8.3.2.2 Notes - Sherwood v. Walker | mengjiezou | September 21, 2012

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8.3.2.2 Notes - Sherwood v. Walker

Original Creator: Kessler, Gilmore & Kronman Current Version: mengjiezou
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NOTE

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1. The leading English case of Kennedy v. Panama, etc., Mail Co., L.R. 2 Q.B. 580 (1867), was relied on in both the majority and dissenting opinions in Sherwood v. Walker as well as in the opinion of the court in Wood v. Boynton. In the Kennedy case the Mail Company had issued shares to raise capital for building a fleet of ships to be used in the Pacific. In their prospectus the directors had in good faith represented that they had a contract with the government of New Zealand for carrying the European mails between New Zealand and Panama (in Panama the mails were transported across the Isthmus and reshipped for the Atlantic and Pacific legs of the journey). Relying on that representation, Kennedy subscribed for 1,600 shares at £7 per share. It turned out that the London agent of the New Zealand government had exceeded his authority in negotiating the contract, which was subsequently repudiated by the government. A second contract was negotiated on terms less favorable to the Mail Company. Kennedy, who had paid down £2 per share, sued the Mail Company to get his money back; the Mail Company counterclaimed to recover the balance of £5 due on each share. At the time the actions were brought the shares were selling for £5 per share. Judgment was for the Mail Company on both the claim and counterclaim. (Mellish, whom we have met before as winning counsel in Raffles v. Wichelhaus, supra p. 869, was the losing counsel, appearing for Kennedy. The opinion in Queens Bench was by Blackburn, J., whom we shall meet again in Taylor v. Caldwell, infra p. 920). On the facts as stated, do you think the Kennedy case is "like" either Wood v. Boynton or Sherwood v. Walker? If you do, is it an authority in support of the Wood decision? Does it support the majority opinion or the dissent in Sherwood?

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2. According to Professor (now Judge) Posner, Sherwood v. Walker can best be approached "by asking how the parties would have allocated the risk [of the cow's pregnancy] between them had they foreseen it." Economic Analysis of Law 73 (2d ed. 1977). He elaborates as follows:

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This approach decomposes the contract into two distinct agreements: an agreement respecting the basic performance (the transfer of the cow) and an agreement respecting a risk associated with the transfer (that the cow will turn out to be different from what the parties believed). In fact there was some evidence that Rose's sale price included her value if pregnant, discounted (very drastically of course) by the probability of that happy eventuality. This evidence, if believed, would have justified the court in concluding that the parties had intended to transfer the risk of the cow's turning out to be pregnant to the buyer, in which event delivery should have been enforced. Even in the absence of any such evidence, there would be an argument for placing on the seller the risk that the cow is not what it seems. In general, if not in every particular case, the owner will have superior access to information concerning the actual or probable characteristics of his property. This is the theory on which the seller of a house is liable to the buyer for any latent (as distinct from obvious) defects; a similar principle could be used to decide cases of mutual mistake. [footnotes omitted]

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Do you agree with Posner's assessment of the case? The plaintiff in Sherwood was a banker; would it have made a difference if he had been a butcher?

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3. In both Wood and Sherwood the thing being sold turned out to be immensely more valuable than the parties had, in good faith, assumed when they made their deal. In Kennedy the shares turned out to be less valuable than they presumably would have been if the representation in the prospectus had been true. Another case of the Kennedy type was Smith v. Zimbalist, 2 Cal. App. 2d 324, 38 P.2d 170 (1934) (hearing denied by Supreme Court of California). Smith was an elderly and evidently wealthy collector of rare violins (that is, he was not a dealer). Zimbalist was a leading concert violinist. Having been invited to inspect Smith's collection, Zimbalist identified two violins as being a Stradivarius and a Guarnerius and offered to buy them. Smith agreed to sell the two violins for $8,000; Zimbalist paid $2,000 down and agreed to pay the balance in six equal monthly installments. A "bill of sale" signed by Smith described the violins as being a Stradivarius and a Guarnerius, stated the price and the terms of payment, acknowledged receipt of the $2,000 down payment and further provided: "I agree that Mr. Zimbalist shall have the right to exchange these for any others in my collection should he so desire." Zimbalist signed a comparable "memorandum." Before Zimbalist had made any further payments, it was discovered that the violins were copies that were not worth more than $300. Smith sued Zimbalist to recover the unpaid balance of $6,000. Judgment was for Zimbalist on two grounds. The first was that in a contract for the sale of goods "the parties to the proposed contract are not bound where it appears that in its essence each of them is honestly mistaken or in error with reference to the identity of the subject matter of such contract." The second was that, by the description in the bill of sale, Smith had warranted that the violins were genuine. (Note that it was Zimbalist who had initially identified the violins.) The trial court concluded that Smith had not given a warranty, but it gave judgment for Zimbalist, presumably on the first ground. It is curious that the appellate court, in affirming the judgment, should have gone to the trouble of reversing the trial judge on his handling of the warranty issue. Possibly that may be taken to suggest that the appellate court was not altogether satisfied with the first ground of decision. There is no further reference in the opinion to the provision of the bill of sale under which Zimbalist was to have the right to exchange the two violins for any others in Smith's collection. It does not appear that Zimbalist attempted to recover the $2,000 down payment. If he had, how do you think the court would (or should) have disposed of the claim?

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4. Houser, J., in the course of his opinion in Smith v. Zimbalist, digested Sherwood v. Walker at some length, adding the following comment: "But to the contrary of such ruling on practically similar facts, see Wood v. Boynton. . . ." Evidently Judge Houser regarded the two cases as irreconcilable (same fact situations, opposite holdings). Do you agree? See further the Note on Bell v. Lever Brothers, Ltd., infra p. 896.

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5. In Amalgamated Investment and Property Co. Ltd. v. John Walker & Sons, Ltd., [1976] 3 All. E.R. 509 (C.A.), Walker in 1973 advertised for the sale of land it owned in London. The land was occupied by a large warehouse that had originally been built for the use of Walker, a whiskey manufacturer, as a bonded warehouse and bottling factory but was no longer used for that or any other purpose. The land was described as being suitable for "occupation or redevelopment." Amalgamated, making clear that it was interested in acquiring the property for redevelopment, offered £1,710,000. On July 19, 1973, Walker accepted the offer "subject to contract." On August 14 Walker, in response to an inquiry from Amalgamated, stated that it was not aware of any proposal to have its warehouse designated as a "building of special architectural or historic interest." On September 25 Amalgamated and Walker signed a contract for sale of the land for £1,710,000. On September 26 the Department of the Environment notified Walker that the warehouse had been listed as a "building of special architectural or historic interest." The listing made the land unavailable for redevelopment unless an exemption (a "listed building consent") could be obtained from the Department. Until receipt of the September 26 communication, neither Walker nor Amalgamated had known that the Department was considering the listing of the ware- house. The effect of the listing was to reduce the value of the property from £1,710,000 (the contract price) to £200,000.

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Amalgamated sought rescission of the contract on the alternative grounds of "common mistake" and "frustration." The trial judge denied relief on either ground. A three-judge panel in the Court of Appeal unanimously affirmed. As to "common mistake," there was no ground for relief since the contract was signed on September 25 and the warehouse was not officially "listed" until the following day when the notification was signed and dispatched. As to "frustration," the possibility that a building might be "listed" and thus made unavailable for redevelopment was, as Buckley, L.J., put it, "a risk which inheres in all ownership of buildings . . . a risk that every owner and every purchaser of property must recognize that he is subject to." All the judges expressed their horror and disgust at the procedures that the Department of the Environment had followed in deciding to list the Walker warehouse as a "building of special architectural or historic interest" and wished Amalgamated the best of luck in its attempt to secure an exemption.

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6. In City of Everett v. Estate of Sumstad, 26 Wash. App. 742, 614 P.2d 1294 (1980) the facts were that the Estate had commissioned an auctioneer to sell certain property belonging to the Estate, including a safe. The safe contained an inner compartment with a combination lock; the compartment was locked; the combination had been lost; neither the Estate nor the auctioneer had had the compartment opened by a locksmith, or knew what, if anything, was inside the compartment. At the auction, the auctioneer stated these facts to the bidders. A sign behind the auctioneer's block read: All Sales are Final. The Mitchells, who operated a second-hand store and were regular customers at the auction, bid on the safe for $50. They engaged a locksmith who, on opening the locked compartment, found $32,207. The locksmith turned the money over to the police. Both the Estate and the Mitchells claimed the money; the City commenced an interpleader action. Apparently no one knew how long the money had been in the safe or who had originally owned it. The trial court awarded the fund to the Estate and was affirmed on appeal by the majority of a three-judge panel. The majority opinion concluded that resolution of the case "depends on an analysis of the objective theory of contract" and that "the parties did not objectively enter into a contract for the sale of the safe and its contents, but only a sale of the safe." [Emphasis in original] The dissenting opinion collects cases, old and new, involving property found in locked or sealed containers (see Annotation, 4 A.L.R.2d 318 (1949)). One of the cases is Durfee v. Jones, 11 R.L 588, 23 Am. Rep. 528 (1877). Plaintiff was the owner of a safe, which he entrusted to the defendant for sale, but also with permission to use the safe until it was sold. The defendant found some bank notes in a crevice of the safe. The plaintiff (who did not claim to be the "original" or "true" owner of the bank notes) naturally claimed them. The Rhode Island court awarded the fund to the defendant, as a "finder." Holmes discussed the Rhode Island case in his lecture on Possession, in The Common Law 177 (M. Howe ed. 1963), commenting: "I venture to think this decision wrong." Young, Half Measures, 81 Colum. L. Rev. 19,24 (1981), comments that in the City of Everett case the Washington court "if [it] had characterized the problem as one of mistake [instead of contract formation] ... might have been willing to consider the argument that treasure troves ought to be divided between the parties to a sale." However the issue in the case is "characterized," how do you think the case should be decided? All the money to the Estate? All the money to the Mitchells? Half to each? Do any of the other materials in this section seem to you to throw any light on this problem?

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7. Assume that A contracts to sell his Blackacre to B for $50,000 (which both A and B consider to be a fair price). Subsequently it is discovered that the land is oil-bearing and worth millions. "Subsequently" in the preceding sentence can be taken to mean: 50 years after the conveyance; immediately after the conveyance; immediately before the conveyance. Would you be in favor of taking the time scheduled for performance under the contract as an absolute cut-off? Or would you prefer a rule under which the seller could recover the land if he discovered its true value within a reasonable time after conveyance and sued to get it back before the buyer had substantially changed his position or third parties had acquired rights in the land? Or a rule under which, in cases of this type, seller and buyer would divide the unanticipated profits? Cady v. Gale, 5 W. Va. 547 (1871), is an oil-bearing land case in which the discovery of oil was made after the buyer of the land had paid the agreed consideration and at a time when the seller ought to have (but had not) conveyed to him. In the buyer's action for specific performance, the Supreme Court of Appeals reversed the lower court and ordered that the seller convey his interest in the land and account to the buyer for interim rents and profits.

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Suppose the buyer in Cady had been a professional geologist who, after conducting a survey of the property in question, concluded it was oil-bearing but said nothing about this to the seller. Compare Laidlaw v. Organ, supra p. 89. Would you consider the buyer's position to be stronger or weaker under these circumstances? A case of this sort would probably be classified as one of unilateral mistake (since only the seller is mistaken as to the property's true value). Do you think it should be treated in the same fashion as the mistaken bid cases, supra pp. 323-348, which have also traditionally been classified under the heading of unilateral mistake? See Kronman, Mistake, Disclosure, Information and the Law of Contracts, 7 J. Legal Stud. 1 (1978).

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8. In Ben v. Lever Brothers, Ltd., L.R. 1932 A.C. 161 (1931), the facts were these: Lever Brothers had entered into employment contracts with Bell and Snelling, under which the two men were to render various services for the company in connection with its West African cocoa business. Several years later, Lever Brothers decided to cancel the contracts for purely financial reasons, and paid Bell and Snelling £50,000 in return for their agreement to accept the cancellations. The company subsequently discovered that during the period of their employment, the two men had exploited their positions of trust in the company for their own personal gain. Bell and Snelling had apparently made no misrepresentations to the contrary, but neither had they disclosed their own wrongdoing. If the fact of their misconduct had been known at the time of the cancellation agreement, Lever Brothers could have simply dismissed Bell and Snelling with no compensation whatsoever. The company brought an action to recover the money it had already paid them, claiming that it had done so on the basis of an invalidating mistake, namely, its ignorance of the fact that it could "have got rid of them for nothing." The trial court gave judgment for Lever Brothers and was unanimously affirmed by a Court of Appeal that included Scrutton, L.J. However, a divided House of Lords reversed the judgment. In the course of his opinion (or speech) for the majority view, Lord Atkin remarked:

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[O]n the whole, I have come to the conclusion that it would be wrong to decide that an agreement to terminate a definite specified contract is void if it turns out that the agreement had already been broken and could have been terminated otherwise. The contract released is the identical contract in both cases, and the party paying for release gets exactly what he bargains for. It seems immaterial that he could have got the same result in another way, or that if he had known the true facts he would not have entered into the bargain. A. buys B.'s horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known as the fact is that the horse is unsound. If B. has made no representation as to soundness and has not contracted that the horse is sound, A. is bound and cannot recover back the price. A. buys a picture from B.; both A. and B. believe it to be the work of an old master, and a high price is paid. It turns out to be a modern copy. A. has no remedy in the absence of representation or warranty. A. agrees to take on lease or to buy from B. an unfurnished dwelling-house. The house is in fact uninhabitable. A. would never have entered into the bargain if he had known the fact. A. has no remedy, and the position is the same whether B. knew the facts or not, so long as he made no representation or gave no warranty. A. buys a roadside garage business from B. abutting on a public thoroughfare: unknown to A., but known to B., it has already been decided to construct a byepass road which will divert substantially the whole of the traffic from passing A's garage. Again A. has no remedy. All these cases involve hardship on A. and benefit B., as most people would say, unjustly. They can be supported on the ground that it is of paramount importance that contracts should be observed, and that if parties honestly comply with the essentials of the formation of contracts — i.e., agree in the same terms on the same subject-matter — they are bound, and must rely on the stipulations of the contract for protection from the effect of facts unknown to them.

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The case was evidently not one of easy or obvious solution. Nine judges voted on the case. Six felt that Lever Brothers should recover the settlements it had paid over to Bell and Snelling. However, the three who felt that Bell and Snelling could keep the money were a bare majority of the House of Lords. It may not be altogether implausible to take this diversity of judicial views as illustrative of the transition from the nineteenth-century rules on excuse from contractual liability under mistake or impossibility theory to the much broader twentieth-century excuse rules. Arguably, if the case had been decided in the 1890s, all the judges would have held that Bell and Snelling could keep the money. Perhaps, if the case had been decided in the 1970s, all the judges would have held that Lever Brothers could get the money back.

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9. Lever Brothers entered into the settlement agreements with Bell and Snelling in March of 1929, paid the money over on May 1, discovered the facts about their misconduct in July and sued to get the money back. Assume that Lever Brothers had discovered the facts in April, refused to make any payments, and been sued by Bell and Snelling. What result? Reconsider in this connection the time sequence in Wood v. Boynton, supra p. 84, Sherwood v. Walker, supra p. 887, and the cases digested in the Note following Sherwood. See also the Note following Raffles v. Wichelhaus, supra p. 869. It should be noted that none of the opinions in any of these cases (or in any other cases of the same type known to the editors) contains the slightest hint or suggestion that the time at which the true state of facts was discovered (that is, before or after performance) was relevant to the decision.

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10. Under a rational system of law, do you think the plaintiff in Wood v. Boynton should get the diamond back? If, in Smith v. Zimbalist, Zimbalist had paid the full price before finding out that the violins were copies, do you think he should get the money back? Do you think that Bell and Snelling, despite their misconduct, should have been allowed to keep the money Lever Brothers had paid them? And how would you distribute the money found in the safe in the City of Everett case? Do you think that your answers to the questions just put are consistent with one another?

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March 12, 2015

8.3.2.2 Notes - Sherwood v. Walker

8.3.2.2 Notes - Sherwood v. Walker

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