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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.
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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,
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).
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).
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
2d x83 (I935). Rest., Contracts § 503, Comment (^) a, Illustration i (1932). '4 [187i] L.R. (^6) Q.B. 597-
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).
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.
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).
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.
11 [1943] App. Cas. 32.
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.