The Law of Confusion: An Examination of Misunderstanding, Mistake, and Ignorance in Contract Law

MICHIGAN ACADEMICIAN XLV (2018), 347–353

The Law of Confusion: An Examination of Misunderstanding, Mistake, and Ignorance in Contract Law NORMAN OTTO STOCKMEYER Western Michigan University Cooley Law School

ABSTRACT Courts have distinguished between several forms of confusion on the part of parties to a contract. This article examines the leading cases defining these related states of mind and their differing legal effects. It offers a fresh look at old chestnuts familiar to generations of law students: cases involving two sailing ships, a pregnant cow, and an uncut diamond. And it shares revealing backstories rarely mentioned in law school.

INTRODUCTION One of the many freedoms we enjoy is freedom of contract. This historic doctrine recognizes that people have the right to bind themselves legally.

Contracts based on mutual assent and free choice are to be enforced as agreed. In general, therefore, competent individuals are free to make such agreements as they see fit and courts will enforce them without passing on their substance. In the absence of fraud, duress, illegality, or other invalidity, this result is true even though enforcement of the contract may result in hardship to one party or the other. Freedom of contract includes the right to enter into a bad bargain.

If contractual rights and duties derive from the existence of an agreement between the parties, then cases where the parties misunderstand each other or reach an apparent agreement under some mistake become problematic.

Thus, there exist at common law a cluster of cases that have denied enforcement of otherwise valid agreements on the basis of some misapprehension on the part of one or both of the parties. I am not here speaking of the defense of mental incapacity; rather, the cases I refer to turn on misunderstanding, mutual mistake, and conscious ignorance. It is my goal to explain these states of mind and what courts do about them. In so doing, I am going to call on three landmark cases known to all students of the law, celebrated as much for their unique fact patterns as their contribution to Contracts jurisprudence. They involve two sailing ships, a pregnant cow, and an uncut diamond. In the middle of their study of Contract law, law students 347 0026-2005/18. Copyright Ă“2018 by The Michigan Academy of Science, Arts, and Letters. All rights of reproduction in any form reserved.

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encounter these three cases and are asked to harmonize them into a coherent statement of principles governing when courts should or should not grant some form of relief to parties who enter into contracts under a misapprehension of fact. Likely the law students are at least as confused as were the parties to the cases studied.

Law student confusion is heightened because American legal education, for almost 150 years, has been taught by the case method. The case method is to be contrasted with the lecture method, which is still commonly in use in the rest of the world. The preference for lectures is probably related to the fact that throughout the rest of the common-law countries, law is taught at the undergraduate level. Instruction in the law of confusion, more than most legal topics, would seemingly benefit from a clarifying lecture. But that is not the law school way. Mastery comes from struggling to make sense of leading cases, not from memorizing a professor’s lecture. So to make sense of this topic, one must take a dive into the cases.

MISUNDERSTANDING The first one is Raffles v. Wichelhaus (159 Eng. Rep. 375 (1864)). The parties entered into a contract for the sale of 125 bales of cotton, at a specified price, to arrive at Liverpool ‘‘ex Peerless from Bombay.’’ The seller sued the buyer for failure to purchase the cotton on arrival. The buyer defended on the ground that the agreement was meant to refer to a ship named Peerless that sailed from Bombay in October, whereas the seller tendered cotton that arrived on a different ship, also named Peerless, which sailed from Bombay in December. At that point the parties demurred, which means that they accepted the facts as stated.

On appeal, seller’s counsel argued that the name of the ship was immaterial once the cotton arrived safely, no claim having been made that the cotton arrived late. The buyer’s counsel responded with several arguments. One was that since the seller meant one Peerless and the buyer meant another one, there was ‘‘no consensus ad idem, and therefore no binding contract.’’ The judges interrupted him and gave judgment for the defaulting buyer, without stating any rationale. It was just as if a contestant on Groucho Marx’s ‘‘You Bet Your Life’’ had said the secret word. An appellate advocate’s fondest dream, for sure.

What are we to make of this decision? Should not a contract between two experienced merchants be enforced as agreed to? The problem is that if the facts are to be believed – as they must be due to the demurrer – no agreement (i.e. consensus ad idem, i.e. meeting of the minds) was reached. Like two ships passing in the night, the minds of the parties never met on the meaning of the term Peerless. Truly a miss-understanding.

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No greater authority on Contract law exists than the Second Restatement of Contracts. Here is its summary of the holding (sec. 20(1)(a)): ‘‘There is no manifestation of mutual assent to an exchange [no binding contract] if the parties attach materially different meanings to their manifestations and neither party knows or has reason to know the meaning attached by the other. . .’’ In other words, if the parties unknowing attach different meanings to a material term of their agreement, no binding contract is formed.

Whichever party sues to enforce it will lose.

What about the seller’s argument that the name of the ship was immaterial once the cotton arrived safely? Many students agree with Yale law professor Grant Gilmore that the only mistake in the case is the judges’ belief that the identity of the transporting ship was important (Gilmore 1974, 39). Meticulous research by University of Michigan law professor A.W. Brian Simpson, however, has established that in ‘‘arrival’’ contracts of this sort, the name of the ship and its departure port provided the best means by which to estimate date of arrival, because no one could guarantee when a sailing ship would arrive from far-away ports like Bombay. So ‘‘in arrival contracts where ship and port were named, the identity of the carrying vessel was of central importance’’ (Simpson 1989, 324). The English judges of the time would have known of this practice; they just didn’t bother to explain it in their extremely cryptic decision.

One more thing: Professor Simpson’s research also has demolished the belief of many that two ships named Peerless sailing from Bombay to Liverpool, within months of each of other, was one of the greatest coincidences in Anglo-American legal history. Wrong! It turns out that at least eleven sailing ships named Peerless existed at the time, nine British and two American (Simpson 1989, 295).

Any doubt whether this 1864 English case would be followed in our country was erased five years later by the case of Kyle v. Kavanagh (103 Mass.

356, 4 Am. Rep. 560 (1869)). The parties entered into a contract for the sale of land on ‘‘Prospect Street’’ in Waltham. It turned out that there were two Prospect Streets in Waltham. Location being material when it comes to land, the Massachusetts Supreme Judicial Court agreed that if unknowingly the parties were negotiating over different parcels, they were not bound by the resulting contract. Professor Gilmore finds it mystifying that all Englishspeaking lawyers know Raffles (two ships named Peerless) while none has heard of Kyle (two streets named Prospect) (Gilmore 1974, 121). But Raffles was decided first. And, paradoxically, the opinion’s opaqueness makes it a better teaching vehicle by requiring students to develop a rationale for the result. Some law school casebooks place the Peerless case in the chapter on offer-and-acceptance. I prefer to pair it with a mistake case to help students differentiate between the two states of mind.

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MUTUAL MISTAKE So, then, let’s turn to the seminal mistake case: Sherwood v. Walker (66 Mich. 568, 33 N.W. 919 (1887)). Thomas Sherwood entered into a contract to purchase a specific cow from Hiram Walker. The seller claimed that the parties believed that she was barren. The claim is supported by her sale at a price of five and one-half cents per pound; if a breeder, she would be worth about ten times as much. The seller learned before tendering delivery that the cow, Rose 2d of Aberlone, was actually with calf. So he refused to part with her at the agreed price. The buyer sued for possession of ‘‘his’’ cow. At trial, the judge instructed the jury that it was immaterial whether the cow was with calf or not. The verdict was for the buyer.

On appeal, Justice Morse, for the majority, said that from the trial record it appeared that both parties supposed Rose was barren. He held that this mistake affected the substance of the whole contract and, as such, would justify the seller’s rescission of the contract. In dissent, Justice Sherwood (no relation to the buyer) agreed that a mutual mistake could invalidate a contract, but denied that such a mistake existed in the case. The buyer, he said, believed that the cow would breed and had not bought Rose for beef.

Thus the facts presented an error in judgment, not a mutual mistake of fact.

The Second Restatement (sec. 152(1)) summarizes the case as follows: ‘‘Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake . . .’’ Sec. 151 defines a mistake as ‘‘a belief that is not in accord with the facts.’’ The elements of the mutual mistake defense thus are (1) there must have been an erroneous belief of fact, (2) shared by both parties, (3) that was basic to the contract, and (4) had a material effect. The result? The contract is voidable.

If sued, the adversely affected party has a good defense.

But, again, was the case correctly decided? When encountering Sherwood v. Walker, many students feel that the dissent had the better argument. So did University of Michigan law professor George Palmer, who has written: ‘‘I find it most difficult to accept the statement of the majority of the court that the buyer, Sherwood, shared the mistake . . . The whole sense of the matter suggested that . . . he thought there was a chance that Rose 2d would breed’’ (Palmer 1962, 95). What critics of the majority opinion fail to recognize, however, is that Justice Morse was not deciding whose version of events made better sense. Rather, he decreed that because the trial judge had failed to instruct the jury on the law of mistake, a retrial must be had. Thanks to recent research by Terrence Ayala, cited in an article by Hillsdale College professor Paul Moreno, we now know that on retrial the jury ruled in favor of Sherwood, the buyer (Moreno 2009, 5, fn. 16). This time no appeal was

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taken. So despite having prevailed in the Michigan Supreme Court, Walker ultimately lost possession of his Rose. Subsequently, Thomas Sherwood became Michigan’s first Banking Commissioner, Hiram Walker’s Canadian Club whisky became a world-recognized brand, and Rose went on to bear five subsequent offspring while grazing on Sherwood’s Plymouth farm (Stockmeyer 2007).

A possible way around cases such as Sherwood is illustrated by a more contemporary Michigan case, Lenawee County Board of Health v. Messerly (417 Mich 17, 331 NW2d 203 (1982)). There Justice Ryan agreed that a mistake by the parties to a contract for the sale of an apartment building, about a defective septic system, was mutual. But he held that an ‘‘as is’’ clause in the contract placed the risk of any unknown defect on the buyer.

Thus, no rescission. More detail is provided in ‘‘The Tortuous History of the Mutual-Mistake Defense in Michigan Contract Law’’ (Stockmeyer 2011).

CONSCIOUS IGNORANCE Let’s look at the last of our 19th century confusion trilogy, Wood v.

Boynton (64 Wis. 265, 25 N.W. 42 (1885)). Clarissa Wood found a 12-sided, straw-colored stone about the size of a canary egg in the village of Eagle, Wisconsin, ‘‘the nature and value of which she was ignorant.’’ She asked Samuel Boynton, a Milwaukee jeweler, what it was. She said she had been advised that it was probably topaz, and he said probably it was. She accepted his offer of $1. Afterward it was discovered to be a 16-carat uncut diamond worth at least $700. She tendered back the $1 (with 10 cents interest) and demanded return of the stone.

The Wisconsin Supreme Court denied relief, finding no fraud or mutual mistake that would invalidate the sale. Being ignorant of the exact nature of the stone, if Wood ‘‘chose to sell it without further investigation as to its intrinsic value . . . she cannot repudiate the sale because it is afterwards ascertained that she made a bad bargain.’’ The Second Restatement summarizes the rule in Sec. 154: ‘‘A party bears the risk of a mistake when . . . he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient.’’

Comment c adds that ‘‘It is sometimes said in such a situation that, in a sense, there was not a mistake but ‘conscious ignorance.’’’ Thus, a party who contracts in conscious ignorance – what Donald Rumsfeld famously called a ‘‘known unknown’’ (Logan 2009) – bears the risk and may not rely on the defense of mistake. As ‘‘mistake’’ is defined as an erroneous belief, one who is conscious of her ignorance is not laboring under a mistake as defined by law.

Again, as with the previous cases, many students question the decision.

How could a jeweler not tell a diamond from a topaz? Was he not guilty of consumer fraud? The Wisconsin Supreme Court blithely accepted Boynton’s

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testimony that he had never seen an uncut diamond and had no idea that it was a diamond. Research by my colleague Professor Mara Kent supports the students’ suspicion that Boynton was a fraudster. After confirming that the stone was a diamond (indeed the largest ever found in the U.S. at the time), he quietly purchased the farm where it was discovered and set up a mining operation. Soon news that Boynton had found two 1/2 carat diamonds set off a diamond rush. Real estate values quadrupled. But the smaller diamonds turned out to have been salted. No additional diamonds were ever found, and Boynton left town in disgrace (Kent 2013-2014, 47-49).

The ‘‘Eagle Diamond’’ passed through the hands of Tiffany & Co. and financier J.P. Morgan before going on display at the American Museum of Natural History in New York City, where in 1964 it was stolen by playboyjewel thief Jack ‘‘Murph the Surf’’ Murphy (Kent 2013-2014, 52-53). Murph, who is still alive today, has never revealed its whereabouts. The whole sorry tale is recounted in Treasure in the Gravel: The Story of the Eagle Diamond (Vymetal-Taylor 2013). Despite its unsavory back-story, and seeming similarity to Sherwood v. Walker, Wood v. Boynton is cited by the leading Contracts text as the principal authority for the concept of conscious ignorance as being distinct from the doctrine of mutual mistake (Farnsworth 2004, 610).

CONCLUSION In summary, if the parties unknowingly attach different meanings to a material term of their purported agreement, no contract exists due to the misunderstanding. If the parties share an erroneous belief about a fact basic to the contract, it is voidable on the ground of mutual mistake. But for a party who knowingly contracts with limited information, such conscious ignorance provides no defense. Or, for those who reason by analogy, is the case at hand more like the two sailing ships, the pregnant cow, or the uncut diamond? I hope that this article has succeeded in clarifying some misunderstandings, rectifying any mistakes, and overcoming whatever ignorance may have surrounded these three classic cases, which together have come to define what I call the Law of Confusion.

REFERENCES FARNSWORTH, E. ALLAN. 2004. Contracts, 4th ed. New York, NY: Aspen Publishers.

GILMORE, GRANT. 1974. The death of contract. Columbus, OH: Ohio State University Press.

KENT, MARA. 2013-2014. Wood v. Boynton and the incredible journey of the Eagle Diamond. Wisconsin Magazine of History 97(2): 44.

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LOGAN, DAVID. 2009. Known knowns, known unknowns, unknown unknowns and the propagation of scientific enquiry. Journal of Experimental Botany 60(3): 712. https://doi.org/10.1093/jxb/erp043 MORENO, PAUL. 2009. Sherwood v. Walker: Cows and contracts. Michigan Bar Journal (January 2009 supp.) 88: 2.

PALMER, GEORGE. 1962. Mistake and unjust enrichment. Columbus, OH: Ohio State University Press.

SIMPSON, A.W. BRIAN. 1989. Contracts for cotton to arrive: The case of the two ships Peerless. Cardozo Law Review 11: 287.

STOCKMEYER, NORMAN. 2007. To err is human, to moo bovine: The Rose of Aberlone story. Thomas M. Cooley Law Review 24: 491.

STOCKMEYER, NORMAN. 2011. The tortuous history of the mutual-mistake defense in Michigan contract law. Michigan Academician 40: 169.

VYMETAL-TAYLOR, JOHN & MARY. 2013. Treasure in the gravel: The story of the Eagle Diamond. Eagle, WI: Eagle Historical Society.

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