Contract doctrine, theory & practice - volume 2

J.H. Verkerke

CALI's eLangdell® Press

This is Volume 2 in a three volume series written for Contracts Law. Its orginal title was "Collaborative Teaching Materials for Contracts."
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.

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https://open.umn.edu/opentextbooks/textbooks/contract-doctrine-theory-practice-volume-2

Contract Doctrine,
Theory & Practice
Volume Two

J.H. Verkerke

CALI eLangdell Press 2012

iii

Notices
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Permission for the Restatement of Contracts, copyright 2012 by The
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iv

to any person for any loss caused by errors or omissions in this collection
of information.

v

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.

vi

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vii

Summary of Contents
IV. Defining the Obligation to Perform .......................................... 1
1. Excuse ............................................................................................................. 1
2. Mistake .......................................................................................................... 15
3. Substantial Performance ............................................................................. 40
4. Exclusive Dealing Contracts ...................................................................... 49

V. Regulating the Bargaining Process .......................................... 67
1. Unconscionability ........................................................................................ 67
2. Modification ................................................................................................. 80
3. Rules Concerning Information.................................................................. 90
4. The Statute of Frauds ............................................................................... 126

viii

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 ........................................................ 8
1.2.1. Paradine v. Jane..................................................................................... 13
1.2.2. Analyzing Risk ................................................................................... 14
1.2.3. Discussion of Taylor v. Caldwell ........................................................ 14
2. Mistake .......................................................................................................... 15
2.1. Principal Case – Sherwood v. Walker ................................................... 17
2.1.1 The Story of Sherwood v. Walker ........................................................ 30
2.1.2. Lenawee County Bd. of Health v. Messerly ............................................ 30
2.1.3. Discussion of Sherwood v. Walker ..................................................... 32
2.2. Principal Case – Anderson v. O’Meara ................................................ 33
2.2.1. Discussion of Anderson v. O’Meara .................................................. 40
2.2.2. Hypo of the Sterile Calf ................................................................... 40
3. Substantial Performance ............................................................................. 40
3.1. Principal Case – Jacob & Youngs v. Kent............................................. 40
3.1.1. Perfect Tender and Substantial Performance ............................... 47
3.1.2. Motion for Rehearing in Jacob & Youngs v. Kent ........................... 48
3.1.3. Discussion of Jacob & Youngs v. Kent .............................................. 48
4. Exclusive Dealing Contracts ...................................................................... 49

ix

4.1. Principal Case – Wood v. Lucy, Lady Duff-Gordon ..................... 50
4.1.1. The Background of Wood v. Lucy, Lady Duff-Gordon .................... 52
4.1.2. Reading Wood v. Lucy, Lady Duff-Gordon ......................................... 53
4.1.3. Discussion of Wood v. Lucy, Lady Duff-Gordon............................... 53
4.1.4. Hypo on Real Estate Sales ............................................................... 54
4.2. Principal Case – Bloor v. Falstaff Brewing Corp. .......................... 55
4.2.1. “Best Efforts” as Joint Maximization ............................................ 64
4.2.2. Discussion of Bloor v. Falstaff ........................................................... 65
4.2.3. Hypo on Joint Maximization........................................................... 65

V. Regulating the Bargaining Process .......................................... 67
1. Unconscionability ........................................................................................ 67
1.1. Principal Case – Williams v. Walker-Thomas Furniture Co. I ............ 68
1.2. Principal Case – Williams v. Walker-Thomas Furniture Co. II ........... 70
1.2.1. Procedural and Substantive Unconscionability ............................ 76
1.2.2. Rent-to-Own Industry and Consumer Protection Laws ............ 77
1.2.3. Uniform Commercial Code Unconscionability Provisions ....... 78
1.2.4. Discussion of Unconscionability .................................................... 79
2. Modification ................................................................................................. 80
2.1. Principal Case – Alaska Packers’ Association v. Domenico ......... 81
2.1.1. The Story of Alaska Packers Association v. Domenico ...................... 89
2.1.2. Hypo on Modification ...................................................................... 90
2.1.3. Discussion of Alaska Packers Association v. Domenico .................... 90
3. Rules Concerning Information.................................................................. 90
3.1. Fraud and Affirmative Misrepresentation ....................................... 91
3.2. Non-Disclosure and Concealment ................................................... 95
3.3. Principal Case – Reed v. King ............................................................... 95
3.4. Principal Case – Stambovsky v. Ackley .............................................. 102
3.4.1. Discussion of Reed v. King and Stambovsky v. Ackley ................... 108
3.4.2. Kronman’s Theory of Deliberately Acquired Information...... 109
3.5. Principal Case – Obde v. Schlemeyer ................................................... 113
3.5.1. Discussion of Obde v. Schlemeyer ..................................................... 119
3.6. Principal Case – L & N Grove, Inc. v. Chapman ............................. 119
3.6.1. Discussion of L&N Grove v. Chapman ......................................... 125
3.6.2. Hypo of Ivy Diamonds .................................................................. 126
3.6.3. Further Discussion of L&N Grove v. Chapman .......................... 126

x

4. The Statute of Frauds ............................................................................... 126
4.1. Principal Case – Monetti, S.P.A. v. Anchor Hocking Corp........ 127
4.1.1. Applying the UCC or Common Law Statute of Frauds ........... 139
4.1.2. Discussion of Monetti v. Anchor Hocking ....................................... 139
4.1.3. Hypo on the UCC Statute of Frauds ........................................... 139
4.1.4. Proposed Amendments to U.C.C. § 2-201 ................................. 140

xi

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 of reference materials. I invite each of you to join us for what will

xii

be a challenging, sometimes frustrating, but ultimately rewarding,
intellectual journey.

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.

2

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 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.

3

[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 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.

4

[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 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

5

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 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.

6

[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. 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

7

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
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.

8

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?
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

9

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 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 causa, aut ex
stipulatii hominem certum mihi debeas: non aliter post mortem ejus

10

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. 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

11

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.
[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

12

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 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,

13

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
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

14

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.
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?

15

Suppose that one of your talented classmates contracts with you to provide
high quality class notes covering each meeting of all of your first-semester
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 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

16

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
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

17

(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.
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

18

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.
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
cattle-yard 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

19

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 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

20

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 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.

21

[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. 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.

22

[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 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

23

Mich. 1, 19 N.W.Rep. 565; Scotten v. Sutter, 37 Mich. 527, 532; 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 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

24

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.
[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

25

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 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

26

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
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

27

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 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

28

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 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.

29

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 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

30

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 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

31

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.]

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.

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.”

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?

33

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. 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
Anderson Brothers Corporation will be referred to as the appellant and O'Meara
as the appellee.
1

34

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 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.

35

[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,
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.

36

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.
[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 alone was mistaken in assuming that

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
2

37

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 wellestablished 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
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.
3

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?
A. No, not that I recall.
Q. In other words-

38

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. 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
A. 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.

39

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
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

40

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 cross-appeal. 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 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.

41

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
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

42

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 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

43

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, 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

44

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.
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

45

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 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 two-fifths 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

46

made by the Reading Manufacturing 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

47

simply to make another 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.

48

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 could

49

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.
Commercial parties confront these problems in long-term supply contracts,
in exclusive distributorship agreements, in some publishing contracts, and

50

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
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

51

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; 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.

52

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

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.

53

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 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, 63738 (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 Duff-Gordon?

54

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?
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?

55

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:
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

56

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 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

1

Miller's, Schlitz, Anheuser-Busch, Coors and Pabst.

57

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
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 year-end 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

2This

was for cooperative advertising with purchasers.

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.
3

4[An

incomprehensible graph comparing sales volumes is omitted. The text above
ably describes the distinctively bad performance of Ballantine brands.]
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.
5

58

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 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.
“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):
6

‘(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.)”

59

[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
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
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.

60

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.
[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
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.
8

61

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 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

62

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. Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917) (Cardozo, J.).
Clause 8 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

63

halt in Rheingold production works the other way since the lowered
figure 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 crossappeal 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 claim is that
the closing of the North Bergen center and Mr. Kalmanovitz' general
come-and-get-it philosophy was, without more, a substantial

64

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 two-thirds 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 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

65

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?
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?

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.

68

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.
[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.

69

[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 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 §§ 128153, 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.

70

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
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

71

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.
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.
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.
1

72

[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
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
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).
2

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).
3

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).
4

73

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
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
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).
5

See Henningsen v. Bloomfield Motors, Inc., supra Note 2; Campbell Soup Co. v.
Wentz, supra Note 2.
6

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

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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 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

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

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

See the general discussion of ‘Boiler-Plate Agreements' in LLEWELLYN, THE
COMMON LAW TRADITION 362-371 (1960).
10

11

Comment, Uniform Commercial Code § 2-307.

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.”
12

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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):
[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 §§
26-601 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

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.
13

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[14] I join the District of Columbia Court of Appeals in its disposition
of the issues.

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
not scrutinize the adequacy of consideration. Each party is free to make a

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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-ACenter 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. 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).

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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 the court to pass
directly on the unconscionability of the contract or
particular clause therein and to make a conclusion

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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?

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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.

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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

82

him thereunder, in consideration of 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 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

83

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 selfevident 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.
[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

84

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 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,

85

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 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

86

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, 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

87

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 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

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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 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.

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[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 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).

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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?
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

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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.
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.

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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.
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 nondisclosure. 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.

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§ 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.
(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.

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§ 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
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

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(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 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

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[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
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
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].)
1

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“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 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.)
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].)
2

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.)
3

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[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, § 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 “non-disclosure of the fact amounts to a failure to act in good
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.)
4

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].)
5

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faith and in accordance with reasonable standards of fair dealing[?]”
(Rest. 2d Contracts, § 161, subd. (b).)
[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, the seller is aware of this effect, we see no principled basis for
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].)
6

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].)
7

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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. Illrepute 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

[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.)
8

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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.

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.
9

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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.
[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

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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 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

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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, 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

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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 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.

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[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 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.

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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).
[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

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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).
[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?

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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?
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

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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 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

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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.
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

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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 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-bycase 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

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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 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.

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[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
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.

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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
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

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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 NonDisclosure, 15 TEX. L. REV. 1, 14-16 (1936). In this article Professor
Keeton also 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
non-disclosure 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,”

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to use Professor Keeton's language, demanded that the Schlemeyers
speak-that 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.
[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:

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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 purchased twice
during the year 1954 by persons who were unaware of the termite
condition for approximately $40,000, Wieber rendered an opinion that

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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).
[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

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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.
[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

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

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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 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.

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[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 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,

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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.
[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.

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[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 fourlaned or become the entrance to Walt Disney World. His 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?

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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?
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

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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 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.

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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
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

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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 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

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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 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 that the statutes of frauds require. The judge, over Monetti's

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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 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

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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.
[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

133

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 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

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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 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 partial-performance exception to the
statute of frauds is often explained (and its boundaries fixed
accordingly) as necessary to protect the reliance of the performing

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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 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,

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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 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

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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 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 partial-performance 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

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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 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

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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
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

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produce and deliver 100 cases at a unit price of $20 per case. On September
7, Starbuck sends Byar the following note:
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 currency trades. Communications between

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[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 bid-ask 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

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between the parties and signed by the party against which
enforcement is sought or by 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:

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(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.