fact does not exist.
§ 161. When Non-Disclosure Is Equivalent To An Assertion
A person's non-disclosure of a fact known to him is equivalent to
an assertion that the fact does not exist in the following cases only:
(a) where he knows that disclosure of the fact is necessary to
prevent some previous assertion from being a misrepresentation or from
being fraudulent or material.
(b) where he knows that disclosure of the fact would correct a
mistake of the other party as to a basic assumption on which that party is
making the contract and if non-disclosure of the fact amounts to a failure
to act in good faith and in accordance with reasonable standards of fair
dealing.

100

(c) where he knows that disclosure of the fact would correct a
mistake of the other party as to the contents or effect of a writing,
evidencing or embodying an agreement in whole or in part.
(d) where the other person is entitled to know the fact because of a
relation of trust and confidence between them.
§ 162. When A Misrepresentation Is Fraudulent Or Material
(1) A misrepresentation is fraudulent if the maker intends his
assertion to induce a party to manifest his assent and the maker
(a) knows or believes that the assertion is not in accord with the
facts, or
(b) does not have the confidence that he states or implies in the
truth of the assertion, or
(c) knows that he does not have the basis that he states or implies
for the assertion.
(2) A misrepresentation is material if it would be likely to induce a
reasonable person to manifest his assent, or if the maker knows that it
would be likely to induce the recipient to do so.
§ 164. When a Misrepresentation Makes a Contract Voidable
(1) If a party's manifestation of assent is induced by either a
fraudulent or a material misrepresentation by the other party upon which
the recipient is justified in relying, the contract is voidable by the
recipient.
(2) If a party's manifestation of assent is induced by either a
fraudulent or a material misrepresentation by one who is not a party to the
transaction upon which the recipient is justified in relying, the contract is
voidable by the recipient, unless the other party to the transaction in good
faith and without reason to know of the misrepresentation either gives
value or relies materially on the transaction.
§ 167. When a Misrepresentation Is an Inducing Cause

101

A misrepresentation induces a party’s manifestation of assent if it
substantially contributes to his decision to manifest his assent.
§ 168. Reliance on Assertions of Opinion
(1) An assertion is one of opinion if it expresses only a belief,
without certainty, as to the existence of a fact or expresses only a
judgment as to quality, value, authenticity, or similar matters.
(2) If it is reasonable to do so, the recipient of an assertion of a
person’s opinion as to facts not disclosed and not otherwise known to the
recipient may properly interpret it as an assertion
(a) that the facts known to that person are not incompatible with
his opinion, or
(b) that he knows facts sufficient to justify him in forming it.
§ 169. When Reliance on an Assertion of Opinion Is Not Justified
To the extent that an assertion is one of opinion only, the recipient
is not justified in relying on it unless the recipient
(a) stands in such a relation of trust and confidence to the person
whose opinion is asserted that the recipient is reasonable in relying on it,
or
(b) reasonably believes that, as compared with himself, the person
whose opinion is asserted has special skill, judgment or objectivity with
respect to the subject matter, or
(c) is for some other special reason particularly susceptible to a
misrepresentation of the type involved.
3.2. Non-Disclosure and Concealment
Now we turn our attention to several real estate cases involving a
failure to disclose material information about the subject matter of the
contract. As you read these cases, try to discern the traditional common law
rule governing information disclosure in the sale of real estate. Think

102

carefully about how courts have adjusted the traditional rule and whether you
think that the benefits of those changes outweigh their costs.
3.3. Principal Case – Reed v. King
Reed v. King
Court of Appeal of California
145 Cal. App. 3d 261 (1983)
BLEASE, J.
[1]
In the sale of a house, must the seller disclose it was the
site of a multiple murder?
[2]
Dorris Reed purchased a house from Robert King.
Neither King nor his real estate agents (the other named defendants) told
Reed that a woman and her four children were murdered there 10 years
earlier. However, it seems “truth will come to light; murder cannot be hid
long.” (Shakespeare, Merchant of Venice, act II, scene II.) Reed learned
of the gruesome episode from a neighbor after the sale. She sues seeking
rescission and damages. King and the real estate agent defendants
successfully demurred to her first amended complaint for failure to state
a cause of action. Reed appeals the ensuing judgment of dismissal. We
will reverse the judgment.
Facts
[3]
We take all issuable facts pled in Reed's complaint as true.
(See 3 WITKIN, CAL. PROCEDURE (2d ed. 1971) Pleading, § 800.) King
and his real estate agent knew about the murders and knew the event
materially affected the market value of the house when they listed it for
sale. They represented to Reed the premises were in good condition and
fit for an “elderly lady” living alone. They did not disclose the fact of the
murders. At some point King asked a neighbor not to inform Reed of
that event. Nonetheless, after Reed moved in neighbors informed her no
one was interested in purchasing the house because of the stigma. Reed
paid $76,000, but the house is only worth $65,000 because of its past.
[4]
The trial court sustained the demurrers to the complaint
on the ground it did not state a cause of action. The court concluded a
cause of action could only be stated “if the subject property, by reason of

103

the prior circumstances, were presently the object of community notoriety
....” (Original italics.) Reed declined the offer of leave to amend.
Discussion
[5]
Does Reed's pleading state a cause of action? Concealed
within this question is the nettlesome problem of the duty of disclosure
of blemishes on real property which are not physical defects or legal
impairments to use.
[6]
Reed seeks to state a cause of action sounding in contract,
i.e. rescission, or in tort, i.e., deceit. In either event her allegations must
reveal a fraud. (See Civ. Code, §§ 1571-1573, 1689, 1709-1710.) “The
elements of actual fraud, whether as the basis of the remedy in contract
or tort, may be stated as follows: There must be (1) a false representation or
concealment of a material fact (or, in some cases, an opinion) susceptible
of knowledge, (2) made with knowledge of its falsity or without sufficient
knowledge on the subject to warrant a representation, (3) with the intent
to induce the person to whom it is made to act upon it; and such person
must (4) act in reliance upon the representation (5) to his damage.”1
(Original italics.) (1 WITKIN, SUMMARY OF CAL. LAW (8th ed. 1973)
Contracts, § 315.)
[7]
The trial court perceived the defect in Reed's complaint
to be a failure to allege concealment of a material fact. “Concealment”
and “material” are legal conclusions concerning the effect of the issuable
facts pled. As appears, the analytic pathways to these conclusions are
intertwined.
[8]
Concealment is a term of art which includes mere
nondisclosure when a party has a duty to disclose. (See, e.g., Lingsch v.
Savage (1963) 213 Cal.App.2d 729, 738 [29 Cal.Rptr. 201, 8 A.L.R.3d 537];
Rest.2d Contracts, § 161; Rest.2d Torts, § 551; Rest., Restitution, § 8, esp.
com. b.) Reed's complaint reveals only nondisclosure despite the
allegation King asked a neighbor to hold his peace. There is no allegation

1 Proof of damage, i.e. specific pecuniary loss, is not essential to obtain rescission

alone. (See 1 WITKIN, op. cit. supra., §§ 324-325; see also Earl v. Saks & Co. (1951)
36 Cal.2d 602 [226 P.2d 340].)

104

the attempt at suppression was a cause in fact of Reed's ignorance.2 (See
Rest.2d Contracts, §§ 160, 162-164; Rest.2d Torts, § 550; Rest.,
Restitution, § 9.) Accordingly, the critical question is: does the seller have
a duty to disclose here? Resolution of this question depends on the
materiality of the fact of the murders.
[9]
Similarly we do not view the statement the house was fit
for Reed to inhabit as transmuting her case from one of nondisclosure to
one of false representation. To view the representation as patently false is
to find “elderly ladies” uniformly susceptible to squeamishness. We
decline to indulge this stereotypical assumption. To view the
representation as misleading because it conflicts with a duty to disclose is
to beg that question.
[10]
In general, a seller of real property has a duty to disclose:
“where the seller knows of facts materially affecting the value or
desirability of the property which are known or accessible only to him
and also knows that such facts are not known to, or within the reach of
the diligent attention and observation of the buyer, the seller is under a
duty to disclose them to the buyer.3 [Italics added, citations omitted.]” (
Lingsch v. Savage, supra., 213 Cal. App. 2d at p. 735.) This broad statement
of duty has led one commentator to conclude: “The ancient maxim caveat
emptor ('let the buyer beware.') has little or no application to California
real estate transactions.” (1 Miller & Starr, Current Law of Cal. Real
Estate (rev. ed. 1975) § 1:80.)
[11]
Whether information “is of sufficient materiality to affect
the value or desirability of the property ... depends on the facts of the
particular case.” (Lingsch, supra., 213 Cal. App. 2d at p. 737.) Materiality
“is a question of law, and is part of the concept of right to rely or
justifiable reliance.” (3 WITKIN, CAL. PROCEDURE (2d ed. 1971) Pleading,
2 Reed elsewhere in the complaint asserts defendants “actively concealed” the fact

of the murders and this in part misled her. However, no connection is made or
apparent between the legal conclusion of active concealment and any issuable fact
pled by Reed. Accordingly, the assertion is insufficient. (See Bacon v. Soule (1912)
19 Cal. App. 428, 438 [126 P. 384].)
3 The real estate agent or broker representing the seller is under the same duty of

disclosure. ( Lingsch v. Savage, supra., 213 Cal.App.2d at p. 736.)

105

§ 578, p. 2217.) Accordingly, the term is essentially a label affixed to a
normative conclusion.4 Three considerations bear on this legal
conclusion: the gravity of the harm inflicted by nondisclosure; the
fairness of imposing a duty of discovery on the buyer as an alternative to
compelling disclosure, and the impact on the stability of contracts if
rescission is permitted.
[12]
Numerous cases have found nondisclosure of physical
defects and legal impediments to use of real property are material. (See 1
Miller & Starr, supra., § 181.)5 However, to our knowledge, no prior real
estate sale case has faced an issue of nondisclosure of the kind presented
here. (Compare Earl v. Saks & Co., supra., 36 Cal.2d 602; Kuhn v. Gottfried
(1951) 103 Cal.App.2d 80, 85-86 [229 P.2d 137].) Should this variety of
ill-repute be required to be disclosed? Is this a circumstance where “nondisclosure of the fact amounts to a failure to act in good faith and in
accordance with reasonable standards of fair dealing[?]” (Rest. 2d
Contracts, § 161, subd. (b).)
4 This often subsumes a policy analysis of the effect of permitting rescission on

the stability of contracts. (See fn. 6, ante.) “In the case law of fraud, the word
'material' has become a sort of talisman. It is suggested that it has no meaning
when undefined other than to the user since the word actually means no more
than that the fraud is the sort which will justify rescission or damages in deceit.
However, courts continue to use materiality as a test without explanatory
reference to the varying standards of reliance, damage, etc. they are following.”
(Note, Rescission: Fraud as Ground: Contracts (1951) 39 Cal. L. Rev. 309, 310-311, fn.
4.)
5 For example, the following have been held of sufficient materiality to require

disclosure: the home sold was constructed on filled land (Burkett v. J.A. Thompson
& Son (1957) 150 Cal.App.2d 523, 526 [310 P.2d 56]); improvements were added
without a building permit and in violation of zoning regulations (Barder v. McClung
(1949) 93 Cal.App.2d 692, 697 [209 P.2d 808]) or in violation of building codes
(Curran v. Heslop (1953) 115 Cal.App.2d 476, 480-481 [252 P.2d 378]); the
structure was condemned (Katz v. Department of Real Estate (1979) 96 Cal.App.3d
895, 900 [158 Cal.Rptr. 766]); the structure was termite-infested ( Godfrey v.
Steinpress (1982) 128 Cal.App.3d 154 [180 Cal.Rptr. 95]); there was water
infiltration 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
yield was overstated (Ford v. Cournale (1973) 36 Cal.App.3d 172, 179-180 [111
Cal.Rptr. 334, 81 A.L.R.3d 704].)

106

[13]
The paramount argument against an affirmative
conclusion is it permits the camel's nose of unrestrained irrationality
admission to the tent. If such an “irrational” consideration is permitted as
a basis of rescission the stability of all conveyances will be seriously
undermined. Any fact that might disquiet the enjoyment of some
segment of the buying public may be seized upon by a disgruntled
purchaser to void a bargain.6 In our view, keeping this genie in the bottle
is not as difficult a task as these arguments assume. We do not view a
decision allowing Reed to survive a demurrer in these unusual
circumstances as indorsing the materiality of facts predicating peripheral,
insubstantial, or fancied harms.
[14]
The murder of innocents is highly unusual in its potential
for so disturbing buyers they may be unable to reside in a home where it
has occurred. This fact may foreseeably deprive a buyer of the intended
use of the purchase. Murder is not such a common occurrence that buyers
should be charged with anticipating and discovering this disquieting
possibility. Accordingly, the fact is not one for which a duty of inquiry
and discovery can sensibly be imposed upon the buyer.
[15]
Reed alleges the fact of the murders has a quantifiable
effect on the market value of the premises.7 We cannot say this allegation
is inherently wrong and, in the pleading posture of the case, we assume it
to be true. If information known or accessible only to the seller has a
significant and measurable effect on market value and, as is alleged here,
6 Concern for the effects of an overly indulgent rescission policy on the stability

of bargains is not new. Our Supreme Court early on quoted with approval the
sentiment: “'The power to cancel a contract is a most extraordinary power. It is
one which should be exercised with great caution—nay, I may say, with great
reluctance—unless in a clear case. A too free use of this power would render all
business uncertain, and, as has been said, make the length of a chancellor's foot
the measure of individual rights. The greatest liberty of making contracts is
essential to the business interests of the country. In general, the parties must look
out for themselves.”' (Colton v. Stanford (1980) 82 Cal. 351, 398 [23 P. 16].)
7 See Evidence Code section 810 et seq. We note the traditional formulation of

market value assumes a buyer “with knowledge of all the issues and purposes to
which [the realty] is adapted.” (See e.g. South Bay Irr. Dist. v. California-American
Water Co. (1976) 61 Cal. App. 3d 944, 961 and 970 [133 Cal. Rptr. 166].)

107

the seller is aware of this effect, we see no principled basis for making the
duty to disclose turn upon the character of the information. Physical
usefulness is not and never has been the sole criterion of valuation.
Stamp collections and gold speculation would be insane activities if
utilitarian considerations were the sole measure of value. (See also Civ.
Code, § 3355 [deprivation of property of peculiar value to owner]; Annot.
(1950) 12 A.L.R.2d 902 [Measure of Damages for Conversion or Loss of,
or Damage to, Personal Property Having No Market Value].)
[16]
Reputation and history can have a significant effect on
the value of realty. “George Washington slept here” is worth something,
however physically inconsequential that consideration may be. Ill-repute
or “bad will” conversely may depress the value of property. Failure to
disclose such a negative fact where it will have a foreseeably depressing
effect on income expected to be generated by a business is tortious. (See
Rest.2d Torts, § 551, illus. 11.) Some cases have held that unreasonable
fears of the potential buying public that a gas or oil pipeline may rupture
may depress the market value of land and entitle the owner to
incremental compensation in eminent domain. (See Annot., Eminent
Domain: Elements and Measure of Compensation for Oil or Gas
Pipeline Through Private Property (1954) 38 A.L.R.2d 788, 801-804.)
[17]
Whether Reed will be able to prove her allegation the
decade-old multiple murder has a significant effect on market value we
cannot determine.8 If she is able to do so by competent evidence she is
entitled to a favorable ruling on the issues of materiality and duty to

8 [In ]determining what factors would motivate [buyers and sellers] in reaching an

agreement as to price, and in weighing the effect of their motivation, [the trier of
fact] may rely upon the opinion of experts in the field and also upon its
knowledge and experience shared in common with people in general.“ ( South Bay
Irr. Dist., supra., 61 Cal.App.3d at p. 970; see also 3 Wigmore, Evidence
(Chadbourn rev.ed. 1970) § 711 et seq.)

108

disclose.9 Her demonstration of objective tangible harm would still the
concern that permitting her to go forward will open the floodgates to
rescission on subjective and idiosyncratic grounds.
[18]
A more troublesome question would arise if a buyer in
similar circumstances were unable to plead or establish a significant and
quantifiable effect on market value. However, this question is not
presented in the posture of this case. Reed has not alleged the fact of the
murders has rendered the premises useless to her as a residence. As
currently pled, the gravamen of her case is pecuniary harm. We decline to
speculate on the abstract alternative.
[19]

The judgment is reversed.

9 The ruling of the trial court requiring the additional element of notoriety, i.e.

widespread public knowledge, is unpersuasive. Lack of notoriety may facilitate
resale to yet another unsuspecting buyer at the ”market price“ of a house with no
ill-repute. However, it appears the buyer will learn of the possibly unsettling
history of the house soon after moving in. Those who suffer no discomfort from
the specter of residing in such quarters per se, will nonetheless be discomforted
by the prospect they have bought a house that may be difficult to sell to less hardy
souls. Nondisclosure must be evaluated as fair or unfair regardless of the ease
with which a buyer may escape this discomfort by foisting it upon another.

109

3.4. Principal Case – Stambovsky v. Ackley
Stambovsky v. Ackley
New York Supreme Court, Appellate Division
169 A.D.2d 254 (1991)
RUBIN, JUSTICE.
[1]
Plaintiff, to his horror, discovered that the house he had
recently contracted to purchase was widely reputed to be possessed by
poltergeists, reportedly seen by defendant seller and members of her
family on numerous occasions over the last nine years. Plaintiff promptly
commenced this action seeking rescission of the contract of sale.
Supreme Court reluctantly dismissed the complaint, holding that plaintiff
has no remedy at law in this jurisdiction.
[2]
The unusual facts of this case, as disclosed by the record,
clearly warrant a grant of equitable relief to the buyer who, as a resident
of New York City, cannot be expected to have any familiarity with the
folklore of the Village of Nyack. Not being a “local,” plaintiff could not
readily learn that the home he had contracted to purchase is haunted.
Whether the source of the spectral apparitions seen by defendant seller
are parapsychic or psychogenic, having reported their presence in both a
national publication (“Readers' Digest”) and the local press (in 1977 and
1982, respectively), defendant is estopped to deny their existence and, as
a matter of law, the house is haunted. More to the point, however, no
divination is required to conclude that it is defendant's promotional
efforts in publicizing her close encounters with these spirits which
fostered the home's reputation in the community. In 1989, the house was
included in a five-home walking tour of Nyack and described in a
November 27th newspaper article as “a riverfront Victorian (with
ghost).” The impact of the reputation thus created goes to the very
essence of the bargain between the parties, greatly impairing both the
value of the property and its potential for resale. The extent of this
impairment may be presumed for the purpose of reviewing the
disposition of this motion to dismiss the cause of action for rescission
(Harris v. City of New York, 147 A.D.2d 186, 188-189, 542 N.Y.S.2d 550)
and represents merely an issue of fact for resolution at trial.

110

[3]
While I agree with Supreme Court that the real estate
broker, as agent for the seller, is under no duty to disclose to a potential
buyer the phantasmal reputation of the premises and that, in his pursuit
of a legal remedy for fraudulent misrepresentation against the seller,
plaintiff hasn't a ghost of a chance, I am nevertheless moved by the spirit
of equity to allow the buyer to seek rescission of the contract of sale and
recovery of his downpayment. New York law fails to recognize any
remedy for damages incurred as a result of the seller's mere silence,
applying instead the strict rule of caveat emptor. Therefore, the
theoretical basis for granting relief, even under the extraordinary facts of
this case, is elusive if not ephemeral.
[4]
“Pity me not but lend thy serious hearing to what I shall
unfold” (WILLIAM SHAKESPEARE, HAMLET, Act I, Scene V [Ghost] ).
[5]
From the perspective of a person in the position of
plaintiff herein, a very practical problem arises with respect to the
discovery of a paranormal phenomenon: “Who you gonna' call?” as the
title song to the movie “Ghostbusters” asks. Applying the strict rule of
caveat emptor to a contract involving a house possessed by poltergeists
conjures up visions of a psychic or medium routinely accompanying the
structural engineer and Terminix man on an inspection of every home
subject to a contract of sale. It portends that the prudent attorney will
establish an escrow account lest the subject of the transaction come back
to haunt him and his client—or pray that his malpractice insurance
coverage extends to supernatural disasters. In the interest of avoiding
such untenable consequences, the notion that a haunting is a condition
which can and should be ascertained upon reasonable inspection of the
premises is a hobgoblin which should be exorcised from the body of
legal precedent and laid quietly to rest.
[6]
It has been suggested by a leading authority that the
ancient rule which holds that mere non-disclosure does not constitute
actionable misrepresentation “finds proper application in cases where the
fact undisclosed is patent, or the plaintiff has equal opportunities for
obtaining information which he may be expected to utilize, or the
defendant has no reason to think that he is acting under any
misapprehension” (PROSSER, LAW OF TORTS § 106, at 696 [4th ed., 1971]
). However, with respect to transactions in real estate, New York adheres

111

to the doctrine of caveat emptor and imposes no duty upon the vendor
to disclose any information concerning the premises (London v. Courduff,
141 A.D.2d 803, 529 N.Y.S.2d 874) unless there is a confidential or
fiduciary relationship between the parties (Moser v. Spizzirro, 31 A.D.2d
537, 295 N.Y.S.2d 188, affd., 25 N.Y.2d 941, 305 N.Y.S.2d 153, 252
N.E.2d 632; IBM Credit Fin. Corp. v. Mazda Motor Mfg. (USA) Corp., 152
A.D.2d 451, 542 N.Y.S.2d 649) or some conduct on the part of the seller
which constitutes “active concealment” ( see, 17 East 80th Realty Corp. v.
68th Associates, 173 A.D.2d 245, 569 N.Y.S.2d 647 [dummy ventilation
system constructed by seller]; Haberman v. Greenspan, 82 Misc.2d 263, 368
N.Y.S.2d 717 [foundation cracks covered by seller]). Normally, some
affirmative misrepresentation ( e.g., Tahini Invs., Ltd. v. Bobrowsky, 99
A.D.2d 489, 470 N.Y.S.2d 431 [industrial waste on land allegedly used
only as farm]; Jansen v. Kelly, 11 A.D.2d 587, 200 N.Y.S.2d 561 [land
containing valuable minerals allegedly acquired for use as campsite] ) or
partial disclosure (Junius Constr. Corp. v. Cohen, 257 N.Y. 393, 178 N.E.
672 [existence of third unopened street concealed]; Noved Realty Corp. v.
A.A.P. Co., 250 App.Div. 1, 293 N.Y.S. 336 [escrow agreements securing
lien concealed] ) is required to impose upon the seller a duty to
communicate undisclosed conditions affecting the premises (contra,
Young v. Keith, 112 A.D.2d 625, 492 N.Y.S.2d 489 [defective water and
sewer systems concealed] ).
[7]
Caveat emptor is not so all-encompassing a doctrine of
common law as to render every act of non-disclosure immune from
redress, whether legal or equitable. “In regard to the necessity of giving
information which has not been asked, the rule differs somewhat at law
and in equity, and while the law courts would permit no recovery of
damages against a vendor, because of mere concealment of facts under
certain circumstances, yet if the vendee refused to complete the contract
because of the concealment of a material fact on the part of the other,
equity would refuse to compel him so to do, because equity only compels
the specific performance of a contract which is fair and open, and in
regard to which all material matters known to each have been
communicated to the other” (Rothmiller v. Stein, 143 N.Y. 581, 591-592, 38
N.E. 718 [emphasis added] ). Even as a principle of law, long before
exceptions were embodied in statute law (see, e.g., UCC §§ 2-312, 2-313,

112

2-314, 2-315; 3-417[2][e]), the doctrine was held inapplicable to contagion
among animals, adulteration of food, and insolvency of a maker of a
promissory note and of a tenant substituted for another under a lease
(see, Rothmiller v. Stein, supra, at 592-593, 38 N.E. 718 and cases cited
therein). Common law is not moribund. Ex facto jus oritur (law arises
out of facts). Where fairness and common sense dictate that an exception
should be created, the evolution of the law should not be stifled by rigid
application of a legal maxim.
[8]
The doctrine of caveat emptor requires that a buyer act
prudently to assess the fitness and value of his purchase and operates to
bar the purchaser who fails to exercise due care from seeking the
equitable remedy of rescission (see, e.g., Rodas v. Manitaras, 159 A.D.2d
341, 552 N.Y.S.2d 618). For the purposes of the instant motion to
dismiss the action pursuant to CPLR 3211(a)(7), plaintiff is entitled to
every favorable inference which may reasonably be drawn from the
pleadings (Arrington v. New York Times Co., 55 N.Y.2d 433, 442, 449
N.Y.S.2d 941, 434 N.E.2d 1319; Rovello v. Orofino Realty Co., 40 N.Y.2d
633, 634, 389 N.Y.S.2d 314, 357 N.E.2d 970), specifically, in this
instance, that he met his obligation to conduct an inspection of the
premises and a search of available public records with respect to title. It
should be apparent, however, that the most meticulous inspection and
the search would not reveal the presence of poltergeists at the premises
or unearth the property's ghoulish reputation in the community.
Therefore, there is no sound policy reason to deny plaintiff relief for
failing to discover a state of affairs which the most prudent purchaser
would not be expected to even contemplate (see, Da Silva v. Musso, 53
N.Y.2d 543, 551, 444 N.Y.S.2d 50, 428 N.E.2d 382).
[9]
The case law in this jurisdiction dealing with the duty of a
vendor of real property to disclose information to the buyer is
distinguishable from the matter under review. The most salient
distinction is that existing cases invariably deal with the physical
condition of the premises (e.g., London v. Courduff, supra [use as a landfill];
Perin v. Mardine Realty Co., 5 A.D.2d 685, 168 N.Y.S.2d 647 aff’d. 6 N.Y.2d
920, 190 N.Y.S.2d 995, 161 N.E.2d 210 [sewer line crossing adjoining
property without owner's consent]), defects in title (e.g., Sands v. Kissane,
282 App. Div. 140, 121 N.Y.S.2d 634 [remainderman]), liens against the

113

property (e.g., Noved Realty Corp. v. A.A.P. Co., supra), expenses or income
(e.g., Rodas v. Manitaras, supra [gross receipts]) and other factors affecting
its operation. No case has been brought to this court's attention in which
the property value was impaired as the result of the reputation created by
information disseminated to the public by the seller (or, for that matter,
as a result of possession by poltergeists).
[10]
Where a condition which has been created by the seller
materially impairs the value of the contract and is peculiarly within the
knowledge of the seller or unlikely to be discovered by a prudent
purchaser exercising due care with respect to the subject transaction,
nondisclosure constitutes a basis for rescission as a matter of equity. Any
other outcome places upon the buyer not merely the obligation to
exercise care in his purchase but rather to be omniscient with respect to
any fact which may affect the bargain. No practical purpose is served by
imposing such a burden upon a purchaser. To the contrary, it encourages
predatory business practice and offends the principle that equity will
suffer no wrong to be without a remedy.
[11]
Defendant's contention that the contract of sale,
particularly the merger or “as is” clause, bars recovery of the buyer's
deposit is unavailing. Even an express disclaimer will not be given effect
where the facts are peculiarly within the knowledge of the party invoking
it (Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322, 184 N.Y.S.2d 599,
157 N.E.2d 597; Tahini Invs., Ltd. v. Bobrowsky, supra). Moreover, a fair
reading of the merger clause reveals that it expressly disclaims only
representations made with respect to the physical condition of the
premises and merely makes general reference to representations
concerning “any other matter or things affecting or relating to the
aforesaid premises”. As broad as this language may be, a reasonable
interpretation is that its effect is limited to tangible or physical matters
and does not extend to paranormal phenomena. Finally, if the language
of the contract is to be construed as broadly as defendant urges to
encompass the presence of poltergeists in the house, it cannot be said
that she has delivered the premises “vacant” in accordance with her
obligation under the provisions of the contract rider.
[12]
To the extent New York law may be said to require
something more than “mere concealment” to apply even the equitable

114

remedy of rescission, the case of Junius Construction Corporation v. Cohen,
257 N.Y. 393, 178 N.E. 672, supra, while not precisely on point, provides
some guidance. In that case, the seller disclosed that an official map
indicated two as yet unopened streets which were planned for
construction at the edges of the parcel. What was not disclosed was that
the same map indicated a third street which, if opened, would divide the
plot in half. The court held that, while the seller was under no duty to
mention the planned streets at all, having undertaken to disclose two of
them, he was obliged to reveal the third (see also, Rosenschein v. McNally, 17
A.D.2d 834, 233 N.Y.S.2d 254).
[13]
In the case at bar, defendant seller deliberately fostered
the public belief that her home was possessed. Having undertaken to
inform the public at large, to whom she has no legal relationship, about
the supernatural occurrences on her property, she may be said to owe no
less a duty to her contract vendee. It has been remarked that the
occasional modern cases which permit a seller to take unfair advantage of
a buyer's ignorance so long as he is not actively misled are “singularly
unappetizing” (PROSSER, LAW OF TORTS § 106, at 696 [4th ed. 1971]).
Where, as here, the seller not only takes unfair advantage of the buyer's
ignorance but has created and perpetuated a condition about which he is
unlikely to even inquire, enforcement of the contract (in whole or in part)
is offensive to the court's sense of equity. Application of the remedy of
rescission, within the bounds of the narrow exception to the doctrine of
caveat emptor set forth herein, is entirely appropriate to relieve the
unwitting purchaser from the consequences of a most unnatural bargain.
[14]
Accordingly, the judgment of the Supreme Court, New
York County (Edward H. Lehner, J.), entered April 9, 1990, which
dismissed the complaint pursuant to CPLR 3211(a)(7), should be
modified, on the law and the facts and in the exercise of discretion, and
the first cause of action seeking rescission of the contract reinstated,
without costs.
All concur except MILONAS, J.P. and SMITH, J., who dissent in
an opinion by SMITH, J.
SMITH, JUSTICE (DISSENTING).

115

[15]
I would affirm the dismissal of the complaint by the
motion court.
[16]
Plaintiff seeks to rescind his contract to purchase
defendant Ackley's residential property and recover his down payment.
Plaintiff alleges that Ackley and her real estate broker, defendant Ellis
Realty, made material misrepresentations of the property in that they
failed to disclose that Ackley believed that the house was haunted by
poltergeists. Moreover, Ackley shared this belief with her community and
the general public through articles published in Reader's Digest (1977)
and the local newspaper (1982). In November 1989, approximately two
months after the parties entered into the contract of sale but subsequent
to the scheduled October 2, 1989 closing, the house was included in a
five-house walking tour and again described in the local newspaper as
being haunted.
[17]
Prior to closing, plaintiff learned of this reputation and
unsuccessfully sought to rescind the $650,000 contract of sale and obtain
return of his $32,500 down payment without resort to litigation. The
plaintiff then commenced this action for that relief and alleged that he
would not have entered into the contract had he been so advised and that
as a result of the alleged poltergeist activity, the market value and
resaleability of the property was greatly diminished. Defendant Ackley
has counterclaimed for specific performance.
[18]
“It is settled law in New York that the seller of real
property is under no duty to speak when the parties deal at arm's length.
The mere silence of the seller, without some act or conduct which
deceived the purchaser, does not amount to a concealment that is
actionable as a fraud (see Perin v. Mardine Realty Co., Inc., 5 A.D.2d 685,
168 N.Y.S.2d 647, aff'd., 6 N.Y.2d 920, 190 N.Y.S.2d 995, 161 N.E.2d
210; Moser v. Spizzirro, 31 A.D.2d 537, 295 N.Y.S.2d 188, aff'd., 25 N.Y.2d
941, 305 N.Y.S.2d 153, 252 N.E.2d 632). The buyer has the duty to
satisfy himself as to the quality of his bargain pursuant to the doctrine of
caveat emptor, which in New York State still applies to real estate
transactions.” London v. Courduff, 141 A.D.2d 803, 804, 529 N.Y.S.2d 874,
app. dism'd., 73 N.Y.2d 809, 537 N.Y.S.2d 494, 534 N.E.2d 332 (1988).

116

[19]
The parties herein were represented by counsel and dealt
at arm's length. This is evidenced by the contract of sale which, inter alia,
contained various riders and a specific provision that all prior
understandings and agreements between the parties were merged into the
contract, that the contract completely expressed their full agreement and
that neither had relied upon any statement by anyone else not set forth in
the contract. There is no allegation that defendants, by some specific act,
other than the failure to speak, deceived the plaintiff. Nevertheless, a
cause of action may be sufficiently stated where there is a confidential or
fiduciary relationship creating a duty to disclose and there was a failure to
disclose a material fact, calculated to induce a false belief. County of
Westchester v. Welton Becket Assoc., 102 A.D.2d 34, 50-51, 478 N.Y.S.2d
305, aff'd., 66 N.Y.2d 642, 495 N.Y.S.2d 364, 485 N.E.2d 1029 (1985).
However, plaintiff herein has not alleged and there is no basis for
concluding that a confidential or fiduciary relationship existed between
these parties to an arm's length transaction such as to give rise to a duty
to disclose. In addition, there is no allegation that defendants thwarted
plaintiff's efforts to fulfill his responsibilities fixed by the doctrine of
caveat emptor. See London v. Courduff, supra, 141 A.D.2d at 804, 529
N.Y.S.2d 874.
[20]
Finally, if the doctrine of caveat emptor is to be discarded, it
should be for a reason more substantive than a poltergeist. The existence
of a poltergeist is no more binding upon the defendants than it is upon
this court.
[21]
Based upon the foregoing, the motion court properly
dismissed the complaint.
3.4.1. Discussion of Reed v. King and Stambovsky v. Ackley
What is the traditional common law rule governing the disclosure of
information in connection with real estate sales?
How have the California courts sought to protect buyers?
Compare the Stambovsky court’s statement of New York law. Can you
specify precisely under what circumstances New York sellers of real estate
have a duty to disclose information to prospective buyers?

117

Is there any reason to believe that the rules announced in Reed and
Stambovsky might increase the costs associated with real estate transactions?
For an amusing take on Reed v. King, view THE SIMPSONS, episode
#909, “Reality Bites.”
3.4.2. Kronman’s Theory of Deliberately Acquired Information
Before we examine several more real estate cases, it will be helpful to
think more systematically about how disclosure obligations are likely to affect
parties’ incentives to obtain and use information. One of the most frequently
cited approaches to this problem is Professor Anthony Kronman’s theory
distinguishing deliberately and casually acquired information.
The centerpiece of Kronman’s article is his discussion of a US
Supreme Court decision concerning non-disclosure. In Laidlaw v. Organ, 15
U.S. (2 Wheat.) 178 (1817), the Court confronted a case in which two parties
had been negotiating the purchase and sale of a large quantity of tobacco. On
the morning of the sale, news was publicly announced in a handbill that the
War of 1812 had ended, thus reopening the foreign tobacco market and
increasing by 30 to 50 percent the price of US tobacco. Organ, the buyer,
somehow learned this news before he went to close the deal, but Girault, the
seller, was unaware of the change in market conditions. Girault even asked
Organ whether he had heard any news that might affect the price of tobacco.
Organ evidently declined to answer this question, and Girault decided to go
ahead with the contract anyhow. The Court ruled without much analysis or
explanation that Organ had no legal duty to inform Girault of such a change
in “extrinsic circumstances” but also held that whether Organ had
affirmatively misrepresented any facts was a jury question. The following
excerpt describes Kronman’s analysis in greater detail:
One effective way of insuring that an individual will
benefit from the possession of information (or anything else for
that matter) is to assign him a property right in the information
itself — a right or entitlement to invoke the coercive machinery
of the state in order to exclude others from its use and
enjoyment. The benefits of possession become secure only when
the state transforms the possessor of information into an owner
by investing him with a legally enforceable property right of some
sort or other. The assignment of property rights in information is
a familiar feature of our legal system. The legal protection

118

accorded patented inventions and certain trade secrets rights are
two obvious examples.
One (seldom noticed) way in which the legal system can
establish property rights in information is by permitting an
informed party to enter — and enforce — contracts which his
information suggests are profitable, without disclosing the
information to the other party. Imposing a duty to disclose upon
the knowledgeable party deprives him of a private advantage
which the information would otherwise afford. A duty to disclose
is tantamount to a requirement that the benefit of the
information be publicly shared and is thus antithetical to the
notion of a property right which — whatever else it may entail —
always requires the legal protection of private appropriation.
Of course, different sorts of property rights may be better
suited for protecting possessory interests in different sorts of
information. It is unlikely, for example, that information of the
kind involved in Laidlaw v. Organ could be effectively protected by
a patent system. The only feasible way of assigning property
rights in short-lived market information is to permit those with
such information to contract freely without disclosing what they
know.
It is unclear, from the report of the case, whether the
buyer in Laidlaw casually acquired his information or made a
deliberate investment in seeking it out (for example, by cultivating
a network of valuable commercial “friendships”). If we assume
the buyer casually acquired his knowledge of the treaty, requiring
him to disclose the information to his seller (that is, denying him
a property right in the information) will have no significant effect
on his future behavior. Since one who casually acquires
information makes no investment in its acquisition, subjecting
him to a duty to disclose is not likely to reduce the amount of
socially useful information which he actually generates. Of
course, if the buyer in Laidlaw acquired his knowledge of the
treaty as the result of a deliberate and costly search, a disclosure
requirement will deprive him of any private benefit which he
might otherwise realize from possession of the information and
should discourage him from making similar investments in the
future.

119

In addition, since it would enable the seller to appropriate
the buyer’s information without cost and would eliminate the
danger of his being lured unwittingly into a losing contract by one
possessing superior knowledge, a disclosure requirement will also
reduce the seller’s incentive to search. Denying the buyer a
property right in deliberately acquired information will therefore
discourage both buyers and sellers from investing in the
development of expertise and in the actual search for
information. The assignment of such a right will not only protect
the investment of the party possessing the special knowledge, it
will also impose an opportunity cost on the other party and thus
give him an incentive to undertake a (cost-justified) search of his
own.
If we assume that courts can easily discriminate between
those who have acquired information casually and those who
have acquired it deliberately, plausible economic considerations
might well justify imposing a duty to disclose on a case-by-case
basis (imposing it where the information has been casually
acquired, refusing to impose it where the information is the fruit
of a deliberate search). A party who has casually acquired
information is, at the time of the transaction, likely to be a better
(cheaper) mistake-preventer than the mistaken party with whom
he deals — regardless of the fact that both parties initially had
equal access to the information in question. One who has
deliberately acquired information is also in a position to prevent
the other party’s error. But in determining the cost to the
knowledgeable party of preventing the mistake (by disclosure), we
must include whatever investment he has made in acquiring the
information in the first place. This investment will represent a
loss to him if the other party can avoid the contract on the
grounds that the party with the information owes him a duty of
disclosure.
If we take this cost into account, it is no longer clear that
the party with knowledge is the cheaper mistake-preventer when
his knowledge has been deliberately acquired. Indeed, the
opposite conclusion seems more plausible. In this case, therefore,
a rule permitting nondisclosure (which has the effect of imposing
the risk of a mistake on the mistaken party) corresponds to the
arrangement the parties themselves would have been likely to

120

adopt if they had negotiated an explicit allocation of the risk at
the time they entered the contract. The parties to a contract are
always free to allocate this particular risk by including an
appropriate disclaimer in the terms of their agreement. Where
they have failed to do so, however, the object of the law of
contracts should be (as it is elsewhere) to reduce transaction costs
by providing a legal rule which approximates the arrangement the
parties would have chosen for themselves if they had deliberately
addressed the problem. This consideration, coupled with the
reduction in the production of socially useful information which
is likely to follow from subjecting him to a disclosure
requirement, suggests that allocative efficiency is best served by
permitting one who possesses deliberately acquired information
to enter and enforce favorable bargains without disclosing what
he knows.
A rule which calls for case-by-case application of a
disclosure requirement is likely, however, to involve factual issues
that will be difficult (and expensive) to resolve. Laidlaw itself
illustrates this point nicely. On the facts of the case, as we have
them, it is impossible to determine whether the buyer actually
made a deliberate investment in acquiring information regarding
the treaty. The cost of administering a disclosure requirement on
a case-by-case basis is likely to be substantial.
As an alternative, one might uniformly apply a blanket
rule (of disclosure or nondisclosure) across each class of cases
involving the same sort of information (for example, information
about market conditions or about defects in property held for
sale). In determining the appropriate blanket rule for a particular
class of cases, it would first be necessary to decide whether the
kind of information involved is (on the whole) more likely to be
generated by chance or by deliberate searching. The greater the
likelihood that such information will be deliberately produced
rather than casually discovered, the more plausible the
assumption becomes that a blanket rule permitting nondisclosure
will have benefits that outweigh its costs.
In Laidlaw, for example, the information involved
concerned changing market conditions. The results in that case
may be justified (from the more general perspective just
described) on the grounds that information regarding the state of

121

the market is typically (although not in every case) the product of
a deliberate search. The large number of individuals who are
actually engaged in the production of such information lends
some empirical support to this proposition.
Anthony Kronman, Mistake, Disclosure, Information, and the Law of
Contracts, 7 J. LEGAL STUD. (1978).
What does Kronman’s analysis imply about situations in which
someone responds untruthfully to a question or takes other measures to
conceal deliberately acquired information? In a footnote, Kronman appears
to suggest that such a variation on the facts of Laidlaw would dictate an
opposite result:
If Organ denied that he had heard any news of this sort
[the treaty], he would have committed a fraud. It may even be, in
light of Laidlaw’s direct question, that silence on Organ’s part was
fraudulent…. In my discussion of the case, …I have put aside
any question of fraud on Organ’s part.
Id. at note 27.
You should bear Kronman’s approach in mind as you read the
remaining cases on non-disclosure and concealment.
3.5. Principal Case – Obde v. Schlemeyer
Obde v. Schlemeyer

Supreme Court of Washington
56 Wash. 2d 449, 353 P.2d 672
FINLEY, JUDGE.
[1]
Plaintiffs, Mr. and Mrs. Fred Obde, brought this action to
recover damages for the alleged fraudulent concealment of termite
infestation in an apartment house purchased by them from the
defendants, Mr. and Mrs. Robert Schlemeyer. Plaintiffs assert that the
building was infested at the time of the purchase; that defendants were
well apprised of the termite condition, but fraudulently concealed it from
the plaintiffs.
[2]
After a trial on the merits, the trial court entered findings
of fact and conclusions of law sustaining the plaintiffs' claim, and
awarded them a judgment for damages in the amount of $3,950. The

122

defendants appealed. Their assignments of error may be
compartmentalized, roughly, into two categories: (1) those going to the
question of liability, and (2) those relating to the amount of damages to
be awarded if liability is established.
[3]
First, as to the question of liability: The Schlemeyers
concede that, shortly after they purchased the property from a Mr. Ayars
on an installment contract in April 1954, they discovered substantial
termite infestation in the premises. The Schlemeyers contend, however,
that they immediately took steps to eradicate the termites, and that, at the
time of the sale to the Obdes in November 1954, they had no reason to
believe that these steps had not completely remedied the situation. We
are not convinced of the merit of this contention.
[4]
The record reveals that when the Schlemeyers discovered
the termite condition they engaged the services of a Mr. Senske, a
specialist in pest control. He effected some measures to eradicate the
termites, and made some repairs in the apartment house. Thereafter,
there was no easily apparent or surface evidence of termite damage.
However, portions of the findings of fact entered by the trial court read
as follows:
Senske had advised Schlemeyer that in order to obtain a
complete job it would be necessary to drill the holes and pump
the fluid into all parts of the basement floors as well as the
basement walls. Part of the basement was used as a basement
apartment. Senske informed Schlemeyer that the floors should be
taken up in the apartment and the cement flooring under the
wood floors should be treated in the same manner as the
remainder of the basement. Schlemeyer did not care to go to the
expense of tearing up the floors to do this and therefore this
portion of the basement was not treated.
Senske also told Schlemeyer even though the job were
done completely, including treating the portion of the basement
which was occupied by the apartment, to be sure of success, it
would be necessary to make inspections regularly for a period of
a year. Until these inspections were made for this period of time
the success of the process could not be determined. Considering
the job was not completed as mentioned, Senske would give

123

Schlemeyer no assurance of success and advised him that he
would make no guarantee under the circumstances.
[5]
No error has been assigned to the above findings of fact.
Consequently, they will be considered as the established facts of the case,
Lewis v. Scott, 1959, 154 Wash. Dec. 509, 341 P.2d 488. The pattern thus
established is hardly compatible with the Schlemeyers' claim that they had
no reason to believe that their efforts to remedy the termite condition
were not completely successful.
[6]
The Schlemeyers urge that, in any event, as sellers, they
had no duty to inform the Obdes of the termite condition. They
emphasize that it is undisputed that the purchasers asked no questions
respecting the possibility of termites. They rely on a Massachusetts case
involving a substantially similar factual situation, Swinton v. Whitinsville
Savings Bank, 1942, 311 Mass. 677, 42 N.E.2d 808, 141 A.L.R. 965.
Applying the traditional doctrine of caveat emptor—namely, that, as
between parties dealing at arms length (as vendor and purchaser), there is
no duty to speak, in the absence of a request for information—the
Massachusetts court held that a vendor of real property has no duty to
disclose to a prospective purchaser the fact of a latent termite condition
in the premises.
[7]
Without doubt, the parties in the instant case were dealing
at arms length. Nevertheless, and notwithstanding the reasoning of the
Massachusetts court above noted, we are convinced that the defendants
had a duty to inform the plaintiffs of the termite condition. In Perkins v.
Marsh, 1934, 179 Wash. 362, 37 P.2d 689, 690, a case involving parties
dealing at arm’s length as landlord and tenant, we held that,
Where there are concealed defects in demised premises,
dangerous to the property, health, or life of the tenant, which
defects are known to the landlord when the lease is made, but
unknown to the tenant, and which a careful examination on his
part would not disclose, it is the landlord's duty to disclose them
to the tenant before leasing, and his failure to do so amounts to a
fraud.
[8]
We deem this rule to be equally applicable to the vendorpurchaser relationship. See Keeton, Fraud-Concealment and Non-Disclosure,
15 TEX. L. REV. 1, 14-16 (1936). In this article Professor Keeton also

124

aptly summarized the modern judicial trend away from a strict
application of caveat emptor by saying:
It is of course apparent that the content of the maxim
“caveat emptor,” used in its broader meaning of imposing risks
on both parties to a transaction, has been greatly limited since its
origin. When Lord Cairns stated in Peek v. Gurney that there was
no duty to disclose facts, however morally censurable their nondisclosure may be, he was stating the law as shaped by an
individualistic philosophy based upon freedom of contract. It was
not concerned with morals. In the present stage of the law, the
decisions show a drawing away from this idea, and there can be
seen an attempt by many courts to reach a just result in so far as
possible, but yet maintaining the degree of certainty which the
law must have. The statement may often be found that if either
party to a contract of sale conceals or suppresses a material fact
which he is in good faith bound to disclose then his silence is
fraudulent.
The attitude of the courts toward non-disclosure is
undergoing a change and contrary to Lord Cairns' famous remark
it would seem that the object of the law in these cases should be
to impose on parties to the transaction a duty to speak whenever
justice, equity, and fair dealing demand it.
[9]
A termite infestation of a frame building, such as that
involved in the instant case, is manifestly a serious and dangerous
condition. One of the Schlemeyers' own witnesses, Mr. Hoefer, who at
the time was a building inspector for the city of Spokane, testified that
“…if termites are not checked in their damage, they can cause a complete
collapse of a building, … they would simply eat up the wood.” Further,
at the time of the sale of the premises, the condition was clearly latent—
not readily observable upon reasonable inspection. As we have noted, all
superficial or surface evidence of the condition had been removed by
reason of the efforts of Senske, the pest control specialist. Under the
circumstances, we are satisfied that “justice, equity, and fair dealing,” to
use Professor Keeton's language, demanded that the Schlemeyers speakthat they inform prospective purchasers, such as the Obdes, of the
condition, regardless of the latter's failure to ask any questions relative to
the possibility of termites.

125

[10]
Error has been assigned to the trial court's finding that
Mrs. Schlemeyer knew of the termite condition and participated with her
husband in the sale to the Obdes. However, this assignment of error has
not been argued in the appeal brief. Thus, it must be deemed to have
been abandoned. Winslow v. Mell, 1956, 48 Wash.2d 581, 295 P.2d 319,
and cases cited therein.
[11]
Schlemeyers' final contentions, relating to the issue of
liability, emphasize the Obdes' conduct after they discovered the termite
condition. Under the purchase agreement with the Schlemeyers, the
Obdes paid $5,000 in cash, and gave their promissory note for $2,250 to
the Schlemeyers. In addition, they assumed the balance due on the
installment contract, under which the Schlemeyers had previously
acquired the property from Ayars. This amounted to $34,750. After they
discovered the termites (some six weeks subsequent to taking possession
of the premises in November 1954), the Obdes continued for a time to
make payments on the Ayars contract. They then called in Senske to
examine the condition—not knowing that he had previously worked on
the premises at the instance of the Schlemeyers. From Senske the Obdes
learned for the first time that the Schlemeyers had known of the termite
infestation prior to the sale. Obdes then ceased performance of the Ayars
contract, and allowed the property to revert to Ayars under a forfeiture
provision in the installment contract.
[12]
The Schlemeyers contend that by continuing to make
payments on the Ayars contract after they discovered the termites the
Obdes waived any right to recovery for fraud. This argument might have
some merit if the Obdes were seeking to rescind the purchase contract.
Salter v. Heiser, 1951, 39 Wash. 2d 826, 239 P.2d 327. However, this is not
an action for rescission; it is a suit for damages, and thus is not barred by
conduct constituting an affirmance of the contract. Salter v. Heiser, supra.
[13]
Contrary to the Schlemeyers final argument relative to the
question of liability, the Obdes' ultimate default and forfeiture on the
Ayars contract does not constitute a bar to the present action. The rule
governing this issue is well stated in 24 Am.Jur. 39, Fraud and Deceit, §
212, as follows:

126

Since the action of fraud or deceit in inducing the
entering into a contract or procuring its execution is not based
upon the contract, but is independent thereof, although it is
regarded as an affirmance of the contract, it is a general rule that
a vendee is entitled to maintain an action against the vendor for
fraud or deceit in the transaction even though he has not
complied with all the duties imposed upon him by the contract.
His default is not a bar to an action by him for fraud or deceit
practiced by the vendor in regard to some matter relative to the
contract.
See, also, Annotation, 74 A.L.R. 169; cf. Conaway v. Co-Operative
Homebuilders, 1911, 65 Wash. 39, 117 P. 716.
[14]
For the reasons hereinbefore set forth, we hold that the
trial court committed no error in determining that the respondents
(Obdes) were entitled to recover damages against the appellants
(Schlemeyers) upon the theory of fraudulent concealment. However,
there remains the question of the proper amount of damages to be
awarded. The trial court found that,
…because of the termite condition the value [of the
premises] has been reduced to the extent of $3950.00 and the
plaintiffs have been damaged to that extent, and in that amount.
[15]
As hereinbefore noted, judgment was thereupon entered
for the respondents in that amount.
[16]
The appellants concede that the measure of damages in a
case of this type is the difference between the actual value of the property
and what the property would have been worth had the
misrepresentations been true. Salter v. Heiser, supra, and cases cited
therein. However, they urge that the only evidence introduced to show
the diminution in value of the premises on account of the termite
condition—namely, the testimony of one Joseph P. Wieber—was
incompetent. Wieber qualified as an expert witness on the basis of
substantial experience as a realtor and appraiser. He examined the
premises in question, and estimated that the termite condition had
reduced the value of the property by some thirty per cent. Applying this
estimate to an assumption (as posed in a hypothetical question
propounded by respondents' counsel) that the property had been

127

purchased twice during the year 1954 by persons who were unaware of
the termite condition for approximately $40,000, Wieber rendered an
opinion that the actual value of the premises (taking into account the
termite condition) was about $25,000.
[17]
Appellants' sole objection to Wieber's testimony is based
upon a claim that the facts (two purchases in 1954 for approximately
$40,000, by persons who were unaware of the termite condition)
supporting the hypothetical question were never supplied. We find no
merit in this claim. The record fully discloses the two purchases in
question: namely, the Obdes' purchase from the Schlemeyers in
November 1954; and the Schlemeyers' purchase from Ayars in April
1954.
[18]
The judgment awarding damages of $3,950 is well within
the limits of the testimony in the record relating to damages. The Obdes
have not cross-appealed. The judgment of the trial court should be
affirmed in all respects. It is so ordered.
WEAVER, C. J., AND ROSELLINI AND FOSTER, JJ., CONCUR. HILL,
J., CONCURS IN THE RESULT.
3.5.1. Discussion of Obde v. Schlemeyer
In Obde, who has the comparative advantage in avoiding this mistake
about the existence of termites?
What sort of investments would buyers need to make if they could
not rescind a contract in cases of concealment?
3.6. Principal Case – L & N Grove, Inc. v. Chapman
L&N Grove v. Chapman
District Court of Appeal of Florida
291 So. 2d 217 (1974)
BOARDMAN, JUDGE.
[1]
Appellants/defendants, Paul L. Curtis and his wife and L
& N Grove, Inc. (hereinafter Curtis) seeks this timely review of an
adverse final judgment of the trial judge in which Curtis was declared to
be constructive trustee of the real property in question for
appellees/plaintiffs, Robert L. Chapman, Jr., et al. (hereinafter Chapman).

128

[2]
The second amended complaint was filed by Chapman on
November 5, 1970, to rescind the contract and deed and to impose a
constructive trust on the property in favor of Chapman, alleging therein,
inter alia, that Curtis was the real estate broker for Chapman and that he
breached the fiduciary relationship by failing to disclose certain material
facts, principally the impact of Walt Disney World on the value of the
property involved here.
[3]
The basic facts are not in serious dispute. During the
summer of 1966 Curtis, who was an active real estate broker with offices
in Orlando, contacted Chapman concerning the purchase of a 10-acre
tract of land located in Lake County and legally described as:
That part West of U.S. #27 of the South Half of the NE
1/4 of the SE 1/4 of Section 35, Township 24 South Range 26
East, less the northerly 15 feet thereof, being 10 acres more or
less.
The property is situated north of and contiguous to a 22-acre
tract that Curtis had purchased previously. Both parcels of land are
located on U.S. Highway 27 near what was designated as State Road
#530, now U.S. Highway 192.
[4]
Chapman is also a real estate broker with offices in St.
Petersburg and was a member of the partnership that owned the subject
property and spokesman for the partnership in this transaction.
[5]
After a period of negotiations between the parties
concerning the purchase of the real property, on or about August 1,
1966, an agreement was reached and Chapman agreed, after submitting
Curtis' offer to the other members of the partnership, to sell the land
involved to Curtis. The said agreement was confirmed by letter dated
August 3, 1966, from Curtis to Dr. Pollard, a member of the partnership,
with copy of said letter being mailed to Chapman. In addition, the letter
advised that Curtis was acting “…as a Broker and a principal and would
look to (his) group for a commission compensation.” The contract for
sale and purchase of the land was subsequently prepared and, in due
course, executed by Chapman on August 23, 1966, and by Curtis on
August 16, 1966. We call attention at this point to the fact that the buyer
designated in the contract was Paul L. Curtis, or assigns.

129

[6]
The purchase price agreed upon was $47,500, which
appears to have been one and one half times the then market value of the
land for grove purposes. The contract provided that Chapman would
maintain the grove and be entitled to the fruit crop under the conditions
set forth in ‘SCHEDULE A’ which was attached to the said contract.
[7]
In August, 1966, Curtis had formed L & N Grove, Inc.,
with one other person named Odell Warren, each owning 50% of the
corporation. The corporation was organized for the purpose of acquiring
title to the real property involved here and the 22-acre tract of land
referred to above. The corporation was dissolved on August 20, 1970.
The warranty deed, mortgage and note were recorded among the public
records of Lake County on December 14, 1966. L & N Grove, Inc. was
the grantee named in the deed. The mortgage and note were signed by
Curtis as president of the corporation.
[8]
The complete terms and conditions of the sale are not
necessarily pertinent. We mention that the mortgage was payable
annually, covering a period of seven years. The mortgage payments due
in June of 1967, 1968, 1969, and 1970, were paid to Chapman or his
assignee. The payment due in June of 1971 was refused by Chapman's
assignee.
[9]
This is the third appearance of this cause before this
court. This appeal followed from entry of the final judgment.
1

[10]
It is, of course, necessary to prove the existence of a
constructive trust by clear and convincing evidence. Carberry v. Foley,
1This

court reversed the trial court's holding that a bond was required in
connection with the lis pendens because plaintiffs/appellees were claiming against
their own deed stating that the claim was ‘founded on a duly recorded
instrument.’ 244 So.2d 154. After trial, final judgment in favor of appellees was
entered and appellants filed several post-trial motions, including a motion to
vacate and set aside judgment for want of indispensible parties, which the trial
court granted. This holding resulted in another interlocutory appeal wherein this
court held that L & N Grove, Inc., was not dissolved until August 20, 1970, that
the cause did not abate, and that the trustees of the corporation were not
indispensible parties and ordered the trial court to reinstate the final judgment and
to hear and rule on the pending post-decretal motions. 265 So.2d 725. Thereafter,
final judgment was entered and the post-decretal motions denied.

130

Fla.App.3rd, 1968, 213 So.2d 635. The doctrine of constructive trust is
well established in Florida law and the courts of this state will impose the
same where … through actual fraud, abuse of confidence reposed and
accepted, to through other questionable means gains something for
himself which in equity and good conscience he should not be permitted
to hold….’ Quinn v. Phipps, 93 Fla. 805, 113 So. 419, 422 (1927). We also
are aware that it is not within the province of this court to substitute its
judgment for that of the trier of the facts unless the record clearly reflects
that the findings and conclusions by the trial court are erroneous. Old
Equity Life Insurance Co. v. Levenson, Fla.App.3rd, 1965, 177 So.2d 50; In re
Estate of Hobein, Fla.App.1st, 1970, 238 So.2d 497; Griffith Services, Inc. v.
Walter Kidde Constructors, Inc., Fla.App.1st, 1972, 262 So.2d 240. Against
this background of general and accepted principles, we turn then to the
particular situation presented in the case sub judice.
[11]
We have carefully considered the records, briefs, the
authorities cited and discussed therein and arguments of respective
counsel and conclude, for reasons delineated hereinafter, that reversible
error has been demonstrated.
[12]
The trial court made a finding of fact in the final
judgment as follows:
It is beyond question that Paul Curtis had knowledge of
the impact which Walt Disney World would have on the value of
this property…
The trial court further found that Curtis failed to disclose that
fact to Chapman. This is the finding of fact that has caused us great
concern. We submit that after many readings of the record this finding of
fact is not supported by substantial competent evidence.
[13]
The central and perhaps the sole question for our
decision is what inside information does the record disclose that Curtis
had that he did not disclose to Chapman and that he had a duty to
disclose to him. There is not a scintilla of evidence in the record that we
have been able to find that shows Curtis knew in 1966 what effect the
Disney project would have on the value of the property. It is, of course,
Chapman's contention that Curtis knew said property was immediately
adjacent to the proposed widening and reconstruction of U.S. Highway

131

27 and that a cloverleaf exchange was to be constructed on said highway
with its intersection with State Road #530.
[14]
In 1966 it is extremely doubtful that anyone knew if Walt
Disney World would ever be developed into a reality. It was only on the
drawing boards at that particular time. There can be no serious doubt
that the Walt Disney World project was announced sometime in the fall
of 1965, many months prior to the sale of the property involved here.
Perhaps it is not significant that Curtis testified that the Disney
announcement was the biggest announcement in the history of Florida
real estate and resounded around the world. We believe it highly plausible
and reasonable to glean from the record that Chapman likewise had this
knowledge, or by the exercise of reasonable diligence could have acquired
it. We believe the announcement was one of general public knowledge.
The alleged information that Curtis is charged with having withheld was
speculative in nature and clearly available to the parties involved here.
[15]
It was not until 1970 that construction of Walt Disney
World had actually been commenced and the Central Florida real estate
boom hit with full impact that this present action was filed by Chapman.
In the interim period of time the record shows that Chapman accepted
the terms of the mortgage and payments made thereon.
[16]
Notwithstanding the above-recited matters, the trial judge
found breach of duty even if the broker-employer relationship did not
exist. In this connection, the trial court found that that relationship at
one time did exist between the parties. As Curtis concedes, this finding is
not assailable. We submit that the record definitely shows that at the time
the contract of sale was executed Chapman was advised of the fact that
Curtis was acting as a principal in the transaction. The trial judge found,
however:
Irrespective of any technical brokerage relationship,
defendant Curtis, as a registered real estate broker, owed plaintiffs
the duty of acting honestly and fairly in his dealings with them.
[17]
It is agreed that there is an abundance of case law
supporting this finding, as well as learned treatises, but, the question is, is
the finding supported by competent evidence. We cannot find wherein
Curtis failed to act honestly and fairly with Chapman. Here the

132

transaction from its conception to its consummation was negotiated
between Curtis and Chapman. Both parties, as stated, are real estate
brokers and must be considered as being fully aware of the duties,
responsibilities and ethics of their time-honored profession.
[18]
Lest it be overlooked, Chapman cannot be thought of as
a stranger to this area of the state. It would be naiveté to reach such a
conclusion. The record shows that he has an interest in over 600 acres of
land in the immediate vicinity of the subject property—433 acres on the
west side of U.S. Highway 27, which lands had been in possession of
Chapman and relatives for approximately 20 years, about 180 acres of
which have been used for citrus purposes and, additionally, had an
interest in approximately 178 acres immediately across the highway and
west of the 433 acres. The latter tract was purchased by the partnership,
of which Chapman was a member, in 1962. Furthermore, Chapman is a
real estate broker and a housing consultant accredited by the U.S.
Department of Housing and Urban Development.
[19]
The remedy of rescisson requires that the reliance be
justified. A representee who has expert knowledge of the general subject
matter, and is peculiarly fitted and qualified, by knowledge and
experience, to evaluate that which he sees and appreciate the obvious
falsity of the claimed representation does not have the right to rely on a
representation. Puget Sound National Bank v. McMahon, 53 Wash.2d 51, 330
P.2d 559 (1958).
[20]
In view of this fact, perhaps standing alone, it is difficult
to reconcile the trial judge's finding that Curtis had all the alleged
information and withheld it from Chapman, who is depicted as being
completely ignorant and innocent of the land market in this area.
[21]
Chapman asserts that he believed that Curtis purchased
the land for grove purposes. The testimony of the parties and the
documentary evidence indicate to us that the land in issue was purchased
for speculative purposes and it is not unreasonable for us to conclude
that Chapman was aware of this fact. We point out again that the
contract documents provide that Chapman was to retain possession of
the fruit under the conditions provided in the contract.

133

[22]
Now, it is true that during the negotiations for the
purchase of this land Curtis had hoped that State Road #530 would be
the entrance to Walt Disney World and that he attempted to ascertain
this information. He had a dream and some five years later it became a
reality. This case appears to be a classic example of the old cliche that
hindsight is better than foresight. As Chapman testified on crossexamination:
… If I had fully realized the effect of Disney World on
that property, I would not have sold it. If I had had adequate
information to make a judgment, we-I would not have been a
party to its sale.
[23]
Chapman further testified that in 1968 he attempted to
make inquiries of the State Road Department, “…Smith, Reynolds &
Hill,” (sic) engineers, concerning a certain configuration taking place on
the highway and he got enough conflicting stories as to what was and
wasn't planned to be at a loss to understand or even if anything was
definite. It appears that Chapman was negotiating an option with
Humble Oil Company for a lease on some other property Chapman
owned and was attempting to find out if U.S. Highway 27 would be
widened and four-laned and the interchange constructed in the area. The
property Chapman owned abutting U.S. Highway 27 is a relatively short
distance from the intersection of U.S. Highway 27 and State road #530.
[24]
The case of Chisman v. Moylan, Fla. App. 2d, 1958, 105 So.
2d 186, is cited in the final judgment and by both parties in their briefs.
We agree with that decision and the cases cited therein. We are impressed
by the language in the court's opinion where it is held:
… Neither a judgment nor a decree, however, should be
entered in favor of an employer or a principal who complains
that he has been injured by breach of duty by a broker where the
complaint appears to be founded on conjecture, suspicion, or
speculation. (105 So. 2d 186, 189).
[25]
Chapman's testimony amounts to just that, for he does
not testify or prove by other witnesses or documentary evidence that
Curtis had specific inside information that State Road #530 would either
be four-laned or become the entrance to Walt Disney World. His

134

testimony in this regard is based purely on conjecture, suspicion, or
speculation.
[26]
In the light of our decision we do not think it necessary
to discuss the remaining points raised by Curtis on appeal. We do
mention that it is quite apparent from the record that cancellation and
rescission, returning the parties to their original position, due to the
passage of time, intervening probable equities, would make a just
settlement of the transaction a very difficult, if not an impossible task.
[27]
Lastly, but importantly, the court truly expresses its
appreciation to the trial judge and attorneys representing the parties
litigant for the exemplary manner in which this case was litigated in the
trial court. The briefs of counsel filed in support of their respective
contentions were superbly presented and oral argument to this court was
presented most ably and was of invaluable assistance.
[28]
Accordingly, for the reasons above stated, the order
appealed from is reversed and the trial court directed to enter judgment
in favor of Curtis. Each party is required to bear his own cost and
expenses incurred in this litigation.
Reversed.
3.6.1. Discussion of L&N Grove v. Chapman
How would you defend Curtis?
What facts about the interaction between Curtis and Chapman make
Chapman’s claim for rescission legally implausible?
3.6.2. Hypo of Ivy Diamonds
Suppose that an international diamond conglomerate uses satellite
imaging to do a geological survey of some farmland that I own near my
home in Ivy, Virginia. The survey shows that there is a high likelihood (about
90%) that diamonds (really big ones) lie under the farmland.
What, if anything, should the diamond conglomerate have to disclose
to me before they purchase the land?
Suppose that the company also wishes to purchase similar farmland
from my neighbor, an 85-year-old blind grandmother. Would you expect
courts to treat these two transactions in the same way?

135

3.6.3. Further Discussion of L&N Grove v. Chapman
Suppose that Curtis tries subtly to conceal the purpose for which he
is buying the land from Chapman (e.g., he talks about his interest in raising
oranges, or he buys under the name of “L&N Grove”). How would you
expect a court to react to this conduct?
What if Chapman (and every other seller of property) asks the buyer:
“Do you know anything about my property that could affect its value?” What
can the buyer say in response?
4. The Statute of Frauds
The Statute of Frauds was originally enacted by Parliament in 1677
under the title “An Act for Prevention of Frauds and Perjuries.” Section four
provided:
And be it further enacted by the authority aforesaid, That
from and after, the said four and twentieth day of June no action
shall be brought (1) whereby to charge any executor or
administrator upon any special promise, to answer damages out
of his own estate, (2) or whereby to charge the defendant upon
any special promise to answer for the debt, default or
miscarriages of another person; (3) or to charge any person upon
any agreement made upon consideration of marriage; (4) or upon
any contract for sale of lands, tenements, or hereditaments, or
any interest in or concerning them; (5) or upon any agreement
that is not to be performed within the space of one year from the
making thereof; (6) unless the agreement upon which such action
shall be brought, or some memorandum or note thereof, shall be
in writing, and signed by the party to be charged therewith, or
some other person thereunto by him lawfully authorized.
Section seventeen provided:
And be it further enacted by the authority aforesaid, That
from and after the said four and twentieth day of June no
contract for the sale of any goods, wares and merchandizes, for
the price of ten pounds sterling or upwards, shall be allowed to
be good, except the buyer shall accept part of the good so sold,
and actually receive the same, or give something in earnest to
bind the bargain, or in part payment, or that some note or
memorandum in writing of the said bargain be made and signed

136

by the parties to be charged by such contract, or their agents
thereto lawfully authorized.
The legislatures of most U.S. states have enacted legislation that
roughly duplicates the provisions of section four of the original Statute of
Frauds. Similarly, U.C.C. § 2-201 establishes a writing requirement for the
sale of goods that parallels section seventeen. There has been some scholarly
debate about the precise historical circumstances that gave rise to the original
statute. However, most contemporary commentary condemns the Statute’s
writing requirement as a trap for the unwary. Critics argue that this rule gives
parties a technical defense to oral promises that they have come to regret. A
smaller group of defenders argue that the Statute sensibly encourages parties
to make some written memorandum of their deal. On this view, the writing
requirement provides far more reliable evidence of the contract and prevents
unscrupulous parties from using perjured testimony to obtain fraudulent
enforcement of an invented oral promise.
For our present purposes, we will focus on the version of the Statute
embodied in the contemporary Uniform Commercial Code. Please read UCC
§ 2-201. Formal Requirements; Statute of Frauds and the related Official
Comment 1.
4.1. Principal Case – Monetti, S.P.A. v. Anchor Hocking Corp.
As you read the following case, ask yourself whether Judge Posner
could have decided the case on narrower grounds. Consider also whether you
agree with his resolution of the many fascinating legal questions that his
opinion addresses.
Monetti, S.P.A. v. Anchor Hocking Corporation
United States Court of Appeals, Seventh Circuit
931 F.2d 1178 (1991)
POSNER, CIRCUIT JUDGE.
[1]
This is a diversity suit for breach of contract; the parties
agree that Illinois law governs the substantive issues. The district judge
dismissed the suit, on the defendant's motion for summary judgment, as
barred by the statute of frauds, and also refused to allow the plaintiffs to
amend their complaint to add a claim of promissory estoppel. The
appeal, which challenges both rulings, presents difficult and important

137

questions concerning both the general Illinois statute of frauds,
Ill.Rev.Stat. ch. 59, ¶ 1, and the statute of frauds in the Uniform
Commercial Code, UCC § 2-201, adopted by Illinois in Ill.Rev.Stat. ch.
26, ¶ 2-201.
[2]
The plaintiffs are Monetti, an Italian firm that makes
decorative plastic trays and related products for the food service industry,
and a wholly owned subsidiary, Melform U.S.A., which Monetti set up in
1981 to market its products in the U.S. In 1984, Monetti began
negotiations with a father-and-son team, the Schneiders, importers of
food service products, to grant the Schneiders the exclusive right to
distribute Monetti's products in the United States and in connection with
this grant to turn over to them Melform's tangible and intangible assets.
While these negotiations were proceeding, the Schneiders sold their
importing firm to Anchor Hocking, the defendant, and their firm became
a division of Anchor Hocking, though—at first—the Schneiders
remained in charge. In the fall of 1984, the younger Schneider, who was
handling the negotiations with Monetti for his father and himself, sent
Monetti a telex requesting preparation of an agreement “formalizing our
[i.e., Anchor Hocking's] exclusive for the United States.” In response,
Monetti terminated all of Melform's distributors and informed all of
Melform's customers that Anchor would become the exclusive U.S.
distributor of Monetti products on December 31, 1984.
[3]
On December 18, the parties met, apparently for the
purpose of making a final agreement. Monetti—which incidentally was
not represented by counsel at the meeting—submitted a draft the
principal provisions of which were that Anchor Hocking would be the
exclusive distributor of Monetti products in the U.S., the contract would
last for ten years, and during each of these years Anchor Hocking would
make specified minimum purchases of Monetti products, adding up to
$27 million over the entire period. No one from Anchor Hocking signed
this or any other draft of the agreement. However, the record contains a
memo, apparently prepared for use at the December 18 meeting, entitled
“Topics of Discussion With Monetti.” The memo's first heading is
“Exclusive Agreement-Attachment # 1”—a reference to an attached
draft which is identical to the Monetti draft except for two additional,
minor paragraphs added in handwriting. Under the heading appears the

138

notation “Agree” beside each of the principal paragraphs of the
agreement, with one exception: beside the first paragraph, the provision
for exclusivity, the notation is “We want Canada” (i.e., exclusive
distribution rights in Canada as well as in the U.S.). On the bottom of the
left-hand side of the last page appears the legend “SS/mh”—indicating
that the younger Schneider (Steve Schneider) had dictated the memo to a
secretary.
[4]
Shortly after the December 18 meeting, Monetti—which
had already, remember, terminated Melform's distributors and informed
Melform's customers that Anchor Hocking would be the exclusive
distributor of Monetti products in the United States as of the last day of
1984—turned over to Anchor Hocking all of Melform's inventory,
records, and other physical assets, together with Melform's trade secrets
and know-how.
[5]
Several months later, in May 1985, Anchor Hocking
abruptly fired the Schneiders. Concerned about the possible implications
of this démarche for its relationship with Anchor Hocking, Monetti
requested a meeting between the parties, and it was held on May 19.
Reviewing the events up to and including that meeting, a memo dated
June 12, 1985, from Raymond Davis, marketing director of Anchor
Hocking's food services division, to the law department of Anchor
Hocking, states that “In the middle to latter part of 1984 Irwin Schneider
and his company were negotiating an agreement with [Monetti and
Melform] to obtain exclusive distribution rights on Melform's plastic tray
product line in the United States”; “later, this distribution agreement was
expanded to also include Canada, the Caribbean and Central and South
America”; there had been many meetings between the parties, including
the meeting of May 19 (at which Davis had been present); “Exhibit A
(attached) represents the summary agreement that was reached in the
meeting. You will notice that I have added some handwritten changes
which I believe represents more clearly our current position regarding the
agreement.... Now that we have had our ‘New Management’ [i.e., the
management team that had replaced the Schneiders] meeting with
Monetti, both parties would like to have a written and signed agreement
to guide this new relationship.” Exhibit A to the Davis memo is identical
to Attachment # 1 to Steve Schneider's memo, except that it contains the

139

handwritten changes to which the Davis memo refers. Shortly after this
memo was written, the parties' relationship began to deteriorate, and
eventually Monetti sued for breach of contract.
[6]
Illinois' general statute of frauds forbids a suit upon an
agreement that is not to be performed within a year “unless the promise
or agreement upon which such action shall be brought, or some
memorandum or note thereof, shall be in writing, and signed by the party
to be charged therewith, or some other person thereunto by him lawfully
authorized.” The statute of frauds in Article 2 of the Uniform
Commercial Code makes a contract for the sale of goods worth at least
$500 unenforceable “unless there is some writing sufficient to indicate
that a contract for sale has been made between the parties and signed by
the party against whom enforcement is sought or by his authorized agent
or broker.” The differences between these formulations are subtle but
important. The Illinois statute requires that the writing “express the
substance of the contract with reasonable certainty.” Frazer v. Howe, 106
Ill. 564, 574 (1883); see also Holsz v. Stephen, 362 Ill. 527, 532, 200 N.E.
601, 603 (1936); Mariani v. School Directors, 154 Ill.App.3d 404, 407, 107
Ill.Dec. 90, 92, 506 N.E.2d 981, 983 (1987). The UCC statute of frauds
does not require that the writing contain the terms of the contract.
Ill.Code Comment 1 to UCC § 2-201. In fact it requires no more than
written corroboration of the alleged oral contract. Even if there is no
such signed document, the contract may still be valid “with respect to
goods ... which have been received and accepted.” § 2-201(3)(c). This
provision may appear to narrow the statute of frauds still further, but if
anything it curtails a traditional exception, and one applicable to Illinois'
general statute: the exception for partial performance, on which see, for
example, Payne v. Mill Race Inn, 152 Ill.App.3d 269, 277-78, 105 Ill.Dec.
324, 330-331, 504 N.E.2d 193, 199-200 (1987); Grundy County National
Bank v. Westfall, 13 Ill.App.3d 839, 845, 301 N.E.2d 28, 32 (1973). The
Uniform Commercial Code does not treat partial delivery by the party
seeking to enforce an oral contract as a partial performance of the entire
contract, allowing him to enforce the contract with respect to the
undelivered goods.
[7]
Let us postpone the question of partial performance for a
moment and focus on whether there was a signed document of the sort

140

that the statutes of frauds require. The judge, over Monetti's objection,
refused to admit oral evidence on this question. He was right to refuse.
The use of oral evidence to get round the requirement of a writing would
be bootstrapping, would sap the statute of frauds of most of its force,
and is therefore forbidden. Western Metals Co. v. Hartman Co., 303 Ill. 479,
485, 135 N.E. 744, 746 (1922); R.S. Bennett & Co. v. Economy Mechanical
Industries, Inc., 606 F.2d 182, 186 n. 4 (7th Cir.1979); Bazak International
Corp. v. Mast Industries, Inc., 73 N.Y.2d 113, 117-18, 538 N.Y.S.2d 503,
505, 535 N.E.2d 633, 635 (1989). The Hip Pocket, Inc. v. Levi Strauss & Co.,
144 Ga.App. 792, 793, 242 S.E.2d 305, 306 (1978), is contra, but does not
discuss the question and is, we think, wrong; while Impossible Electronic
Techniques, Inc. v. Wackenhut Protective Systems, Inc., 669 F.2d 1026, 1034 (5th
Cir.1982), on which Monetti also relies, is distinguishable from our case
because there the writing was first held to satisfy the statute of frauds and
only then was oral evidence admitted to clear up a detail, albeit a vital
one—the identity of one of the parties!
[8]
Although we have cited cases from different jurisdictions,
the question whether oral evidence is admissible to show that an
ambiguous document satisfies the requirements of the statute of frauds is
ultimately one of state law. So far as we have been able to discover, the
question is uniformly assumed to be substantive rather than procedural
for purposes of determining, in accordance with the Erie doctrine,
whether state or federal law applies, though direct authority on the
question is sparse. Lehman v. Dow, Jones & Co., 606 F. Supp. 1152, 1156
(S.D.N.Y.1985); McInnis v. A.M.F., Inc., 765 F.2d 240, 245 (1st Cir. 1985)
(dictum); 19 Charles Alan Wright, Arthur R. Miller & Edward H. Cooper,
Federal Practice and Procedure § 4512, at pp. 194-95 (1982). We think the
assumption is well founded, although the point is not crucial in this case
because neither party questions the applicability of Illinois law. It is true
that a statute of frauds is procedural in form and that its main proximate
goal is evidentiary; it is largely based on distrust of the ability of juries to
determine the truth of testimony that there was or was not a contract. 2
E. Allan Farnsworth, Farnsworth on Contracts § 6.1, at p. 85 (1990). But it is
usually and we think correctly regarded as a part of contract law, not of
general procedural law. Cf. Harbor Ins. Co. v. Continental Bank Corp., 922
F.2d 357, 364 (7th Cir.1990). It is designed to make the contractual

141

process cheaper and more certain by encouraging the parties to contracts
to memorialize their agreement. The end of the statute of frauds thus is
substantive (albeit the means is procedural), which makes essential
aspects of the administration of the statute, such as the admissibility of
oral evidence to disambiguate an ambiguous document that is contended
to satisfy the statute of frauds, a matter of primary concern to the states
rather than to the federal government. So Illinois law applies to the issue;
and Western Metals indicates that Illinois courts would not allow oral
evidence to be used to enable a vague document to satisfy the statute of
frauds.
[9]
Because oral evidence was inadmissible on the question
whether the documents meet the requirements of the statutes of frauds,
it was proper for the judge to resolve it on motion for summary
judgment. The parties agree that, if this was proper, our review is plenary.
This does not follow, however, from the documentary character of the
issue, Anderson v. City of Bessemer City, 470 U.S. 564, 105 S.Ct. 1504, 84
L.Ed.2d 518 (1985), as the parties may believe. But in view of the parties'
agreement concerning the proper scope of our review, we need not
resolve the matter, beyond noting that there is authority, illustrated by the
Bazak case, for regarding the issue as one of law, not fact—and if it is an
issue of law, then our review is indeed plenary.
[10]
We have two documents (really, two pairs of documents)
to consider. The first is Steve Schneider's “Topics for Discussion” memo
with its “Attachment ## 1.” Since “signed” in statute-of-frauds land is a
term of art, meaning executed or adopted by the defendant, Weston v.
Myers, 33 Ill. 424, 433 (1864); UCC § 1-201(39) and Ill.Code Comment
thereto; 2 Farnsworth on Contracts, supra, § 6.8, at p. 144, Schneider's typed
initials are sufficient. The larger objection is that the memo was written
before the contract—any contract—was made. The memo indicates that
Schneider (an authorized representative of the defendant) agrees to the
principal provisions in the draft agreement prepared by Monetti, but not
to all the provisions; further negotiations are envisaged. There was no
contract when the memo was prepared and signed, though it is fair to
infer from the memo that a contract much like the draft attached to it
would be agreed upon—if Monetti agreed to Anchor Hocking's demand
for Canada, as Monetti concedes (and the Davis memo states) it did.

142

[11]
Can a memo that precedes the actual formation of the
contract ever constitute the writing required by the statute of frauds?
Under the Uniform Commercial Code, why not? Its statute of frauds
does not require that any contracts “be in writing.” All that is required is
a document that provides solid evidence of the existence of a contract;
the contract itself can be oral. Three cases should be distinguished. In the
first, the precontractual writing is merely one party's offer. We have held,
interpreting Illinois' version of the Uniform Commercial Code, that an
offer won't do. R.S. Bennett & Co. v. Economy Mechanical Industries, Inc.,
supra, 606 F.2d at 186. Otherwise there would be an acute danger that a
party whose offer had been rejected would nevertheless try to use it as
the basis for a suit. The second case is that of notes made in preparation
for a negotiating session, and this is another plausible case for holding
the statute unsatisfied, lest a breakdown of contract negotiations become
the launching pad for a suit on an alleged oral contract. Third is the
case—arguably this case—where the precontractual writing—the
Schneider memo and the attachment to it—indicates the promisor's
(Anchor Hocking's) acceptance of the promisee's (Monetti's) offer; the
case, in other words, where all the essential terms are stated in the writing
and the only problem is that the writing was prepared before the contract
became final. The only difficulty with holding that such a writing satisfies
the statute of frauds is the use of the perfect tense by the draftsmen of
the Uniform Commercial Code: the writing must be sufficient to
demonstrate that “a contract for sale has been made.... The ‘futuristic’
nature of the writing disqualifies it.” Micromedia v. Automated Broadcast
Controls, 799 F.2d 230, 234 (5th Cir.1986) (emphasis in original); see also
American Web Press, Inc. v. Harris Corp., 596 F. Supp. 1089, 1093
(D.Colo.1983). Yet under a general statute of frauds, “it is well settled
that a memorandum satisfying the Statute may be made before the
contract is concluded.” Farrow v. Cahill, 663 F.2d 201, 209 (D.C.Cir.1980)
(footnote omitted). And while merely because the UCC's draftsmen
relaxed one requirement of the statute of frauds-that there be a writing
containing all the essential terms of the contract—doesn't exclude the
possibility that they wanted to stiffen another, by excluding writings
made before the contract itself was made, the choice of tenses is weak
evidence. No doubt they had in mind, as the typical case to be governed
by section 2-201, a deal made over the phone and evidenced by a

143

confirmation slip. They may not have foreseen a case like the present, or
provided for it. The distinction between what is assumed and what is
prescribed is critical in interpretation generally.
[12]
In both of the decisions that we cited for the narrow
interpretation, the judges' concern was with our first two classes of case;
and judicial language, like other language, should be read in context.
Micromedia involved an offer; in American Web, negotiations were
continuing. We agree with Professor Farnsworth that in appropriate
circumstances a memorandum made before the contract is formed can
satisfy the statute of frauds, 2 Farnsworth on Contracts, supra, § 6.7, at p. 132
and n. 16, including the UCC statute of frauds. This case illustrates why a
rule of strict temporal priority is unnecessary to secure the purposes of
the statute of frauds. Farnsworth goes further. He would allow a written
offer to satisfy the statute, provided of course that there is oral evidence it
was accepted. Id., n. 16. We needn't decide in this case how far we would
go with him, and therefore needn't reexamine Bennett.
[13]
Nor need we decide whether the first memo (Schneider's)
can be linked with the second (Davis's) —probably not, since they don't
refer to each other, Poulos v. Reda, 165 Ill.App.3d 793, 800, 117 Ill.Dec.
465, 471, 520 N.E.2d 816, 822 (1987); Southmark Corp. v. Life Investors, Inc.,
851 F.2d 763, 767 n. 5 (5th Cir.1988) —to constitute a post-contract
writing and eliminate the issue just discussed. For, shortly after the
Schneider memo was prepared, Monetti gave dramatic evidence of the
existence of a contract by turning over its entire distribution operation in
the United States to Anchor Hocking. (In fact it had started to do this
even earlier.) Monetti was hardly likely to do that without a contract—
without in fact a contract requiring Anchor Hocking to purchase a
minimum of $27 million worth of Monetti's products over the next ten
years, for that was a provision to which Schneider in the memo had
indicated agreement, and it is the only form of compensation to Monetti
for abandoning its distribution business that the various drafts make
reference to and apparently the only one the parties ever discussed.
[14]
This partial performance took the contract out of the
general Illinois statute of frauds. Unilateral performance is pretty solid
evidence that there really was a contract—for why else would the party
have performed unilaterally? Almost the whole purpose of contracts is to

144

protect the party who performs first from being taken advantage of by
the other party, so if a party performs first there is some basis for
inferring that he had a contract. The inference of contract from partial
performance is especially powerful in a case such as this, since while the
nonenforcement of an oral contract leaves the parties free to pursue their
noncontractual remedies, such as a suit for quantum meruit (a form of
restitution), Farash v. Sykes Datatronics, Inc., 59 N.Y.2d 500, 503, 465
N.Y.S.2d 917, 918, 452 N.E.2d 1245, 1246 (1983); Robertus v. Candee, 205
Mont. 403, 407, 670 P.2d 540, 542 (1983); 2 Farnsworth on Contracts, supra,
§ 6.11, at p. 171, once Monetti turned over its trade secrets and other
intangible assets to Anchor Hocking it had no way of recovering these
things. (Of course, Monetti may just have been foolish.) The partialperformance exception to the statute of frauds is often explained (and its
boundaries fixed accordingly) as necessary to protect the reliance of the
performing party, so that if he can be made whole by restitution the oral
contract will not be enforced. This is the Illinois rationale, Payne v. Mill
Race Inn, supra, 152 Ill.App.3d at 277-78, 105 Ill.Dec. at 330-331, 504
N.E.2d at 199-200, and it is not limited to Illinois. 2 Farnsworth on
Contracts, supra, § 6.9. It supports enforcement of the oral contract in this
case.
[15]
This discussion assumes, however, that the contract is
governed by the general Illinois statute of frauds rather than, as the
district judge believed, by the UCC's statute of frauds (or in addition to
it—for both might apply, as we shall see), with its arguably narrower
exception for partial performance. The UCC statute of frauds at issue in
this case appears in Article 2, the sale of goods article of the Code, and,
naturally therefore, is expressly limited to contracts for the sale of goods.
That is a type of transaction in which a partial performance exception to
a writing requirement would make no sense if the seller were seeking
payment for more than the goods he had actually delivered. Suppose A
delivers 1,000 widgets to B, and later sues B for breach of an alleged oral
contract for 100,000 widgets and argues that the statute of frauds is not a
bar because he performed his part of the contract in part. In such a case
partial performance just is not indicative of the existence of an oral
contract for any quantity greater than that already delivered, so it is no
surprise that the statute of frauds provides that an oral contract cannot

145

be enforced in a quantity greater than that received and accepted by the
buyer. § 2-201(3)(c); cf. § 2-201(1). The present case is different. The
partial performance here consisted not of a delivery of goods alleged to
be part of a larger order but the turning over of an entire business. That
kind of partial performance is evidence of an oral contract and also
shows that this is not the pure sale of goods to which the UCC's statute
of frauds was intended to apply.
[16]
This is not to say that the contract is outside the Uniform
Commercial Code. It is a contract for the sale of goods plus a contract
for the sale of distribution rights and of the assets associated with those
rights. Courts forced to classify a mixed contract of this sort ask,
somewhat unhelpfully perhaps, what the predominant purpose of the
contract is. Yorke v. B.F. Goodrich Co., 130 Ill.App.3d 220, 223, 85 Ill.Dec.
606, 608, 474 N.E.2d 20, 22 (1985), and cases cited there. And, no doubt,
they would classify this contract as one for the sale of goods, therefore
governed by the UCC, because the $27 million in sales contemplated by
the contract (if there was a contract, as we are assuming) swamped the
goodwill and other intangibles associated with Melform's very new, very
small operation. Distributorship agreements, such as this one was in part,
and even sales of businesses as going concerns, are frequently though not
always classified as UCC contracts under the predominant-purpose test.
Compare De Filippo v. Ford Motor Co., 516 F.2d 1313, 1323 (3d Cir.1975);
Hudson v. Town & Country True Value Hardware, Inc., 666 S.W.2d 51, 53
(Tenn.1984); Cavalier Mobile Homes, Inc. v. Liberty Homes, Inc., 53 Md.App.
379, 394, 454 A.2d 367, 376 (1983); and WICO Corp. v. Willis Industries,
567 F. Supp. 352, 355 (N.D.Ill.1983) (applying Illinois law), with Lorenz
Supply Co. v. American Standard, Inc., 419 Mich. 610, 615, 358 N.W.2d 845,
847 (1984).
[17]
We may assume that the UCC applies to this contract; but
must all of the UCC apply? We have difficulty seeing why. It is not a
matter of holding the contract partly enforceable and partly
unenforceable, a measure disapproved in Distribu-Dor, Inc. v. Karadanis, 11
Cal.App.3d 463, 468, 90 Cal.Rptr. 231, 234 (1970). Because of the
contract's mixed character, the UCC statute of frauds doesn't make a nice
fit; it's designed for a pure sale of goods. The general statute works
better. The fact that Article 2, which we have been loosely referring to as

146

the sale of goods article, in fact applies not to the sale of goods as such
but rather to “transactions in goods,” § 2-102, while its statute of frauds
is limited to “contract[s] for the sale of goods,” § 2-201(1), could be
thought to imply that the statute of frauds does not cover every
transaction that is otherwise within the scope of Article 2. 2 Farnsworth on
Contracts, supra, § 6.6, at p. 126 and n. 5. Perhaps the contract in this case
is better described as a transaction in goods than as a contract for the sale
of goods, since so much more than a mere sale of goods was
contemplated.
[18]
Another possibility is to interpret the UCC statute of
frauds flexibly (an approach endorsed in Meyer v. Logue, 100 Ill.App.3d
1039, 1044-46, 56 Ill.Dec. 707, 710-12, 427 N.E.2d 1253, 1256-58 (1981))
in consideration of the special circumstances of the class of cases
represented by this case, so that it does make a smooth fit. There is
precedent for doing this. When the partial performance is not the
delivery of some of the goods but part payment for all the goods, most
courts will enforce oral contracts under the UCC. Sedmak v. Charlie's
Chevrolet, Inc., 622 S.W.2d 694, 698-99 (Mo.App.1981); W.I. Snyder Corp. v.
Caracciolo, 373 Pa. Super. 486, 494-95, 541 A.2d 775, 779 (1988); The Press,
Inc. v. Fins & Feathers Publishing Co., 361 N.W.2d 171, 174
(Minn.App.1985). Such cases do not present the danger at which the
limitation on using partial performance to take the entire contract outside
of the statute of frauds was aimed, that of the seller's unilaterally altering
the quantity ordered by the buyer, although they could be thought to
present the analogous danger of the seller's unilaterally altering the price
the buyer had agreed to pay—by claiming that full payment was actually
part payment. This case, at all events, presents no dangers of the sort the
provision in question was designed to eliminate. The semantic lever for
the interpretation we are proposing is that the UCC does not abolish the
partial-performance exception. It merely limits the use of partial delivery
as a ground for insisting on the full delivery allegedly required by the oral
contract. That is not what Monetti is trying to do.
[19]
We need not pursue these interesting questions about the
applicability and scope of the UCC statute of frauds any further in this
case, because our result would be unchanged no matter how they were
answered. For we have said nothing yet about the second writing in the

147

case, the Davis memorandum of June 12. It was a writing on Anchor
Hocking's letterhead, so satisfied the writing and signature requirements
of the UCC statute of frauds, and it was a writing sufficient to evidence
the existence of the contract upon which Anchor Hocking is being sued.
It is true that “Exhibit A” does not contain all the terms of the contract;
it makes no reference to the handing over of Melform's assets. But,
especially taken together with the Davis memo itself (and we are
permitted to connect them provided that the connections are “apparent
from a comparison of the writings themselves,” Western Metals Co. v.
Hartman Co., supra, 303 Ill. at 483, 135 N.E. at 746, and they are, since the
Davis memo refers explicitly to Exhibit A), Exhibit A is powerful
evidence that there was a contract and that its terms were as Monetti
represents. Remember that the UCC's statute of frauds does not require
that the contract be in writing, but only that there be a sufficient
memorandum to indicate that there really was a contract. The Davis
memorandum fits this requirement to a t. So even if the partialperformance doctrine is not available to Monetti, the UCC's statute of
frauds was satisfied. And since the general Illinois statute was satisfied as
well, we need not decide whether, since the contract in this case both was
(we are assuming) within the UCC and could not be performed within
one year, it had to satisfy both statutes of frauds. 2 Farnsworth on Contracts,
supra, § 6.2, at pp. 90-91.
[20]
Our conclusion that Monetti's suit for breach of contract
is not barred by the statute(s) of frauds makes the district judge's second
ruling, refusing to allow Monetti to add a claim for promissory estoppel,
academic. The only reason Monetti wanted to add the claim was as a
backstop should it lose on the statute of frauds. In light of our decision
today, he does not need a backstop.
[21]
Can promissory estoppel be used to avoid the limitations
that the statute of frauds places on the enforcement of oral promises? It
can be argued that a party to a contract for the sale of goods should not
be allowed to get around the statute of frauds merely by alleging
promissory estoppel and using partial performance to establish the
necessary reliance in circumstances in which the requirements for the
exception in the statute of frauds for partial performance would for one
reason or another not be satisfied. It can further be argued that since

148

promissory estoppel unlike equitable estoppel is a method of establishing
contractual liability, the statute of frauds should be no less applicable
than if the contract were supported by consideration or a seal rather than
by promissory estoppel. A/S Apothekernes Laboratorium for
Specialpraeparater v. I.M.C. Chemical Group, Inc., 725 F.2d 1140, 1142 (7th
Cir.1984). On the other side it can be argued that promissory estoppel is
deliberately open-ended, and should therefore remain available to
overcome, in appropriate cases, possible rigidities in the statute of frauds.
Hoffman v. Red Owl Stores, Inc., 26 Wis. 2d 683, 133 N.W.2d 267 (1965).
Consistent with this counterargument, we held in R.S. Bennett & Co. v.
Economy Mechanical Industries, Inc., supra, 606 F.2d at 187-89, that Illinois'
version of the UCC statute of frauds was inapplicable to promissory
estoppel cases. Janke Construction Co. v. Vulcan Materials Co., 386 F. Supp.
687, 697 (W.D.Wis.1974), aff'd, 527 F.2d 772 (7th Cir.1976), reached a
similar conclusion under Wisconsin's general statute of frauds, and in
affirming we cut loose promissory estoppel from contract law, thus
answering the second argument in favor of applying the statute of frauds
in promissory estoppel cases. Id. at 777. See also 2 Farnsworth on Contracts,
supra, § 6.12, at p. 185 n. 26. We have been having second thoughts lately.
Goldstick v. ICM Realty, 788 F.2d 456, 464-66 (7th Cir.1986); Evans v. Fluor
Distribution Cos., 799 F.2d 364, 367-68 (7th Cir.1986). But as in Goldstick
and Evans, so in this case, we need not and do not decide whether Bennett
was an accurate forecast of Illinois law. Not only is the issue moot in
view of our decision that the statute of frauds does not bar Monetti from
enforcing the contract, but Bennett was not a case in which the plaintiff
was using promissory estoppel to avoid the UCC's provision disallowing
a defense to the statute of frauds for partial performance consisting of
the delivery of some but not all of the quantity allegedly contracted for
orally. It is in such a case that the “end run” character of promissory
estoppel appears most strongly; yet we need not and do not decide
whether the appearance is so strong as to preclude resort to promissory
estoppel.
Reversed and Remanded.
4.1.1. Applying the UCC or Common Law Statute of Frauds
Judge Posner discusses at some length the issue of whether U.C.C. §
2-201 or the common law statute of frauds should apply to the transaction in

149

Monetti. These boundary wars between different legal regimes occur in other
transactional settings as well. As we have seen for some other issues like
indefiniteness doctrine, U.S. jurisdictions sometimes adopt conflicting
solutions to these problems.
Consider, for example, a contract to install a swimming pool. In
Kentucky, the UCC applies because a contract to install a swimming pool “is
primarily one [for the sale] of goods and the services are necessary to insure
that those goods are merchantable….” Riffe v. Black, 548 S.W.2d 175, 177
(Ky. App. 1977). In contrast, Connecticut treats the same transaction as a
contract for services governed by the common law. Gulosh v. Stylarama, Inc.,
33 Conn. Supp. 108, 364 A.2d 1221 (1975). In some other jurisdictions,
courts treat the same deal as a mixed contract and apply different rules to
different parts of the transaction.
4.1.2. Discussion of Monetti v. Anchor Hocking
How could Judge Posner have decided Monetti on far narrower
grounds?
Consider whether you agree with Posner’s resolution of the many
other issues he addresses including:
(1) Whether the trial judge should have refused to admit oral
evidence about the memos.
(2) Whether the UCC statute of frauds can be satisfied by a writing
that precedes the parties’ agreement.
(3) Whether the UCC’s limits on enforcement for partial
performance apply to mixed contracts of this sort, including the clever
textual argument about the difference between “transactions in goods” and
“contracts for the sale of goods,” and the distinction between partial delivery
and partial payment.
4.1.3. Hypo on the UCC Statute of Frauds
On September 1, Bob Byar phones Sally Starbuck, the owner of a
local microbrewery, to order a special holiday edition of her Starbuck Ale. At
the conclusion of their conversation, Bob and Sally agree that Starbuck will
produce and deliver 100 cases at a unit price of $20 per case. On September
7, Starbuck sends Byar the following note:

150

Starbuck Brewery, LLC
Just a quick note to confirm your September 1st order for
50 cases of our holiday edition of Starbuck Ale at a unit cost of
$20 per case to be delivered no later than November 1st.
On September 14, Byar discovers that he can obtain a similar holiday
product from another local brewery for only $15 per case. The next day, he
responds to Starbuck with the following note:
Sally,
I thought that we had agreed on 75 cases, but never mind
because I’ve decided that I no longer want any at all this year.
Hope though that we can do business in the future.
Best,
/s/ Bob Byar
Now imagine that Starbuck has consulted you about her legal
options. She wants to know whether she can bring a suit against Byar for
breach of contract. Do the writings in this case satisfy the applicable statute
of frauds?
Consider also the following variations on the quantities described
above:
Case
Original
Different Quantity
Denies Agreement

Oral
100
50
100

Confirm
50
50
50

Rescind
75
75
0

4.1.4. Proposed Amendments to U.C.C. § 2-201
Many commentators have raised questions about whether the UCC
statute of frauds is compatible with modern business methods. The following
excerpt describes the commercial norms and practices in the global currency
market:
There is an uneasy tension between the technology and
business practices of the foreign exchange market on the one
hand, and the demands of contract enforceability rules in sales
law on the other hand. The technology is telephonic. It expands
the ways in which market participants negotiate and execute

151

currency trades. Communications between [currency traders] are
not face-to-face meetings in which written draft contracts are
exchanged and marked up by lawyers representing the parties
during endless rounds of coffee and take-out sandwiches. The
trading floors of [currency traders] are entirely different from the
conventional lawyers’ conference room; traders often
communicate by telephone. In sum, the deals made in the
currency bazaar are oral and are concluded rapidly and informally.
The statute of frauds must adapt to this telephonic
technology…. Foreign exchange market participants might not
reduce their agreements to writing for good reason. Because bidask spreads are thin for trading in liquid currencies, profits are
made through a high volume of trading. To maximize profits,
market participants seek to conclude as many transactions as
cheaply and quickly as possible. Outdated legal formalities like
the statute of frauds requirements lead to higher transaction costs
and delay the completion of transactions. Not surprisingly, many
market participants prefer tape recordings of conversations
among traders instead of written agreements.
The law also must account for the culture of the currency
bazaar. Trust among participants in the foreign exchange market
is high. Perhaps this aspect of business culture also distinguishes
the trading floor from the conference room. The participants
repeatedly deal with one another. To engage in fraudulent or
deceptive practices is to invite ostracism: a trader’s unctuous
behavior quickly becomes widely known and other traders decide
it is risky and imprudent to deal with the rogue trader.
Raj Bhala, A Pragmatic Strategy for the Scope of Sales Law, the Statute of
Frauds, and the Global Currency Bazaar, 72 Denv. U. L. Rev. 1, 27–28 (1994).
Proposed amendments to Article 2 of the UCC include the following
revisions to the statute of frauds:
§ 2-201. Formal Requirements; Statute of Frauds
(1) A contract for the sale of goods for the price of $5,000 or more
is not enforceable by way of action or defense unless there is some record
sufficient to indicate that a contract for sale has been made between the
parties and signed by the party against which enforcement is sought or by

152

the party's authorized agent or broker. A record is not insufficient because
it omits or incorrectly states a term agreed upon but the contract is not
enforceable under this subsection beyond the quantity of goods shown in
the record.
(2) Between merchants if within a reasonable time a record in
confirmation of the contract and sufficient against the sender is received
and the party receiving it has reason to know its contents, it satisfies the
requirements of subsection (1) against the recipient unless notice of
objection to its contents is given in a record within 10 days after it is
received.
(3) A contract that does not satisfy the requirements of subsection
(1) but which is valid in other respects is enforceable:
(a) if the goods are to be specially manufactured for the buyer and
are not suitable for sale to others in the ordinary course of the seller's
business and the seller, before notice of repudiation is received and under
circumstances which reasonably indicate that the goods are for the buyer,
has made either a substantial beginning of their manufacture or
commitments for their procurement; or
(b) if the party against whom enforcement is sought admits in his
pleading, or in the party's testimony or otherwise in court that a contract
for sale was made, but the contract is not enforceable under this provision
beyond the quantity of goods admitted; or
(c) with respect to goods for which payment has been made and
accepted or which have been received and accepted (Sec. 2-606).
(4) A contract that is enforceable under this section is not
unenforceable merely because it is not capable of being performed within
one year or any other period after its making.
Uniform Commercial Code § 2-103(1)(m) defines a “record” in the
following terms:

153

(m) "Record" means information that is inscribed on a tangible
medium or that is stored in an electronic or other medium and is
retrievable in perceivable form.

154