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The Extent of Relief for Unilateral Mistakes in Contracts, Exams of Contract Law

The trend in contract law towards wider relief for mutual and unilateral mistakes, focusing on the debate surrounding unilateral mistakes. various tests used to determine relief, such as the identity-of-subject-matter test and the fundamental assumption test. It also examines specific cases and their outcomes, highlighting the policy considerations involved in granting relief for unilateral mistakes.

What you will learn

  • What policy considerations are involved in granting relief for unilateral mistakes in contracts?
  • Why do some courts hesitate to grant relief for unilateral mistakes?
  • What are the different tests used to determine relief for unilateral mistakes in contracts?

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COMMEMNTS
725
Still
there
appears
no
justification
for
the
lengths to
which
the stamp
of
consti-
tutional
approval
has
been
applied
simply
because
the
defendant
hired
his
own
lawyer.
One
would
think
that
the
Sixth Amendment guaranteed
sober
counsel.
The Court
of
Appeals
for
the
Tenth
Circuit
has held
otherwise:
"The
most
that
can
be said
for
this
testimony
is
that
it
establishes
that
appellee's
counsel
drank
throughout
the
trial
and
that
he
was
under
the
influence
of
intoxicat-
ing
liquor
to
a
greater
or
less
degree
during
the
whole
trial.
But
what
of
it?
Appellee
employed
him;.
..
"4r
EXTENSION
OF
RELIEF
FOR
UNILATERAL MISTAKE
The
modem
trend
of
the
law of
mistake
in
contracts
is
toward
wider
relief
for
both
mutual
and
unilateral
error.
For most
types
of
unilateral
mistake,
rescis-
sion
is
opposed
by
adherents
of
the
rigidly
"objective"
view
of
mistake
in
con-
tracts.
Occasionally
courts
hesitate
to
give
relief
for
any
type
of
unilateral
error,
although
paying
lip
service
to
the
doctine
permitting
rescission
under
certain
conditions.
In
United
States
v.
Jones,'
the
War
Assets
Administration
made
a
special
offering
of
certain universal
gear
joints
declared
as
surplus
property
by
the
U.
S.
Maritime
Commission
and
fully
described
in
the
declarations.
The
WAA
asked
for
bids upon
the
property,
and,
receiving
none,
later
put
it
up
on
a
negotiated
sale
basis. Jones,
the
defendant,
asked
an
employee
of
the
WAA
if
there
were
jeep
motors for
sale
and
was
told
that
there
were
but
that
they
might
only
be
purchased as
part
of
an entire
odd
lot.
In
the
lot
Jones
recognized
the
universal
gear
joints
as
equipment worth perhaps
$6o,ooo.
Jones
knew
that
the
agent
of
the
government
was
not
aware
of
the
nature
or
value
of
the
equipment.
By
negotiation
he
lowered
the
asking
price
from
$250
to
$75
and
bought
at
the
latter
price. Upon learning
of
its
mistake
the
government
refused
delivery
and
brought
suit
for
rescission
of
the
contract.
The
court
admitted
that
rescission
was
proper
on
this
state
of
facts,
applying
the
test
of
whether
the
mistake
was one
as
to
the identity
of
the
subject
matter
or merely
as
to
a
collateral characteristic.'
The
metaphysical character and
in-
utility
of
this
test
have
misled
courts
into
dubious
and
occasionally
startling
41
Hudspeth
v. McDonald,
12o
F.
2d
962,
967
(C.A.
ioth,
1941).
The
district
court
had
found
that
the
defendant had
had
no
effective
assistance
of
counsel
as required
by
the
Sixth
Amendment.
McDonald
v.
Hudspeth,
41
F.
Supp.
182
(Kan.,
1941).
Compare
Wade
v.
Mayo,
334
U.S.
672 (1948),
where
the
district
court's
finding
that
the
defendant
was
handicapped
by
lack
of
counsel was
upheld
as
"not
clearly
erroneous."
The
district
court's
finding
in
the
McDonald
case
appears
to
be
clearly
"not
clearly
erroneous."
'
76F.
2d
278
(C.A.
9
th,
1949).
Adoption
of
this
test
rather than
the
modem
fundamental
assumption
test
might indicate
thecourt's
desire
to
restrict
relief
for
mistake,
for,
as
pointedout
in
5
Williston,
Contracts
§
1570A
(rev.
ed.
1937),
"under
the
modern
basic assumption
test
the
way
is
opened
for
further
develop-
ment
of
the
law
toward
greater
extension
of
relief.
..
."
The
court
cites
Frank's
concurring
opinion
in
Ricketts
v.
Pennsylvania
R.
Co.,
153
F.
2d
757
(C.A.
2d,
1946),
but
is
noncommital
as
to
his recommendation
of
extension
of
relief
for
unilateral
mistake.
176
F.
2d
278,
at
286
n.
4
(C.A.
9th,
1949).
pf3
pf4
pf5
pf8
pf9

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COMMEMNTS 725

Still there^ appears^ no^ justification^ for^ the^ lengths to^ which^ the stamp^ of^ consti-

tutional approval has been applied simply because the defendant hired his own

lawyer. One would think that^ the^ Sixth Amendment guaranteed^ sober^ counsel.

The Court of Appeals for the Tenth Circuit has held otherwise:

"The most that can be said for this testimony is that it establishes that appellee's

counsel drank throughout the trial and that he was under the influence of intoxicat-

ing liquor to a greater or less degree during the whole trial. But what of it? Appellee

employed him;. .. "4r

EXTENSION OF RELIEF FOR UNILATERAL MISTAKE

The modem trend of the law of mistake in contracts is toward wider relief for

both mutual and unilateral error. For most types of unilateral mistake, rescis-

sion is opposed by adherents of the rigidly "objective" view of mistake in con-

tracts. Occasionally courts hesitate to give relief for any type of unilateral error,

although paying lip service to the doctine permitting rescission under certain

conditions. In United States v. Jones,' the War Assets Administration made a

special offering of^ certain universal^ gear^ joints^ declared^ as^ surplus^ property^ by

the U. S. Maritime Commission and fully described in the declarations. The

WAA asked for bids upon the property, and, receiving none, later put it up on a

negotiated sale basis. Jones, the defendant, asked an employee of the WAA if

there were jeep^ motors for^ sale^ and^ was^ told^ that^ there^ were^ but^ that^ they^ might

only be purchased as part of an entire odd lot. In the lot Jones recognized the

universal gear joints as equipment worth perhaps $6o,ooo. Jones knew that the

agent of the government was not aware of the nature or value of the equipment.

By negotiation he lowered the asking price from $250 to $75 and bought at the

latter price. Upon learning of its mistake the government refused delivery and

brought suit for rescission of the contract.

The court admitted that rescission was proper on this state of facts, applying

the test of^ whether^ the^ mistake^ was one^ as^ to^ the identity^ of^ the^ subject^ matter

or merely as to a collateral characteristic.' The metaphysical character and in-

utility of this test have misled courts into dubious and^ occasionally^ startling

41 Hudspeth v. McDonald, 12o F. 2d 962, 967 (C.A. ioth, 1941). The district court had found that the defendant had had no effective assistance of counsel as required by the Sixth Amendment. McDonald v. Hudspeth, 41 F. Supp. 182 (Kan., 1941). Compare Wade v. Mayo,

334 U.S. 672 (1948), where the district court's finding that the defendant was handicapped

by lack of counsel was upheld as "not clearly erroneous." The district court's finding in the McDonald case appears to be clearly "not clearly erroneous." ' 76F. 2d 278 (C.A. 9 th, 1949). Adoption of this test rather than the modem fundamental assumption test might indicate thecourt's desire to restrict relief for mistake, for, as pointedout in 5 Williston, Contracts § 1570A (rev. ed. 1937),^ "under^ the^ modern^ basic assumption^ test^ the^ way^ is^ opened^ for^ further^ develop- ment of the law toward greater extension of relief. .. ."^ The^ court^ cites^ Frank's^ concurring opinion in Ricketts v. Pennsylvania R. Co., 153 F. 2d 757 (C.A. 2d, 1946), but is noncommital as to his recommendation of extension of relief for unilateral mistake. 176 F. 2d 278, at 286 n. 4 (C.A. 9th, 1949).

THE UNIVERSITY OF CHICAGO LAW REVIEW

reasoning.3 A test which bases relief upon whether or not the mistake concerned a fundamental assumption of one or both of the parties is the best replacement for the identity-of-subject-matter test. 4 A leading English case, Bell v. Lever Bros.,^5 illustrates the different results obtainable under the two tests. In order to terminate service contracts for a term of years with the defendants, Lever Bros., Ltd., entered into termination agreements providing for additional compensa- tion. Later, Lever Bros. discovered that the defendants' acts while under the service contracts would have justified termination of the contracts without com- pensation. In an action for rescission of the termination agreements the jury found that Lever Bros. would have so terminated the contracts had it known of the defendants' breach of contractual duty. A majority of the court held that the mistake was not one as to the identity of the subject matter but merely one as to quality (viz., that the service contracts were no longer binding on Lever Bros.). "The contract released is the identical contract in both cases, and the party praying for release gets exactly what he bargains for. It seems immaterial that he could have got the same result in another way."1^6 But this is precisely what would be material under the fundamental assumption test, used success- fully by many courts,^7 under which rescission would have been granted. Al- though in the Jones case the court did find a mistake sufficient to justify rescis- 3 King Co. v. Aldrich, 81 N.H. 42, 121 At. 434 (1923). Plaintiff bought diseased hogs from the defendants, both parties knowing that the hogs were to be used for food, but (^) neither know- ing that they were diseased and so useless for that purpose. The court said there was no con- tract because of mutual mistake since diseased hogs are really not the same hogs as healthy ones and therefore (^) not the ones the parties had in mind. 5 Williston, Contracts § x569 (rev. ed. r937), shows the fallacy of this argument to be that the hogs were specific and identified when delivered, if not before. In addition to the casuistry often entailed in its application, the identity-of-subject-matter test fails to take account of the policy to be served in mistake cases. Parties are undoubtedly surprised when a court bases its decision on whether the mistake concerned the identity of the subject of their transaction. They are more likely concerned with notions of fairness and of unjust enrichment and impoverishment resulting from mistake. Courts should be concerned with the conditions for healthy trading in our economy, one of which requires informed buyers and sellers. (^) The identity test is unrelated to either consideration. 4 5 Williston, Contracts § i544 (rev. ed. 1937); Rest., Contracts § 502 (1932); Williston, Rescission of a Contract for Mutual Mistake of Fact, 35 Harv. L. Rev. 757 (1922). Sharp, Notes on Contract Problems and Comparative Law, 3 Univ. Chi. L. Rev. 277, at 283 (1935), is the best statement of the fundamental assumption test: "[W]here the parties to a transaction think of a fact as humanly certain, that is, possessing very high probability, and as a result make their transaction; and it is impossible to suppose that they were taking the risk of cir- cumstances turning out otherwise, the mistake, if prejudicial, will be a defense to a contract action or suit, or a ground for affirmative relief." This test reflects the policy considerations mentioned in note 3 supra. S [1932] App. Cas. i6r. 6 Ibid., (^) at 223 (Lord Atkin). 7 In Lindeberg v. Murray, 117 Wash. 483, 201 Pac. 759 (1921), the buyer of a large number of shares of stock in a bank was allowed rescission on the ground that the transaction had been entered into under a mutual mistake as to the assets of the corporation. Rosenblum v. Manu- facturers Trust Co., 27o N.Y. 79, 2oo N.E. 587 (z936); Jones v. Metzger, 132 Miss. 247, 96 So. 161 (1923); Jackman v. Northwestern Trust Co., 87 Ore. 209, 170 Pac. 3o4 (r9x8).

728 THE UNIVERSITY OF CHICAGO LAW REVIEW

was so glaring that it should have been known (^) (palpable mistake).'3 However, the English rule as stated in Smith v. Hughes'4 requires not only that the other's mistake be known to the nonmistaken party, but that the nonmistaken party know that the other believes him to be promising what in fact he is not. The distinction is shown by Anson's Dresden (^) China cases.' 5 The seller knows that the buyer thinks he is getting Dresden china when in fact he is not. There is no rescission; caveat emptor governs. But if the seller knows that the buyer thinks that the china is offered as Dresden when actually it is not, rescission is granted. Probably the reason for this distinction is that in the first case the buyer is get- ting the (^) china for the price of ordinary china and may be trying to take advan- tage of what he thinks (^) is a mistake by the seller while in the second situation the buyer is innocent of such intent and is (^) getting ordinary china for the price of Dresden. Not all American courts follow the "objective" theory of unilateral mistake when to do so would cause unjustifiable hardship. (^) In Rosenblum v. Manufac- turers Trust Co.' (^6) plaintiff's deceased husband had named her as beneficiary of a life insurance policy. After the birth of their child he replaced plaintiff with the defendant (^) trust company as trustee for his children because he thought their child would thus share equally with his two children by a prior marriage in (^) the benefits of the policy. But he was mistaken as to the trust arrangement and only the defendant children by the (^) former marriage shared. Defendants had no knowledge or reason to know of this error. Rescission was given because unjust enrichment would otherwise result. In Schaefer v. Henze,'7 an Illinois case, the party seeking relief mistakenly conveyed part of his house and lot, thinking he was conveying another strip of land, in order to correct a deed between the nonmistaken party and (^) a third person. The nonmistaken party, certain of the footage he wanted, did not know or have reason to know of the mistake. The court granted (^) rescission. Not to have done so would have been an especially marked injustice since the consideration (^) was merely nominal. There is a scat- tering of other cases to the same effect.' 8 X3 In Moffett, Hodgkins & Clarke Co. v. Rochester, '78 U.S. 373 (igoo), (^) there wasa mistake in a bid submitted to the city by a contractor, and rescission (^) was given because the difference between this bid and others was so glaring that the city ought to have known of the mistake. Gross v. Stone, 173 Md. 653, 197 At. 137 (1938); Geremia v. Boyarsky, (^107) Conn. 387, I At. 749 (1928); Holmes v. Cameron, 267 Pa. 90, 11o AtI. 8r (1920); City of New York v. Dowd Lumber Co., 14o App. Div. 358, 125 N.Y. Supp. (^394) (igio); Singer v. Grand Rapids

Match Co., 117 Ga. 86,43 S.E. 755 (I9O3); see Saline County v. Thorpe, 337 Mo. ii4 o,^ 88 S.W.

2d x83 (I935). Rest., Contracts § 503, Comment (^) a, Illustration i (1932). '4 [187i] L.R. (^6) Q.B. 597-

IS Anson, Contracts 156-57 (i8th ed. 1937).

x6 (^27) o N.Y. 79, 2oo N.E. 587 (1936). 17 337 Ill. 41, x68 N.E. 625 (1929). is In re Clark's Estate, 233 App. Div. 487, 253 N.Y. Supp. 524 (1931); Murrayv. Sanderson, 62 Wash. 477, 114 Pac. 424 (igi); see Seidman v. New York Life Insurance Co., 162 N.Y. Misc. 560, 296 N.Y. Supp. 55 (ig37); Brown v. Bradley, (^259) S.W. 676 (Tex. Civ. App., 1924); Morgan v. Owens, 228 Ill. 598, 8z N.E. i x3 (i9o7).

COMENTS

The party seeking relief may be able to establish unilateral palpable mistake

and yet fail on the ground that it is impossible to restore the parties to status

quo. 19 Perhaps this rule should be modified to allow rescission if the mistake was

palpable. At any rate, where exact restoration of the status quo is impossible

courts should not deny rescission if money damages can approximate this result.

This would have led to a more satisfactory disposition of Lang v. Horne,20 where

rescission was denied on the alternative ground that plaintiff had cut timber

from the land he wished to reconvey. In suits for rescission for fraud courts

have left more leeway in defining restoration to the status quo. 21 Relief would

be granted more often in cases of unilateral mistake if the same liberality of

definition were observed there. Although the courts tend to deny rescission

where the agreement is executed,2 mere execution does not entail that irrepa-

rable change of position which alone ought to bar such relief. Thus the party

seeking relief in Brown v. Lamphear3 meant to reserve the right to a spring in

a conveyance of land but by mistake failed to do so. The party resisting relief

did not know that the spring existed. The resisting party was given the option

of accepting reformation or rescission. And in Goodrich v. Lathrop^2 4 a drop in

the value of the land during the time the party asking rescission was in posses-

sion was no bar to relief in the absence of evidence of physical deterioration.

The court remarked that it had the power to make just restitution if rescission

was granted.

Courts commonly require for relief in unilateral mistake cases that the party

seeking relief must not have been negligently mistaken.2S^ However, negligence

19 America Land Co. v. City of Keene, 41 F. 2d 484 (C.A. 1st, 1930); Howell v. Baker,

xo6 N.J. (^) Eq. 434, 151 At. 117 (1930); Beattie v. Friddle, 229 Ky. 361, 17 S.W. 2d 246 (1929). 20 ,56 Fla. 605, 23 So. 2d 848 (i945). 21 Buffalo Builders Supply Co. v. Reeb, 247 N.Y. 170, 176, 159 N.E. (^) 899, 90o (1928): "The plaintiff must restore to the defendant at least the value of the tangible chattels no longer in its possession. Restoration of the chattels themselves would give the defendant no greater benefit. Perhaps the plaintiff made some sales it would not (^) have made if defendant had not sold his business. These circumstances do not bar the (^) equitable remedy of rescission for wrong done. (^) The terms upon which rescission may be granted where complete restoration of the (^) parties to their former position is impossible rests in the sound discretion of the courts." In Heckscher v. Edenborn, (^) 203 N.Y. 210, 96 N.E. 441 (igii), the defendant parted with property and in (^) a suit for rescission, stock representing the property was tendered him. The court said the tender was sufficient. Where (^) a wrongdoer has so complicated matters as between him and the party seeking relief (^) that complete restoration is impossible, it will not be de- manded by the court. Mosteller v. Braham, 9o Cal. App. 715, 266 Pac. 367 (1928). (^) In a suit for rescission (^) of the sale of a lunchroom plaintiff was given back his money less the worth of the personal property not returned to defendant. 22 5 Williston, Contracts § 158o (rev. ed. (^) 1937). (^23 35) Vt. (^252) (1862). 24 94 Cal. 56, 29 Pac. 329 (1892). (^) Decided under California Civil Code (Deering, (^) 1949) § 3407 which enacts substantially the common law as to restoration of the status (^) quo.

2S Jefferson County Bank v. Hansen Lumber Co., 246 Ky. 384, 55 S.W. 2d 54 (1932); Lasier

v. Mayer, (^) 35 Ill. 362, 146 N.E. 465 (1925); Grant Marble Co. v. Abbot, 142 Wis. 279, 124 N.W. 264 (19io); Steinmeyer v. Schroeppel, 226 Ill. 9, 8o N.E. 564 (1907); (^) Bonney v. Stough- ton, 122 Ill. 536, (^13) N.E. 833 (1887); Durkee v. Durkee, 59 Vt. 70, 8 Aft. 49o (887).

COMMENTS 731

the original owner from something like^ the^ 'loss'^ of^ things against^ a^ 'finder'^ who

'wrongfully,' without justification, insists on the uncompensated retention of

'accidentally acquired' (not 'deliberately given') benefits to the original owner's

hurt."3o

Whether or not relief should be given for unilateral mistake should be deter-

mined, even as in mutual mistake, by whether or not there has been an assump-

tion of risk as to the mistake, negligent or^ not.^ This^ is^ accomplished^ by^ the^ use

of the fundamental assumption test.^ It^ is^ important^ in doubtful^ cases^ that^ the

parties be presumed to have taken the risk of the external world not conform-

ing to the mental images upon the basis of which they contracted. This is so

not only because of the presumption in favor of the validity of contracts, but

because our society rewards^ risk-taking^ and^ speculation.3'

If relief is given for unilateral mistake, the party resisting it should be given

the option of accepting the contract, as reformed to express the mistaken party's

true intent, or of rescission. With rescission the party resisting relief should re-

ceive damages^ to^ cover^ any detriment^ due^ to^ his^ reliance^ in^ good^ faith^ upon^ the

existence of a binding obligation.32 Damages may be awarded according to the

court's estimate of the injury caused and the degree of compensable reliance.

Viscount Cave^ attempted^ this^ in^ Jones^ v.^ Waring.^33 There^ Bodenham,^ a^ third

party, had defrauded plaintiffs of £5,000 by having them make payment to

defendants whom he represented as financing an automobile firm of which

plaintiffs were persuaded by Bodenham to become agents. Bodenham owed

defendants £5,000 for goods received under a hire-purchase agreement. When

defendants received and cashed plaintiffs' check they^ returned to^ Bodenham

the goods they had^ repossessed^ and^ delivered^ more^ goods.^ These^ goods^ under-

went deterioration while in use by Bodenham. Viscount Cave, seeking to

apportion the^ damages,^ voted^ with^ a^ minority^ of^ the^ court for^ the^ defendants,

subject to their undertaking to return all of the money not required to cover

their detriment. But the majority merely returned the money to plaintiffs,

letting defendants suffer the full damages caused by the unilateral mistakes of

both.

The power of the courts to apportion damages for reliance and their reluc-

tance to do so is illustrated by Fibrosa Spolka Akcyjna v. FairbairnLawson

Combe Barbour,^34 a frustrated contract case. Historically different, frustration

30 Sharp, Notes on Contract Problems and Comparative Law, 3 Univ. Chi. L. Rev. 277, 284 (1935). See Lord Sumner in Jones v. Waring, [1926] App. Cas. 67 o^ , 696, for the analysis of the "windfall" concept applied by Professor Sharp. 3xIn Aristotelian terms, the willingness to take risks is one of the factors rewarded by the rates of distribution of wealth in our society; it is part of our notion of distributive justice. Courts are concerned with corrective justice, with the enforcement of rates of distribution set up by society and not with their determination. Aristotle, Nichomachean^ Ethics,^ Bk.^ v,^ c.^ 2-4.

32 See Paget v. Marshall, 28 Ch. D. 255, 284-85 (1884).

33 [19261 App. Cas. 670.

11 [1943] App. Cas. 32.

THE UNIVERSITY OF CHICAGO LAW REVIEW

and mistake are similar analytically.35 A contract for the sale and delivery of special textile machinery to Poland was frustrated by the outbreak of war. The Polish company, having paid £i,ooo in advance and received nothing in return, asked for the refund of its money. The previous rule as enunciated in Chandler v. Webster,3^6 that when a contract is frustrated the loss lies where it falls, was overruled and it was held that the English company must return the advance payment. This meant that the English company must bear any loss the frustration of the transaction might entail. Viscount Simon recognized the hardship likely to result from either rule, but stated: "It must be for the legis- lature to decide whether provision should be made for an equitable appor- tionment of prepaid (^) moneys which have to be returned by the recipient in view of the frustration of the contract in respect of which they were paid."37 In answer to this call for aid the Law Reform [Frustrated Contracts] Act of I was passed. Under it sums paid are to be recovered, but allowances are to be made for expenses incurred in reliance on the contract by the party to whom the sums were paid and for benefits conferred prior to the time of discharge. The courts are given wide discretion to consider the particular circumstances of each case in apportioning the loss. But, as Professor Corbin states: "It did not require a Frustration of Contracts Act to confer this power upon the courts. In Chandler v. Webster, the court made an allocation of risks and a sub-division of losses. It has not been questioned that this was within its power. The alloca- tion was 'overruled' because it was not regarded as the most desirable one, and a different allocation was decreed."39 This problem in the Fibrosa case is like that in faultless mutual mistake. The solution suggested here for a case of neg- ligent unilateral mistake is restitution minus reliance damages. Where the mis- take is faultless (nonnegligent) the loss caused by it should be split since neither party is to blame. 40 This resembles faultless mutual mistake. Perhaps in cases of unilateral palpable mistake there should be no reliance damages since the nonmistaken party's conduct borders upon the fraudulent. In view of the timidity of courts in splitting damages to compensate for reli- ance, whether in the field of frustration or mistake, and in extending relief to

35 The frustration of a contract may be viewed as a mistake by the parties as to future cir- cumstances bearing upon their transaction. At times the fields overlap. 36 [J904] i K.B. 493. 31 [1943] App. Cas. 32, (^) at 49. 38 6 & 7 Geo. VI, c. 40 (1943). 39 Frustration of Contract in the United States, 29 J. Comp. Leg. & Int.L. 8, n. 19 (i947). 40 Actually the so-called nonmistaken party is mistaken as to the other's mistake and so neither mistake can be said to have caused the (^) loss alone. The basic notion of law is fault. Where both parties (^) are faultless, one should not be made to bear the entire loss. In a subsequent issue of the Review the problem of damage splitting will be discussed more fully.