This is yet another doctrine that deals with unexpected losses. It is a doctrine that answers the question, "When something goes wrong, who gets stuck with the loss?" The doctrine is concerned with mistakes.
Griffith v. Bymer
This case illustrates the doctrine. What happened in the case? It involved a contract to rent rooms to watch King Edward's coronation parade. The parade was canceled, and the renter wanted out of the contract. Just like the frustration case of Krell v. Henry. In Krell the court lets the renter out because the cancellation of the parade frustrated the purpose of the contract. In Griffith the court reaches the same result--it lets the renter out of the contract--but this time it says because there was a "missupposition of the state of the facts which went to the whole root of the matter." To understand this, note the that the decision to canceled the parade was made at 10:00 AM on 6/24/02; the contract was signed at 11:00 AM that same day. When they signed the contract both parties still thought--mistakenly--that the parade would take place. This is the "missupposition".
Mistake vs. frustration
What is the difference between Krell and Griffith? It really comes down to a question of timing. When the contract is signed in Krell, the parade has not yet been canceled. So when the parties think that the parade is planned, they are not mistaken. So the doctrine of mistake that we are now looking at does not apply. In Krell the cancellation of the parade is a subsequent unexpected event that makes the contract lose its point. In Griffith there is no such subsequent event; the parade was canceled before the contract was signed. The contract is made based on a mistaken assumption that the parade is still planned, an assumption the parties make because they are ignorant of an event that has already happened.
Review of impracticability and frustration
Impracticability: this doctrine applies when the difficulty of performance becomes unexpectedly great.
Frustration: This doctrine applies when the performance has become pointless--when the benefits of performing have become unexpectedly low.
Both doctrines apply when the unexpected event occurs after the signing of the contract. If the "unexpected event" occurs prior to the signing of the contract, then the relevant doctrine is the doctrine of mistake.
The remedial consequences of the three doctrines are the same: recission--the contract is void and the parties have to rely on off the contract remedies. Sometimes--not often--courts will split losses in mistake cases on an equitable apportionment theory.
Which doctrine to use
Sometimes you have a choice between the doctrines of mistake, impracticability, and frustration. For example, suppose the parade is canceled at 11:01--just after the contract is signed. Is that mistake or frustration? Looks like frustration--an unexpected event occurring after the contract. But the other side argues that the unexpected event is really the King's having appendicitis--which he had before the contract was signed. So it is really a mistake case.
Fact: many cases can be both. This occurs when the ultimate disaster occurs after the contract has been signed but the causes of the disaster were already in existence prior to the signing of the contract. In any case, the outcome of the case will not depend on which doctrine one chooses.
Similarity in black letter rules
Recall the three part test for impracticability: There must be (1) an unexpected event (2) making performance impracticable where (3) the risk is not allocated otherwise.
If we look at the 2d R on mistake, we find a very similar test.
First: There has to be a mistake of fact.
Note: we don't talk about unexpected contingencies here; that is the language we use for events that happen subsequent to the contract. Here there is an event that has already occurred, an event about which the parties hold a mistaken belief. Still, the event is "unexpected" in that the parties are mistaken about it.
Second: The mistake has to involve a "basic assumption" on which the contact was made.
In Griffith the court describes the mistake as going to the whole root of the contract. This is like saying, in impracticability that the unexpected contingency must make the performance impracticable--or, in frustration doctrine, that the unexpected contingency makes performance pointless.
Third: The party claiming excuse on the basis of a mistake must not bear the risk of the mistake.
When does a party bear the risk of a mistake? When the contract explicitly assigns that risk; or when a party acts with limited knowledge [I'll come back to this]; or, if the court thinks the party ought to bear the risk. Clearly this is a lot like the third requirement in impracticability doctrine.
Some differences between the doctrines
There are some differences between the doctrines that are worth noting.
A technical difference: Under impracticability doctrine, we say that the contract is rescinded. Under mistake doctrine, we say that the contract was never formed. Why? The idea behind impracticability doctrine is that the contract was valid when made and would have stayed valid had the unexpected event not occurred. So the doctrine undoes an existing contract. The idea behind mistake doctrine is that the contract was never valid at all; it was void from the beginning. So there never was a legally enforceable promise.
The role of risk allocation: Some courts make mistake doctrine sound like a two-part test. They do not include the 2d R's requirement that the risk not be otherwise assigned. But this probably is not as big a difference as it first appears. To see why, think about the plumbing hypothetical. I start to work on your pipes, then I realize that I can't fix them. We treated this as an impracticability case, but we can also treat it as a mistake case--the problem in the plumbing was unfixable before the contract was made, and we made the contract on the assumption that I could fix the problem. So the first two requirements of mistake doctrine are fulfilled. Can I get out of the contract? Or, do I have to put your bathroom back together? No court would let me out of the contract. How
do courts that do not accept the third requirement do this?
Interpreting the meaning of "basic assumption"
One way is to say that the assumption that I could fix the pipes is not a basic assumption. Of course, by the literal meaning of "basic assumption" it is basic. But what this shows is that the courts do not always go by the literal meaning.
What are these courts really doing? I suggest that they are interpreting the meaning of "basic assumption" so as to assign the risk in what seems the fair way.
In McRae v. Commonwealth Disposals Commission (not in book, not assigned) an Australian Commission sold rights to salvage a stranded oil tanker. Small problem: the tanker did not exist. So when the salvage company sued the Commission says, "Well, guess there was a mistake here." This was a mistake about a basic assumption of the contract. Did the Commission get out of the contract? No. Why? The mistake was their fault. They sold the rights based on a rumor that they did not investigate.
This also really turns out to be a disguised assignment of the risk issue. Ask: Who was at fault--the Commission or the salvage company? The salvage company did not investigate either. So the question is who was in a better position to investigate? Probably the Commission, so they bear the risk.
We can see why the 2d R says that courts are really trying to decide who bears the risk.
The brings us to the "acts with limited knowledge" provision of the 2d R. The idea is that party assumes the risk if the party knows that he or she is acting on limited knowledge, on information that might be crucially incomplete or inaccurate. The requirement is usually put this way: you can't get out on mistake if you were consciously ignorant.
The McRae case illustrates the point. We could argue that the Commission acted on "limited knowledge" was "consciously ignorant"; they must have known that there was some chance that the rumor was false, but they chose to act anyway. They took a chance, knowing that they were doing so.
The requirement of mutuality
This is another way of making the same point. This time we make it this way: the mistake has to be mutual; mistake only voids the contract if both parties are mistaken.
How does this work in McRae? The idea here is that both parties were not mistaken. The salvager mistakenly believed that the ship existed, but the Commission knew that its existence was only a rumor, and that the ship might not exist. The Commission was accurately informed here, not mistaken. So the risk ought to fall on them.
Take this with a grain of salt: as we will see, courts do not insist that both parties be mistaken.
Breadth of conscious ignorance
If we looked at the overall pattern of how courts apply these criteria--mistake involving a basic assumption--we would see that they apply the criteria in a way that fairly assigns the risk of loss from the mistake.
Think about the coronation cases. The renter certainly knew--or should have known--that there was some chance that the parade would be canceled; after all, King Edward had been sick for a while. So the renter is like the Commission; he did not investigate the possibility that the parade would be canceled; he just rented the room anyway. So if we thought the renter should bear the loss arising from the mistake, we could say he acted in conscious ignorance. So why not say that? Probably because the renter was not in any better position than the landlord to investigate the chance that the parade would be canceled.
So the judgment about whether there is conscious ignorance is in many cases a judgment about who ought to bear the risk.
Now let's see how the doctrine gets applied in the cases.
Sherwood v. Walker and Wood v. Boyton
These cases are usually used to show how fuzzy the notion of a "basic assumption" is. In Sherwood the court says that a barren cow is fundamentally different kind of animal than a fertile cow, so the mistake about fertility involved a basic assumption on which the contract was made. In Wood the courts says that a diamond is not fundamentally different a piece of topaz, so the mistake in thinking that the diamond was topaz does not involve a basic assumption on which the contract was made.
The difference between a diamond and a piece of topaz looks pretty basic--surely as basic as the difference between a barren cow and a fertile cow. So what is going on here? I suggest: the issue turns on who should bear the risk here.
Allocating the risk of gain
In these two cases, it is a "risk" of gain we are talking about. What we want to know is who gets to keep the thing that has turned out to be more valuable than thought.
How should we allocate the gain? One way is to ask who is in the better position to recognize that there might be a possible gain from the transaction. The dissent makes this argument in Sherwood v. Walker. The dissent argues that the plaintiff did not buy the cow for beef but because the plaintiff thought the cow might be able to breed. He was speculating on the chance that the cow was fertile. He turned out to be right, and perhaps saved a valuable cow from being slaughtered for beef. So why shouldn't he get to keep the cow? This could explain Wood v. Boyton too--who is in a better position to see if the stone is valuable? The seller or the buyer, a jeweler? The jeweler.
Elsinore School Dist. v. Kastorff
What was the mistake here? The contractor added up his figures wrong; he submitted a bid just under $90,000 when he meant to bid just under $99,500. The contractor discovered his mistake the next morning and tried to cancel, but the school dist. insisted that it was too late, that the contract has already been made. The court held that the contractor could rescind the contract.
Mistaken bid cases generally
Cases like this are common, cases in which someone submits a bid that turns out to be mistaken. And there are lots of cases that let the bidder out because of the mistake.
But why? We said earlier that you can't get out for a unilateral mistake; they mistake has to be mutual--both parties have to have the relevant mistaken belief. But a mistake in the bid looks like a unilateral mistake. What is the mistaken belief of the person that accepts the bid? That person believes that the bidder made a bid of a certain amount, and this belief is true. It is the bidder that mistakenly believes that the amount of the bid accurately reflects the costs of the project.
But the courts let the bidder out anyway. And this is hard to explain in terms of mistake doctrine. I suggest that we break the issue down into two questions:
(1) Who should bear responsibility for the mistake?
(2) How much of the loss should be allocated to the person that bears that responsibility?
Ability to prevent the mistake
Let's start with the first question. Who is responsible for the mistake in Elsinore School Dist.? The contractor. How could the school district know about the mistake? They asked the contractor if his figures were accurate, and he said they were. Of course, you could say that the school district could check the figures too, but they are not as familiar with them as the contractor, and anyway the contractor did not have them with him.
Change facts. Suppose contractor was not negligent at all; suppose for example that the error was a computer malfunction, a malfunction there was no reason to suspect. So the contractor is not at fault, not negligent. Note: notions of fault here do not always coincide with negligence; might say it was the contractor's fault even if there was no way he could prevent the problem.
But still, who is in a better position to prevent the mistake? It may be hard for the contractor to prevent the mistake, but it is certainly harder still for the school district. The contractor is certainly the best cost-avoider: he chose the computer; he has the knowledge relevant to checking for the mistake; he is the one that can check for the mistake most easily. So even without negligence seems like the loss is more the contractor's responsibility.
Last clear chance and incentives
But it will not always be the contractor's responsibility. Suppose another contractor was careless in submitting his bid; the bid is for $10,000 when all the other bids are between $90,000 - $100,000. The school district does not say anything, it just accepts the bid. Who can best prevent the mistake here? The school district. They must have realized that something was wrong; they should have told the contractor to check his or her figures.
This is like the last clear chance doctrine in torts: Jones is negligent, and ordinarily the loss would fall on Jones, but Smith realized Jones' negligence and could have prevented the loss but did not. Then the loss falls on Smith because Smith had the last clear chance to prevent it. (Jones leave a match burning next gasoline; Smith walks by, notices the match and the danger, but does nothing.)
This is pretty much what courts have done. We can see this in Rushlight Automatic Sprinkler v. Portland (not assigned), where a buyer is not allowed to snap up a deal that is too good to be true. The courts want to provide an incentive to reveal the mistake before any losses occur.
It was hard to reconcile this result with the black letter rules that require that the mistake be mutual. In Rushlight for example there is no mutual mistake; when the buyers open the incredibly low bid, they know what is going on, that the bid is much lower than intended. So there is no mistake by them; hence no mutual mistake. So can the buyer then hold the bidder to the contract? Some courts said so, but others did not go along--said you could get out in some cases for unilateral mistake.
One way to look at the mistaken bid cases is like the other mistake cases: the courts put the risk of loss on the one in the best position to avoid the loss. This will be factual question.
Amount of liability
Problem: this way of looking at the cases does not explain Elsinore School District. Who was in the best position to avoid the loss there? The contractor, as we argued earlier. Who won? The contractor. Why? The answer lies in the second question, which we have not yet discussed: How much of the loss should be allocated to the person who bears the responsibility for the risk?
To see what is going on here, it helps to change the facts of Elsinore a bit. Suppose the school district had no way of discovering the mistake, and the contractor did not notice it either. The contractor begins work, spends $10,000, and then notices the mistake. Can the contractor get out of the contract? Not likely. When the mistake has actually caused losses, and the district had no way of noticing the mistake, the loss will fall on the contractor = the person in the best position to correct the mistake. This is consistent with what we have said so far.
Mistake without reliance damages
Suppose the facts are different; closer to the actual case. The school district still has no way of realizing the mistake, but this time the contractor discovers the mistake prior to beginning work. The school district can still accept the next lowest bid--say that was $97,000. This is not as good as the $90,000 contract, but they are no worse off than if the mistake had not been made. Then the $97,000 bid would have been the lowest.
So what should the contractor pay in damages here? Well, what damage did the mistake cause? Zero. So he shouldn't have to pay anything.
Rule in cases with no reliance
And this is often what the courts have done. They let the contractor off if the mistake did not cause any damage--even if the mistake is the contractor's fault, even if the contractor is in the best position to prevent the mistake.
The rule is sometimes stated like this: you can get recision for a mistake of fact if enforcement would be unfair, and the other party can be placed in the status quo prior to the mistake--i. e., the other party has not yet relied.
Negligent mistakes causing no damage
Would this rule apply if the contractor had been negligent? Answer: probably, if the mistake has caused no damage.
We see this in White v. Berendan Mesa Water Dist.. This sounds like a negligent mistake; the contractor simply did not read the specifications. Courts often say: can't get out on mistake for errors of judgment. But: the mistake was discovered before the water district relied in anyway; the next lowest bid was still available. So the district was no worse off than if the bid had never been made. And the court let the bidder out of the contract.
We see this as well in United States v. Metro Novelty Mfg. Co. Here the buyer knew of the mistake and did not ask the bidder to check his bid. Also, the bidder discovered the mistake before it caused any damage. The gov't could still accept the next lowest bid. May be a key reason why the court let the bidder off.
Last variation: small reliance damages
What if, in Elsinore, these were the figures? The district has to put out a new round of bids. This costs them $500 in administrative costs, and the new lowest bid is $98,000, not $97,000. Then the mistake has caused $1500 in damage. Should the bidder be liable for this much? Many case reach such a result. The situation here is like the one in the John Bowen cases; we don't award expectation damages, but we do award damages incurred in reliance.
Recovering reliance losses
Under what legal theory are reliance losses recoverable? This is not easy to see. The traditional rule: If the contract is enforceable, then we will award expectation damages-more than we want to award. But mistake takes us off the contract. So the parties will have to sue in restitution, but here the bidder has conferred no benefit on the school district, so the bidder will get nothing back. So, under the traditional approach, it looks like one cannot get reliance damages here.
This traditional doctrine may have influenced the result in Elsinore. In Elsinore the bid is not so low that the school district should have been on notice that it was a mistake; at least this is how the lower court treats the matter. So the contractor is responsible for the mistake. But how much should he pay? The district did have to have a new round of bids; that costs something, and the new bids were a little higher. So some losses were caused by the mistake. But losses were relatively small. Also, note that the district asked only for the full expectation award. Lowest new bid was $102,900, so the school district needed $12,900 to put them in as good a position as they would have been had the work been done for the original bid price. Perhaps the court thought that the contractor should not be responsible for that much. So they let him out of the contract.
Ways to give reliance damages
There are ways to give reliance damages.
One can find some sort of benefit conferred and allow the suit in restitution--that would be a big stretch of the notion of a benefit.
One can imply a promise to pay for damages caused by the mistake. This isn't done much either.
One can just assert that one has the equitable power to divide losses fairly. This is fairly common in this area, but not universal.
Summary of unilateral mistake
We have looked at some cases where the mistake is unilateral. The upshot is that you can get out of the contract for unilateral mistake, but not always. Sometimes the courts will not let you out. The 2d R summarizes the situation here by saying that you can get out for unilateral mistake "as justice requires".
Limits on getting out on unilateral mistake
There has to be some limit on getting out of the contract for unilateral mistake. If we contract for me to sell you my house, and then I change my mind and want out, I can't get out just because now I think it was a mistake on my part to sell. Even if I offer to pay all your reliance expenses, I can't get out. If I could do this, a contract would hardly be binding. So what is the limit? I can get out "as justice requires."
Jones bought a safe at an estate auction. Before taking bids, the auctioneer noted that the safe contained an inner door that was locked and would have to be opened by a profession locksmith. Jones paid $50 for the safe; he later found over $32,000 in the compartment behind the inner door. Can the estate rescind the contract on grounds of mistake? (City of Everett v. Estate of Sumstad 631 P.2d 266 (1981).)
John mistakenly believes that he is the father of unmarried Mary's child; Mary also believes that John is the father. John promises to pay for the child's support. When blood tests reveal that John cannot possibly be the father, John quits paying. Mary sues. Does the doctrine of mistake provide John with a successful defense?
[What kind of preliminary investigation is possible? Is there speculation about gain on the part of the "buyer"?]
Mistakes of "transcription"
We have three more categories of mistakes to consider:
(1) Cases where the agreement was written down incorrectly;
(2) cases where one party was only joking;
(3) cases like Raffles v. Wichelhaus where the parties use the same word but have different things in mind.
I will call these all errors of transcription although really that applies literally only to the first type of case.
Travelers Insurance Co. v. Bailey
This is a case where the agreement was written down incorrectly. What happened? The parties agreed on an insurance policy that would pay $500 a year to Bailey when he reached 65. But when they filled out the form, they wrote down that the payments would be $500 a month ($6000 a year). A big difference. Who is asking for a remedy? The insurance company. What are they asking for? For the contract to be reformed.
This is the first time we have seen a suit in reformation. Technically, this is an off the contract suit; the insurance company is not suing to enforce the contract but to have the contract rewritten, the way it should have been in the first place. The suit in reformation is an equitable cause of action; it doesn't charge anyone with breaching a contract. It just asks for the transcription error to be corrected.
Note: sometimes the suit in reformation will be combined with an on the contract suit--a suit to enforce the new, rewritten contract.
Responsibility for the mistake
So how do we approach reformation suits? We can ask the same sort of questions we have been asking.
Whose fault is the mistake? The insurance company filled out the policy, so it looks like it is their fault. Caution: we do have enough facts to know it the company was actually negligent.
Who was in the best position to notice and correct the mistake? The insurance company--since they are the one's filling out the form. Note this is true even if the company is not negligent.
So who should have the incentive to look for and correct such mistakes? The insurance company.
Last clear chance in the insurance case
Suppose Mr. Bailey reads the form over, notices the mistake and thinks "My lucky day!". He says nothing about the mistake. Who is in the best position to correct the mistake here? Bailey. This is the last clear chance idea.
Suppose the insurance company is in the best position to notice and correct the mistake. What do they have to pay Bailey?
Ask two questions here? First, what was the parties actual agreement? Clearly, it was for $500 a year. This is the contract both parties thought they were writing down; it is the annuity for which Bailey paid the premium. Second, was Bailey injured by the mistake? What would he have gotten if there had been no mistake? $500 a year after age 65. What does he get if we correct the mistake? $500 a year after age 65. So the mistake did not hurt Bailey--assuming, as seems to be true, that Bailey did not change his retirement plans in reliance on the mistake (and there would still be the issue of whether his reliance was reasonable).
So what should we do by way of a remedy?
(1) We could let Bailey enforce the contract. This would mean denying the reformation suit, allowing Bailey to sue on the existing contract. Why should Bailey get this much money for a mistake that caused no damage? This would be a windfall to Bailey, and it would not be enforcing the parties actual agreement.
(2) We can reform the contract so that the new contract pays $500 a year. This makes sense since the mistake did no harm, and we would be enforcing the actual agreement.
This is what the court does. It says not to worry about whether the mistake was mutual or unilateral; if there has been no prejudical change of position Bailey, the court will rewrite the agreement to make it fit the actual agreement.
What if there had been reliance losses?
Suppose Bailey had pulled out the policy thirty years after making it at age 19. He is planning for retirement. He sees that the policy is for $500 a month. He doesn't remember what they really agreed on, and he plans according to what the policy says. Suppose he retires sooner than he would have otherwise; saves less for retirement, etc.
Will the court reform the policy for the insurance company? It depends on how much reliance there was. If the amount spent in reliance is not to great the court may reform the contract.
Suppose Bailey spent only $200 more than he would otherwise have spent because of the mistake. Does this mean the insurance company had to pay Bailey $500 a month? Or just the extra $200? This would mean reforming the contract and paying an extra $200 to compensate for the money spent in reliance.
Doctrinal problems with partial compensation
There is an argument here for just paying the reliance expenses--the $200 in our example. And this is what a lot of courts would do. But the courts had a hard time reaching this result doctrinally. Why? Same problem we have seen before. Traditionally, damages were all or nothing in this area: if the court denied the suit in reformation, the contract was enforceable and the full value of the policy had to be paid; if the court allowed the suit in reformation, the contract was rewritten, and there was no way to get the reliance damages (because the restitution suit wouldn't work--no benefit conferred).
Ways of giving partial compensation
So what did the courts do? They claimed the power to equitably apportion losses. We can see this in Travelers, p. 694: the court holds that it will reform if there has been no prejudicial change of position or if "such a change of position can be equitably taken into account and adjusted for in the decree."
Chernick v. United States
This case raises similar issues. Chernick made a mistake in making up his bid, and the bid was very low. Chernick wrote .8% and .7% where he intended to write 8% and 7%. The government as a result did not try to negotiate for an even lower price from Chernick. So, in this way, the government relied on the low bid. Point for us: the court splits the losses here. It does not enforce the contract as written. It also does not reform the contact to include the 8% and 7% figures. It looks at the next lowest bid to estimate what the result of negotiations between the parties would have been if the contract had been written as intended.
The joke cases
What if the error was due to a joke, rather than a transcription error? Lucy v. Zehmer is such a case. The buyer and seller were drunk--"higher than a Georgia pine"--the buyer offers to buy the seller's farm for $50,000. The seller thinks it is a joke and writes up a contract. The seller then tries to enforce the contract.
There are three different variations to consider here.
First variation: The buyer has no idea the seller is joking. The buyer relies on the promise to sell--hires an architect, etc.
Who is the better position to avoid the misunderstanding and the loss here? The seller--by not making the joke, or making it clear that he was joking.
Did the joke cause harm? Yes, money was spent in reliance.
So the seller should at least be liable for something; at least for the reliance damages. In the actual case, the court enforces the contract. The court finds that the buyer did not know that the seller was joking and enforces the contract. The rule is actually fairly well settled: if there is no way the other party could know it was a joke, the joker can't get out of the contract. On the facts of the case, this seems an odd decision as the evidence suggests that the buyer knew that the seller was joking.
Second variation: It is obvious to everyone in the bar, including the buyer, that the seller is joking. The buyer could have prevented the loss--the money spent in reliance--by not snapping up the offer and acting on it. This is a last clear chance case. The buyer has the last clear chance to avoid the loss. This is the same point as in the mistake cases. (This is one reason that this material and the mistake material is best taught together.)
Third variation: Suppose the buyer does not know the seller is joking and the buyer accepts the offer to sell, thinking it is a serious contract. Then, before the buyer acts in reliance, the seller reveals that he was joking. What should we do in this case?
This is like the mistake cases in which the mistake causes no loss, or just a little loss (where there was just a little reliance). There we said there was no contract. Shouldn't that be what we say here? Looks like it. But is this what the courts do?
In Lucy it looks like the court lays down a hard and fast rule: if there is no way the other party could know it was a joke, the joker can't get out of the contract. If we follow this rule, we will enforce the contract even in this third variation.
Is there a relevant difference between jokes and mistakes?
There are three points.
(1) One might think that we should enforce the contract against the joker because the joker deliberately made the joke, and in this way ought to bear the risk of his joke not being understood or perceived. There is a contrast here with mistakes; no one deliberately makes a mistake--because then it is not a mistake. But I wouldn't put too much weight on this. Enforcing the contract might lead to a lot of injustice.
(2) There are proof problems in the joke cases that don't come up in the mistake cases. It is not usually too difficult to show that a mistake was made; you have the worksheets, etc. It is harder to show that the purported contract was a joke. You have the testimony of the alleged joker, the testimony of witnesses. Worry: if we allow people out of contracts because they were joking, won't everyone claim they were just joking whenever they want out? Then the court will be presented with a difficult factual issue: was the party joking?
I wouldn't put too much weight on this either. One thing courts do is resolve difficult factual questions. And if the joker wants out, the burden will be on the joker to prove that he was joking.
(3) The joke cases are all fairly old. They don't happen to often. Lucy is 37 years old. I wouldn't count on the case being decided the same way today. The trend to award less than expectation damages is relatively recent; Lucy was decided before this trend had taken hold. Nobody has articulated a good reason why the no harm/no foul policy should not apply to the joke cases as well as the mistake cases.
This is the last category of mistake cases that we will look at. We have two cases here. Another minor classic: Raffles v. Wichelhaus and its modern equivalent Frigaliment Importing.
In Raffles v. Wichelhaus the parties agree to ship cotton on the ship Peerless. But there are two ships named "Peerless"; they arrive at different times, and the time makes big difference to what the buyer of the cotton would be able to turn around and sell the cotton for.
In Frigaliment, the parties agreed to buy and sell "chicken". But there are two kinds of chicken: stewing and frying. Stewing is old and tough. That is what the sellers ship, and the buyers refuse to accept it.
Note: the doctrine involved in these cases is very different than the doctrine involved in the mistake cases. The court here talks about a "meeting of the minds". However, before we discuss the meeting of the minds doctrine, let's look at the cases using the framework we developed for mistake.
"Last clear chance" in misunderstanding cases
Who should bear responsibility for the misunderstanding?
Suppose--contrary to fact--that one of the parties in Wichelhaus knew there were two ships named the "Peerless"; or suppose in Frigaliment, the buyer knew the seller meant a different kind of chicken. But the party in the know does nothing to clear up the confusion. Then the party in the know should bear the responsibility for the mistake. Why? Because that party had the last clear chance to correct the confusion.
This is what the courts do. You see this in the 2d R §201(2). You see Judge Friendly making this argument in Frigaliment. He says that the buyer should have known that there was a misunderstanding because the price being charged was much too low to be a price for fryers. This is like arguing, in the bid cases, that the bid is so low that the buyer should know that there has been a mistake.
Best ambiguity avoider?
The hard case is the one in which neither party is aware of the potential confusion. This is the actual situation in Raffles and Frigaliment. Who should bear the responsibility then? Who is the best ambiguity avoider?
Neither side. So there is no reason to put the responsibility on one side or the other. This is a good argument for recission. But before we make up our minds about this, we need to turn to another issue.
Extent of the loss in the misunderstanding cases
Now let's switch to a different issue. Suppose we decide that one side or the other is responsible for the confusion. We still have the question of how much that side has to pay, how much it should liable for?
Let's look at Oswald v. Allen. This is the case in which Oswald pays $50,000 for a Swiss coin collection. He thinks he is buying what are in fact two distinct Swiss coin collections; Allen thinks she is selling only one of the collections. The contract was for sale of "Swiss coins"--the phrase was ambiguous in the context as it did not pick out which of the two collections was the one.
The court let the seller out of the agreement. Was this a good idea? It looks like.
The seller would be hurt by letting the deal go through; she would sell a collection she did not intend to sell for the price paid. The buyer is not really hurt by recission; he just doesn't get a deal that was probably too good to be true anyway. If the seller had discovered the ambiguity before the deal was final, she would have stopped at that point. Then the parties would have negotiated about what coins Oswald wanted to buy and at what price. The court basically stops the deal after the contract was signed, and purs the parties in a position to renegotiate.
The situation would be different if Oswald had relied to his detriment on the deal. There is reliance in Raffles (the cotton was delivered in reliance on the contract) and Frigaliment (chicken was delivered). Should we apportion losses here?
Let's be clear about what the decisions do. In Raffles the contract is rescinded, so the losses stay where they fall; in Frigaliment it is enforced, so the breaching buyer has to pay the expectation damages. But would it be better to award reliance damages in both cases? In Raffles the shipper spends money shipping in reliance on the contract. The buyer loses money by the delay. So here maybe it is fairest to leave losses where they fall.
In Frigaliment, Judge Friendly later notes that perhaps he should have decided the case by rescinding the contract and awarding reliance damages. This makes sense if we can figure out what the reliance expenses are and if awarding them compensates for the actual damage caused.
"Meeting of the minds", contact vs. tort
What does all this have to do with the doctrine about "meeting of the minds"? Not much. But then "meeting of the minds" doctrine is overrated as a contract doctrine.
"Meeting of the minds" is sometimes described as the fundamental principle of all contract doctrine--because you can't have an agreement without a meeting of the minds. But you can analyze the "meeting of the minds" cases--like Raffles--without ever mentioning that principle. You just have to ask the questions we have been asking: who is responsible for the confusion? And, how much should the responsible person have to pay?
But this sounds like were talking about avoiding accidents--the damage caused by misunderstandings, the negligent use of language. And this sounds like torts. So what are we doing? Enforcing the contracts people agreed to? Or, compensating, on a tort theory, for the damage caused by negligence?
With these remarks in mind, let's look at the meeting of the minds doctrine.
Objective meeting of the minds
The traditional doctrine is that to form a contract, we do not require an actual "subjective" meeting of the minds. An example of what we don't require: you and I enter a contract; I breach; you sue for expectation damages. I argue that I never thought I would be liable for that much. When I made the contract, I really intended, and sincerely thought I would be, liable only for 10 cents. This will not be a successful defense; I should have learned the rules before contracting. The fact that I actually intended to be liable for only 10 cents is irrelevant.
What parties agree to is what a reasonable outsider would think they agreed to given what they said and did. This is called the objective meeting of the minds; it is objective in the sense that it involves a "reasonable outsider" test. What I actually intend is thought of, by contrast, as "subjective". So it is the objective appearance of consent that matters, not the actual subjective existence of consent.
This theory does fit some of the cases--the joke cases, for example. If the joke is so obvious that everyone knows it is a joke, then there is no contract. Why? On the meeting of the minds theory, a reasonable outsider would not interpret the words and actions as the making of an agreement. If the buyer does not know the seller is joking, then there is a contract. Why? Because the reasonable outsider would interpret the seller as making an agreement.
Objective meeting of the minds is still the accepted theory today.
Meeting of the minds in Raffles v. Wichelhaus
But there are problems. What about Raffles v. Wichelhaus? Would a reasonable outsider say that the parties had reached an agreement here? It looks like it. Given what the said and did, it is reasonable to think that they agreed that the cotton should be shipped on the Peerless. Of course, there is a problem about exactly what they agreed to, but it looks like there is an agreement. So the meeting of the minds doctrine should hold that there is a contract here--even if an ambiguous one.
But the court finds that there is no enforceable contract here. This sounds like the courts are ignoring the meeting of the minds doctrine in these cases. And I do think these cases are better analyzed in terms of the mistake analysis we have developed.
A caution: There are not many cases like Raffles; Oswald v. Allen is one of the few other cases. So we don't have a big exception here.
You should be aware that the meeting of the minds doctrine is still the standard theory.