Mistake: when both sides, or one side, got the facts wrong

Wayne County, Michigan, May eighteen eighty six. A banker from Plymouth wants to buy a polled Angus cow from Hiram Walker and Sons, importers and breeders, who tell him that the few head left on their Greenfield farm are probably barren, and would not breed. He picks one, Rose Second of Aberlone, lot fifty six of the catalogue. The price, agreed by telephone, is five and a half cents a pound, live weight, less fifty pounds shrinkage. About eighty dollars.
The Walkers confirm the sale in writing and send an order to their farm manager. Deliver the cow, send halter with cow, and have her weighed. Before the banker collects her, the manager reports that in his judgment the cow is with calf. The Walkers refuse to deliver. The banker tenders eighty dollars, is refused, and sues in replevin for the cow. She calves in October. A breeding cow of her blood is worth seven hundred and fifty to a thousand dollars.
So here is the question. Both parties believed the cow was barren. Both were wrong. The contract was complete, in writing, and the price was fair for what they thought they were selling. Can the seller undo it because the thing turned out to be worth ten times more? Think about it before I go on, because there is a dissent in this case that you may find more convincing than the majority, and generations of students have.
And now the question I keep asking. What exactly did these people promise each other? A cow, by the pound, at beef prices. Module Eleven was about consent obtained by pressure or deceit. Today's module is about consent given on a false picture of the world that nobody painted. Mistake, and in the next two lectures, events that change the world after the promise is made.
Here is the first line for the board. A mistake is a belief that is not in accord with the facts, and it must relate to a fact in existence when the contract is made, not a prediction about the future. Where both parties are mistaken about a basic assumption on which the contract was made, and the mistake has a material effect on the agreed exchange, the contract is voidable by the adversely affected party.
Second line, the limit that decides most cases. Rescission is not available to relieve a party who bears the risk of the mistake. He bears it if the contract allocates it to him, if he knew at the time that his knowledge was limited and treated it as sufficient anyway, or if the court thinks it reasonable in the circumstances to put it on him. Conscious ignorance is not mistake. It is a gamble.
Third line. A mistake by one party alone does not ordinarily excuse him. But a unilateral mistake may be relieved where the other party knew or had reason to know of it, or where enforcement would be unconscionable, provided the mistake was not a neglect of legal duty, the mistaken party gives prompt notice, and the other party can be restored to where he was. The classic case is the arithmetic error in a bid.
Now the case. Sherwood against Walker, Supreme Court of Michigan, eighteen eighty seven, Justice Morse. First the rule.
A party who has given an apparent consent to a contract of sale may refuse to execute it, or he may avoid it after it has been completed, if the assent was founded, or the contract made, upon the mistake of a material fact, such as the subject matter of the sale, the price, or some collateral fact materially inducing the agreement, and this can be done when the mistake is mutual.
Then the line the court tried to draw. If there is a difference or misapprehension as to the substance of the thing bargained for, if the thing actually delivered or received is different in substance from the thing bargained for and intended to be sold, then there is no contract.
But if it be only a difference in some quality or accident, even though the mistake may have been the actuating motive to the purchaser or seller, or both of them, yet the contract remains binding.
Substance or quality. A sound horse that turns out lame is a difference in quality, the court said, and the buyer must stand by his bargain. But a barren cow that turns out to breed? The mistake was not of the mere quality of the animal, but went to the very nature of the thing. A barren cow is substantially a different creature than a breeding one.
There is as much difference between them for all purposes of use as there is between an ox and a cow that is capable of breeding and giving milk.
So the Walkers could rescind. She was not a barren cow, and, if this fact had been known, there would have been no contract. The mistake affected the substance of the whole consideration, and it must be considered that there was no contract to sell or sale of the cow as she actually was. The thing sold and bought had in fact no existence.
New trial, with the jury to be told that if both parties understood her to be barren, the sellers had a right to rescind.
Now the dissent, Justice Sherwood, no relation to the banker, and read it twice. There was no warranty in the case of the quality of the animal. Both sides knew the fact could not be known. The defendants say to the plaintiff that in all probability they were sterile and would not breed. The plaintiff thought she could be made to breed. As to the quality of the animal, subsequently developed, both parties were equally ignorant, and as to this each party took his chances.
If this were not the law, there would be no safety in purchasing this kind of stock.
He had an illustration.
If the owner of a Hambletonian horse had speeded him, and was only able to make him go a mile in three minutes, and should sell him to another, believing that was his greatest speed, for three hundred dollars, and a few days thereafter the horse was driven a mile in two minutes sixteen seconds, and was found to be worth twenty thousand dollars, I hardly think it would be held that the seller in such case could rescind the contract.
The dissent lost, but it named the missing piece. Who took the chance? Ninety five years later the same court answered. Lenawee County, Michigan, nineteen seventy seven. A couple buys a six hundred square foot lot with a three unit apartment building on it for twenty five thousand five hundred dollars, on a land contract that says, purchaser has examined this property and agrees to accept same in its present condition. Days later raw sewage seeps out of the ground.
A previous owner had installed an illegal septic tank, the lot is too small to fix it, and the county condemns the building. It cannot be lived in. It is worth nothing.
The Supreme Court of Michigan, in Lenawee County Board of Health against Messerly, nineteen eighty two, Justice Ryan, found a mutual mistake. The vendors and the vendees each believed that the property transferred could be utilized as income-generating rental property. Was that substance or quality? The court refused to play that game. It is disingenuous to label such a mistake collateral. The thing sold and bought, income-generating rental property, had in fact no existence, it said, quoting the cow case against itself.
Then it limited Sherwood to its facts and adopted the Restatement. We think the better-reasoned approach is a case-by-case analysis whereby rescission is indicated when the mistaken belief relates to a basic assumption of the parties upon which the contract is made, and which materially affects the agreed performances of the parties. Rescission is not available, however, to relieve a party who has assumed the risk of loss in connection with the mistake.
And the buyers had assumed it. There was indeed some agreed allocation of the risk to the vendees by the incorporation of an as is clause into the contract. If the as is clause is to have any meaning at all, it must be interpreted to refer to those defects which were unknown at the time that the contract was executed. Thus, the parties themselves assigned the risk of loss to Mr. and Mrs. Pickles. No rescission. The court added a footnote worth remembering.
Had such an inquiry been undertaken in Sherwood, we believe that the result might have been different.
Now Wisconsin, eighteen eighty three, for the gamble. A woman has a small stone, the size of a canary bird's egg, straw coloured, that she found in the village of Eagle and has been told is a topaz. She shows it to a jeweller, who says it might be, and offers a dollar to keep it as a specimen. Months later, needing money, she takes the dollar. The stone is an uncut diamond worth about seven hundred dollars.
She tenders a dollar and ten cents and sues for it back.
Wood against Boynton, Supreme Court of Wisconsin, eighteen eighty five. Both were entirely ignorant at the time of the character of the stone and of its intrinsic value. The jeweller had never seen an uncut diamond. There is no pretense of any mistake as to the identity of the thing sold. She sold the very stone she showed him.
If she chose to sell it without further investigation as to its intrinsic value to a person who was guilty of no fraud or unfairness which induced her to sell it for a small sum, she cannot repudiate the sale because it is afterwards ascertained that she made a bad bargain.
Put the cow, the sewage and the diamond together. The cow was rescinded because the mistake went to the nature of the thing. The apartment was not rescinded, though the mistake was just as basic, because the buyers had taken the risk in writing. The diamond was not rescinded because both parties knew they did not know what the stone was, and sold it anyway. Conscious ignorance is an assumption of risk.
That is the Restatement's second category, and it is why the diamond and the cow come out differently though both were sold for a fraction of their worth.
Now the one-sided mistake. Elsinore, California, August nineteen fifty two. A contractor is preparing a bid for additions to a school, due at eight in the evening. Subcontractors bid at the last minute. A plumbing bid of nine thousand two hundred and eighty five dollars comes in, then a second at six thousand five hundred. Thinking he had already carried the first into his total, he deducts three thousand and bids eighty nine thousand nine hundred and ninety four dollars.
In fact the total included no allowance whatsoever for the plumbing work.
His bid is eleven thousand dollars below the next. The board asks whether he is sure. Without his worksheets, he says yes. They award him the contract that night. The next morning he finds the error, drives to the architect, shows the worksheets, and asks to be released. The board refuses, lets the contract to the next bidder at one hundred and two thousand nine hundred dollars, and sues him for the difference, twelve thousand nine hundred and six dollars.
The Supreme Court of California, in Elsinore Union Elementary School District against Kastorff, nineteen sixty, Justice Schauer, let him out. Rescission may be had for mistake of fact if the mistake is material to the contract and was not the result of neglect of a legal duty, if enforcement of the contract as made would be unconscionable, and if the other party can be placed in statu quo.
In addition, the party seeking relief must give prompt notice of his election to rescind and must restore or offer to restore to the other party everything of value which he has received under the contract.
Every element was met. The omission of the plumbing was plainly material. The type of error here involved is one which will sometimes occur in the conduct of reasonable and cautious businessmen, and it was not a neglect of legal duty. The board knew of the error before it demanded the contract, and could still take the next bid. He gave notice the next morning. And the court's last word was about the board's conduct.
Under the circumstances the bargain for which the board presses appears too sharp for law and equity to sustain.
Notice the difference from the Sherwood line. In a mutual mistake the question is who bears the risk. In a unilateral mistake the question is whether the other side knew, or whether holding the mistaken party would be unconscionable, and whether he acted promptly and without culpable neglect. A bid that is eleven thousand dollars under the field puts the other side on notice. A bid that is a few hundred under does not.
Now let's change one fact. The Walkers had sold Rose Second with a catalogue note reading, may or may not be barren, sold as is, and the banker had paid eighty dollars knowing that. Does the seller rescind when she calves? Choose an answer before I go on.
No. This is Lenawee applied to the cow, and it is the footnote the Michigan court wrote. The words allocate the risk of exactly this uncertainty to the buyer, and a buyer who pays a barren price for a cow that may breed has bought a chance. Under the Restatement he bears the risk by agreement, and under the diamond case he bears it by conscious ignorance. The sale stands.
Change one fact again. The woman in Wisconsin had shown the stone to the jeweller, who recognised it at once as a rough diamond, said nothing, and offered a dollar. Choose.
Now the sale falls, but not for mistake. The Wisconsin court said the sale stood because the buyer was guilty of no fraud or unfairness, and because both were entirely ignorant. A jeweller who knows and buys for a dollar has, at the least, taken advantage of a mistake he knew about, and in most states that is treated like a mutual mistake, as the California court said.
Knowledge by one party that the other is acting under mistake is treated as equivalent to mutual mistake for purposes of rescission. And it may be fraud outright, under last module's rules.
Change one fact a third time. The contractor's bid had been six hundred dollars below the next, the error was a two hundred dollar item, and he had asked to withdraw a week after the award, when the board had already let the other bids expire. Choose.
Now he is held. Every element that saved him has weakened. The board had no reason to know of a small error. The mistake is not material enough to make enforcement unconscionable. The notice was not prompt. And the board can no longer be placed in statu quo, because the competing bids are gone. He signs at his price, and the plumbing comes out of his profit. Unilateral mistake relief is narrow, and it is meant to be.
Here is what people get wrong here, and why it is tempting. The first mistake is arguing substance versus quality. Michigan gave that up in nineteen eighty two. The modern question is basic assumption, material effect, and who bears the risk. The second mistake is calling a bad prediction a mistake. A mistake is about a present fact. The buyer who thought prices would rise was not mistaken. He was wrong.
The third mistake is forgetting the gamble. A party who knows he does not know, and contracts anyway, has bought the risk. The diamond seller knew the stone was unidentified. The as is buyers knew they were taking the property as it stood. Neither can complain that the world turned out differently.
Here is the rule, in one breath. A contract is voidable for a mutual mistake about a basic assumption on which it was made that materially affects the agreed exchange, unless the adversely affected party bears the risk by agreement, by conscious ignorance, or by the court's allocation.
A unilateral mistake is relieved only where the other party knew or had reason to know of it or enforcement would be unconscionable, and the mistaken party was not culpably negligent, gave prompt notice, and can restore the other side. Now, five questions.