Joseph Eugene DODSON, a minor, by his next friend Gene DODSON, Plaintiff/Appellee, v. Burns SHRADER, Jr., and Mary Shrader, individually and d/b/a Shrader’s Auto Sales, Defendant/Appellant.

Supreme Court of Tennessee, at Nashville.

Jan. 27, 1992.

William S. Fleming, Fleming, Holloway & Flynn, Columbia, for defendant/appellant.

Barbara J. Walker, Columbia, for plaintiff/appellee.

OPINION

O’BRIEN, Justice.

This is an action to disaffirm the contract of a minor for the purchase of a pick-up truck and for a refund of the purchase price. The issue is whether the minor is entitled to a full refund of the money he paid or whether the seller is entitled to a setoff for the decrease in value of the pickup truck while it was in. the possession of the minor.

In early April of 1987, Joseph Eugene Dodson, then 16 years of age, purchased a used 1984 pick-up truck from Burns and Mary Shrader. The Shraders owned and operated Shrader’s Auto Sales in Columbia, Tennessee. Dodson paid $4,900 in cash for the truck, using money he borrowed from his girlfriend’s grandmother. At the time of the purchase there was no inquiry by the Shraders, and no misrepresentation by Mr. Dodson, concerning his minority. However, Mr. Shrader did testify that at the time he believed Mr. Dodson to be 18 or 19 years of age.

In December 1987, nine (9) months after the date of purchase, the truck began to develop mechanical problems. A mechanic diagnosed the problem as a burnt valve, but could not be certain without inspecting the valves inside the engine. Mr. Dodson did not want, or did not have the money, to effect these repairs. He continued to drive the truck despite the mechanical problems. One month later, in January, the truck’s engine “blew up” and the truck became inoperable.

Mr. Dodson parked the vehicle in the front yard at his parents home where he lived. He contacted the Shraders to rescind the purchase of the truck and requested a full refund. The Shraders refused to accept the tender of the truck or to give Mr. Dodson the refund requested.

Mr. Dodson then filed an action in general sessions court seeking to rescind the contract and recover the amount paid for the truck. The general sessions court dismissed the warrant and Mr. Dodson perfected a de novo appeal to the circuit court. At the time the appeal was filed in the circuit court Mr. Shrader, through counsel, declined to accept the tender of the truck without compensation for its depreciation. Before the circuit court could hear the case, the truck, while parked in Dodson’s front yard, was struck on the left front fender by a hit-and-run driver. At the time of the circuit court trial, according to Shrader, the truck was worth only $500 due to the damage to the engine and the left front fender.

The case was heard in the circuit court in November 1988. The trial judge, based on previous common-law decisions and, under the doctrine of stare decisis reluctantly granted the rescission. The Shraders were ordered, upon tender and delivery of the truck, to reimburse the $4,900 purchase price to Mr. Dodson. The Shraders appealed.

The Court of Appeals, per Todd, J., affirmed; Cantrell, J., concurring separately, Koch, J., dissenting.

The earliest recorded case in this State, on the issue involved, appears to be in Wheaton v. East, 13 Tenn. 35 (5 Yeager 41) (1833). In pronouncing the rule to apply governing infant’s contracts, the court said:

We do not perceive that any general rule, as to contracts which are void and voidable, can be stated with more precision that is done by Lord Ch.J.Eyre in Keane v. Boycott, 2 H.Black, 511, and quoted with approbation by Judge Story, 1 Mason’s Rep. 82, and by Chancellor Kent, 2 Com. 193, which is this: “that when the court can pronounce the contract to be to the infant’s prejudice, it is void, and when to his benefit, as for necessaries, it is good; and when the contract is of any uncertain nature, as to benefit or prejudice, it is voidable only, at the election of the infant.” ...

The law on the subject of the protection of infant’s rights has been slow to evolve. However, in Human v. Hartsell, 24 Tenn.App. 678, 148 S.W.2d 634, 636 (1940) the Court of Appeals noted:

The last case in Tennessee holding a minor’s contract void and adopting as the criterion for determining whether a given contract is void or only voidable [based upon] the prejudicial, uncertain or beneficial effect upon the rights and interests of the minor, appears to be the case of Robinson v. Coulter, supra, [90 Tenn. 705, 18 S.W. 250] decided November 12, 1891. In Tuck v. Payne, 159 Tenn. 192, 17 S.W.2d 8, in an opinion by Mr. Justice McKinney, the modern rule that contracts of infants are not void but only voidable and subject to be disaffirmed by the minor either before or after attaining majority appears to have been favored.

Under this rule the efforts of early authorities to classify contracts as beneficial or harmful and determine whether they are void or only voidable upon the basis of such classification are abandoned in favor of permitting the infant himself when he has become of age to determine what contracts are and what are not to his interest and liking. He is thus permitted to assume the burden of a contract, clearly disadvantageous to him, if he deems himself under a moral obligation to do so.

The adoption of this rule does not lead to any retrenchment of the infant’s rights but gives him the option of invoking contracts found to be advantageous but which, if held void, could not be enforced against the other party to the contract. Thus the minor can secure the advantage of contracts advantageous to himself and be relieved of the effect of an injudicious contract.

In Tuck, supra, 17 S.W.2d at p. 9, the court applied the rule based upon the maxims that he who seeks equity must do equity, that he who comes into equity must come with clean hands, that no one can take advantage of his own wrong, that he that has committed inequity shall not have equity, and that minors will not be permitted to use the shield of infancy as a cover, or turn it into a sword with which to injure others dealing with them in good faith.

As noted by the Court of Appeals, the rule in Tennessee, as modified, is in accord with the majority rule on the issue among our sister states. This rule is based upon the underlying purpose of the “infancy doctrine” which is to protect minors from their lack of judgment and “from squandering their wealth through improvident contracts with crafty adults who would take advantage of them in the marketplace.” Halbman v. Lemke, 99 Wis.2d 241, 245, 298 N.W.2d 562, 564 (1980).

There is, however, a modern trend among the states, either by judicial action or by statute, in the approach to the problem of balancing the rights of minors against those of innocent merchants. As a result, two (2) minority rules have developed which allow the other party to a contract with a minor to refund less than the full consideration paid in the event of rescission.

The first of these minority rules is called the “Benefit Rule.” E.g., Hall v. Butterfield, 59 N.H. 354 (1879); Johnson v. Northwestern Mut. Life Insurance Co., 56 Minn. 365, 59 N.W. 992 (1894); Berglund v. American Multigraph Sales Co., 135 Minn. 67, 160 N.W. 191 (1916); Porter v. Wilson, 106 N.H. 270, 209 A.2d 730 (1965); Valencia v. White, 134 Ariz. 139, 654 P.2d 287 (Ariz.App.1982). The rule holds that, upon rescission, recovery of the full purchase price is subject to a deduction for the minor’s use of the merchandise. This rule recognizes that the traditional rule in regard to necessaries has been extended so far as to hold an infant bound by his contracts, where he failed to restore what he has received under them to the extent of the benefit actually derived by him from what he has received from the other party to the transaction. See Porter v. Wilson, 106 N.H. 270, 209 A.2d 730, 13 A.L.R.3d 1247 (1965); Valencia v. White, supra, 2 Williston on Contracts, § 238, p. 43 (3rd Ed. Jaeger 1959). Berglund v. American Multigraph Sales Co., supra.

The other minority rule holds that the minor’s recovery of the full purchase price is subject to a deduction for the minor’s “use” of the consideration he or she received under the contract, or for the “depreciation” or “deterioration” of the consideration in his or her possession. See Carter v. Jays Motors, 3 N.J.Super. 82, 65 A.2d 628 (N.J.S.Ct., App.Div.1949); Creer v. Active Automobile Exch., 99 Conn. 266, 121 A. 888 (Conn.1923); Rodriguez v. Northern Auto Auction, 225 N.Y.S.2d 107 (N.Y.App.Div.1962); Pettit v. Liston, 97 Or. 464, 191 P. 660 (1920).

We are impressed by the statement made by the Arizona Appeals Court in Valencia v. White, supra, citing the Court of Appeals of Ohio in Haydocy Pontiac Inc. v. Lee, 19 Ohio App.2d 217, 250 N.E.2d 898 (1969):

At a time when we see young persons between 18 and 21 years of age demanding and assuming more responsibilities in their daily lives; when we see such persons emancipated, married, and raising families; when we see such persons charged with the responsibility for committing crimes; when we see such persons being sued in tort claims for acts of negligence; when we see such persons subject to military service; when we see such persons engaged in business and acting in almost all other respects as an adult, it seems timely to re-examine the case law pertaining to contractual rights and responsibilities of infants to see if the law as pronounced and applied by the courts should be redefined.

In Pettit v. Liston, supra, the Oregon court, endeavoring to resolve issues similar to those at hand in this case noted that in dealing with the right of the minor to rescind his contract and the conditions under which he may do so, the decisions of the courts in the different states have not only conflicted upon the main question involved, but many of the decisions of the same court in the same state seem to be inconsistent with each other; and often times one court has made its decision turn upon a distinction or difference not recognized by the courts of other states as a distinguishing feature. As a result rules have been promulgated which are considered to be suitable and appropriate upon considerations of principal and public policy.

Upon serious reflection we are convinced that a modified form of the Oregon rule should be adopted in this State concerning the rights and responsibilities of minors in their business dealings.

This is no quantum leap in the evolution of the common law. As early as 1842, in the case of Jacob v. The State, 22 Tenn. 372, 388, 3 Humphreys 514 (1842), Justice Turley delivered a profound dissertation on the policy and principles of the common law:

The common law has been aptly called the “lex non scripta,” because it is a rule prescribed by the common consent and agreement of the community as one applicable to its different relations, and capable of preserving the peace, good order, and harmony of society, and rendering unto every one that which of right belongs to him. Its sources are to be found in the usages, habits, manners, and customs of a people. Its seat is in the breast of the judges who are its expositors and expounders. Every nation must of necessity have its common law, let it be called by what name it may, and it will be simple or complicated in its details, as society is simple or complicated in its relations. A few plain and practical rules will do for a wandering horde of savages, but they must and will be much more extensively ramified when civilization has polished, and commerce and arts and agriculture enriched, a nation. The common law of a country will, therefore, never be entirely stationary, but will be modified, and extended by analogy, construction and custom, so as to embrace new relations, springing up from time to time, from an amelioration or change of society. The present common law of England is as dissimilar from that of Edward III. as is the present state of society. And we apprehend that no one could be found to contend that hundreds of principles, which have in more modern times been examined, argued, and determined by the judges, are not principles of the common law, because not found in the books of that period. They are held to be great and immutable principles, which have slumbered in their repositories, because the occasion called for their exposition had not arisen. The common law, then, is not like the statute law, fixed, and immutable but by positive enactment, except where a principle has been adjudged as the rule of action.

If, then, one generation be not so hedged in by the principles of the common law, established by another, as to be prohibited from extending them, by analogy and construction, to new relations and modifications of society, by what principle shall a sovereign state, which has adopted the common law of another as one of its rule of action, be so prohibited?

Such, then, is the common law, that though principles once established by judicial determination can only be changed by legislative enactment, yet such is its malleability (if we may use the expression) that new principles may be developed, and old ones extended, by analogy, so as to embrace newly-created relations and changes produced by time and circumstances. ...

The late Justice Joseph W. Henry, past member and former Chief Justice of this Court stated the message of the flexibility of the common law in more modern language in Dunn v. Palermo, 522 S.W.2d 679, 688 (Tenn.1975), as follows:

This Court in the past has not hesitated to depart from the rigid common law where “the reason for the common law rule does not exist.” Brown v. Shelby, 206 Tenn. 71, 332 S.W.2d 166 (1960).

The common law does not have the force of Holy Writ; it is not a last will and testament, nor is it a cadaver embalmed in perpetuity, nor is it to be treated like the sin of Judah — “written with a pen of iron and with the point of a diamond.” Jeremiah 17:1.

Former Chief Justice Frantz of Colorado, in his dissenting opinion in Tesone v. School Dist. No. Re-2, In County of Boulder, 152 Colo. 596, 384 P.2d 82 (1963), made this erudite observation on the common law:

“The common law of America is evolutionary; it is not static and immutable. It is in constant growth, going through mutations in adapting itself to changing conditions and in improving and refining doctrine. By its very nature, it seeks perfection in the achievement of justice.”

This is an eloquent description of the greatness and the glory of the common law.

We state the rule to be followed hereafter, in reference to a contract of a minor, to be where the minor has not been overreached in any way, and there has been no undue influence, and the contract is a fair and reasonable one, and the minor has actually paid money on the purchase price, and taken and used the article purchased, that he ought not to be permitted to recover the amount actually paid, without allowing the vender of the goods reasonable compensation for the use of, depreciation, and willful or negligent damage to the article purchased, while in his hands. If there has been any fraud or imposition on the part of the seller or if the contract is unfair, or any unfair advantage has been taken of the minor inducing him to make the purchase, then the rule does not apply. Whether there has been such an overreaching on the part of the seller, and the fair market value of the property returned, would always, in any case, be a question for the trier of fact. This rule will fully and fairly protect the minor against injustice or imposition, and at the same time it will be fair to a business person who has dealt with such minor in good faith.

This rule is best adapted to modern conditions under which minors are permitted to, and do in fact, transact a great deal of business for themselves, long before they have reached the age of legal majority. Many young people work and earn money and collect it and spend it oftentimes without any oversight or restriction. The law does not question their right to buy if they have the money to pay for their purchases. It seems intolerably burdensome for everyone concerned if merchants and business people cannot deal with them safely, in a fair and reasonable way. Further, it does not appear consistent with practice of proper moral influence upon young people, tend to encourage honesty and integrity, or lead them to a good and useful business future, if they are taught that they can make purchases with their own money, for their own benefit, and after paying for them, and using them until they are worn out and destroyed, go back and compel the vendor to return to them what they have paid upon the purchase price. Such a doctrine can only lead to the corruption of principles and encourage young people in habits of trickery and dishonesty.

In view of the foregoing considerations, we conclude that the rule, as we have indicated, and which we have paraphrased from that adopted in the State of Oregon, will henceforth be the rule to be utilized in this State.

We note that in this case, some nine (9) months after the date of purchase, the truck purchased by the plaintiff began to develop mechanical problems. Plaintiff was informed of the probable nature of the difficulty which apparently involved internal problems in the engine. He continued to drive the vehicle until the engine “blew up” and the truck became inoperable. Whether or not this involved gross negligence or intentional conduct on his part is a matter for determination at the trial level. It is not possible to determine from this record whether a counterclaim for tortious damage to the vehicle was asserted. After the first tender of the vehicle was made by plaintiff, and refused by the defendant, the truck was damaged by a hit-and-run driver while parked on plaintiff’s property.. The amount of that damage and the liability for that amount between the purchaser and the vendor, as well as the fair market value of the vehicle at the time of tender, is also an issue for the trier of fact.

The case is remanded to the trial court for further proceedings in accordance with this judgment. The costs on appellate review are assessed equally between the parties.

REID, C.J. and DROWOTA, DAUGHTREY and ANDERSON, JJ., concur.

Francis B. Ortelere, Individually and as Executor of Grace W. Ortelere, Deceased, Appellant, v. Teachers’ Retirement Board of the City of New York, Respondent.

Argued April 23, 1969;

decided July 2, 1969.

A. Mark Levien for appellant.

I. Plaintiff established that the decedent was mentally incompetent to make a rational choice among the optional forms of payment. (Matter of Ireland, 246 App. Div. 113.) II. The trial court properly annulled decedent’s retirement application. (Barnes v. Waterman, 54 Misc. 392; Faber v. Sweet Style Mfg. Corp., 40 Misc 2d 212; Schwartzberg v. Teachers’ Retirement Bd. of City of N. Y., 273 App. Div. 240; Martin v. Teachers’ Retirement Bd. of City of N. Y., 269 App. Div. 115; Beisman v. New York Gity Employees’ Retirement System, 275 App. Div. 836, 300 N. Y. 580.) III. The Appellate Division exceeded the limit on its power to review. (People ex rel. Mac Cracken v. Miller, 291 N. Y. 55; People v. Gaimari, 176 N. Y. 84; Kelly v. Watson Elevator Co., 309 N. Y. 49; Electrolux Corp. v. Val-Worth, Inc., 6 N Y 2d 556; Amend v. Hurley, 293 N. Y. 587; Boyd v. Boyd, 252 N. Y. 422; Barnet v. Cannizzaro, 3 A D 2d 745.) IV. That decedent was never adjudicated an incompetent nor hospitalized is not a valid basis for the intimation that decedent was not mentally incompetent. (Commercial Cas. Ins. Co. v. Roman, 269 N. Y. 451; Fichter Steel Corp. v. Cox Constr. Co., 266 App. Div. 347; Matter of Sebring, 238 App. Div. 281.) V. The apparently intelligent letter which decedent sent to the Retirement Board on February 8, 1965 was written either during a momentary lucid interval or without real comprehension of the text and was actually irrational. VI. Decedent’s choice of the maximum retirement payments was wholly irrational. VII. The weight and credibility to be given to the testimony of defendant’s witnesses was for the trial court. VIII. The decision of the trial court was also justified by principles of equity. (Green v. Roworth, 113 N. Y. 462; Morse v. Miller, 267 App. Div. 801, 293 N. Y. 936; Wurster v. Armfield, 175 N. Y. 256; Martin v. Teachers’ Retirement Bd. of City of N. Y., 269 App. Div. 115.)

J. Lee Rankin, Corporation Counsel (Robert T. Hartmann and Stanley Buchsbaum of counsel), for respondent.

Deceased was mentally competent when she executed her application for retirement and selected maximum monthly payments as her retirement allowance. (Beisman v. New York City Employees’ Retirement System, 275 App. Div. 836, 300 N. Y. 580; Paine v. Aldrich, 133 N. Y. 544; Moritz v. Moritz, 153 App. Div. 147, 211 N. Y. 580; Faber v. Sweet Style Mfg. Corp., 40 Misc 2d 212; Schwartzberg v. Teachers’ Retirement Bd. of City of N. Y., 273 App. Div. 240, 298 N. Y. 741.)

Breitel, J.

This appeal involves the revocability of an election of benefits under a public employees’ retirement system and suggests the need for a renewed examination of the kinds of mental incompetency which may render voidable the exercise of contractual rights. The particular issue arises on the evidently unwise and foolhardy selection of benefits by a 60-year-old teacher, on leave for mental illness and suffering from cerebral arteriosclerosis, after service as a public schoolteacher and participation in a public retirement system for over 40 years. The teacher died a little less than two months after making her election of maximum benefits, payable to her during her life, thus causing the entire reserve to fall in. She left surviving her husband of 38 years of marriage and two grown children.

There is no doubt that any retirement system depends for its soundness on an actuarial experience based on the purely prospective selections of benefits and mortality rates among the covered group, and that retrospective or adverse selection after the fact would be destructive of a sound system. It is also true that members of retirement systems are free to make choices which to others may seem unwise or foolhardy. The issue here is narrower than any suggested by these basic principles. It is whether an otherwise irrevocable election may be avoided for incapacity because of known mental illness which resulted in the election when, except in the barest actuarial sense, the system would sustain no unfavorable consequences.

The husband and executor of Grace W. Ortelere, the deceased New York City schoolteacher, sues to set aside her application for retirement without option, in the event of her death. It is alleged that Mrs. Ortelere, on February 11, 1965, two months before her death from natural causes, was not mentally competent to execute a retirement application. By this application, effective the next day, she elected the maximum retirement allowance (Administrative Code of City of New York, § B20-46.0). She thus revoked her earlier election of benefits under which she named her husband a beneficiary of the unexhausted reserve upon her death. Selection of the maximum allowance extinguished all interests upon her death.

Following a nonjury trial in Supreme Court, it was held that Grace Ortelere had been mentally incompetent at the time of her February 11 application, thus rendering it “null and void and of no legal effect ”. The Appellate Division, by a divided court, reversed the judgment of the Supreme Court and held that, as a matter of law, there was insufficient proof of mental incompetency as to this transaction (31 A D 2d 139).

Mrs. Ortelere’s mental illness, indeed, psychosis, is undisputed. It is not seriously disputable, however, that she had complete cognitive judgment or awareness when she made her selection. A modern understanding of mental illness, however, suggests that incapacity to contract or exercise contractual rights may exist, because of volitional and affective impediments or disruptions in the personality, despite the intellectual or cognitive ability to understand. It will be recognized as the civil law parallel to the question of criminal responsibility which has been the recent concern of so many and has resulted in statutory and decisional changes in the criminal law (e.g., A. L. I. Model Penal Code, § 4.01; Penal Law, § 30.05; Durham v. United States, 214 F. 2d 862).

Mrs. Ortelere, an elementary schoolteacher since 1924, suffered a “ nervous breakdown ” in March, 1964 and went on a leave of absence expiring February 5, 1965. She was then 60 years old and had been happily married for 38 years. On July 1, 1964 she came under the care of Dr. D’Angelo, a psychiatrist, who diagnosed her breakdown as involutional psychosis, melancholia type. Dr. D ’Angelo prescribed, and for about six weeks decedent underwent, tranquilizer and shock therapy. Although moderately successful, the therapy was not continued since it was suspected that she also suffered from cerebral arteriosclerosis, an ailment later confirmed. However, the psychiatrist continued to see her at monthly intervals until March, 1965. On March 28, 1965 she was hospitalized after collapsing at home from an aneurysm. She died 10 days later; the cause of death was “ Cerebral thrombosis due to H[ypertensive] H[eart] D[isease].”

As a teacher she had been a member of the Teachers’ Retirement System of the City of New York (Administrative Code, § B20-30). This entitled her to certain annuity and pension rights, preretirement death benefits, and empowered her to exercise various options concerning the payment of her retirement allowance.

Some years before, on June 28, 1958, she had executed a “ Selection of Benefits under Option One ” naming her husband as beneficiary of the unexhausted reserve. Under this option upon retirement her allowance would-be less by way of periodic retirement allowances, but if she died before receipt of her full reserve the balance of the reserve would be payable to her husband. On June 16, 1960, two years later, she had designated her husband as beneficiary of her service death benefits in the event of her death prior to retirement.

Then on February 11, 1965, when her leave of absence had just expired and she was still under treatment, she executed a retirement application, the one here involved, selecting the maximum retirement allowance payable during her lifetime with nothing payable on or after death. She also, at this time, borrowed from the system the maximum cash withdrawal permitted, namely, $8,760. Three days earlier she had written the board, stating that she intended to retire on February 12 or 15 or as soon as -she received ‘ ‘ the information I need in order to decide whether to take an option or maximum allowance.” She then listed eight specific questions, reflecting great understanding of the retirement ¡system, concerning the various alternatives available. An extremely detailed reply was sent, by letter of February 15,1965, although by that date it was technically impossible for her to change her selection. However, the board’s chief clerk, before whom Mrs. Ortelere executed the application, testified that the questions were ‘ ‘ answered verbally by me on February 11th.” Her retirement reserve totalled $62,165 (after deducting the $8,760 withdrawal), and the difference between electing the maximum retirement allowance (no option) and the allowance under “ option one ” was $901 per year or $75 per month. That is, had the teacher selected “option one” she would have received an annual allowance of $4,494 or $375 per month, while if no option had been selected she would have received an annual allowance of $5,395 or $450 per month. Had she not withdrawn the cash the annual figures would be $5,247 and $6,148 respectively.

Following her taking a leave of absence for her condition, Mrs. Ortelere had become very depressed and was unable to care for herself. As a result, her husband gave up his electrician’s job, in which he earned $222 per week, to stay home and take care of her on a full-time basis. She left their home only when he accompanied her. Although he took her to the Retirement Board on February 11,1965, he did not know why she went, and did not question her for fear "she’d start crying hysterically that I was scolding her. That’s the way she was. And I wouldn’t upset her.”

The Orteleres were in quite modest -circumstances. They owned their own home, valued at $20,000, and had $8,000 in a savings account. They also owned some farm land worth about $5,000. Under these -circumstances, as revealed in this record, retirement for both of the Orteleres or the survivor of them had to be provided, as a practical matter, largely out of Mrs. Ortelere’s retirement benefits.

According to Dr. D ’Angelo, the psychiatrist who treated her, Mrs. Ortelere never improved enough to “ warrant my sending her back [to teaching].” A physician for the Board of Education examined her on February 2, 1965 to determine her fitness to return to teaching. Although not a psychiatrist but rather a specialist in internal medicine, this physician ‘ ‘ judged that she had apparently recovered from the depression ’ ’. and that she appeared rational. However, before allowing her to return to teaching, a report was requested from Dr. D ’Angelo concerning her condition. It is notable that the Medical Division of the Board of Education on February 24, 1965 requested that Mrs. Ortelere report to the board’s “ panel psychiatrist ” on March 11, 1965.

Dr. D’Angelo stated “ [a]t no time since she was under my care was she ever mentally competent"; that "[m]entally she couldn’t make a decision of any kind, actually, of any kind, small or large.” He also described how involutional melancholia affects the judgment process: “They can’t think rationally, no matter what the situation is. They will even tell you, ‘ I used to be able to think of anything and make any decision. Now,’ they say, ‘ even getting up, I don’t know whether I should get up or whether I should stay in bed.’ Or, 'I don’t even know how to make a slice of toast any more. ’ Everything is impossible to decide, and everything is too great an effort to even think of doing. They just don’t have the effort, actually, because their nervous breakdown drains them of all their physical energies.”

While the psychiatrist used terms referring to “ rationality ”, it is quite evident that Mrs. Ortelere’s psychopathology did not lend itself to a classification under the legal test of irrationality. It is undoubtedly, for this reason, that the Appellate Division was unable to accept his testimony and the trial court’s finding of irrationality in the light of the prevailing rules as they have been formulated.

The well-established rule is that contracts of a mentally incompetent person who has not been adjudicated insane are voidable. Even where the contract has been partly or fully performed it will still be avoided upon restoration of the status quo. (Verstandig v. Schlaffer, 296 N. Y. 62, 64; Blinn v. Schwarz, 177 N. Y. 252, 262; see, also, Ann., Contracts with Incompetent, 95 A. L. R. 1442; Ann., Incompetent—Contract Before Adjudication, 46 A. L. R. 416.)

Traditionally, in this State and elsewhere, contractual mental capacity has been measured by what is largely a cognitive test (Aldrich v. Bailey, 132 N. Y. 85; 2 Williston, Contracts [3d ed.], § 256; see 17 C.J.S., Contracts, § 133 [1], subd. e, pp. 869-862). Under this standard the ‘ ‘ inquiry ’ ’ is whether the mind was "so affected as to render him wholly and absolutely incompetent to comprehend and understand the nature of the transaction ” (Aldrich v. Bailey, supra, at p. 89). A requirement that the party also be able to make a rational judgment concerning the particular transaction qualified the cognitive test (Paine v. Aldrich, 133 N. Y. 544, 546; Note, “ Civil Insanity The New York Treatment of the Issue of Mental Incompetency in NonCriminal Cases, 44 Cornell L. Q. 76). Conversely, it is also well recognized that contractual ability would be affected by insane delusions intimately related to the particular transaction (Moritz v. Moritz, 153 App. Div. 147, affd. 211 N. Y. 580; see Green, Judicial Tests of Mental Incompetency, 6 Mo. L. Rev. 141, 151).

These traditional standards governing competency to contract were formulated when psychiatric knowledge was quite primitive. They fail to account for one who by reason of mental illness is unable to control his conduct even though his cognitive ability seems unimpaired. "When these standards were evolving it was thought that all the mental faculties were simultaneously affected by mental illness. (Green, Mental Incompetency, 38 Mich. L. Rev. 1189, 1197-1202.) This is no longer the prevailing view (Note, Mental Illness and the Law of Contracts, 57 Mich. L. Rev. 1020, 1033-1036).

Of course, the greatest movement in revamping legal notions of mental responsibility has occurred in the criminal law. The nineteenth century cognitive test embraced in the M’Naghten rules has long been criticized and changed by statute and decision in many jurisdictions (see M’Naghten’s Case, 10 Clark & Fin. 200; 8 Eng. Rep. 718 [House of Lords, 1843]; Weihofen, Mental Disorder as a Criminal Defense [1954], pp. 65-68; British Royal Comm, on Capital Punishment [1953], ch. 4; A. L. I. Model Penal Code, § 4.01, supra; cf. Penal Law, § 30.05).

While the policy considerations for the criminal law and the civil law are different, both share in common the premise that policy considerations must be based on a sound understanding of the human mind and, therefore, its illnesses. Hence, because the cognitive .rules are, for the most part, too restrictive and rest on a false factual basis they must be re-examined. Once it is understood that, accepting plaintiff’s proof, Mrs. Ortelere was psychotic and because of that psychosis could have been incapable of making a voluntary selection of her retirement system benefits, there is an issue that a modern jurisprudence should not exclude, merely because her mind could pass a “ cognition ” test based on nineteenth century psychology.

There has also been some movement on the civil law side to achieve a modern posture. For the most part, the-movement has been glacial and has been disguised under traditional formulations. Various devices have been used to avoid unacceptable results under the old rules by finding unfairness or overreaching in order to avoid transactions (see, e.g., Green, Proof of Mental Incompetency ' and the Unexpressed Major Premise, 53 Yale L. J. 271, 298-305).

In this State there has been at least one candid approach. In Faber v. Sweet Style Mfg. Corp. (40 Misc 2d 212) Mr. Justice Meyer wrote: “ [i]ncompetence to contract also exists when a contract is entered into under the compulsion of a mental disease or disorder but for which the contract would not have been made ” (at p. 216; noted in 39 N.Y.U. L. Rev. 356). This is the first known time a court has recognized that the traditional standards of incompetency for contractual capacity are inadequate in light of contemporary psychiatric learning and applied modern standards. Prior to this, courts applied the cognitive standard giving great weight to objective evidence of rationality (e.g., Beisman v. New York City Employees’ Retirement System, 81 N. Y. S. 2d 373, revd. 275 App. Div. 836, affd. 300 N. Y. 580; Schwartsberg v. Teachers’ Retirement Bd., 273 App. Div. 240, affd. 298 N. Y. 741; Martin v. Teachers’ Retirement Bd., 70 N. Y. S. 2d 593).

It is quite significant that Restatement, 2d, Contracts, states the modern rule on competency to contract. This is in evident recognition, and the Reporter’s Notes support this inference, that, regardless of how the cases formulated their reasoning, the old cognitive test no longer explains the results. Thus, the new Restatement section reads: “ (1) A person incurs only voidable contractual duties by entering into a transaction if by reason of mental illness or defect * * * (b) he is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.” (Restatement, 2d, Contracts [T.D. No. 1, April 13, 1964], § 18C.) (See, also, Allen, Ferster, Weihofen, Mental Impairment and Legal Incompetency, p. 253 [Recommendation b] and pp. 260-282; and Note, 57 Mich. L. Rev. 1020, supra, where it is recommended ‘ ‘ that a complete test for contractual incapacity should provide protection to those persons whose contracts are merely uncontrolled reactions to their mental illness, as well as for those who could not understand the nature and consequences of their actions ” [at p .1036]).

The avoidance of duties under an agreement entered into by those who have done so by reason of mental illness, but who have understanding, depends on balancing competing policy considerations. There must be stability in contractual relations and protection of the expectations of parties who bargain in good faith. On the other hand, it is also desirable to protect persons who may understand the nature of the transaction but who, due to mental illness, cannot control their conduct. Hence, there should be relief only if the other party knew or was put on notice as to the contractor’s mental illness. Thus, the Restatement provision for avoidance contemplates that “ the other party has reason to know ” of the mental illness (id.).

When, however, the other party is without knowledge of the contractor’s mental illness and the agreement is made on fair terms, the proposed Restatement rule is: “ The power of avoidance under subsection (1) terminates to the extent that the contract has been .so performed in whole or in part or the circumstances have so changed that avoidance would be inequitable. In .such a case a court may grant relief on such equitable terms as the situation requires.” (Restatement, 2d, Contracts, supra, § 18C, subd. [2].)

The system was, or should have been, fully aware of Mrs. Ortelere’s condition. They, or the Board of Education, knew of. her leave of absence for medical reasons and the resort to staff psychiatrists by the Board of Education. Hence, the other of the conditions for avoidance is satisfied.

Lastly, there are no significant changes of position by the system other than those that flow from the barest actuarial consequences of benefit selection.

Nor should one ignore that in the relationship between retirement system and member, and especially in a public system, there is not involved a commercial, let alone an ordinary commercial, transaction. Instead the nature of the system and its announced goal is the protection of its members and those in whom its members have an interest. It is not a sound scheme which would permit 40 years of contribution and participation in the system to be nullified by a one-instant act committed by one known to be mentally ill. This is especially true if there would be no substantial harm to the system if the act were avoided. On the record none may gainsay that her selection of a “ no option ” retirement while under psychiatric care, ill with cerebral arteriosclerosis, aged. 60, and with a family in which she had always manifested concern, was so unwise and foolhardy that a factfinder might conclude that it was explainable only as a product of psychosis.

On this analysis it is not difficult to see that plaintiff’s evidence was sufficient to sustain a finding that, when she acted as she did on February 11, 1965, she did so solely as a result of serious mental illness, namely, psychosis. Of course, nothing less serious than medically classified psychosis should suffice or else few contracts would be invulnerable to some kind of psychological attack. Mrs. Ortelere’s psychiatrist testified quite flatly that as an involutional melancholiac in depression she was incapable of making a voluntary “ rational ” decision. Of course, as noted earlier, the trial court’s finding and perhaps some of the testimony attempted to fit into the rubrics of the traditional rules. For that reason rather than reinstatement of the judgment at Trial Term there should be a new trial under the proper standards frankly considered and applied.

Accordingly, the order of the Appellate division should be reversed, without costs, and the action remanded to Trial Term for a new trial.

Jasen, J. (dissenting).

Where there has been no previous adjudication of incompetency, the burden of proving mental incompetence is upon the party alleging it. I agree with the majority at the Appellate Division that the plaintiff, the husband of the decedent, failed to sustain the burden incumbent upon him of proving deceased’s incompetence.

The evidence conclusively establishes that the decedent, at the time she made her application to retire, understood not only that she was retiring, but also that she had selected the maximum payment during her lifetime.

Indeed, the letter written by the deceased to the Teachers’ Retirement System prior to her retirement demonstrates her full mental capacity to understand and to decide whether to take an option or the maximum allowance. The full text of the letter reads as follows:

February 8, 1965

Gentlemen:

I would like to retire on Feb. 12 or Feb. 15. In other words, just as soon as possible after I receive the information I need in order to decide whether to take an option or maximum allowance. Following are the questions I would like to have answered:

1. What is my ‘ average ’ five-year salary?

2. What is my maximum allowance ?

3. I am 60 years old. If I select option four-a with a beneficiary (female) 27 years younger, what is my allowance?

4. If I select four-a on the pension part only, and take the maximum annuity, what is my allowance?

5. If I take a loan of 89% of my year’s salary before retirement, what would my maximum allowance be?

6. If I take a loan of $5,000 before retiring, and select option four-a on both the pension and annuity, what would my allowance be?

7. What is my total service credit? I have been on a leave without pay since Oct. 26,19,64.

8. What is the ‘ factor ’ used for calculating option four-a with the above beneficiary®

Thank you for your promptness in making the necessary calculations. I will come to your office on Thursday afternoon of this week.

It seems clear that this detailed, explicit and extremely pertinent list of queries reveals a mind fully in command of the salient features of the Teachers’ Retirement System. Certainly, it cannot be said that the decedent could possess sufficient capacity to compose a letter indicating such a comprehensive understanding of the retirement system, and yet lack the capacity to understand the answers.

As I read the record, the evidence establishes that the dependent’s election to receive maximum payments was predicated on the need for a higher income to support two retired persons — her husband and herself. Since the only source of income available to decedent and her husband was decedent’s retirement pay, the additional payment of $75 per month which she would receive by electing the maximal payment was a necessity. Indeed, the additional payments represented an increase of 20% over the benefits payable under option 1. Under these circumstances, an election of maximal income during decedent’s lifetime was not only a rational, but a necessary decision.

Further indication of decedent’s knowledge of the financial needs of her family is evidenced by the fact that she took a loan for the maximum amount ($8,760) permitted by the retirement system, at the time she made application for retirement.

Moreover, there is nothing in the record to indicate that the decedent had any warning, premonition, knowledge or indication at the time of retirement that her life expectancy was, in any way, reduced by her condition.

Decedent’s election of the maximum retirement benefits, therefore, was not so contrary to her best interests so as to create an inference of her mental incompetence.

Indeed, concerning election of options under a retirement system, it has been held: “Even where no previous election has been made, the court must make the election for an incompetent which would be in accordance with what would have been his manifest and reasonable choice if he were sane, and, in the absence of convincing evidence that the incompetent would have made a different selection, it is presumed that he would have chosen the option yielding the largest returns in his lifetime.” (Schwartzberg v. Teachers’ Retirement Bd., 273 App. Div. 240, 242-243, affd. 298 N. Y. 741; emphasis supplied.)

Nor can I agree with the majority’s view that the traditional rules governing competency to contract “are, for the most part, too restrictive and rest on a false factual basis ”.

The issue confronting the courts concerning mental capacity to contract is under what circumstances and conditions should a party be relieved of contractual obligations freely entered. This is peculiarly a legal decision, although, of course, available medical knowledge forms a datum which influences the legal choice. It is common knowledge that the present state of psychiatric knowledge is inadequate to provide a fixed rule for each and every type of mental disorder. Thus, the generally accepted rules which have evolved to determine mental responsibility are general enough in application to encompass all types of mental disorders, and phrased in a manner which can be understood and practically applied by juries composed of laymen.

The generally accepted test of mental competency to contract which has thus evolved is whether the party attempting to avoid the contract was capable of understanding and appreciating the nature and consequences of the particular act or transaction which he challenges. (Schwartzberg v. Teachers’ Retirement Bd., supra; Paine v. Aldrich, 133 N. Y. 544; Beisman v. New York City Employees’ Retirement System, 275 App. Div. 836, affd. 300 N. Y. 580.) This rule represents a balance struck between policies to protect the security of transactions between individuals and freedom of contract on the one hand, and protection of those mentally handicapped on the other hand. In my opinion, this rule has proven workable in practice and fair in result. A broad range of evidence including psychiatric testimony is admissible under the existing rules to establish a party’s mental condition. (See 2 Wigmore, Evidence [3d ed.], §§ 227-233.) In the final analysis, the lay jury will infer the state of the party’s mind from his observed behavior as indicated by the evidence presented at trial. Each juror instinctively judges what is normal and what is abnormal conduct from his own experience, and the generally accepted test harmonizes the competing policy considerations with human experience to achieve the fairest result in the greatest number of cases.

As in every situation where the law must draw a line between liability and nonliability, between responsibility and non-responsibility, there will be borderline cases, and injustices may occur by deciding erroneously that an individual belongs on one side of the line or the other. To minimize the chances of such injustices occurring, the line should be drawn as clearly as possible.

The Appellate Division correctly found that the deceased was capable of understanding the nature and effect of her retirement benefits, and exercised rational judgment in electing to receive the maximum allowance during her lifetime. I fear that the majority’s refinement of the generally accepted rules will prove unworkable in practice, and make many contracts vulnerable to psychological attack. Any benefit to those who understand what they are doing, but are unable to exercise self-discipline, will be outweighed by frivolous claims which will burden our courts and undermine the security of contracts. The reasonable expectations of those who innocently deal with persons who appear rational and who understand what they are doing should be protected.

Accordingly, I would affirm the order appealed from.

Chief Judge Fuld and Judges Burke and Bergaet concur with Judge Breitel; Judge Jaseet dissents and votes to affirm in separate opinion in which Judge Scileppi concurs.

Order reversed, without costs, and a new trial granted.

Error to circuit court, Wayne county.

SHERWOOD, J., dissents. [919] C.J. Reilly, for plaintiff.

Wm. Aikman, Jr., (D.C. Holbrook, of counsel,) for defendants and appellants.

MORSE, J.

Replevin for a cow. Suit commenced in justice's court; judgment for plaintiff; appealed to circuit court of Wayne county, and verdict and judgment for plaintiff in that court. The defendants bring error, and set out 25 assignments of the same.

The main controversy depends upon the construction of a contract for the sale of the cow. The plaintiff claims that the title passed, and bases his action upon such claim. The defendants contend that the contract was executory, and by its terms no title to the animal was acquired by plaintiff. The defendants reside at Detroit, but are in business at Walkerville, Ontario, and have a farm at Greenfield, in Wayne county, upon which were some blooded cattle supposed to be barren as breeders. The Walkers are importers and breeders of polled Angus cattle. The plaintiff is a banker living at Plymouth, in Wayne county. He called upon the defendants at Walkerville for the purchase of some of their stock, but found none there that suited him. Meeting one of the defendants afterwards, he was informed that they had a few head [920] upon their Greenfield farm. He was asked to go out and look at them, with the statement at the time that they were probably barren, and would not breed. May 5, 1886, plaintiff went out to Greenfield, and saw the cattle. A few days thereafter, he called upon one of the defendants with the view of purchasing a cow, known as Rose 2d of Aberlone. After considerable talk, it was agreed that defendants would telephone Sherwood at his home in Plymouth in reference to the price. The second morning after this talk he was called up by telephone, and the terms of the sale were finally agreed upon. He was to pay five and one-half cents per pound, live weight, fifty pounds shrinkage. He was asked how he intended to take the cow home, and replied that he might ship her from King's cattle-yard. He requested defendants to confirm the sale in writing, which they did by sending him the following letter: WALKERVILLE, May 15, 1886.

T.C. Sherwood, President, etc.-DEAR SIR: We confirm sale to you of the cow Rose 2d of Aberlone, lot 56 of our catalogue, at five and half cents per pound, less fifty pounds shrink. We inclose herewith order on Mr. Graham for the cow. You might leave check with him, or mail to us here, as you prefer. Yours, truly, HIRAM WALKER & SONS.

The order upon Graham inclosed in the letter read as follows:

WALKERVILLE, May 15, 1886.

George Graham: You will please deliver at King's cattle-yard to Mr. T.C. Sherwood, Plymouth, the cow Rose 2d of Aberlone, lot 56 of our catalogue. Send halter with the cow, and have her weighed.

Yours truly, HIRAM WALKER & SONS.

On the twenty-first of the same month the plaintiff went to defendants' farm at Greenfield, and presented the order and letter to Graham, who informed him that the defendants had instructed him not to deliver the cow. Soon after, the plaintiff tendered to Hiram Walker, one of the defendants, $80, and demanded the cow. Walker refused to take the money or deliver the cow. The plaintiff then instituted this suit. After he had secured possession of the cow under the writ of replevin, the plaintiff caused her to be weighed by the constable who served the writ, at a place other than King's cattle-yard. She weighed 1,420 pounds.

When the plaintiff, upon the trial in the circuit court, had submitted his proofs showing the above transaction, defendants moved to strike out and exclude the testimony from the case, for the reason that it was irrelevant and did not tend to show that the title to the cow passed, and that it showed that the contract of sale was merely executory. The court refused the motion, and an exception was taken. The defendants then introduced evidence tending to show that at the time of the alleged sale it was believed by both the plaintiff and themselves that the cow was barren and would not breed; that she cost $850, and if not barren would be worth from $750 to $1,000; that after the date of the letter, and the order to Graham, the defendants were informed by said Graham that in his judgment the cow was with calf, and therefore they instructed him not to deliver her to plaintiff, and on the twentieth of May, 1886, telegraphed plaintiff what Graham thought about the cow being with calf, and that consequently they could not sell her. The cow had a calf in the month of October following. On the nineteenth of May, the plaintiff wrote Graham as follows: PLYMOUTH, May 19, 1886.

Mr. George Graham, Greenfield-DEAR SIR: I have bought Rose or Lucy from Mr. Walker, and will be there for her Friday morning, nine or ten o'clock. Do not water her in the morning.

Yours, etc., T.C. SHERWOOD.

Plaintiff explained the mention of the two cows in this letter by testifying that, when he wrote this letter, the order and letter of defendants was at his home, and, writing in a hurry, and being uncertain as to the name of the cow, and not wishing his cow watered, he thought it would do no harm to name them [921] both, as his bill of sale would show which one he had purchased. Plaintiff also testified that he asked defendants to give him a price on the balance of their herd at Greenfield, as a friend thought of buying some, and received a letter dated May 17, 1886, in which they named the price of five cattle, including Lucy, at $90, and Rose 2d at $80. When he received the letter he called defendants up by telephone, and asked them why they put Rose 2d in the list, as he had already purchased her. They replied that they knew he had, but thought it would make no difference if plaintiff and his friend concluded to take the whole herd.

The foregoing is the substance of all the testimony in the case.

The circuit judge instructed the jury that if they believed the defendants, when they sent the order and letter to plaintiff, meant to pass the title to the cow, and that the cow was intended to be delivered to plaintiff, it did not matter whether the cow was weighed at any particular place, or by any particular person; and if the cow was weighed afterwards, as Sherwood testified, such weighing would be a sufficient compliance with the order. If they believed that defendants intended to pass the title by writing, it did not matter whether the cow was weighed before or after suit brought, and the plaintiff would be entitled to recover. The defendants submitted a number of requests which were refused. The substance of them was that the cow was never delivered to plaintiff, and the title to her did not pass by the letter and order; and that under the contract, as evidenced by these writings, the title did not pass until the cow was weighed and her price thereby determined; and that, if the defendants only agreed to sell a cow that would not breed, then the barrenness of the cow was a condition precedent to passing title, and plaintiff cannot recover. The court also charged the jury that it was immaterial whether the cow was with calf or not. It will therefore be seen that the defendants claim that, as a matter of law, the title of this cow did not pass, and that the circuit judge erred in submitting the case to the jury, to be determined by them, upon the intent of the parties as to whether or not the title passed with the sending of the letter and order by the defendants to the plaintiff.

This question as to the passing of title is fraught with difficulties, and not always easy of solution. An examination of the multitude of cases bearing upon this subject, with their infinite variety of facts, and at least apparent conflict of law, ofttimes tends to confuse rather than to enlighten the mind of the inquirer. It is best, therefore, to consider always, in cases of this kind, the general principles of the law, and then apply them as best we may to the facts of the case in hand.

The cow being worth over $50, the contract of sale, in order to be valid, must be one where the purchaser has received or accepted part of the goods, or given something in earnest, or in part payment, or where the seller has signed some note or memorandum in writing. How.St. 6186. Here there was no actual delivery, nor anything given in payment or in earnest, but there was a sufficient memorandum signed by the defendants to take the case out of the statute, if the matter contained in such memorandum is sufficient to constitute a completed sale. It is evident from the letter that the payment of the purchase price was not intended as a condition precedent to the passing of the title. Mr. Sherwood is given his choice to pay the money to Graham at King's cattle-yards, or to send check by mail.

Nor can there be any trouble about the delivery. The order instructed Graham to deliver the cow, upon presentation of the order, at such cattle-yards. But the price of the cow was not determined upon to a certainty. Before this could be ascertained, from the terms of the contract, the cow had to be weighed; and, by the order inclosed with the letter, Graham was instructed to have her weighed. If the cow had been weighed, and this letter had stated, upon such weight, the express and exact price of the animal, there can be no [922] doubt but the cow would have passed with the sending and receipt of the letter and order by the plaintiff. Payment was not to be a concurrent act with the delivery, and therein this case differs from Case v. Dewey, 55 Mich. 116, 20 N.W.Rep. 817, and 21 N.W.Rep. 911. Also, in that case, there was no written memorandum of the sale, and a delivery was necessary to pass the title of the sheep; and it was held that such delivery could only be made by a surrender of the possession to the vendee, and an acceptance by him. Delivery by an actual transfer of the property from the vendor to the vendee, in a case like the present, where the article can easily be so transferred by a manual act, is usually the most significant fact in the transaction to show the intent of the parties to pass the title, but it never has been held conclusive. Neither the actual delivery, nor the absence of such delivery, will control the case, where the intent of the parties is clear and manifest that the matter of delivery was not a condition precedent to the passing of the title, or that the delivery did not carry with it the absolute title. The title may pass, if the parties so agree, where the statute of frauds does not interpose without delivery, and property may be delivered with the understanding that the title shall not pass until some condition is performed.

And whether the parties intended the title should pass before delivery or not is generally a question of fact to be determined by a jury. In the case at bar the question of the intent of the parties was submitted to the jury. This submission was right, unless from the reading of the letter and the order, and all the facts of the oral bargaining of the parties, it is perfectly clear, as a matter of law, that the intent of the parties was that the cow should be weighed, and the price thereby accurately determined, before she should become the property of the plaintiff. I do not think that the intent of the parties in this case is a matter of law, but one of fact. The weighing of the cow was not a matter that needed the presence or any act of the defendants, or any agent of theirs, to be well or accurately done. It could make no difference where or when she was weighed, if the same was done upon correct scales, and by a competent person. There is no pretense but what her weight was fairly ascertained by the plaintiff. The cow was specifically designated by this writing, and her delivery ordered, and it cannot be said, in my opinion, that the defendants intended that the weighing of the animal should be done before the delivery even, or the passing of title. The order to Graham is to deliver her, and then follows the instruction, not that he shall weigh her himself, or weigh her, or even have her weighed, before delivery, but simply, Send halter with the cow, and have her weighed.

It is evident to my mind that they had perfect confidence in the integrity and responsibility of the plaintiff, and that they considered the sale perfected and completed when they mailed the letter and order to plaintiff. They did not intend to place any conditions precedent in the way, either of payment of the price, or the weighing of the cow, before the passing of the title. They cared not whether the money was paid to Graham, or sent to them afterwards, or whether the cow was weighed before or after she passed into the actual manual grasp of the plaintiff. The refusal to deliver the cow grew entirely out of the fact that, before the plaintiff called upon Graham for her, they discovered she was not barren, and therefore of greater value than they had sold her for.

The following cases in this court support the instruction of the court below as to the intent of the parties governing and controlling the question of a completed sale, and the passing of title: Lingham v. Eggleston, 27 Mich. 324;Wilkinson v. Holiday, 33 Mich. 386;Grant v. Merchants' & Manufacturers' Bank, 35 Mich. 527;Carpenter v. Graham, 42 Mich. 194, 3 N.W.Rep. 974;Brewer v. Michigan Salt Ass'n, 47 Mich. 534, 11 N.W.Rep. 370;Whitcomb v. Whitney, 24 Mich. 486;Byles v. Colier, 54 Mich. 1, 19 N.W.Rep. 565;Scotten v. Sutter, 37 Mich. 527, 532; [923] Ducey Lumber Co. v. Lane, 58 Mich. 520, 525, 25 N.W.Rep. 568;Jenkinson v. Monroe, 28 N.W.Rep. 663.

It appears from the record that both parties supposed this cow was barren and would not breed, and she was sold by the pound for an insignificant sum as compared with her real value if a breeder. She was evidently sold and purchased on the relation of her value for beef, unless the plaintiff had learned of her true condition, and concealed such knowledge from the defendants. Before the plaintiff secured the possession of the animal, the defendants learned that she was with calf, and therefore of great value, and undertook to rescind the sale by refusing to deliver her. The question arises whether they had a right to do so. The circuit judge ruled that this fact did not avoid the sale and it made no difference whether she was barren or not. I am of the opinion that the court erred in this holding. I know that this is a close question, and the dividing line between the adjudicated cases is not easily discerned. But it must be considered as well settled that 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. 1 Benj. Sales, 605, 606; Leake, Cont. 339; Story, Sales, (4th Ed.) 377, 148. See, also, Cutts v. Guild, 57 N.Y. 229;Harvey v. Harris, 112 Mass. 32;Gardner v. Lane, 9 Allen, 492, 12 Allen, 44; Huthmacher v. Harris' Adm'rs, 38 Pa.St. 491; Byers v. Chapin, 28 Ohio St. 300;Gibson v. Pelkie, 37 Mich. 380, and cases cited; Allen v. Hammond, 11 Pet. 63-71.

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. The difficulty in every case is to determine whether the mistake or misapprehension is as to the substance of the whole contract, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not affect the substance of the whole consideration. Kennedy v. Panama, etc., Mail Co., L.R. 2 Q.B. 580, 587. It has been held, in accordance with the principles above stated, that where a horse is bought under the belief that he is sound, and both vendor and vendee honestly believe him to be sound, the purchaser must stand by his bargain, and pay the full price, unless there was a warranty.

It seems to me, however, in the case made by this record, that the mistake or misapprehension of the parties went to the whole substance of the agreement. If the cow was a breeder, she was worth at least $750; if barren, she was worth not over $80. The parties would not have made the contract of sale except upon the understanding and belief that she was incapable of breeding, and of no use as a cow. It is true she is now the identical animal that they thought her to be when the contract was made; there is no mistake as to the identity of the creature. Yet 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. If the mutual mistake had simply related to the fact whether she was with calf or not for one season, then it might have been a good sale, but the mistake affected the character of the animal for all time, and for its present and ultimate use. She was not in fact the animal, or the kind of animal, the defendants intended to sell or the plaintiff to buy. She was not a barren cow, and, if this fact had been known, there would have been no contract. The mistake [924] 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. She was sold as a beef creature would be sold; she is in fact a breeding cow, and a valuable one. The court should have instructed the jury that if they found that the cow was sold, or contracted to be sold, upon the understanding of both parties that she was barren, and useless for the purpose of breeding, and that in fact she was not barren, but capable of breeding, then the defendants had a right to rescind, and to refuse to deliver, and the verdict should be in their favor.

The judgment of the court below must be reversed, and a new trial granted, with costs of this court to defendants.

CAMPBELL, C.J., and CHAMPLIN, J., concurred.

SHERWOOD, J., (dissenting.)

I do not concur in the opinion given by my brethren in this case. I think the judgments before the justice and at the circuit were right. I agree with my Brother MORSE that the contract made was not within the statute of frauds, and the payment for the property was not a condition precedent to the passing of the title from the defendants to the plaintiff. And I further agree with him that the plaintiff was entitled to a delivery of the property to him when the suit was brought, unless there was a mistake made which would invalidate the contract, and I can find no such mistake. There is no pretense there was any fraud or concealment in the case, and an intimation or insinuation that such a thing might have existed on the part of either of the parties would undoubtedly be a greater surprise to them than anything else that has occurred in their dealings or in the case.

As has already been stated by my brethren, the record shows that the plaintiff is a banker and farmer as well, carrying on a farm, and raising the best breeds of stock, and lived in Plymouth, in the county of Wayne, 23 miles from Detroit; that the defendants lived in Detroit, and were also dealers in stock of the higher grades; that they had a farm at Walkerville, in Canada, and also one in Greenfield in said county of Wayne, and upon these farms the defendants kept their stock. The Greenfield farm was about 15 miles from the plaintiff's. In the spring of 1886 the plaintiff, learning that the defendants had some polled Angus cattle for sale, was desirous of purchasing some of that breed, and meeting the defendants, or some of them, at Walkerville, inquired about them, and was informed that they had none at Walkerville, but had a few head left on their farm in Greenfield, and asked the plaintiff to go and see them, stating that in all probability they were sterile and would not breed. In accordance with said request, the plaintiff, on the fifth day of May, went out and looked at the defendants' cattle at Greenfield, and found one called Rose, Second, which he wished to purchase, and the terms were finally agreed upon at five and a half cents per pound, live weight, 50 pounds to be deducted for shrinkage. The sale was in writing, and the defendants gave an order to the plaintiff directing the man in charge of the Greenfield farm to deliver the cow to plaintiff. This was done on the fifteenth of May. On the twenty-first of May plaintiff went to get his cow, and the defendants refused to let him have her; claiming at the time that the man in charge at the farm thought the cow was with calf, and, if such was the case, they would not sell her for the price agreed upon. The record further shows that the defendants, when they sold the cow, believed the cow was not with calf, and barren; that from what the plaintiff had been told by defendants (for it does not appear he had any other knowledge or facts from which he could form an opinion) he believed the cow was farrow, but still thought she could be made to breed. The foregoing shows the entire interview and treaty between the parties as to the sterility and qualities of the cow sold to the plaintiff. The cow had a calf in the month of October.

[925] There is no question but that the defendants sold the cow representing her of the breed and quality they believed the cow to be, and that the purchaser so understood it. And the buyer purchased her believing her to be of the breed represented by the sellers, and possessing all the qualities stated, and even more. He believed she would breed. There is no pretense that the plaintiff bought the cow for beef, and there is nothing in the record indicating that he would have bought her at all only that he thought she might be made to breed. Under the foregoing facts,-and these are all that are contained in the record material to the contract,-it is held that because it turned out that the plaintiff was more correct in his judgment as to one quality of the cow than the defendants, and a quality, too, which could not by any possibility be positively known at the time by either party to exist, the contract may be annulled by the defendants at their pleasure. I know of no law, and have not been referred to any, which will justify any such holding, and I think the circuit judge was right in his construction of the contract between the parties.

It is claimed that a mutual mistake of a material fact was made by the parties when the contract of sale was made. There was no warranty in the case of the quality of the animal. When a mistaken fact is relied upon as ground for rescinding, such fact must not only exist at the time the contract is made, but must have been known to one or both of the parties. Where there is no warranty, there can be no mistake of fact when no such fact exists, or, if in existence, neither party knew of it, or could know of it; and that is precisely this case. 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 $300, when the purchaser believed he could go much faster, and made the purchase for that sum, and a few days thereafter, under more favorable circumstances, the horse was driven a mile in 2 min. 16 sec., and was found to be worth $20,000, I hardly think it would be held, either at law or in equity, by any one, that the seller in such case could rescind the contract. The same legal principles apply in each case.

In this case neither party knew the actual quality and condition of this cow at the time of the sale. The defendants say, or rather said, to the plaintiff, they had a few head left on their farm in Greenfield, and asked plaintiff to go and see them, stating to plaintiff that in all probability they were sterile and would not breed. Plaintiff did go as requested, and found there these cows, including the one purchased, with a bull. The cow had been exposed, but neither knew she was with calf or whether she would breed. The defendants thought she would not, but the plaintiff says that he thought she could be made to breed, but believed she was not with calf. The defendants sold the cow for what they believed her to be, and the plaintiff bought her as he believed she was, after the statements made by the defendants. No conditions whatever were attached to the terms of sale by either party. It was in fact as absolute as it could well be made, and I know of no precedent as authority by which this court can alter the contract thus made by these parties in writing,-interpolate in it a condition by which, if the defendants should be mistaken in their belief that the cow was barren, she could be returned to them and their contract should be annulled. It is not the duty of courts to destroy contracts when called upon to enforce them, after they have been legally made. There was no mistake of any material fact by either of the parties in the case as would license the vendors to rescind. There was no difference between the parties, nor misapprehension, as to the substance of the thing bargained for, which was a cow supposed to be barren by one party, and believed not to be by the other. 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.

I entirely agree with my brethren that the right to rescind occurs whenever the thing actually delivered or received is different in substance from the [926] thing bargained for, and intended to be sold; but if it be only a difference in some quality or accident, even though the misapprehension may have been the actuating motive of the parties in making the contract, yet it will remain binding. In this case the cow sold was the one delivered. What might or might not happen to her after the sale formed no element in the contract. The case of Kennedy v. Panama Mail Co., L.R. 2 Q.B. 587, and the extract cited therefrom in the opinion of my brethren, clearly sustains the views I have taken. See, also, Smith v. Hughes, L.R. 6 Q.B. 597; Carter v. Crick, 4 Hurl. & N. 416.

According to this record, whatever the mistake was, if any, in this case, it was upon the part of the defendants, and while acting upon their own judgment. It is, however, elementary law, and very elementary, too, that the mistaken party, without any common understanding with the other party in the premises as to the quality of an animal, is remediless if he is injured through his own mistake. Leake, Cont. 338; Torrance v. Bolton, L.R. 8 Ch. 118; Smith v. Hughes, L.R. 6 Q.B. 597.

The case cited by my brethren from 37 Mich. I do not think sustains the conclusion reached by them. In that case the subject-matter about which the contract was made had no existence, and in such case Mr. Justice GRAVES held there was no contract; and to the same effect are all the authorities cited in the opinion. That is certainly not this case. Here the defendants claim the subject-matter not only existed, but was worth about $800 more than the plaintiff paid for it.

The case of Huthmacher v. Harris, 38 Pa.St. 491, is this: A party purchased at an administrator's sale a drill-machine, which had hid away in it by the deceased a quantity of notes, to the amount of $3,000, money to the amount of over $500, and two silver watches and a pocket compass of the value of $60.25. In an action of trover for the goods, it was held that nothing but the machine was sold or passed to the purchasers, neither party knowing that the machine contained any such articles.

In Cutts v. Guild, 57 N.Y. 229, the defendant, as assignee, recovered a judgment against D. & H. He also recovered several judgments in his own name on behalf of the T. Co. The defendant made an assignment of and transferred the first judgment to an assignee of the plaintiff,-both parties supposing and intending to transfer one of the T. Co. judgments,-and it was held that such contract of assignment was void, because the subject-matter contained in the assignment was not contracted for.

In the case of Byers v. Chapin, 28 Ohio St. 300, the defendant sold the plaintiffs 5,000 oil barrels. The plaintiffs paid $5,000 upon their purchase, and took some of the barrels. The barrels proved to be unfit for use, and the contract was rescinded by consent of the parties. The defendant, instead of returning all the money paid to the purchaser, retained a portion and gave plaintiffs his note for the remainder. The plaintiffs brought suit upon this note. The defendant claimed that, under the contract of sale of the barrels, they were to be glued by the plaintiffs, which the plaintiffs properly failed to do, and this fact was not known to defendant when he agreed to rescind, and gave the note, and therefore the note was given upon a mistaken state of facts, falsely represented to the defendant, and which were known to the plaintiffs. On the proofs, the jury found for the defendant, and the verdict was affirmed.

In Gardner v. Lane, 9 Mass. 492, it is decided that if, upon a sale of No. 1 mackerel, the vendor delivers No. 3 mackerel, and some barrels of salt, no title to the articles thus delivered passes.

Allen v. Hammond, 11 Pet. 63, decides that if a life-estate in land is sold, and at the time of the sale the estate is terminated by the death of the person in whom the right vested, a court of equity will rescind the purchase.

In Harvey v. Harris, 112 Mass. 32, at an auction, two different grades of flour were sold, and a purchaser of the second claimed to have bought a quantity [927] of the first grade, under a sale made of the second, and this he was not allowed to do, because of the mutual mistake; the purchaser had not in fact bought the flour he claimed. In this case, however, it is said it is true that, if there is a mutual agreement of the parties for the sale of particular articles of property, a mistake of misapprehension as to the quality of the articles will not enable the vendor to repudiate the sale.

The foregoing are all the authorities relied on as supporting the positions taken by my brethren in this case. I fail to discover any similarity between them and the present case; and I must say, further, in such examination as I have been able to make, I have found no adjudicated case going to the extent, either in law or equity, that has been held in this case. In this case, if either party had superior knowledge as to the qualities of this animal to the other, certainly the defendants had such advantage. I understand the law to be well settled that there is no breach of any implied confidence that one party will not profit by his superior knowledge as to facts and circumstances actually within the knowledge of both, because neither party reposes in any such confidence unless it be specially tendered or required, and that a general sale does not imply warranty of any quality, or the absence of any; and if the seller represents to the purchaser what he himself believes as to the qualities of an animal, and the purchaser buys relying upon his own judgment as to such qualities, there is no warranty in the case, and neither has a cause of action against the other if he finds himself to have been mistaken in judgment.

The only pretense for avoiding this contract by the defendants is that they erred in judgment as to the qualities and value of the animal. I think the principles adopted by Chief Justice CAMPBELL in Williams v. Spurr completely cover this case, and should have been allowed to control in its decision. See 24 Mich. 335. See, also, Story, Sales, 174, 175, 382, and Benj. Sales, 430. The judgment should be affirmed.

LENAWEE COUNTY BOARD OF HEALTH v MESSERLY

Docket No. 65513.

Argued November 9, 1981

(Calendar No. 3).

Decided December 23, 1982.

Force & Baldwin (by Lawrence C. Force) for the Messerlys.

Robertson, Bartlow, Des Chenes & Sautér, P.C. (by Michael J. Sauter), for the Pickleses.

Ryan, J.

In March of 1977, Carl and Nancy Pickles, appellees, purchased from appellants, William and Martha Messerly, a 600-square-foot tract of land upon which is located a three-unit apartment building. Shortly after the transaction was closed, the Lenawee County Board of Health condemned the property and obtained a permanent injunction which prohibits human habitation on the premises until the defective sewage system is brought into conformance with the Lenawee County sanitation code.

We are required to determine whether appellees should prevail in their attempt to avoid this land contract on the basis of mutual mistake and failure of consideration. We conclude that the parties did entertain a mutual misapprehension of fact, but that the circumstances of this case do not warrant rescission.

I

The facts of the case are not seriously in dispute. In 1971, the Messerlys acquired approximately one acre plus 600 square feet of land. A three-unit apartment building was situated upon the 600-square-foot portion. The trial court found that, prior to this transfer, the Messerlys’ predecessor in title, Mr. Bloom, had installed a septic tank on the property without a permit and in violation of the applicable health code. The Messerlys used the building as an income investment property until 1973 when they sold it, upon land contract, to James Barnes who likewise used it primarily as an income-producing investment.1

Mr. and Mrs. Barnes, with the permission of the Messerlys, sold approximately one acre of the property in 1976, and the remaining 600 square feet and building were offered for sale soon thereafter when Mr. and Mrs. Barnes defaulted on their land contract. Mr. and Mrs. Pickles evidenced an interest in the property, but were dissatisfied with the terms of the Barnes-Messerly land contract. Consequently, to accommodate the Pickleses’ preference to enter into a land contract directly with the Messerlys, Mr. and Mrs. Barnes executed a quitclaim deed which conveyed their interest in the property back to the Messerlys. After inspecting the property, Mr. and Mrs. Pickles executed a new land contract with the Messerlys on March 21, 1977. It provided for a purchase price of $25,-500. A clause was added to the end of the land contract form which provides:

"17. Purchaser has examined this property and agrees to accept same in its present condition. There are no other or additional written or oral understandings.”

Five or six days later, when the Pickleses went to introduce themselves to the tenants, they discovered raw sewage seeping out of the ground. Tests conducted by a sanitation expert indicated the inadequacy of the sewage system. The Lenawee County Board of Health subsequently condemned the property and initiated this lawsuit in the Lenawee Circuit Court against the Messerlys as land contract vendors, and the Pickleses, as vendees, to obtain a permanent injunction proscribing human habitation of the premises until the property was brought into conformance with the Lenawee County sanitation code. The injunction was granted, and the Lenawee County Board of Health was permitted to withdraw from the lawsuit by stipulation of the parties.

When no payments were made on the land contract, the Messerlys filed a cross-complaint against the Pickleses seeking foreclosure, sale of the property, and a deficiency judgment. Mr. and Mrs. Pickles then counterclaimed for rescission against the Messerlys, and filed a third-party complaint against the Barneses, which incorporated, by reference, the allegations of the counterclaim against the Messerlys. In count one, Mr. and Mrs. Pickles alleged failure of consideration. Count two charged Mr. and Mrs. Barnes with wilful concealment and misrepresentation as a result of their failure to disclose the condition of the sanitation system. Additionally, Mr. and Mrs. Pickles sought to hold the Messerlys liable in equity for the Barneses’ alleged misrepresentation. The Pickleses prayed that the land contract be rescinded.2

After a bench trial, the court concluded that the Pickleses had no cause of action against either the Messerlys or the Barneses as there was no fraud or misrepresentation. This ruling was predicated on the trial judge’s conclusion that none of the parties knew of Mr. Bloom’s earlier transgression or of the resultant problem with the septic system until it was discovered by the Pickleses, and that the sanitation problem was not caused by any of the parties. The trial court held that the property was purchased "as is”, after inspection and, accordingly, its "negative * * * value cannot be blamed upon an innocent seller”. Foreclosure was ordered against the Pickleses, together with a judgment against them in the amount of $25,943.09.3

Mr. and Mrs. Pickles appealed from the adverse judgment. The Court of Appeals unanimously affirmed the trial court’s ruling with respect to Mr. and Mrs. Barnes but, in a two-to-one decision, reversed the finding of no cause of action on the Pickleses’ claims against the Messerlys. Lenawee County Board of Health v Messerly, 98 Mich App 478; 295 NW2d 903 (1980).4 It concluded that the

mutual mistake5 between the Messerlys and the Pickleses went to a basic, as opposed to a collateral, element of the contract,6 and that the parties intended to transfer income-producing rental property but, in actuality, the vendees paid $25,500 for an asset without value.7

We granted the Messerlys’ application for leave to appeal. 411 Mich 900 (1981).8

II

We must decide initially whether there was a mistaken belief entertained by one or both parties to the contract in dispute and, if so, the resultant legal significance.9

A contractual mistake "is a belief that is not in accord with the facts”. 1 Restatement Contracts, 2d, § 151, p 383. The erroneous belief of one or both of the parties must relate to a fact in existence at the time the contract is executed. Richardson Lumber Co v Hoey, 219 Mich 643; 189 NW 923 (1922); Sherwood v Walker, 66 Mich 568, 580; 33 NW 919 (1887) (Sherwood, J., dissenting). That is to say, the belief which is found to be in error may not be, in substance, a prediction as to a future occurrence or non-occurrence. Henry v Thomas, 241 Ga 360; 245 SE2d 646 (1978); Hailpern v Dryden, 154 Colo 231; 389 P2d 590 (1964). But see Denton v Utley, 350 Mich 332; 86 NW2d 537 (1957).

The Court of Appeals concluded, after a de novo review of the record, that the parties were mistaken as to the income-producing capacity of the property in question. 98 Mich App 487-488. We agree. The vendors and the vendees each believed that the property transferred could be utilized as income-generating rental property. All of the parties subsequently learned that, in fact, the property was unsuitable for any residential use.

Appellants assert that there was no mistake in the contractual sense because the defect in the sewage system did not arise until after the contract was executed. The appellees respond that the Messerlys are confusing the date of the inception of the defect with the date upon which the defect was discovered.

This is essentially a factual dispute which the trial court failed to resolve directly. Nevertheless, we are empowered to draw factual inferences from the facts found by the trial court. GCR 1963, 865.1(6).

An examination of the record reveals that the septic system was defective prior to the date on which the land contract was executed. The Messerlys’ grantor installed a nonconforming septic system without a permit prior to the transfer of the property to the Messerlys in 1971. Moreover, virtually undisputed testimony indicates that, assuming ideal soil conditions, 2,500 square feet of property is necessary to support a sewage system adequate to serve a three-family dwelling. Likewise, 750 square feet is mandated for a one-family home. Thus, the division of the parcel and sale of one acre of the property by Mr. and Mrs. Barnes in 1976 made it impossible to remedy the already illegal septic system within the confines of the 600-square-foot parcel.10

Appellants do not dispute these underlying facts which give rise to an inference contrary to their contentions.

Having determined that when these parties entered into the land contract they were laboring under a mutual mistake of fact, we now direct our attention to a determination of the legal significance of that finding.

A contract may be rescinded because of a mutual misapprehension of the parties, but this remedy is granted only in the sound discretion of the court. Harris v Axline, 323 Mich 585; 36 NW2d 154 (1949). Appellants argue that the parties’ mistake relates only to the quality or value of the real estate transferred, and that such mistakes are collateral to the agreement and do not justify rescission, citing A & M Land Development Co v Miller, 354 Mich 681; 94 NW2d 197 (1959).

In that case, the plaintiff was the purchaser of 91 lots of real property. It sought partial rescission of the land contract when it was frustrated in its attempts to develop 42 of the lots because it could not obtain permits from the county health department to install septic tanks on these lots. This Court refused to allow rescission because the mistake, whether mutual or unilateral, related only to the value of the property.

"There was here no mistake as to the form or substance of the contract between the parties, or the description of the property constituting the subject matter. The situation involved is not at all analogous to that presented in Scott v Grow, 301 Mich 226; 3 NW2d 254; 141 ALR 819 (1942). There the plaintiff sought relief by way of reformation of a deed on the ground that the instrument of conveyance had not been drawn in accordance with the intention and agreement of the parties. It was held that the bill of complaint stated a case for the granting of equitable relief by way of reformation. In the case at bar plaintiff received the property for which it contracted. The fact that it may be of less value than the purchaser expected at the time of the transaction is not a sufficient basis for the granting of equitable relief, neither fraud nor reliance on misrepresentation of material facts having been established.” 354 Mich 693-694.

Appellees contend, on the other hand, that in this case the parties were mistaken as to the very nature of the character of the consideration and claim that the pervasive and essential quality of this mistake renders rescission appropriate. They cite in support of that view Sherwood v Walker, 66 Mich 568; 33 NW 919 (1887), the famous "barren cow” case. In that case, the parties agreed to the sale and purchase of a cow which was thought to be barren, but which was, in reality, with calf. When the seller discovered the fertile condition of his cow, he refused to deliver her. In permitting rescission, the Court stated:

"It seems to me, however, in the case made by this record, that the mistake or misapprehension of the parties went to the whole substance of the agreement. If the cow was a breeder, she was worth at least $750; if barren, she was worth not over $80. The parties would not have made the contract of sale except upon the understanding and belief that she was incapable of breeding, and of no use as a cow. It is true she is now the identical animal that they thought her to be when the contract was made; there is no mistake as to the identity of the creature. Yet 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. If the mutual mistake had simply related to the fact whether she was with calf or not for one season, then it might have been a good sale; but the mistake affected the character of the animal for all time, and for her present and ultimate use. She was not in fact the animal, or the kind of animal, the defendants intended to sell or the plaintiff to buy. 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. She was sold as a beef creature would be sold; she is in fact a breeding cow, and a valuable one.

"The court should have instructed the jury that if they found that the cow was sold, or contracted to be sold, upon the understanding of both parties that she was barren, and useless for the purpose of breeding, and that in fact she was not barren, but capable of breeding, then the defendants had a right to rescind, and to refuse to deliver, and the verdict should be in their favor.” 66 Mich 577-578.

As the parties suggest, the foregoing precedent arguably distinguishes mistakes affecting the essence of the consideration from those which go to its quality or value, affording relief on a per se basis for the former but not the latter. See, e.g., Lenawee County Board of Health v Messerly, 98 Mich App 478, 492; 295 NW2d 903 (1980) (Mackenzie, J., concurring in part).

However, the distinctions which may be drawn from Sherwood and A & M Land Development Co do not provide a satisfactory analysis of the nature of a mistake sufficient to invalidate a contract. Often, a mistake relates to an underlying factual assumption which, when discovered, directly affects value, but simultaneously and materially affects the essence of the contractual consideration. It is disingenuous to label such a mistake collateral. McKay v Coleman, 85 Mich 60; 48 NW 203 (1891). Corbin, Contracts (one vol ed), § 605, p 551.

Appellant and appellee both mistakenly believed that the property which was the subject of their land contract would generate income as rental property. The fact that it could not be used for human habitation deprived the property of its income-earning potential and rendered it less valuable. However, this mistake, while directly and dramatically affecting the property’s value, cannot accurately be characterized as collateral because it also affects the very essence of the consideration. "The thing sold and bought [income-generating rental property] had in fact no existence”. Sherwood v Walker, 66 Mich 578.

We find that the inexact and confusing distinction between contractual mistakes running to value and those touching the substance of the consideration serves only as an impediment to a clear and helpful analysis for the equitable resolution of cases in which mistake is alleged and proven. Accordingly, the holdings of A & M Land Development Co and Sherwood with respect to the material or collateral nature of a mistake are limited to the facts of those cases.

Instead, 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. Denton v Utley, 350 Mich 332; 86 NW2d 537 (1957); Farhat v Rassey, 295 Mich 349; 294 NW 707 (1940); Richardson Lumber Co v Hoey, 219 Mich 643; 189 NW 923 (1922). 1 Restatement Contracts, 2d, § 152, pp 385-386.11 Rescission is not available, however, to relieve a party who has assumed the risk of loss in connection with the mistake. Denton v Utley, 350 Mich 344-345; Farhat v Rassey, 295 Mich 352; Corbin, Contracts (one vol ed), § 605, p 552; 1 Restatement Contracts, 2d, §§ 152, 154, pp 385-386, 402-406.12

All of the parties to this contract erroneously assumed that the property transferred by the vendors to the vendees was suitable for human habitation and could be utilized to generate rental income. The fundamental nature of these assumptions is indicated by the fact that their invalidity changed the character of the property transferred, thereby frustrating, indeed precluding, Mr. and Mrs. Pickles’ intended use of the real estate. Although the Pickleses are disadvantaged by enforcement of the contract, performance is advantageous to the Messerlys, as the property at issue is less valuable absent its income-earning potential. Nothing short of rescission can remedy the mistake. Thus, the parties’ mistake as to a basic assumption materially affects the agreed performances of the parties.

Despite the significance of the mistake made by the parties, we reverse the Court of Appeals because we conclude that equity does not justify the remedy sought by Mr. and Mrs. Pickles.

Rescission is an equitable remedy which is granted only in the sound discretion of the court. Harris v Axline, 323 Mich 585; 36 NW2d 154 (1949); Hathaway v Hudson, 256 Mich 694; 239 NW 859 (1932). A court need not grant rescission in every case in which the mutual mistake relates to a basic assumption and materially affects the agreed performance of the parties.

In cases of mistake by two equally innocent parties, we are required, in the exercise of our equitable powers, to determine which blameless party should assume the loss resulting from the misapprehension they shared.13 Normally that can only be done by drawing upon our "own notions of what is reasonable and just under all the surrounding circumstances”.14

Equity suggests that, in this case, the risk should be allocated to the purchasers. We are guided to that conclusion, in part, by the standards announced in § 154 of the Restatement of Contracts, 2d, for determining when a party bears the risk of mistake. See fn 12. Section 154(a) suggests that the court should look first to whether the parties have agreed to the allocation of the risk between themselves. While there is no express assumption in the contract by either party of the risk of the property becoming uninhabitable, there was indeed some agreed allocation of the risk to the vendees by the incorporation of an "as is” clause into the contract which, we repeat, provided:

"Purchaser has examined this property and agrees to accept same in its present condition. There are no other or additional written or oral understandings.”

That is a persuasive indication that the parties considered that, as between them, such risk as related to the "present condition” of the property should lie with the purchaser. 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.15 Thus, the parties themselves assigned the risk of loss to Mr. and Mrs. Pickles.16

We conclude that Mr. and Mrs. Pickles are not entitled to the equitable remedy of rescission and, accordingly, reverse the decision of the Court of Appeals.

Fitzgerald, C.J., and Kavanagh, Williams, Levin, and Coleman, JJ., concurred with Ryan, J.

Riley, J., took no part in the decision of this case.

1

James Barnes was married shortly after he purchased the property. Mr. and Mrs. Barnes lived in one of the apartments on the property for three months and, after they moved, Mrs. Barnes continued to aid in the management of the property.

2

Linehan Realty Company and Andrew E. Czmer, doing business as Andrew Realty Company, were also named as third-party defendants, but were later dismissed from the lawsuit by stipulation of the parties.

3

The parties stipulated that this amount was due on the land contract, assuming that the contract was valid and enforceable.

4

Judge Mackenzie dissented from this part of the opinion. She would have held that the trial court’s refusal to grant rescission to Mr. and Mrs. Pickles was not an abuse of discretion.

"I would find that the trial court correctly denied rescission to Mr. and Mrs. Pickles, who received essentially the same property they bargained for and failed to prove that any mistake or failure of consideration existed at the time the parties entered into the contract.” 98 Mich App 494.

5

Mr. and Mrs. Pickles did not allege mutual mistake as a ground for rescission in their pleadings. However, the trial court characterized their failure of consideration argument as mutual mistake resulting in failure of consideration. Recognizing a potential difficulty in reversing the trial court on an issue not raised by the pleadings, the Court of Appeals devoted a footnote to an explanation of its decision to consider the mutual mistake argument.

"4 The pleadings below set forth the Pickleses’ theory as failure of consideration. However, it appears that the trial judge considered the failure of consideration issue to be essentially rooted in an allegation of mutual mistake. While issues not pleaded or otherwise presented to the trial court are not available for use on appeal, Long Mfg Co, Inc v Wright-Way Farm Service, Inc, 39 Mich App 546; 197 NW2d 862 (1972), rev’d on other grounds, 391 Mich 82 (1974), we address the issue of mutual mistake as one 'otherwise presented to the trial court’.

"We further note that an exception to the general rule that an issue not raised before the trial court cannot be raised on appeal exists where the issue has been fully briefed,’ and this Court in the interest of justice chooses to consider it. Turner v Ford Motor Co, 81 Mich App 521, 525, fn 2; 265 NW2d 400 (1978).” 98 Mich App 485, fn 4.

Since the mutual mistake issue was dispositive in the Court of Appeals, we find its consideration necessary to a proper determination of this case.

6

Mr. and Mrs. Pickles did not appeal the trial court’s finding that there was no fraud or misrepresentation by the Messerlys or Mr. and Mrs. Barnes. Likewise, the propriety of that ruling is not before this Court today.

7

The trial court found that the only way that the property could be put to residential use would be to pump and haul the sewage, a method which is economically unfeasible, as the cost of such a disposal system amounts to double the income generated by the property. There was speculation by the trial court that the adjoining land might be utilized to make the property suitable for residential use, but, in the absence of testimony directed at that point, the court refused to draw any conclusions. The trial court and the Court of Appeals both found that the property was valueless, or had a negative value.

8

The Court of Appeals decision to affirm the trial court’s finding of no cause of action against Mr. and Mrs. Barnes has not been appealed to this Court and, accordingly, the propriety of that ruling is not before us today.

9

We emphasize that this is a bifurcated inquiry. Legal or equitable remedial measures are not mandated in every case in which a mutual mistake has been established.

10

It is crucial to distinguish between the date on which a belief relating to a particular fact or set of facts becomes erroneous due to a change in the fact, and the date on which the mistaken nature of the belief is discovered. By definition, a mistake cannot be discovered until after the contract is executed. If the parties were aware, prior to the execution of a contract, that they were in error concerning a particular fact, there would be no misapprehension in signing the contract. Thus stated, it becomes obvious that the date on which a mistaken fact manifests itself is irrelevant to the determination whether or not there was a mistake.

11

The parties have invited our attention to the first edition of the Restatement of Contracts in their briefs, and the Court of Appeals cites to that edition in its opinion. However, the second edition was published subsequent to the issuance of the lower court opinion and the filing of the briefs with this Court. Thus, we take it upon ourselves to refer to the latest edition to aid us in our resolution of this case.

Section 152 delineates the legal significance of a mistake.

"§ 152. When Mistake of Both Parties Makes a Contract Voidable "(1) 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 under the rule stated in § 154.

"(2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

12

"§ 154. When a Party Bears the Risk of a Mistake

“A party bears the risk of a mistake when

"(a) the risk is allocated to him by agreement of the parties, or

"(b) 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, or

"(c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.”

13

This risk-of-loss analysis is absent in both A & M Land Development Co and Sherwood, and this omission helps to explain, in part, the disparate treatment in the two cases. Had such an inquiry been undertaken in Sherwood, we believe that the result might have been different. Moreover, a determination as to which party assumed the risk in A & M Land Development Co would have alleviated the need to characterize the mistake as collateral so as to justify the result denying rescission. Despite the absence of any inquiry as to the assumption of risk in those two leading cases, we find that there exists sufficient precedent to warrant such an analysis in future cases of mistake.

14

Hathaway v Hudson, 256 Mich 702, quoting 9 CJ, p 1161.

15

An "as is” clause waives those implied warranties which accompany the sale of a new home, Tibbitts v Openshaw, 18 Utah 2d 442; 425 P2d 160 (1967), or the sale of goods. MCL 440.2316(3)(a); MSA 19.2316(3)(a). Since implied warranties protect against latent defects, an "as is” clause will impose upon the purchaser the assumption of the risk of latent defects, such as an inadequate sanitation system, even when there are no implied warranties.

16

An "as is” clause does not preclude a purchaser from alleging fraud or misrepresentation as a basis for rescission. See 97 ALR2d 849. However, Mr. and Mrs. Pickles did not appeal the trial court’s finding that there was no fraud or misrepresentation, so we are bound thereby.

MICHAEL JORDAN, Plaintiff and Counterdefendant-Appellee, v. KARLA KNAFEL, Defendant and Counterplaintiff-Appellant.

First District (3rd Division)

No. 1—06—2398

Opinion filed December 12, 2007.

Michael T. Hannafan and Blake T. Hannafan, both of Hannafan & Hannafan, Ltd., of Chicago, for appellant.

Frederick J. Sperling, Paul E. Greenwalt III, and Sondra A. Hemeryck, all of Schiff Hardin LLP, of Chicago, for appellee.

JUSTICE THEIS

delivered the opinion of the court:

This action arises from a complaint for declaratory judgment originally filed by plaintiff Michael Jordan alleging that defendant Karla Knafel was attempting to extort $5 million from him by threatening to publicly expose their relationship. Knafel filed a counterclaim asserting breach of contract based on Jordan’s alleged agreement to pay her $5 million when he retired from basketball in exchange for her agreement not to file a paternity suit against him and to keep their romantic involvement confidential. Ultimately, Jordan filed a motion for summary judgment on Knafel’s counterclaim and on his amended complaint. The circuit court granted the motions for summary judgment, finding that the alleged settlement agreement was unenforceable because it would have been either fraudulently induced by Knafel’s false statement to Jordan that “she was pregnant with his child” or would have been based on a mutual mistake of fact as to the paternity of her unborn child.

On appeal, Knafel contends that the circuit court erred in granting Jordan’s motions for summary judgment on her verified counterclaim and his amended complaint where: (1) material issues of fact remain regarding the validity of the paternity tests; (2) material issues of fact remain on the elements of good faith, intent, materiality, and reliance in connection with Jordan’s defenses of fraudulent inducement and mutual mistake of fact; and (3) there was no evidence that she ever threatened Jordan to substantiate his claim of extortion. Additionally, Knafel contends that the circuit court abused its discretion in denying her motions to compel Jordan’s deposition and the production of certain documents.

BACKGROUND

On October 23, 2002, Jordan filed his original complaint for a declaratory judgment and injunctive relief against Knafel. Therein, he alleged that he had a relationship with Knafel more than a decade earlier, but denied the existence of any agreement to pay Knafel $5 million. Jordan further alleged that Knafel had previously extorted $250,000 from him under threat of publicly exposing their relationship and that, pursuant to a purported second agreement, she threatened to publicly expose their relationship unless Jordan paid her an additional $5 million. He sought a declaratory judgment that her demand for payment, even if an agreement existed, was unenforceable because (1) extortionate agreements violate public policy; (2) there would be no consideration to support any such agreement due to Knafel’s existing obligation not to publicly expose their relationship; (3) any such agreement would violate the statute of frauds; and (4) any such agreement would be barred by the statute of limitations. Additionally, Jordan sought an order enjoining Knafel, and any other person acting on her behalf, from engaging in further efforts to extort money from him.

Knafel responded to the complaint by filing a verified answer and affirmative defenses denying the material allegations of the complaint. Therein, she admitted that Jordan paid her $250,000 but stated that it was for her mental pain and anguish arising from their romantic relationship. In addition, Knafel filed a verified counterclaim asserting theories of breach of contract and anticipatory breach of contract based on Jordan’s alleged breach of his promise to pay Knafel $5 million “when he retired from professional basketball in exchange for her agreement not to file a paternity suit against him and for her agreement to keep their romantic involvement publicly confidential.”

The following relevant facts were alleged in the verified counterclaim. In the spring of 1989, Knafel, a singer, was performing in a band at a hotel in Indianapolis, Indiana. The Chicago Bulls were also in town to play the Indiana Pacers. After her performance, Knafel was approached by a National Basketball Association referee, who eventually introduced her to Jordan over the telephone. Although Knafel declined Jordan’s invitations to meet during the spring and summer of 1989, she and Jordan continued long-distance telephone conversations during that time.

In December 1989, three months after Jordan had married his wife, Knafel traveled to Chicago to meet Jordan, where they had unprotected sex. Thereafter, in November 1990, Knafel stayed with Jordan in Phoenix, Arizona, where they again had unprotected sex. In early 1991, Knafel learned that she was pregnant. She “was convinced that she was carrying Jordan’s baby,” but kept silent about the pregnancy for some time. The Bulls were on their way to their first NBA championship and Jordan was earning large sums of money in product endorsements. Knafel alleged that as a result, Jordan was “troubled” when she told him “she was pregnant with his child” in the spring of 1991. He was worried about destroying his public image, which he and his agent had carefully cultivated, and was concerned about the loss of future endorsements. Knafel further alleged that Jordan demanded that she abort the baby, but because of her personal beliefs, she refused.

According to Knafel, during several conversations about the impending birth of the baby, she and Jordan “discussed possible resolutions of their dilemma.” In the spring of 1991, Jordan offered, and urged Knafel to accept, his proposed settlement agreement to “resolve their problems.” Jordan offered to pay her “$5 million when he retired from professional basketball in return for her agreement not to file a paternity suit against him and for her agreement to keep their romantic involvement publicly confidential.” Knafel accepted Jordan’s offer. In consideration for his promise to pay her, she agreed to forbear filing a public paternity action against him and agreed to keep their romantic relationship confidential.

In July 1991, Knafel’s child was born. Jordan paid certain hospital bills and medical costs and paid Knafel $250,000 for “her mental pain and anguish arising from her relationship with him.” Knafel did not file a paternity suit against Jordan and she kept their relationship confidential.

Thereafter, in October 1993, Jordan announced his retirement from the Bulls, but in March of 1995, he returned again to the NBA to play for the Bulls. Knafel had not contacted Jordan to demand her payment of the $5 million which he had allegedly promised her until the summer of 1998, amid public speculation that Jordan would soon retire again. In September 1998, Knafel approached Jordan while he was vacationing in Las Vegas. During their conversation, Knafel reminded Jordan of his obligation to pay her the money under their agreement. Knafel alleged that Jordan reaffirmed his agreement to pay her the $5 million. A few months later, Jordan again retired from professional basketball.

Two years later, after Jordan failed to pay the $5 million under the alleged agreement, Knafel’s counsel contacted Jordan’s counsel to resolve their contract dispute. Jordan denied that he had promised to pay Knafel $5 million and eventually filed his complaint for declaratory judgment and an injunction. Knafel’s counterclaim sought $5 million for breach of contract. Additionally, at the time Knafel filed her counterclaim, it was alleged that Jordan was playing basketball for the Washington Wizards. Accordingly, she also alleged an anticipatory breach of their 1991 contract and 1998 reaffirmation.

Thereafter, Jordan filed a hybrid motion for judgment on the pleadings, which was directed to his complaint, and a motion to dismiss Knafel’s counterclaim. Therein, Jordan argued that the alleged agreement was unenforceable because it violated public policy or, in the alternative, that it was induced by fraud or mutual mistake of fact regarding the paternity of her child.

After a separate hearing on both motions, the trial court dismissed Jordan’s complaint for declaratory judgment and denied his motion for judgment on the pleadings. The court found that Jordan failed to allege an actual controversy and that issuing a declaratory judgment on a hypothetical contract would constitute the rendering of an advisory opinion. The trial court further dismissed the counterclaim, finding the agreement to be extortionate and against public policy. The parties appealed both rulings.

In Jordan v. Knafel, 355 Ill. App. 3d 534, 542, 823 N.E.2d 1113, 1121 (2005), this court reversed the circuit court’s dismissal of the counterclaim, holding that taking the pleadings as alleged, “the agreement could be construed as a good-faith settlement of her paternity claim with a confidentiality provision which is not violative of public policy.” Jordan, 355 Ill. App. 3d at 542, 823 N.E.2d at 1121. Additionally, this court held that it could not address the merits of the fraudulent inducement and mutual mistake arguments because there was no proper evidence presented to the court with which to conclude that Jordan was not the father of the child. Jordan, 355 Ill. App. 3d at 544, 823 N.E.2d at 1122. Finally, this court reversed the dismissal of Jordan’s complaint and held that although on its face it lacked sufficient facts to state a cause of action, the facts alleged in Knafel’s counterclaim were sufficient to form a record establishing an actual controversy. Jordan, 355 Ill. App. 3d at 545, 823 N.E.2d at 1123.

On remand, Jordan filed a verified amended complaint for declaratory judgment and injunctive relief and a motion for summary judgment on Knafel’s counterclaims. For purposes of the motion for summary judgment, Jordan did not contest the existence of the alleged settlement agreement. Rather, he argued that the alleged agreement was unenforceable because it was either fraudulently induced or was based on a mutual mistake of fact as to the paternity of Knafel’s child. In support, Jordan attached the affidavit of Dr. Charles M. Strom. Dr. Strom’s affidavit provided that in August 1991, which was one month after Knafel’s child was born, and a few months after the purported settlement agreement, he collected blood samples from Jordan, Knafel, and Knafel’s child, and conducted genetic testing for all three individuals under pseudonyms. Based upon the lab report from the Genetics Institute of the Illinois Masonic Medical Center, which was attached to Dr. Strom’s affidavit, Dr. Strom concluded that “[t]he test exclude[d] Mr. Jordan from being the father” of Knafel’s child. Additionally, in September 1991, Dr. Strom collected blood samples from Jordan to conduct additional genetic testing of Jordan, Knafel, and her child. Those tests were conducted by Cellmark Diagnostics and the report, also attached to the affidavit, indicated that Jordan was excluded from being the father of Knafel’s child by both DNA and serology testing.

In response, Knafel argued that Jordan’s actual paternity was irrelevant to the enforceability of the alleged settlement agreement. In support of her argument, she filed an affidavit in opposition to the motion for summary judgment. Therein, she stated that at the time of the alleged agreement she believed in good faith that she was pregnant with Jordan’s child. Specifically, she stated that she informed Jordan throughout their relationship that she was having sex with another man and that he even teased her about it. She never told Jordan that she was using birth control and he never used a condom when they had sex. She and Jordan were together in Phoenix, Arizona, on November 19-20, 1990, when they had unprotected sex. On February 14, 1991, her obstetrician, Dr. Michael F. Grisanti, told her that her baby was conceived on November 19 or 20, 1990. Knafel attached to her affidavit a copy of Dr. Grisanti’s signed and dated office note. The note provides as follows:

“TO WHOM IT MAY CONCERN:

KARLA KNAFEL IS A PATIENT UNDER MY CARE FOR HER PREGNANCY. HER DATE OF CONCEPTION IS NOV 19, 20, 1990. HER LMP WAS NOV 5, 1990. HER EDC IS AUG. 10, 1991. ANY QUESTIONS PLEASE FEEL FREE TO CALLME [sic] AT MY OFFICE.”

Knafel alleged that since those dates coincided with her stay with Jordan in Phoenix, she believed in good faith that she was pregnant with Jordan’s child. Ultimately, Knafel’s child was born in July 1991.

Additionally, in response to Jordan’s motion for summary judgment, Knafel disputed the validity and reliability of the paternity tests submitted by Jordan and sought to compel discovery from him, but declined to depose Dr. Strom and declined Jordan’s offer of additional paternity testing.

After a hearing, the trial court granted Jordan’s motion for summary judgment on the counterclaim, finding that “as a result of Knafel’s fraudulent misrepresentation to Jordan that he was the child’s father or, alternatively, as a result of a mutual mistake of fact, the alleged settlement contract is voidable and is therefore unenforceable against Jordan.” Thereafter, the trial court also granted Jordan’s motion for summary judgment on his amended complaint for declaratory judgment, concluding that “the relief sought in [Jordan’s] declaratory judgment is the same relief’ granted in the motion for summary judgment on the counterclaim. Knafel’s motions to compel discovery were also denied. Knafel filed a timely appeal from those orders.

ANALYSIS

Knafel contends on appeal that the circuit court erred in granting Jordan’s motions for summary judgment where there were disputed issues of fact relating to his defenses of fraudulent inducement and mutual mistake of fact. Summary judgment is proper where the pleadings, depositions, and admissions on file, when viewed in the light most favorable to the nonmoving party, reveal that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. 735 ILCS 5/2 — 1005(c) (West 2004).

“The movant bears the initial burden of production in a motion for summary judgment.” Bourgonje v. Machev, 362 Ill. App. 3d 984, 994, 841 N.E.2d 96, 106 (2005). “A defendant moving for summary judgment may meet its burden of production either by presenting evidence that, left unrebutted, would entitle it to judgment as a matter of law or by demonstrating that the plaintiff will be unable to prove an element of its cause of action.” Bourgonje, 362 Ill. App. 3d at 994, 841 N.E.2d at 106. If a defendant presents facts that would demonstrate its entitlement to judgment as a matter of law, the burden then shifts to the plaintiff to present some evidence allowing the imposition of liability on the defendant and supporting each element of his cause of action, thereby defining a material issue of fact to be determined at trial. Bourgonje, 362 Ill. App. 3d at 994-95, 841 N.E.2d at 106. Thus, although a plaintiff need not prove his case during a summary judgment proceeding, he must present some evidence to support each element of the cause of action. Prostran v. City of Chicago, 349 Ill. App. 3d 81, 85, 811 N.E.2d 364, 367 (2004). Our standard of review is de novo. Northern Illinois Emergency Physicians v. Landau, Omahana & Kopka, Ltd., 216 Ill. 2d 294, 305, 837 N.E.2d 99, 106 (2005).

Initially, we address Knafel’s threshold assertion that there is a disputed issue of fact regarding Jordan’s paternity. Although rejecting several opportunities to depose Dr. Strom and to conduct additional paternity testing, Knafel instead claims that she is entitled to an inference that Dr. Strom’s expert opinion is invalid or unreliable. She makes the following arguments: (1) the tests performed by the Genetics Institute were spoiled or tainted as a result of refrigeration; (2) the Genetics Institute test results are inadmissible hearsay where Dr. Strom did not personally conduct these tests; (3) no chain of custody has been shown to prove that the blood samples drawn actually came from Jordan; and (4) Dr. Strom cannot verify the authenticity of the Cellmark testing.

We find that Dr. Strom’s affidavit and attached test results constitute valid and admissible evidence in support of Jordan’s motion for summary judgment. Contrary to Knafel’s assertions, the Genetics Institute final results were not spoiled or tainted. Rather, Dr. Strom indicated that due to inadvertent refrigeration of certain samples, definitive HLA serology testing could not be completed. However, despite the refrigeration issue, he was able to conclude that Jordan was not the father of Knafel’s child because Jordan “was excluded from paternity by 4 other serology tests which are not sensitive to refrigeration, and by DNA testing.” This conclusion was further supported by the subsequent Cellmark DNA and serology testing.

Furthermore, we reject Knafel’s argument, made without citation to any relevant authority, that the test results are inadmissable hearsay because Dr. Strom does not claim to have done the testing himself. Indeed, Dr. Strom indicated in his affidavit that with respect to the Genetics Institute tests, he “conducted genetic testing,” and the test results are signed by him. Knafel was free to test that assertion by deposing Dr. Strom, but she declined. With respect to the Cell-mark test results, although Knafel argues that Dr. Strom cannot verify their authenticity, as an expert witness, Dr. Strom may rely on otherwise inadmissible facts or data to support his opinion that Jordan is not the father of Knafel’s child. Wilson v. Clark, 84 Ill. 2d 186, 192-93, 417 N.E.2d 1322, 1326 (1981).

Additionally, Knafel’s arguments regarding chain of custody and authenticity are mere speculation and are unsupported by any evidence suggesting that the tests were actually tainted or contaminated. Mere speculation is not enough to create a genuine issue of material fact sufficient to survive a motion for summary judgment. Tzakis v. Dominick’s Finer Foods, Inc., 356 Ill. App. 3d 740, 747, 826 N.E.2d 987, 994 (2005). As the trial court aptly stated, “[t]his Court will not hear Knafel’s unsupported challenge to the paternity tests when the Court’s offer of yet a third round of testing was rebuffed by Knafel’s counsel.” Accordingly, where Jordan has presented unrebutted evidence regarding paternity, Knafel has failed to meet her burden to raise a genuine issue of material fact regarding Dr. Strom’s findings.

We must now consider what impact the paternity evidence has on the enforceability of the alleged agreement. Knafel argues that Jordan’s actual paternity is irrelevant to the enforceability of the alleged settlement agreement as long as she has alleged a good-faith belief at the time of contracting that she was pregnant with Jordan’s child. Jordan maintains that, based upon the uncontroverted evidence that he is not the father of Knafel’s child, her statement to him at the time of the alleged settlement that “she was pregnant with his child” is a fraudulent misrepresentation as a matter of law which makes the contract voidable, permitting rescission.

A contract may contain all of the elements necessary for enforceability, but may nonetheless be unenforceable as a result of the imposition of an affirmative defense. R. Lord, Williston on Contracts §69:1, at 485 (4th ed. 2003). Here, Jordan seeks rescission of the contract, which is an equitable doctrine (Illinois State Bar Ass’n Mutual Insurance Co. v. Coregis Insurance Co., 355 Ill. App. 3d 156,165, 821 N.E.2d 706, 713 (2004)), based on the affirmative defense of fraud in the inducement. Fraud in the inducement of a contract is a defense that renders the contract voidable at the election of the injured party. Tower Investors, LLC v. 111 East Chestnut Consultants, Inc., 371 Ill. App. 3d 1019, 1030, 864 N.E.2d 927, 939 (2007).

In order for a representation to constitute fraud that would permit a court to set aside a contract, the party seeking such relief must establish that the representation was: (1) one of material fact; (2) made for the purpose of inducing the other party to act; (3) known to be false by the maker, or not actually believed by him on reasonable grounds to be true, but reasonably believed to be true by the other party; and (4) was relied upon by the other party to his detriment. Tower Investors, LLC, 371 Ill. App. 3d at 1030, 864 N.E.2d at 939; Wilkinson v. Appleton, 28 Ill. 2d 184, 187, 190 N.E.2d 727, 729-30 (1963).

Knafel asserts that there is a genuine issue of fact as to whether her affirmative representation to Jordan that “she was pregnant with his child” was material to the alleged settlement agreement and induced Jordan to act. Specifically, she argues that Jordan’s actual paternity (1) was not a subject of discussion when they reached their settlement agreement; (2) it was not a term or contingent condition of their settlement agreement; and (3) Jordan has never actually stated that it was material to the agreement. Additionally, she maintains that she is entitled to an inference that Jordan’s only motive was to preserve his image and protect his lucrative endorsements.

A misrepresentation is “material” if the party seeking rescission would have acted differently had he been aware of the fact or if it concerned the type of information upon which he would be expected to rely when making his decision to act. Miller v. William Chevrolet/ GEO, Inc., 326 Ill. App. 3d 642, 649, 762 N.E.2d 1, 7 (2001); see also Restatement (Second) of Contracts §162(2) (1981) (materiality exists when the misrepresentation would be likely to affect the conduct of a reasonable person). To be material, the representation need not have been the “paramount or decisive inducement, so long as it was a substantial factor.” R. Lord, Williston on Contracts §69:12, at 550-51 (4th ed. 2003); see Restatement (Second) of Contracts §167, at 453 (1981) (“a misrepresentation induces a party’s manifestation of assent if it substantially contributes to his decision to manifest his assent”).

Contrary to Knafel’s assertions, her own allegations establish that paternity was material to the alleged settlement agreement and was made for the purposes of inducing Jordan to act. Knafel alleged that in the spring of 1991, when she told Jordan “she was pregnant with his child,” Jordan “became worried” and they “discussed possible resolutions of their dilemma.” When she refused to get an abortion, Jordan then “proposed a settlement agreement which would resolve their problems.” In her verified statement, she asserted that it was not until “after [she] told Jordan of [her] pregnancy” that “Jordan said he was troubled at the prospect of destroying his public image” and he agreed to the alleged settlement. Thus, although a general fear of public exposure of their relationship may well have been a factor when Jordan proposed the alleged settlement, it was not Jordan’s only inducement. Rather, by Knafel’s own account, her statement to Jordan that he was the father of her child was indeed material and a substantial factor in inducing Jordan to act.

To hold otherwise would render her agreement not to file a paternity claim to have been a mere pretense to extort money. If Jordan’s paternity was immaterial to the parties’ settlement agreement, then her claim that she had a good-faith basis for a paternity action against Jordan would be unfounded. Without a good-faith basis, they would have lacked the necessary consideration for their bargain. See McKinley v. Watkins, 13 Ill. 140, 143-44 (1851). Since consideration is a material element of a contract (Steinberg v. Chicago Medical School, 69 Ill. 2d 320, 371 N.E.2d 634 (1977)), Jordan’s paternity must have been material to a good-faith settlement of her paternity claim.

Next, we consider whether there is a genuine issue of fact as to whether Knafel’s representation was known to be false or not reasonably believed by her to be true at the time of the alleged agreement. Jordan argues that because Knafel represented to him with certainty that “she was pregnant with his child,” yet paternity testing ultimately revealed that someone else was the father, it necessarily follows that at the time she told Jordan he was the father, she must have lacked certainty about the paternity of the child. Therefore, Knafel’s knowledge of her uncertainty regarding paternity satisfies the “knowledge” element of fraudulent misrepresentation. He relies upon Lipscomb v. Wells, 326 Ill. App. 3d 760, 761 N.E.2d 218 (2001), and section 162(1) of the Restatement (Second) of Contracts in support (Restatement (Second) of Contracts §162(1) (1981)).

In Lipscomb, the plaintiff brought a paternity action against the defendant to have him adjudicated the father of her child, alleging in a verified complaint that he was the natural father. Lipscomb, 326 Ill. App. 3d at 762, 761 N.E.2d at 219. Thereafter, an agreed order of parentage was entered requiring the defendant to pay child support. Years later, after being told by the plaintiff that he was not the child’s natural father and that she had been seeing another man at the time of conception, the defendant filed a petition seeking DNA testing to determine his paternity and to vacate the agreed order and to refund the child support payments. Lipscomb, 326 Ill. App. 3d at 762, 761 N.E.2d at 219-20. Therein, he asserted that he entered into the parentage agreement without the benefit of DNA testing based upon a representation from the plaintiff that he was the natural father of the child and a representation that she “had no other relations with men at the time of conception.” Lipscomb, 326 Ill. App. 3d at 762, 761 N.E.2d at 219. The trial court vacated the parentage judgment finding that prior to the entry of the agreed order of paternity, the plaintiff concealed from defendant the material fact that he was not the child’s father. Lipscomb, 326 Ill. App. 3d at 763, 761 N.E.2d at 220.

On appeal, the appellate court affirmed, recognizing generally that concealing the paternity of a child from a man held liable for paternity of that child is fraud. Lipscomb, 326 Ill. App. 3d at 765-66, 761 N.E.2d at 222. The court reasoned that when a party claims to know a material fact with certainty, yet knows that she does not have that certainty, the assertion constitutes a fraudulent misrepresentation. Lipscomb, 326 Ill. App. 3d at 768, 761 N.E.2d at 224. Thus, the court reasoned, as applied to this context, when a woman categorically represents to a man that he is the father of her child, it is implicit in her representation that during the period of conception she had only one sexual partner. If the man is actually not the father, that representation is categorically false and constitutes a fraudulent misrepresentation. Lipscomb, 326 Ill. App. 3d at 768, 761 N.E.2d at 224.

Although Lipscomb does not specifically rely on section 162(1) (Restatement (Second) of Contracts §162(1) (1981)) to support its reasoning, it is implicitly recognized therein. That provision is instructive and provides:

“(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest his assent and the maker

(a) knows or believes that the assertion is not in accord with the facts, or

(b) does not have the confidence that he states or implies in the truth of the assertion, or

(c) knows that he does not have the basis that he states or implies for the assertion.” Restatement (Second) of Contracts §162(1) (1981).

Here, at the time of contract formation, Knafel represented with certainty that she knew Jordan was the father of her child. However, the paternity tests reveal that it was also the case that she was having sexual relations with someone other than Jordan around the time of conception. Therefore, the evidence presented establishes that she knew that she lacked the certainty about the paternity of the child or, at least, knew that she did not have the basis that she stated or implied for that categorical representation, thus making it fraudulent.

To rebut that finding, Knafel asserts that she believed she had certainty about the paternity of her child, and in support of that state of mind, she relies on Dr. Grisanti’s office memo regarding the timing of conception. However, the memo is insufficient to defeat summary judgment. Knafel merely states that the doctor’s information regarding the dates of conception coincided with the dates she was with Jordan in Phoenix. That assertion does not discount that she knew she was also with another partner around that same time period. Although one could contemplate a situation where a pregnant woman could be subjectively certain about paternity, Knafel has presented no such affirmative evidence to support an adequate basis for her certainty.

Additionally, Knafel argues that she indeed disclosed to Jordan throughout their relationship that she was having sex with another man. Nevertheless, the question is not whether she told him about her relationships with other men at some previous time, but whether she failed to disclose material information in the process of contract formation that would render the contract voidable. Section 161(b) (Restatement (Second) of Contracts §161(b) (1981)) is instructive here, providing that one makes a misrepresentation through nondisclosure:

“(b) Where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.” Restatement (Second) of Contracts §161(b) (1981).

Here, at the time of negotiating the settlement, Knafel was not forthcoming that she had sex with another partner at the time of conception. Instead, she made an affirmative representation with certainty that she was pregnant with Jordan’s child. Her failure to disclose the information when she alone had access to that information amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.

Finally, with respect to the element of reliance, Knafel initially argues that Jordan’s failure to state that he relied upon Knafel’s representation precludes summary judgment. However, “[w]here representations have been made in regard to a material matter and action has been taken, in the absence of evidence showing the contrary, it will be presumed that the representations were relied on.” R. Lord, Williston on Contracts §69:32, at 12 (4th ed. 2003), citing Hicks v. Stevens, 121 Ill. 186, 11 N.E. 241 (1887). Knafel argues that Jordan’s statements to her in 1998, that he remembered their agreement and would still pay her, despite his knowledge that he was not the child’s father, supports an inference that, at the time he entered into the contract, he never relied on her representation that he was the father of the child. However, as stated previously, if the alleged agreement had nothing to do with his paternity, then the agreement was merely an agreement to keep their romantic relationship confidential and could no longer be construed as a settlement of her paternity claim with a confidentiality provision. Accordingly, based upon Knafel’s own allegations, Jordan must have relied on the representation or the alleged settlement agreement was otherwise untenable.

Furthermore, as the court in Lipscomb articulated, Jordan had a right to rely upon the categorical representation by Knafel that he was the father because “[i]t would make little sense to compel a putative father to conduct an independent investigation in the face of a clear and categorical representation of a mother (who is also his sexual partner) as to his parentage.” Lipscomb, 326 Ill. App. 3d at 768, 761 N.E.2d at 224. Additionally, we find no merit to Knafel’s contention that Jordan should not have relied on the representation. “ ‘ “[0]ne who has intentionally deceived the other to his prejudice is not to be heard to say, in defense of the charge of fraud, that the innocent party ought not to have trusted him or was guilty of negligence in so doing.” [Citations.]’ ” Lipscomb, 326 Ill. App. 3d at 768-69, 761 N.E.2d at 224, quoting Arndt v. Arndt, 336 Ill. App. 65, 76, 82 N.E.2d 908, 913 (1948). Accordingly, for all of the foregoing reasons, the alleged settlement agreement was premised on a fraudulent misrepresentation and, therefore, was voidable by Jordan.

We further find Knafel’s cited cases, primarily a Maryland case from 1956 and an Illinois case from 1880, to lack any persuasive or instructive value where contract law has evolved and societal notions regarding intimate relationships have changed. Moreover, Heaps v. Dunham, 95 Ill. 583 (1880), and Fiege v. Boehm, 210 Md. 352, 123 A.2d 316 (1956), merely stand for the unremarkable proposition already recognized by this court that forbearance to sue for a lawful claim or demand is sufficient consideration for a promise to pay for the forbearance “if the party forbearing had an honest intention to prosecute litigation which is not frivolous, vexatious, or unlawful, and which he believed to be well founded.” Fiege, 210 Md. at 361, 123 A.2d at 322.

The court in Fiege found that even though Fiege was ultimately found not to be the father there was no proof of fraud or unfairness and that the mother gave testimony which indicated that “she made the charge of bastardy against [the father] in good faith.” Fiege, 210 Md. at 362, 123 A.2d at 323. The court in Heaps affirmed a settlement of a bastardy claim, finding no fraud despite evidence that there was doubt whether the woman was actually pregnant. Heaps, 95 Ill. at 585. Nevertheless, the court recognized that the settlement of a bastardy claim could be avoided by the putative father where the settlement was procured by fraud. Heaps, 95 Ill. at 586; see also Fiege, 210 Md. at 361, 123 A.2d at 322.

Moreover, under modern case law and section 161 (Restatement (Second) of Contracts §161 (1981)), the mother’s testimony in Fiege that she had sex with the defendant on one occasion, would likely constitute a misrepresentation permitting rescission where she failed to disclose the material fact that she also had sex with another partner around the time of conception. See M. Oberman, Sex, Lies, and the Duty to Disclose, 47 Ariz. L. Rev. 871 (2005) (arguing in favor of subjecting these types of agreements between intimates to contemporary rules favoring disclosure of material information). Accordingly, Knafel’s reliance on these cases is not well founded.

Alternatively, we consider Jordan’s defense of mutual mistake of fact. “Mutual mistake of fact” as defined by section 152 of the Restatement (Restatement (Second) of Contracts §152 (1981)), and as recognized in Bentley v. Slavik, 663 F. Supp. 736 (S.D. Ill. 1987), citing Hagenbuch v. Chapin, 149 Ill. App. 3d 572, 500 N.E.2d 987 (1986), provides that if a mistake by both parties “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.” Restatement (Second) of Contracts §152, at 385 (1981).

Here, even if Knafel’s representation was not fraudulent and was made in good faith, her representation regarding paternity was ultimately mistaken as Jordan was not the father of the child. As we have already held, the issue of paternity went to a basic assumption upon which the contract was made because it was the consideration for the alleged settlement of her paternity claim. Knafel’s certainty regarding Jordan’s paternity had a material effect on the agreed exchange of performances, and Jordan did not bear the risk of mistake as a matter of law as he was not obligated to infer that Knafel had another sexual partner at the time of conception in the face of Knafel’s categorical representation that Jordan was the father. See Lipscomb, 326 Ill. App. 3d at 768. In other words, Jordan had no duty to attempt independent verification of the information especially where, here, ascertainment of the true fact was more readily available to Knafel than it was to Jordan. See Allstate Insurance Co. v. National Tea Co., 25 Ill. App. 3d 449, 461, 323 N.E.2d 521, 529 (1975) (party had no duty to attempt independent verification of representation that building had sprinkler system especially where true condition of the building was more readily ascertainable to the other party). Accordingly, Jordan is entitled to rescission based upon a mutual mistake of fact regarding paternity and summary judgment was properly granted in his favor on that basis.

Next, we consider Knafel’s argument that the circuit court improperly denied her repeated requests to depose Jordan and to obtain documentary discovery prior to granting Jordan’s motions for summary judgment. Knafel essentially argues in her Supreme Court Rule 191(b) (145 Ill. 2d R. 191(b)) affidavit that in order to properly oppose the motion for summary judgment, she needed relevant discovery from Jordan regarding the elements of his defense, namely, “reliance, materiality, good faith and mistake.”

Discovery is authorized in the supreme court rules “ ‘regarding any matter relevant to the subject matter involved in the pending action.’ ” Computer Teaching Corp. v. Courseware Applications, Inc., 199 Ill. App. 3d 154, 157, 556 N.E.2d 816, 818 (1990), quoting 107 Ill. 2d R. 201(b)(1). “Discovery is to be a mechanism for the ascertainment of truth and for the purpose of promoting either a fair settlement or a fair trial.” Computer Teaching Corp., 199 Ill. App. 3d at 157, 556 N.E.2d at 818. Because discovery focuses on the relevance and materiality of both admissible materials as well as materials that lead to what would be admissible at trial, Illinois trial courts traditionally have been given great latitude in determining the scope of discovery. Computer Teaching Corp., 199 Ill. App. 3d at 157, 556 N.E.2d at 818. “A trial court’s discovery order is usually reviewed for an abuse of discretion.” Wisniewski v. Kownacki, 221 Ill. 2d 453, 457, 851 N.E.2d 1243, 1245 (2006).

Here, we find no abuse of discretion in the trial court’s decision to stay discovery that was not relevant to the evidentiary issues raised in the motion for summary judgment. The court found Knafel’s Supreme Court Rule 191(b) (145 Ill. 2d R. 191(b)) affidavit was entirely conclusory. The court further found that discovery was unnecessary on the issues of materiality and reliance because those matters were demonstrated by Knafel’s own verified pleadings and Jordan took those allegations as true for purposes of the motion. Furthermore, Knafel was given an opportunity by the court to refute the paternity evidence by deposing Dr. Strom and testing the basis for his assertions and the authenticity of the documents upon which he relied and to engage in additional paternity testing. She chose not to take that opportunity. Accordingly, it was not an abuse of discretion for the trial court to find that her assertions that she was “denied access to the truth” to be baseless.

Lastly, where Jordan’s complaint for declaratory judgment was premised upon the same arguments in defense of the counterclaim, namely, fraudulent inducement and mutual mistake of fact, the trial court properly granted summary judgment on his complaint as well. For all of the foregoing reasons, we affirm the judgment of the circuit court.

Affirmed.

GREIMAN and CUNNINGHAM, JJ., concur.

3 Best & S. 826
122 Eng. Rep. 310 (Q.B. 1863)
TAYLOR
v.
CALDWELL
Queen’s Bench
May 6, 1863

The declaration alleged that by an agreement, bearing date the 27th May, 1861, the defendants agreed to let, and the plaintiffs agreed to take, on the terms therein stated, The Surrey Gardens and Music Hall, Newington, Surrey, for the following days, that is to say, Monday the 17th June, 1861, Monday the 15th July, 1861, Monday the 5th August, 1861, and Monday the 19th August, 1861, for the purpose of giving a series of four grand concerts and day and night fetes, at the Gardens and Hall on those days respectively, at the rent or sum of 100l. for each of those days. It then averred the fulfilment of conditions etc., on the part of the plaintiffs; and breach by the defendants, that they did not nor would allow the plaintiffs to have the use of The Surrey Music Hall and Gardens according to the agreement, but wholly made default therein, etc.; whereby the plaintiffs lost divers moneys paid by them for printing advertisements of and in advertising the concerts, and also lost divers sums expended and expenses incurred by them in preparing for the concerts and otherwise in relation thereto, and on the faith of the performance by the defendants of the agreement on their part, and had been otherwise injured, etc.

Pleas. First. Traverse of the agreement.

Second. That the defendants did allow the plaintiffs to have the use of The Surrey Music Hall and Gardens according to the agreement, and did not make any default therein, etc.

Third. That the plaintiffs were not ready or willing to take The Surrey Music Hall and Gardens.

Fourth. Exoneration before breach.

Fifth. That at the time of the agreement there was a general custom of the trade and business of the plaintiffs and the defendants, with respect to which the agreement was made, known to the plaintiffs and the defendants, and with reference to which they agreed, and which was part of the agreement, that in the event of the Gardens and Music Hall being destroyed or so far damaged by accidental fire as to prevent the entertainments being given according to the intent of the agreement, between the time of making the agreement and the time appointed for the performance of the same, the agreement should be rescinded and at an end; and that the Gardens and Music Hall were destroyed and so far damaged by accidental fire as to prevent the entertainments, or any of them, being given, according to the intent of the agreement, between the time of making the agreement and the first of the times appointed for the performance of the same, and continued so destroyed and damaged until after the times appointed for the performance of the agreement had elapsed, without the default of the defendants or either of them.

Issue on all the pleas. On the trial, before Blackburn J., at the London Sittings after Michaelmas Term, 1861, it appeared that the action was brought on the following agreement:

"Royal Surrey Gardens,

"27th May, 1861.

"Agreement between Messrs. Caldwell & Bishop, of the one part, and Messrs. Taylor & Lewis of the other part, whereby the said Caldwell & Bishop agree to let, and the said Taylor & Lewis agree to take, on the terms hereinafter stated, The Surrey Gardens and Music Hall, Newington, Surrey, for the following days, viz.:

"Monday, the 17th June, 1861,

Monday the 15th July, 1861,

Monday the 5th August, 1861,

Monday the 19th August, 1861,

for the purpose of giving a series of four grand concerts and day and night fetes at the said Gardens and Hall on those days respectively at the rent or sum of £100 for each of the said days. The said Caldwell & Bishop agree to find and provide at their own sole expense, on each of the aforesaid days, for the amusement of the public and persons then in the said Gardens and Hall, an efficient and organised military and quadrille band, the united bands to consist of from thirty-five to forty members; al fresco entertainments of various descriptions; coloured minstrels, fireworks and full illuminations; a ballet or divertissement, if permitted; a wizard and Grecian statues; tight rope performances; rifle galleries; air gun shooting; Chinese and Parisian games; boats on the lake, and (weather permitting) aquatic sports, and all and every other entertainment as given nightly during the months and times above mentioned. And the said Caldwell & Bishop also agree that the before mentioned united bands shall be present and assist at each of the said concerts, from its commencement until 9 o'clock at night; that they will, one week at least previous to the above mentioned dates, underline in bold type in all their bills and advertisements that Mr. Sims Reeves and other artistes will sing at the said gardens on those dates respectively, and that the said Taylor & Lewis shall have the right of placing their boards, bills and placards in such number and manner (but subject to the approval of the said Caldwell & Bishop) in and about the entrance to the said gardens, and in the said grounds, one week at least previous to each of the above mentioned days respectively, all bills so displayed being affixed on boards. And the said Caldwell & Bishop also agree to allow dancing on the new circular platform after 9 o'clock at night, but not before. And the said Caldwell & Bishop also agree not to allow the firework display to take place till a J past 11 o'clock at night. And, lastly, the said Caldwell & Bishop agree that the said Taylor & Lewis shall be entitled to and shall be at liberty to take and receive, as and for the sole use and property of them the said Taylor & Lewis, all moneys paid for entrance to the Gardens, Galleries and Music Hall and firework galleries, and that the said Taylor & Lewis may in their own discretion secure the patronage of any charitable institution in connection with the said concerts. And the said Taylor & Lewis agree to pay the aforesaid respective sum of £100 in the evening of the said respective days by a crossed cheque, and also to find and provide, at their own sole cost, all the necessary artistes for the said concerts, including Mr. Sims Reeves, God's will permitting.(Signed)

"J. CALDWELL."

Witness "CHAS. BISHOP.

(Signed) "S. Denis."

On the 11th June the Music Hall was destroyed by an accidental fire, so that it became impossible to give the concerts. Under these circumstances a verdict was returned for the plaintiff, with leave reserved to enter a verdict for the defendants on the second and third issues.

Petersdorff Serjt., in Hilary Term, 1862, obtained a rule to enter a verdict for the defendants generally.

The rule was argued, in Hilary Term, 1863 (January 28th); before Cockburn C.J., Wightman, Crompton and Blackburn JJ.

H. Tindal Atkinson shewed cause. First. The agreement sued on does not shew a "letting" by the defendants to the plaintiffs of the Hall and Gardens, although it uses the word "let," and contains a stipulation that the plaintiffs are to be empowered to receive the money at the doors, and to have the use of the Hall, for which they are to pay £100, and pocket the surplus; for the possession is to remain in the defendants, and the whole tenor of the instrument is against the notion of a letting. Whether an instrument shall be construed as a lease or only an agreement for a lease, even though it contains words of present demise, depends on the intention of the parties to be collected from the instrument; Morgan d. Dowding v. Bissell (3 Taunt. 65). Christie v. Lewis (2 B. & B. 410) is the nearest case to the present, where it was held that, although a charter party between the owner of a ship and its freighter contains words of grant of the ship, the possession of it may not pass to the freighter, but remain in the owner, if the general provisions in the instrument qualify the words of grant.

Secondly. The destruction of the premises by fire will not exonerate the defendants from performing their part of the agreement. In Paradine v. Jane (Al. 26) it is laid down that, where the law creates a duty or charge, and the party is disabled to perform it without any default in him, and hath no remedy over, there the law will excuse him; but when the party, by his own contract, creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. And there accordingly it was held no plea to an action for rent reserved by lease that the defendant was kept out of possession by an alien enemy whereby he could not take the profits.

Pearce, in support of the rule. First. This instrument amounts to a demise. It uses the legal words for that purpose, and is treated in the declaration as a demise.

Secondly. The words "God's will permitting" override the whole agreement.

Cur. adv. vult.

The judgment of the Court was now delivered by

BLACKBURN, J. In this case the plaintiffs and defendants had, on the 27th May, 1861, entered into a contract by which the defendants agreed to let the plaintiffs have the use of The Surrey Gardens and Music Hall on four days then to come, viz., the 17th June, 15th July, 5th August and 19th August, for the purpose of giving a series of four grand concerts, and day and night fetes at the Gardens and Hall on those days respectively; and the plaintiffs agreed to take the Gardens and Hall on those days, and pay £100 for each day.

The parties inaccurately call this a "letting," and the money to be paid a "rent;" but the whole agreement is such as to shew that the defendants were to retain the possession of the Hall and Gardens so that there was to be no demise of them, and that the contract was merely to give the plaintiffs the use of them on those days. Nothing however, in our opinion, depends on this. The agreement then proceeds to set out various stipulations between the parties as to what each was to supply for these concerts and entertainments, and as to the manner in which they should be carried on. The effect of the whole is to shew that the existence of the Music Hall in the Surrey Gardens in a state fit for a concert was essential for the fulfilment of the contract,—such entertainments as the parties contemplated in their agreement could not be given without it.

After the making of the agreement, and before the first day on which a concert was to be given, the Hall was destroyed by fire. This destruction, we must take it on the evidence, was without the fault of either party, and was so complete that in consequence the concerts could not be given as intended. And the question we have to decide is whether, under these circumstances, the loss which the plaintiffs have sustained is to fall upon the defendants. The parties when framing their agreement evidently had not present to their minds the possibility of such a disaster, and have made no express stipulation with reference to it, so that the answer to the question must depend upon the general rules of law applicable to such a contract.

There seems no doubt that where there is a positive contract to do a thing, not in itself unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burthensome or even impossible. The law is so laid down in 1 Roll. Abr. 450, Condition (G), and in the note (2) to Walton v. Waterhouse (2 Wms. Saund. 421 a. 6th ed.), and is recognised as the general rule by all the Judges in the much discussed case of Hall v. Wright (E. B. & E. 746). But this rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied: and there are authorities which, as we think, establish the principle that where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.

There seems little doubt that this implication tends to further the great object of making the legal construction such as to fulfil the intention of those who entered into the contract. For in the course of affairs men in making such contracts in general would, if it were brought to their minds, say that there should be such a condition. Accordingly, in the Civil law, such an exception is implied in every obligation of the class which they call obligatio de certo corpore. The rule is laid down in the Digest, lib. xlv., tit. l, de verborum obligationibus, 1. 33. "Si Stichus certo die dari promissus, ante diem moriatur: non tenetur promissor." The principle is more fully developed in l. 23. "Si ex legati causa, aut ex stipulatii hominem certum mihi debeas: non aliter post mortem ejus tenearis mihi, quam si per te steterit, quominus vivo eo eum mihi dares: quod ita fit, si aut interpellatus non dedisti, aut occidisti eum." The examples are of contracts respecting a slave, which was the common illustration of a certain subject used by the Roman lawyers, just as we are apt to take a horse; and no doubt the propriety, one might almost say necessity, of the implied condition is more obvious when the contract relates to a living animal, whether man or brute, than when it relates to some inanimate thing (such as in the present case a theatre) the existence of which is not so obviously precarious as that of the live animal, but the principle is adopted in the Civil law as applicable to every obligation of which the subject is a certain thing. The general subject is treated of by Pothier, who in his Traite des Obligations, partie 3, chap. 6, art. 3, § 668 states the result to be that the debtor corporis certi is freed from his obligation when the thing has perished, neither by his act, nor his neglect, and before he is in default, unless by some stipulation he has taken on himself the risk of the particular misfortune which has occurred.

Although the Civil law is not of itself authority in an English Court, it affords great assistance in investigating the principles on which the law is grounded. And it seems to us that the common law authorities establish that in such a contract the same condition of the continued existence of the thing is implied by English law.

There is a class of contracts in which a person binds himself to do something which requires to be performed by him in person; and such promises, e.g. promises to marry, or promises to serve for a certain time, are never in practice qualified by an express exception of the death of the party; and therefore in such cases the contract is in terms broken if the promisor dies before fulfilment. Yet it was very early determined that, if the performance is personal, the executors are not liable; Hyde v. The Dean of Windsor (Cro. Eliz. 552, 553). See 2 Wms. Exors. 1560, 5th ed., where a very apt illustration is given. "Thus," says the learned author, "if an author undertakes to compose a work, and dies before completing it, his executors are discharged from this contract: for the undertaking is merely personal in its nature, and, by the intervention of the contractor's death, has become impossible to be performed."For this he cites a dictum of Lord Lyndhurst in Marshall v. Broadhurst (1 Tyr. 348, 349), and a case mentioned by Patteson J. in Wentworth v. Cock (10 A. & E. 42, 45-46). In Hall v. Wright (E. B. & E. 746, 749), Crompton J., in his judgment, puts another case. "Where a contract depends upon personal skill, and the act of God renders it impossible, as, for instance, in the case of a painter employed to paint a picture who is struck blind, it may be that the performance might be excused."

It seems that in those cases the only ground on which the parties or their executors, can be excused from the consequences of the breach of the contract is, that from the nature of the contract there is an implied condition of the continued existence of the life of the contractor, and, perhaps in the case of the painter of his eyesight. In the instances just given, the person, the continued existence of whose life is necessary to the fulfilment of the contract, is himself the contractor, but that does not seem in itself to be necessary to the application of the principle; as is illustrated by the following example. In the ordinary form of an apprentice deed the apprentice binds himself in unqualified terms to "serve until the full end and term of seven years to be fully complete and ended," during which term it is covenanted that the apprentice his master "faithfully shall serve," and the father of the apprentice in equally unqualified terms binds himself for the performance by the apprentice of all and every covenant on his part. (See the form, 2 Chitty on Pleading, 370, 7th ed. by Greening.) It is undeniable that if the apprentice dies within the seven years, the covenant of the father that he shall perform his covenant to serve for seven years is not fulfilled, yet surely it cannot be that an action would lie against the father? Yet the only reason why it would not is that he is excused because of the apprentice's death.

These are instances where the implied condition is of the life of a human being, but there are others in which the same implication is made as to the continued existence of a thing. For example, where a contract of sale is made amounting to a bargain and sale, transferring presently the property in specific chattels, which are to be delivered by the vendor at a future day; there, if the chattels, without the fault of the vendor, perish in the interval, the purchaser must pay the price and the vendor is excused from performing his contract to deliver, which has thus become impossible.

That this is the rule of the English law is established by the case of Rugg v. Minett (11 East, 210), where the article that perished before delivery was turpentine, and it was decided that the vendor was bound to refund the price of all those lots in which the property had not passed; but was entitled to retain without deduction the price of those lots in which the property had passed, though they were not delivered, and though in the conditions of sale, which are set out in the report, there was no express qualification of the promise to deliver on payment. It seems in that case rather to have been taken for granted than decided that the destruction of the thing sold before delivery excused the vendor from fulfilling his contract to deliver on payment.

This also is the rule in the Civil law, and it is worth noticing that Pothier, in his celebrated Traite du Contrat de Vente (see Part. 4, § 307, etc.; and Part. 2, ch. 1, sect. 1, art. 4, § 1), treats this as merely an example of the more general rule that every obligation de certo corpore is extinguished when the thing ceases to exist. See Blackburn on the Contract of Sale, p. 173.

The same principle seems to be involved in the decision of Sparrow v. Sowyate (W. Jones, 29), where, to an action of debt on an obligation by bail, conditioned for the payment of the debt or the render of the debtor, it was held a good plea that before any default in rendering him the principal debtor died. It is true that was the case of a bond with a condition, and a distinction is sometimes made in this respect between a condition and a contract. But this observation does not apply to Williams v. Lloyd (W. Jones, 179). In that case the count, which was in assumpsit, alleged that the plaintiff had delivered a horse to the defendant, who promised to redeliver it on request. Breach, that though requested to redeliver the horse he refused. Plea, that the horse was sick and died, and the plaintiff made the request after its death; and on demurrer it was held a good plea, as the bailee was discharged from his promise by the death of the horse without default or negligence on the part of the defendant. "Let it be admitted," say the Court, "that he promised to deliver it on request, if the horse die before, that is become impossible by the act of God, so the party shall be discharged, as much as if an obligation were made conditioned to deliver the horse on request, and he died before it." And Jones, adds the report, cited 22 Ass. 41, in which it was held that a ferryman who had promised to carry a horse safe across the ferry was held chargeable for the drowning of the animal only because he had overloaded the boat, and it was agreed, that notwithstanding the promise no action would have lain had there been no neglect or default on his part.

It may, we think, be safely asserted to be now English law, that in all contracts of loan of chattels or bailments if the performance of the promise of the borrower or bailee to return the things lent or bailed, becomes impossible because it has perished, this impossibility (if not arising from the fault of the borrower or bailee from some risk which he has taken upon himself) excuses the borrower or bailee from the performance of his promise to redeliver the chattel. The great case of Coggs v. Bernard (1 Smith's L. C. 171, 5th ed.; 2 L. Raym. 909) is now the leading case on the law of bailments, and Lord Holt, in that case, referred so much to the Civil law that it might perhaps be thought that this principle was there derived direct from the civilians, and was not generally applicable in English law except in the ease of bailments; but the case of Williams v. Lloyd (W. Jones, 179), above cited, shews that the same law had been already adopted by the English law as early as The Book of Assizes. The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.

In none of these cases is the promise in words other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel. In the present case, looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance.

We think, therefore, that the Music Hall having ceased to exist, without fault of either party, both parties are excused, the plaintiffs from taking the gardens and paying the money, the defendants from performing their promise to give the use of the Hall and Gardens and other things. Consequently the rule must be absolute to enter the verdict for the defendants.

Rule absolute.

The OPERA COMPANY OF BOSTON, INC., Appellee, v. The WOLF TRAP FOUNDATION FOR the PERFORMING ARTS, Appellant.

No. 86-2505.

United States Court of Appeals, Fourth Circuit.

Argued Nov. 13, 1986.

Decided May 4, 1987.

Rodney F. Page (David L. Kelleher, Arent, Fox, Kintner, Plotkin & Kahn, Washington, D.C., on brief), for appellant.

Edward Gross, for appellee.

Before RUSSELL and HALL, Circuit Judges, and McMILLAN, United States District Judge for the Western District of North Carolina, sitting by designation.

DONALD RUSSELL, Circuit Judge:

This is a breach of contract suit by the plaintiff to recover the agreed payment from the defendant for four operatic performances at the Filene Center in The Wolf Trap Park. The plaintiff asserts it was prepared, able and willing to perform as agreed but that it was prevented from giving one of the performances because of cancellation by the defendant of the performance on the ground it considered the performance impossible as a result of an electrical storm which terminated power to the pavillion during the time this performance was to be given. The court found against defendant’s claim of cancellation of the performance because of an unexpected occurrence and granted judgment in favor of plaintiff. Defendant has appealed. We reverse and remand with instructions.

I.

The parties in this suit are the The Opera Company of Boston, Inc., an operatic organization recognized both nationally and internationally. The defendant The Wolf Trap Foundation for the Performing Arts is an organization for the advancement of the performing arts headquartered at Vienna, Virginia, and as such sponsors at the Filene Center in the Wolf Trap Park1 operatic performances and similar artistic programs. The Filene Center is located in the Wolf Trap National Park and is a part of the various facilities maintained and controlled by the National Park Service. It consists of a main stage tower, an auditorium and an open lawn. The main stage tower contains the stage, dressing rooms and space for the scenery and electrical effects. In front of the tower is a covered auditorium seating approximately 3,500 people. Beyond this is the uncovered lawn providing seating for an additional 3,000 people. The Park provides parking space. This parking area is separated from the Center itself. A number of pathways leading from the parking area to the Filene Center are available. The distance of the parking area from the Center varies from approximately 300 to 700 yards. Ordinarily, when there are any night performances at the Center, the roads in the park, the parking area and the pathways to the Center are lighted for the guidance of patrons at performances at the Center.

This suit between the parties arises under a contract between the plaintiff The Opera Company of Boston, Inc. (Opera Company) and the defendant The Wolf Trap Foundation for the Performing Arts (Wolf Trap) by which the Opera Company for its part agreed to give four “fully staged orchestrally accompanied [operatic] performances to the normally recognized standards” of the Opera Company on the nights of June 12, 13, 14 and 15, 1980 at the Filene Center. For this the Opera Company was to be paid by Wolf Trap $272,000 payable under a schedule providing for payment of $20,000 at the signing of the contract and a further $40,000 on April 1, 1980, with the balance payable in four equal installments before the rise of the curtain on each performance. Wolf Trap, in turn, for its part under the contract was obliged to make the above payments and also to furnish the place of performance including an undertaking “to provide lighting equipment as shall be specified by the Opera Company of Boston’s lighting designer.”2

Both parties to the contract performed apparently all their obligations under the contract through the operatic performance on June 14. These performances had been fully sold as well as had the remaining performance on June 15. During this final day, the weather was described as hot and humid, with rain throughout the day. Sometime between 6:00 and 6:30 p.m. a severe thunderstorm arose causing an electrical power outage. As a result all electrical service in the Park, in its roadways, parking area, pathways and auditorium were out. Conferences were had among representatives of the Park Service and that of Wolf Trap. The public utility advised that it would be at least after eleven o’clock before any service by it could be resumed in the Park and that it was likely power might not be available before morning. Various alternatives for supplying power were considered but none was regarded as relieving the situation. Already some 3,000 people were in the Park for the performance; 3,500 more were expected before 8:00 p.m. when the performance was to begin. The Park Service recommended the immediate cancellation of the performance and advised Wolf Trap if the performance were not cancelled, it disclaimed any responsibility for the safety of the people who were to attend as well as those who were to perform. It was the Park Service’s view that a prompt cancellation was necessary to enable the parties to leave the park safely and to prevent others from coming. Wolf Trap agreed and the performance was cancelled. While some of these discussions were being carried on a representative of the Opera Company was present but she took no part in the decision to cancel, though she voiced no objection. Since the performance was cancelled, Wolf Trap failed to make the final payment under the contract to the Opera Company. Five years after the cancellation, the Opera Company filed this suit to recover the balance due under the contract. Wolf Trap defended on the ground that performance by it of its obligation under the contract was excused under the doctrine of impossibility of performance.3 The basis for this defense was that the final performance by the Opera Company for which payment was claimed had been cancelled because a performance was impracticable as a result of the power outage.

II.

The district judge began his oral opinion granting judgment in favor of the plaintiff by noting that the parties had stipulated the contract in question, a memorandum detailing the occurrence at the Park on the evening of June 15 by Craig Hankenson, an official of Wolf Trap, and the amount in issue. He then proceeded to find the storm, which caused the power shortage in the Wolf Trap Park, resulted in a complete loss of power at Filene Hall from about 6 o’clock on the evening of June 15. He apparently accepted the accuracy of Mr. Hankenson’s memorandum that the performance on the night of June 15 was cancelled “based on a public safety decision, that the performance should not go forward since there was no lighting in the parking area to the walkways, and very questionable as to whether or not a generator could be set up to provide additional light for the theater itself and still provide adequate light for the people who had to move backstage.” He found as a fact “that the Opera Company was there [at the Park] and was ready to go forward with the performance,” but that “the only reason the performance did not go on was the fact that there wasn’t adequate lighting.” As he read the contract Wolf Trap was obligated to provide sufficient lighting “for the performance to go on,” and that power outages were “reasonably foreseeable,” as there had been some outages in the past and while “none had affected a performance prior to this occasion,” it was “readily foreseeable that a power outage could affect a performance.” He, therefore, held Wolf Trap had not made out its defense of impossibility of performance and granted judgment for the plaintiff.

The single question on appeal is whether this dismissal of Wolf Trap’s defense of impossibility of performance was proper. The resolution of this issue requires a review of the doctrine of impossibility. We proceed first to that review.

III.

The doctrine of impossibility of performance as an excuse or defense for a breach of contract was for long smothered under a declared commitment to the principle of sanctity of contracts. This rationale for constrained application of the doctrine was expressed by the United States Supreme Court in Dermott v. Jones (2 Wall.), 69 U.S. 1, 8, 17 L.Ed. 762 (1864):

The principle which controlled the decision of the cases referred to rests upon a solid foundation of reason and justice. It regards the sanctity of contracts. It requires parties to do what they have agreed to do. If unexpected impediments lie in the way, and a loss must ensue, it leaves the loss where the contract places it. If the parties have made no provision for a dispensation, the rule of law gives none. It does not allow a contract fairly made to be annulled, and it does not permit to be interpolated what the parties themselves have not stipulated.

The growth of commercial activity in the nineteenth century, however, made this rigidity of the doctrine of impossibility both “economically and socially unworkable,” see Cook v. Deltona Corp., 753 F.2d 1552, 1558 (11th Cir.1985), and in Taylor v. Caldwell, 3 B. & S. 826, 122 Eng.Rep. 309, 324, 6 R.C. 603 (1863),. the English courts recognized these changed conditions and, relying largely on civil law precedents,4 relaxed the constraints on the doctrine by the principle of sanctity of contracts as followed by the English courts since Paradine v. Jayne, Alleyn, 27, 23d Charles II (1670). It based such relaxation on the theory of an implied condition arising without express condition in the contract itself. In stating this new rule on impossibility of performance as a defense to a breach of contract suit, the court said:

The principle seems to us to be that in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility arising from the perishing of the person or thing shall excuse the performance. In none of the cases is the promise in words other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance, but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel.

Though the United States Supreme Court had not taken note of Taylor v. Caldwell in its decision in Dermott v. Jones, rendered the year after Taylor v. Caldwell, it, two decades later, adopted the reasoning and the restatement of the doctrine of impossibility as enunciated in Taylor v. Caldwell in its decision in The Tornado, 108 U.S. 342, 351, 2 S.Ct. 746, 752, 27 L.Ed. 747 (1883). In that case the Court said:

In Taylor v. Caldwell, 3 Best & Smith, 826, it is laid down as a rule, that, “in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied, that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.” The reason given for the rule is, that without “any express stipulation that the destruction of the person or thing shall excuse the performance,” “that excuse is by law implied, because, from the nature of the contract, it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel.”

Other American cases had even earlier embraced the new rule as to impossibility of performance stated in Taylor v. Caldwell: Dexter v. Norton, 47 N.Y. 62, 65, 7 Am. Rep. 415 (1871); Wells v. Calnan, 107 Mass. 514, 516 (1817); Walker v. Tucker, 70 Ill. 527, 543 (1873). Based on all these authorities Lawson in his The Principles of the American Law of Contracts at Law and in Equity, § 425 at p. 465 (F.H. Thomas Law Book Co., St. Louis, 1893), stated as the prevalent American rule in this regard:

Where the contract relates to the use or possession or any dealing with specific things in which the performance necessarily depends on the existence of the particular thing, the condition is implied by the law that the impossibility arising from the perishing or destruction of the thing, without default in the party, shall excuse the performance, because, from the nature of the contract, it is apparent that the parties contracted on the basis of the continued existence of the subject of the contract.

This relaxed rule for the application of the doctrine of impossibility of performance was adopted by the Supreme Court of Virginia, in whose jurisdiction this action arose, in Virginia Iron, Coal & Coke Co. v. Graham, 124 Va. 692, 98 S.E. 659, 662 (1919), and again in Housing Authority, Etc. v. East Tenn. L. & P. Co., 183 Va. 64, 31 S.E.2d 273, 276 (1944). In the latter case, the Court, observing that “[t]he tendency of the law is towards an enlargement of the defense, ...” said:

It is, however, fairly well settled that where impossibility is due to domestic law, to the death or illness of one who by the terms of the contract was to do an act requiring his personal performance, or to the fortuitous destruction or change in the character of something to which the contract related, or which by the terms of the contract was made a necessary means of performance, the promisor will be excused, unless he either expressly agreed in the contract to assume the risk of performance, whether possible or not, or the impossibility was due to his fault.

In between these two Virginia cases, the United States Supreme Court in Texas Co. v. Hogarth Shipping Co., 256 U.S. 619, 629-30, 41 S.Ct. 612, 614, 65 L.Ed. 1123 (1921) declared:

[W]here parties enter into a contract on the assumption that some particular thing essential to its performance will continue to exist and be available for the purpose and neither agrees to be responsible for its continued existence and availability, the contract must be regarded as subject to an implied condition that, if before the time for performance and without the default of either party the particular thing ceases to exist or be available for the purpose, the contract shall be dissolved and the parties excused from performing it.

As we have indicated, Taylor v. Caldwell, the United States Supreme Court cases and the Virginia cases all relied in their statement of the doctrine on an implied, though unstated, condition in the contract. Increasingly, though, commentators and text writers were uncomfortable with the implied condition rationale for the new doctrine of impossibility of performance. In 6 Corbin on Contracts, § 1331, p. 360 (1962 ed.), the author puts his objection to the implied condition theory strongly and rephrased the rationale for the doctrine thus:

Though it has been constantly said by high authority, including Lord Sumner, that the explanation of the rule is to be found in the theory that it depends on an implied condition of the contract, that is really no explanation. It only pushes back the problem a single stage. It leaves the question what is the reason for implying a term. Nor can I reconcile that theory with the view that the result does not depend on what the parties might, or would as hard bargainers, have agreed. The doctrine is invented by the court in order to supplement the defects of the actual contract. The parties did not anticipate fully and completely, if at all, or provide for what actually happened.5

18 Williston on Contracts, § 1937, p. 33 (3d. ed. Jaeger 1978) is equally forceful in its rejection of the implied condition theory:

Any qualification of the promise is based on the unfairness or unreasonableness of giving it the absolute force which its words clearly state. In other words, because the court thinks it fair to qualify the promise, it does so and quite rightly; but clearness of thought would be increased if it were plainly recognized that the qualification of the promise or the defense to it is not based on any expression of intention by the parties.

Moreover, in line with the “tendency of the law ... towards an enlargement,”6 modern authorities also abandoned any absolute definition of impossibility and, following the example of the Uniform Commercial Code,7 have adopted impracticability or commercial impracticability as synonymous with impossibility in the application of the doctrine of impossibility of performance as an excuse for breach of contract. Matter of Westinghouse Elec. Corp., Etc., 517 F.Supp. 440, 451 (E.D.Va.1981).8

Under these revisions the doctrine of impossibility of performance is basically according to Corbin one “invented by the court in order to supplement the defects of the actual contract” in the interest of reason, justice and fairness. 6 Corbin on Contracts § 1331, p. 360. Williston is equally specific in recognizing that the revision in the doctrine as envisioned by both it and Corbin had made the doctrine "essentially an equitable defense, [which could] ... be asserted in an action at law.” 18 Williston on Contracts, § 1931, p. 6. And, in effect, that was the declaration of the court in Paddock v. Mason, 187 Va. 809, 48 S.E.2d 199, 202 (1948). Similarly, Restatement (Second) on Contracts has accepted this view in its statement of the doctrine.

In its Introductory Note to Chapter 11 on Impossibility of Performance (pp. 309-10) Restatement (Second) on Contracts said:

Even where the obligor has not limited his obligation by agreement, a court may grant him relief. An extraordinary circumstance may make performance so vitally different from what was reasonably to be expected as to alter the essential nature of that performance. In such a case the court must determine whether justice requires a departure from the general rule that the obligor bear the risk that the contract may become more burdensome or less desirable.9

This is but another way of declaring, as did Williston, that essentially the doctrine is an equitable one to be applied when fair and just.

The modern doctrine of impossibility or impracticability, deduced from these authorities, has been formulated in § 265, pp. 334-35 of the Restatement (Second) of Contracts in these words:

Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

Supplementing this statement of the doctrine, the Restatement in § 263, p. 328, defines the event the “non-occurrence of which [may be] a basic assumption on which the contract was made”:

If, ... the existence of a specific thing is necessary for the performance of a duty ... its failure to come into existence or its destruction or deterioration makes performance impracticable, [is an event] ... “the non-occurrence of which was a basic assumption on which the contract was made.

This statement of the revised doctrine is restated in 2-615(a) of the Uniform Commercial Code which excuses non-delivery under a contract “if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made____”

In Eastern Air Lines, Inc. v. McDonnell Douglas Corp., 532 F.2d 957, 991 (5th Cir.1976), the court, adopting the modem statement of the doctrine, said impossibility-impracticability arises as a defense to breach of contract when “the circumstances causing the breach has made performance so vitally different from what was anticipated that the contract cannot reasonably be thought to govern.”

A shorter statement of the new rule is given in Mishara Const. Co., Inc. v. Transit-Mixed Con. Corp., 365 Mass. 122, 310 N.E.2d 363, 367 (1974) in which the court said: “It is implicit in the doctrine of impossibility (and the companion rule of ‘frustration of purpose’) that certain risks are so unusual and have such severe consequences that they must have been beyond the scope of the assignment of risks inherent in the contract, that is, beyond the agreement made by the parties.” Probably, though, the fullest statement of the modem doctrine of impossibility or impracticability is that of Judge Wright, speaking for the Court, in Transatlantic Financing Corporation v. United States, 363 F.2d 312, 315 (D.C.Cir.1966):

The doctrine of impossibility of performance has gradually been freed from the earlier fictional and unrealistic strictures of such tests as the “implied term” and the parties’ “contemplation.” Page, The Development of the Doctrine of Impossibility of Performance, 18 Mich.L.Rev. 589, 596 (1920). See generally 6 Corbin, Contracts §§ 1320-1372 (rev. ed. 1962); 6 Williston, Contracts §§ 1931-1979 (rev. ed. 1938). It is now recognized that “A thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost.” (citing authorities) The doctrine ultimately represents the ever-shifting line, drawn by courts hopefully responsive to commercial practices and mores, at which the community’s interest in having contracts enforced according to their terms is outweighed by the commercial senselessness of requiring performance. When the issue is raised, the court is asked to construct a condition of performance based on the changed circumstances, a process which involves at least three reasonably definable steps.

In line with these cases, we accept as the correct statement of the modem and prevailing doctrine of impossibility of performance as a defense to a breach of contract to be essentially as equitable in character “based [to quote Williston] on the unfairness or unreasonableness of giving [the contract] the absolute force which its words clearly state” and to be applied under the circumstances so well stated in Transatlantic.

Manifestly the first fact to be established in making out this modem defense of impossibility or impracticability of performance is the existence of an “occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.” And, in determining the existence of such occurrence, it is necessary to have in mind the Restatement’s definition of an “occurrence” in this context as that which, because of the “destruction, or such deterioration” of a “specific thing necessary for the performance” of the contract “makes performance impracticable.” 10 The occurrence, as Transatlantic puts it, must be unexpected but it does not necessarily have to have been unforeseeable. A requirement of absolute non-foreseeability as a condition to the application of the doctrine would be so logically inconsistent that in effect it would nullify the doctrine. This was recognized by Judge Clark in L.N. Jackson & Co. v. Royal Norwegian Government, 177 F.2d 694, 699 (2d Cir.1949), where he said that to require an absolute absence of foreseeability would, if accepted,

practically destroy the doctrine of supervening impossibility, notwithstanding its present wide and apparently growing popularity. Certainly the death of a promisor, the burning of a ship, the requisitioning of a merchant marine on the outbreak of a war could, and perhaps should, be foreseen. In fact, the more common expression of the rule appears to be in terms which tend to state the burden the other way, e.g., that “the duty of the promisor is discharged, unless a contrary intention has been manifested” or “in the absence of circumstances showing either a contrary intention or contributing fault on the part of the person subject to the duty.”

Williston expressed the same objection to such an absolute rule. It said:

It is frequently said that where an event which causes impossibility “might have been anticipated and guarded against in the contract,” one who makes an absolute promise is bound by it unconditionally-

Such a test, however, seems of little value. It has descended in the law from a time when it was more nearly true than it now is, because impossibility was more rarely an excuse. Any kind of impossibility is more or less capable of anticipation. The question is one of degree, and if anticipated, any circumstance whatever may be guarded against by the draftsman of the contract.11

In Comment c, § 261 of the Restatement (Second) on Contracts the drafters follow this reasoning in the requirement of foreseeability in the application of the doctrine. They said:

If the supervening event was not reasonably foreseeable when the contract was made, the party claiming discharge can hardly be expected to have provided against its occurrence. However, if it was reasonably foreseeable, or even foreseen, the opposite conclusion does not necessarily follow. Factors such as the practical difficulty of reaching agreement on the myriad of conceivable terms of a complex agreement may excuse a failure to deal with improbable contingencies.

These statements of the Restatement and of Williston were accepted and repeated by Judge Wright in the decision in Transatlantic:

Foreseeability or even recognition of a risk does not necessarily prove its allocation. Compare Uniform Commercial Code § 2-615, Comment 1, Restatement, Contracts § 457 (1932). Parties to a contract are not always able to provide for all the possibilities of which they are aware, sometimes because they cannot agree, often simply because they are too busy. Moreover, that some abnormal .risk was contemplated is probative but does not necessarily establish an allocation of the risk of the contingency which . actually occurs.12

As the Court in Mishara Const. Co., Inc. v. Transit-Mixed Concrete Corp., supra, 310 N.E.2d at 367 remarked this question is much broader than mere foreseeability and is, “Was the contingency which developed one which the parties could reasonably be thought to have foreseen as a real possibility which could affect performance?”13 and this question is in turn what Judge Learned Hand in Companhia De Navegacao Lloyd Brasileiro v. C.G. Blake Co., 34 F.2d 616, 619 (2d Cir.1929) said was “in the end a question of how unexpected at the time [the contract was made] was the event which prevented performance.” After all, as Williston has said, practically any occurrence can be foreseen but whether the foreseeability is sufficient to render unacceptable the defense of impossibility is “one of degree” of the foreseeability and whether the non-occurrence of the event was sufficiently unlikely or unreasonable to constitute a reason for refusing to apply the doctrine. And that is the rule which we think accords with modem reasoning of the doctrine as an equitable doctrine and is the one we approve.14

The second fact to be determined in the proposed application of the doctrine is that the frustration of performance was substantial. To satisfy this requirement “[t]he frustration must be so severe that it is not fairly to be regarded as within the risks [the obligor] assumed under the contract.” Comment a, § 265 of Restatement (Second) of Contracts And, finally, the defendant asserting the defense must establish that performance was impossible as that term has been defined in the refinements of the doctrine.

In summary, then, a party relying on the defense of impossibility of performance must establish (1) the unexpected occurrence of an intervening act, (2) such occurrence was of such a character that its non-occurrence was a basic assumption of the agreement of the parties, and (3) that occurrence made performance impracticable. When all those facts are established the defense is made out.

IV.

Applying the law as above stated to the facts of this case, we conclude, as did the district judge, that the existence of electric power was necessary for the satisfactory performance by the Opera Company on the night of June 15. While he seems to conclude that public safety was the main consideration on which the cancellation was based, he found that the power outage was the reason assigned for cancellation, and in that connection he found it to be questionable that “a generator could [have been] set up to provide additional light for the theater itself (when power from the utility company became unavailable) and still provide adequate light for the people who had to move backstage.” Such findings meet the requirement of Restatement (Second) on Contracts § 263 for an event, the “non-occurrence of which was a basic assumption on which the contract was made” and accordingly satisfies the definition of an impracticability which will relieve the obligor of his duty to perform as declared in section 265 of such Restatement (which we have accepted as the proper present statement of the doctrine of impossibility of performance as a defense to a breach of contract suit). Moreover, the facts as found make out impracticability of performance under the phraseology of the doctrine of impossibility in the Virginia case of Housing Authority, supra. The district judge, however, refused to sustain the defense because he held that if the contingency that occurred was one that could have been foreseen reliance on the doctrine of impossibility as a defense to a breach of contract suit is absolutely barred. As we have said, this is not the modern rule and he found that the power outage was foreseeable. In this the district judge erred. Foreseeability, as we have said, is at best but one fact to be considered in resolving first how likely the occurrence of the event in question was and, second whether its occurrence, based on past experience, was of such reasonable likelihood that the obligor should not merely foresee the risk but, because of the degree of its likelihood, the obligor should have guarded against it or provided for non-liability against the risk. This is a question to be resolved by the trial judge after a careful scrutiny of all the facts in the case. The trial judge in this case made no such findings. The cause must be remanded for such findings. In connection with that remand, the parties may be permitted to offer additional evidence on the matters in issue.

Because of the dissent, we would review anew some of the other undisputed facts in this case, it should be noted in this connection that, while the lack of power may have interfered with the immediate commencement of the performance, that, as we have seen, was not the basic consideration which motivated the Park Service in pressing for the cancellation of the performance and it must be remembered that it was the Park Service which was the primary advocate of cancellation. There was, it is admitted, auxiliary power available for the stage and perhaps the dressing rooms furnished by the Park as a part of the Park’s service. But to have made this auxiliary service operable would have delayed the commencement of the performance until ten or eleven o’clock. The Park Service’s concern was for the safety of the thirty-five hundred people already in the Park and the additional three thousand who were due to come into the Park for the performance. The situation confronting the Park Service must be understood: Should the performance be delayed while the auxiliary services for the Pavillion were brought into operation? Even when the auxiliary service was brought into operation, it would not have provided lights for the roads and paths in the wooded park. To have sixty-five hundred people stranded in a wooded park during a lightning storm without any lights for a period of hours was a hazard to safety for which the Park Service was understandably unwilling to take the responsibility. All the parties at the conference— the Park Service, Wolf Trap, and Boston Opera — recognized the problem. After debating it, the agreement to cancel was reached, based, as we have said, primarily on “the Park Service’s view that a prompt cancellation was necessary to enable the parties to leave the Park safely and to prevent others from coming.” To this decision the Boston Opera’s representative did not, it is true, affirmatively agree but she did not dissent. It may be that this situation would not have arisen if the Park had had auxiliary power services which, in the event of a power shortage on the part of the public utility, would have provided ample lighting for the roads and paths in the Park. But can it fairly be said that this was the obligation of Wolf Trap, the lessee of merely the Pavillion area, whatever may have been its obligation for the stage and dressing rooms at the Pavillion itself, or that the failure of Wolf Trap to provide auxiliary lighting for all the roads and paths in the Park was such action on its part as would preclude it from asserting the defense of impossibility of performance on its part? We think not.

CONCLUSION

The judgment herein must, therefore, be vacated and the action remanded to the district court to make findings, based on a statement of reasons, whether the possible foreseeability of the power failure in this case was of that degree of reasonable likelihood as to make improper the assertion by Wolf Trap of the defense of impossibility of performance.

The judgment of the district court is reversed, and the action is remanded with instructions.

VACATED and REMANDED WITH INSTRUCTIONS.

1

Wolf Trap Park is a national park owned by the United States Government and operated under the jurisdiction of the National Park Services.

2

The contract included a number of other provisions but such provisions are irrelevant to the resolution of the issues posed by the action.

3

Wolf Trap has not argued on this appeal that its non-performance was excused because of an Act of God. For a statement of the rule in connection with the plea of Act of God, see Sanders v. Coleman, 97 Va. 690, 34 S.E. 621 (1899).

4

See Bruce, An Economic Analysis of the Impossibility Doctrine, XI, The Journal of Legal Studies 211, 324-25 (1982).

5

The Restatement (Second) on Contracts accepts this statement of the doctrine in its Introductory Note to Chapter 11 ('Impracticability of Performance and Frustration of Purpose") at pp. 310-11.

6

See Housing Authority Etc. v. East Tenn. L. & P. Co., supra, 31 S.E.2d at 276.

7

See U.C.C. § 2-615(a) (1978).

8

Impossibility or impracticability may not be “subjective” but must be "objective,” and the difference between the two concepts has been summarized in the phrases "the thing cannot be done" (this being objective impossibility or impracticability) and ‘7 cannot do it” (classified as subjective impossibility or impracticability). B’s Company, Inc. v. Barber & Associates, Inc., 391 F.2d 130, 137 (4th Cir.1968); Ballou v. Basic Construction Co., 407 F.2d 1137, 1140-41 (4th Cir.1969). It is often necessary in this connection to consider when the performance, as stipulated, is objectively impossible, whether there is an alternative form of performance and, if there ' is, if it is not "so excessive [in cost of performance] as to make performance extremely impracticable,” there is no objective impracticability so far as the obligor is concerned. See Waegemann v. Montgomery Ward & Co., Inc., 713 F.2d 452, 454 (9th Cir.1983).

9

See also Comment, Restatement (Second) on Contracts § 261: “Even though a party, in assuming a duty, has not qualified the language of his undertaking, a court may relieve him of that duty if performance has unexpectedly become impracticable as a result of a supervening event."

10

Restatement (Second) on Contracts § 263.

11

18 Williston on Contracts, § 1953, pp. 117-18.

12

Transatlantic, supra, 363 F.2d at 318.

13

Emphasis added.

14

We do not intend to suggest that there are not dicta — some even in the more recent decisions — which still adhere to the obsolete rule that foreseeability, whether reasonably likely or not, bars the application of the doctrine. There is in Eastern Air Lines, supra, 532 F.2d at 992 a dictum, which, though somewhat ambiguous, could be assumed to support this view. It finds warrant for its dictum in two authorities, Lloyd v. Murphy, 25 Cal.2d 48, 54, 153 P.2d 47, 50 (1944) and in Madeirense Do Brasil S/A v. Stulman-Emrick Lumber Co., 147 F.2d 399, 403 (2d Cir.1945). Madeirense may be quickly dismissed. The opinion in that case was written by Judge Clark who authored the subsequent case of L.N. Jackson, quoted supra. If his language in Madeirense could be considered to establish what Eastern Air Lines seems to assume (contrary to our reading of the decision) it is difficult to reconcile that construction with the strong contrary declaration of Judge Clark in L.N. Jackson. It is noteworthy that any construction of Lloyd v. Murphy as stating a rule that foreseeability was an absolute bar to the use of the doctrine as a defense in a breach of contract action was found to be improper by the Ninth Circuit (within whose jurisdiction federal appeals involving California law were reviewable) in West Las Angeles Institute for Cancer Research v. Mayer, 366 F.2d 220, 225 (9th Cir.1966).

McMILLAN, District Judge,

dissenting in part and concurring in part:

The majority opinion does an admirable job of analyzing and declaring the state of the court decisions on the doctrine of impossibility of performance.

However, I believe that the District Court takes that law into account and that although he did not fully articulate a classic statement of the law, he reached the right result for the right reasons and ought to be affirmed.

Evening opera on an indoor stage obviously requires power and lights. Supplying power and lights was a necessary part of Wolf Trap’s undertaking, a cost figured into their charges for the facility.

The financing and the preparation for the delivery of the essential power required nothing esoteric, inspirational, unforeseeable or expensive.

Mr. Craig Hankenson, a representative of Wolf Trap who apparently negotiated the contract, made a detailed statement about the situation immediately after the cancellation of the concert. On pertinent matters, his statement included the following:

From my experience in theatres with which I have been affiliated prior to Wolf Trap, I know it is possible to install at the main service panel for the theatre a switchover system so that within 10 minutes an external portable generator or an emergency stage lighting generator can provide emergency service for minimal theatrical lighting and sound. This is not a major investment.

Generally every region of the country has a civil defense program which has stationed somewhere in its region a large portable generator. Prior arrangement can be made with the Civil Defense so that in emergencies, such as ours, the generator, which is usually on a trailer, could be transported to the rear of the Theatre.

In my opinion a far better solution though it is a capital investment of some size is to have a generator of sufficient capacity to deliver power to our stage so that we can carry on a performance with minimal interruption, though we would certainly have to compromise with less than the full lighting and sound which was designed for that performance.

It is my feeling that a theater without this capacity is incomplete. I attach a memo to Claire which I wrote last summer voicing this opinion along with her response.

My memo addressed two equally critical issues: public safety and the ability to continue the performance. Her reply seems to be based solely on public safety and a very “let’s wait to see it if it ever happens and then maybe we’ll do something” attitude.

The facts are that we have experienced power outages on several occasions. It is perhaps a matter of opinion as to how many occurrences can be called frequent. There have been many other occasions of power outage at Wolf Trap has been very lucky they did not occur during the evening when the performance would have been affected. It can perhaps be said that tonight, too we were lucky. What if the failure had occurred after 9:30 in the middle of the performance in darkness?

I recommend that this situation be addressed immediately. The cost to the Foundation, the Park Service and the Opera Company of Boston for the evening’s cancellation would go along way if not all the way toward providing emergency backup equipment to prevent such a recurrence.

[Emphasis. added.]

From this evidence, the trial court could rationally have concluded, and did obviously conclude, that performance of this contract was not “impossible”; that power failures were not only foreseeable in an abstract sense, but were, in fact, inevitable; that a theater without emergency capacity to carry on in case of a power outage is “incomplete”; that Hankenson had advised “Claire,” chairman of the theater board, of this opinion during the previous summer; that power outages had occurred on several previous occasions; that “Wolf Trap has been very lucky they did not occur during the evening when the performance would have been affected”; and that the “cost to the Foundation, the Park Service and the Opera Company of Boston for the evening’s cancellation would go along [sic] way if not all the way toward providing emergency backup equipment to prevent such a recurrence.”

It would have taken only a few seconds to write into the contract a sentence which said, in effect, “If the electric power fails, Wolf Trap will not be responsible for any losses caused by the power failure.”

If the parties had agreed to such a provision I would not raise my voice.

They did not so agree.

I do not think we should write for the defendant a defense it did not write for itself.

I would affirm the decision of the trial court.

L.R. 2 K.B. 740
KRELL
v.
HENRY.
IN THE COURT OF APPEAL.
August 11, 1903

Contract—Impossibility of Performance—Implied Condition—Necessary Inference—Surrounding Circumstances—Substance of Contract—Coronation—Procession—Inference that Procession would pass.

By a contract in writing of June 20, 1902, the defendant agreed to hire from the plaintiff a flat in Pall Mall for June 26 and 27, on which days it had been announced that the coronation processions would take place and pass along Pall Mall. The contract contained no express reference to the coronation processions, or to any other purpose for which the flat was taken. A deposit was paid when the contract was entered into, As the processions did not take place on the days originally fixed, the defendant declined to pay the balance of the agreed rent :—

Held (affirming the decision of Darling J.), from necessary inferences drawn from surrounding circumstances, recognised by both contracting parties, that the taking place of the processions on the days originally fixed along the proclaimed route was regarded by both contracting parties as the foundation of the contract; that the words imposing on the defendant the obligation to accept and pay for the use of the flat for the days named, though general and unconditional, were not used with reference to the possibility of the particular contingency which afterwards happened, and consequently that the plaintiff was not entitled to recover the balance of the rent fixed by the contract.

Taylor v. Caldwell, (1863) 3 B. & S. 826, discussed and applied.

APPEAL from a decision of Darling J.

The plaintiff, Paul Krell, sued the defendant, C. S. Henry, for £50, being the balance of a sum of £75, for which the defendant had agreed to hire a flat at 56A, Pall Mall on the days of June 26 and 27, for the purpose of viewing the processions to be held in connection with the coronation of His Majesty. The defendant denied his liability, and counterclaimed for the return of the sum of £25, which had been paid as a deposit, on the ground that, the processions not having taken place owing to the serious illness of the King, there had been a total failure of consideration for the contract entered into by him. The facts, which were not disputed, were as follows. The plaintiff on leaving the country in March, 1902, left instruc [741] tions with his solicitor to let his suite of chambers at 56A, Pall Mall on such terms and for such period (not exceeding six months) as he thought proper. On June 17,1902, the defendant noticed an announcement in the windows of the plaintiff's flat to the effect that windows to view the coronation processions were to be let. The defendant interviewed the housekeeper on the subject, when it was pointed out to him what a good view of the processions could be obtained from the premises, and he eventually agreed with the housekeeper to take the suite for the two days in question for a sum of 751. On June 20 the defendant wrote the following letter to the plaintiff's solicitor:—

“I am in receipt of yours of the 18th instant, inclosing form of agreement for the suite of chambers on the third floor at 56A, Pall Mall, which I have agreed to take for the two days, the 26th and 27th instant, for the sum of £75. For reasons given you I cannot enter into the agreement, but as arranged over the telephone I inclose herewith cheque for £25 as deposit, and will thank you to confirm to me that I shall have the entire use of these rooms during the days (not the nights) of the 26th and 27th instant. You may rely that every care will be taken of the premises and their contents. On the 24th inst. I will pay the balance, viz., £50, to complete the £75 agreed upon."

On the same day the defendant received the following reply from the plaintiff's solicitor:—

“I am in receipt of your letter of to-day's date inclosing cheque for £25. deposit on your agreeing to take Mr. Krell's chambers on the third floor at 56A, Pall Mall for the two days, the 26th and 27th June, and I confirm the agreement that you are to have the entire use of these rooms during the days (but not the nights), the balance, £50, to, be paid to me on Tuesday next the 24th instant."

The processions not having taken place on the days originally appointed, namely, June 26 and 27, the defendant declined to pay the balance of £50 alleged to be due from him under the contract in writing of June 20 constituted by the above two letters. Hence the present action.

[742] Darling J., on August 11, 1902, held, upon the authority of Taylor v. Caldwell^[1] and The Moorcock^[2], that there was an implied condition in the contract that the procession should take place, and gave judgment for the defendant on the claim and counter-claim.

The plaintiff appealed.

Spencer Bower, K.C., and Holman Gregory, for the plaintiff. In the contract nothing is said about the coronation procession, but it is admitted that both parties expected that there would be a procession, and that the price to be paid for the rooms was fixed with reference to the expected procession. Darling J. held that both the claim and the counter-claim were governed by Taylor v. Caldwell^[1], and that there was an implied term in the contract that the procession should take place. It is submitted that the learned judge was wrong. If he was right, the result will be that in every case of, this kind an unremunerated promisor will be in effect an insurer of the hopes and expectations of the promisee.

Taylor v. Caldwell^[1] purports to be founded on two passages in the Digest. But other passages in the Digest are more directly in point, and shew that the implied condition is that there shall not lie a physical extinction of the subject-matter of the contract.

[VAUGHAN WILLIAMS L.J. The English cases have extended the doctrine of the Digest.]

The limits of the extension are—(1.) the not coming into being of a thing which was not in existence at the date of the contract; (2.) the case of a thing, e.g., a ship, or a person in a contract for personal service, being incapacitated from doing the work intended. In order that the person who has contracted to pay the price should be excused from doing so, there must be (1.) no default on his part; (2.) either the physical extinction or the not coming into existence of the subject-matter of the contract; (3.) the performance of the contract must have been thereby rendered impossible.

In the present case there has been no default on the part of [743] the defendant. But there has been no physical extinction of the subject-matter, and the performance of the contract was quite possible. Rule 1, laid down in Taylor v. Caldwell^[3], and not rule 3, is the rule that regulates this case. Rule 1 is directly in the plaintiff's favour, for here the contract was positive and absolute. In that case the music hall which was the subject of the contract had been burnt down, so that performance of the contract by either party had become impossible.

[VAUGHAN WILLIAMS L.J. referred to Wright v. Hall.^[4]]

The cases which will be relied on for the defendant are all distinguishable from the present case.

Appleby v. Meyers^[5], Boast v. Firth^[6], Baily v. De Crespigny^[7], Howell v. Coupland^[8], and Nickoll v. Ashton^[9] are all distinguishable from the present case, in which two of the necessary elements do not exist.

There are a number of authorities in favour of the plaintiff, such as Paradine v. Jane^[10] ; Barker v. Hodgson^[11] ; Marquis of Bute v. Thompson^[12] ; Hills v. Sughrue^[13] ; Brown v. Royal Insurance Co.^[14] These cases were all anterior to Taylor v. Caldwell.^[1] There are other cases subsequent to Taylor v. Caldwell^[1] , such as Kennedy v. Panama & c., Mail Co.^[15] ; In re Arthur^[16] ; The Moorcock.^[17]

The real question is, What was the position of the parties on June 20, and what was the contract then entered into between them? The right possessed by the plaintiff on that day was the right of looking out of the window of the room, with the opportunity of seeing the procession from that window; the only sale to the defendant was of such right as the plaintiff had, and that was all that the plaintiff was parting with by the contract. There was, of course, the risk that the procession, [744] the anticipation or which gave the room a marketable value, might, from some cause or other, never take place; but that risk passed to the defendant by the contract. On entering into the contract with the defendant the plaintiff put it out of his power to let the room to anyone else: he passed the right and the risk at the same time. No implied condition can be imported into the contract that the object of it shall be attained. There can be no implied condition that the defendant shall be placed in the actual position of seeing the procession. This case is closely analogous to that of London Founders' Association, Limited v. Clarke^[18] , where it was held that in a contract for the sale of shares in a company there was no implied covenant that the purchaser should be put into the status of a shareholder by registration. So in Turner v. Goldsmith^[19] , where the defendant contracted to employ the plaintiff for a fixed term as agent in a business which he, the defendant, ultimately abandoned before the expiration of the term, it was held that there was no implied condition for the continued existence of the business, and accordingly the plaintiff was held entitled to damages for breach of contract. And that was so although part of the res had perished; here no part of the res had perished. The rule is that the Court will not imply any condition in a contract except in case of absolute necessity: Hamlyn, v. Wood.^[20] No doubt under the Sale of Goods Act, 1893 (56 & 57 Vict. c. 71), s. 7, where the specific goods, the subject of the contract, perish, the contract is gone; but this is not a case of that kind. And s. 14 enacts that, unless specified, no implied warranty or condition as to the quality or fitness of the goods supplied under a contract shall be imported. Ashmore v. Cox^[21] is an authority in favour of the plaintiff, for it was there held that a buyer under a contract took the risk of the performance of the contract being rendered impossible by unforeseen circumstances.

Blakeley v. Muller^[22] is also in the plaintiff's favour to the extent of the counter-claim.

[745] [Duke, K.C. The defendant abandons his counter-claim for £25 so that the sole question is as to his liability for the £50.

Upon the main question, then, it is submitted that both the decision in Blakeley v. Muller^[23] and of Darling, J. in the present case are opposed to the principle of Taylor v.Caldwell.^[1] The contract here is absolute, and the defendant has not, as he might have done, guarded himself against the risk by suitable words.

Then, if it is said that this was a mere licence to use the room and therefore revocable as not being under seal, it has now been decided that even if such a licence is revoked an action is still maintainable for breach of contract: Kerrison v. Srnith.^[24]

In conclusion it is submitted that the Court cannot imply an express condition that the procession should pass. Nothing should be implied beyond what was necessary to give to the contract that efficacy which the parties intended at the time. There is no such necessity here; in fact, the inference is the other way, for money was paid before the days specified; which shews that the passing of the procession did not really constitute the basis of the contract, except in a popular sense. The truth is that each party had an expectation, no doubt; but the position is simply this: one says, "Will you take the room?" and the other says, "Yes." That is all. The contract did nothing more than give the defendant the opportunity of seeing whatever might be going on upon the days mentioned.

Duke, K.C., and Ricardo, for the defendant. The question is, What was the bargain? The defendant contends that it was a bargain with an implied condition that the premises taken were premises in front of which a certain act of State would take place by Royal Proclamation. A particular character was thus impressed upon the premises; and when that character ceased to be impressed upon them the contract was at an end. It is through nobody's fault, but through an unforeseen misfortune that the premises lose that character. The price agreed to be paid must he regarded: it is equivalent to [746] many thousands a year. What explanation can be given of that, except that it was agreed to be paid for the purpose of enabling the defendant to see the procession? It was the absolute assumption of both parties when entering into the contract that the procession would pass.

The principle of Taylor v. Caldwell^[1] —namely, that a contract for the sale of a particular thing must not be construed as a positive contract, but as subject to an implied condition that, when the time comes for fulfilment, the specified thing continues to exist—exactly applies. The certainty of the coronation and consequent procession taking place was the basis of this contract. Both parties bargained upon the happening of a certain event the occurrence of which gave the premises a special character with a corresponding value to the defendant; but as the condition failed the premises lost their adventitious value. There has been such a change in the character of the premises which the plaintiff agreed the defendant should occupy as to deprive them of their value. When the premises become unfit for the purpose for which they were taken the bargain is off: Taylor v. Caldwell^[25] , the principle of which case was adopted by the Court of Appeal in Nickoll v. Ashton.^[26] What was in contemplation here was not that the defendant should merely go and sit in the room, but that he should see a procession which both parties regarded as an inevitable event. There was an implied warranty or condition founded on the presumed intention of the parties, and upon reason: The Moorcock.^[27] No doubt the observations of the Court in that ca.se were addressed to a totally different subject-matter, but the principle laid down was exactly as stated in Taylor v. Caldwell ^[1]and Nickoll v. Ashton.^[28] In Hamlyn v. Wood^[29] it was held that a contract there must be a reasonable implication in order to give the transaction such efficacy as both parties intended it to have, and that without such implication the consideration would fail. In the case of a demise, collateral bargains do not arise; but here [747] there is an agreement, and what has to be done is to ascertain the meaning and intention the parties had in entering into it.

[STIRLING L.J. In Appleby v. Myers^[30] there was a contract to supply certain machinery to a building, but before the completion of the contract the building was burnt down; and it was held that both parties were excused from performance of the contract.]

In that case the contract had been partly performed; but the defendant's case is stronger than that. When, as here, the contract is wholly executory and the subject-matter fails, the contract is at an end.

[STIRLING L.J. In Baily v. De Crespigny^[31] , where the performance of a covenant woo rendered impossible by an Act of Parliament, it was held that the covenantor was discharged.

VAUGHN WILLIAMS L.J. In Howell v. Coupland^[32] the contract was held to be subject to an implied condition that the parties should-be excused if performance became impossible through the perishing of the subject-matter.]

That applies here: it is impossible for the plaintiff to give the defendant that which he bargained for, and, therefore, there is a total failure of consideration.

To sum up, the basis of the contract is that there would be a procession; that is to say it is a contract based upon a certain thing coming into existence: there is a condition precedent that there shall be a procession. But for the mutual expectation of a procession upon the days mentioned there would have been no contract whatever. The basis of the contract was also the continuance of a thing in a certain condition; for on June 20 the rooms were capable of being described as a place from which to view a procession on two particular days; whereas when those days arrived the rooms were no longer capable of being so described.

Holman Gregory replied.

Cur. adv. vult.

Aug. 11. VAUGHAN WILLIAMS L.J. read the following written judgment:—The real question in this case is the extent [748] of the application in English law of the principle of the Roman law which has been adopted and acted on in many English decisions, and notably in the case of Taylor v. Caldwell.^[1] That case at least makes it clear that

“where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless, when the time for the fulfilment of the contract arrived, some particular specified thing continued to exist, so that when entering into the contract they must have contemplated such continued existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be considered a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor."

Thus far it is clear that the principle of the Roman law has been introduced into the English law. The doubt in the present case arises as to how far this principle extends. The Roman law dealt with obligationes de certo corpore. Whatever may have been the limits of the Roman law, the case of Nickoll v. Ashton^[33] makes it plain that the English law applies the principle not only to cases where the performance of the contract becomes impossible by the cessation of existence of the thing which is the subject-matter of the contract, but also to cases where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root of the contract, and essential to its performance. It is said, on the one side, that the specified thing, state of things, or condition the continued existence of which is necessary for the fulfilment of the contract, so that the parties entering into the contract must have contemplated the continued existence of that thing, condition, or state of things as the foundation of what was to be done under the contract, is limited to things which are either the subject-matter of the contract or a condition or state of things, present or anticipated, which is expressly [749] mentioned in the contract. But, on the other side, it is said that the condition or state of things need not be expressly specified, but that it is sufficient if that condition or state of things clearly appears by extrinsic evidence to have been assumed by the parties to be the foundation or basis of the contract, and the event which causes the impossibility is of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made. In such a case the contracting parties will not be held bound by the general words which, though large enough to include, were not used with reference to a possibility of a particular event rendering performance of the contract impossible. I do not think that the principle of the civil law as introduced into the English law is limited to cases in which the event causing the impossibility of performance is the destruction or non-existence of some thing which is the subject-matter of the contract or of some condition or state of things expressly specified as a condition of it. I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things. If it does, this will limit the operation of the general words, and in such case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited. Now what are the facts of the present case? The contract is contained in two letters of June 20 which passed between the defendant and the plaintiff's agent, Mr. Cecil Bisgood. These letters do not mention the coronation, but speak merely of the taking of Mr. Krell's chambers, or, rather, of the use of them, in the daytime of June 26 and 27, for the sum of £75, £25. then paid, balance £50 to be paid on the 24th. But the affidavits, which by agreement between the parties are to be taken as stating the facts of the case, shew that the plaintiff exhibited on his [750] premises, third floor, 56A, Pall Mall, an announcement to the effect that windows to view the Royal coronation procession were to be let, and that the defendant was induced by that announcement to apply to the housekeeper on the premises, who said that the owner was willing to let the suite of rooms for the purpose of seeing the Royal procession for both days, but not nights, of June 26 and 27.

In my judgment the use of the rooms was let and taken for the purpose of seeing the Royal procession. It was not a demise of the rooms, or even an agreement to let and take the rooms. It is a licence to use rooms for a particular purpose and none other. And in my judgment the taking place of those processions on the days proclaimed along the proclaimed route, which passed 56A, Pall Mall, was regarded by both contracting parties as the foundation of the contract; and I think that it cannot reasonably be supposed to have been in the contemplation of the contracting parties, when the contract was made, that the coronation would not be held on the proclaimed days, or the processions not take place on those days along the proclaimed route; and I think that the words imposing on the defendant the obligation to accept and pay for the use of the rooms for the named days, although general and unconditional, were not used with reference to the possibility of the particular contingency which afterwards occurred. It was suggested in the course of the argument that if the occurrence, on the proclaimed days, of the coronation and the procession in this case were the foundation of the contract, and if the general words are thereby limited or qualified, so that in the event of the non-occurrence of the coronation and procession along the proclaimed route they would discharge both parties from further performance of the contract, it would follow that if a cabman was engaged to take some one to Epsom on Derby Day at a suitable enhanced price for such a journey, say £10, both parties to the contract would be discharged in the contingency of the race at Epsom for some reason becoming impossible; but I do not think this follows, for I do not think that in the cab case the happening of the race would be the foundation of the contract. No doubt the purpose of the engager would be to go to see the Derby, and the price would be proportionately high; but the cab had [751] no special qualifications for the purpose which led to the  selection of the cab for this particular occasion. Any other cab would have done as well. Moreover, I think that, under the cab contract, the hirer, even if the race went off, could have said, "Drive me to Epsom; I will pay you the agreed sum; you have nothing to do with the purpose for which I hired the cab," and that if the cabman refused he would have been guilty of a breach of contract, there being nothing to qualify his promise to drive the hirer to Epsom on a particular day. Whereas in the case of the coronation, there is not merely the purpose of the hirer to see the coronation procession, but it is the coronation procession and the relative position of the rooms which is the basis of the contract as much for the lessor as the hirer; and I think that if the King, before the coronation day and after the contract, had died, the hirer could not have insisted on having the rooms on the days named. It could not in the cab case be reasonably said that seeing the Derby race was the foundation of the contract, as it was of the licence in this case. Whereas in the present case, where the rooms were offered and taken, by reason of their peculiar suitability from the position of the rooms for a view of the coronation procession, surely the view of the coronation procession was the foundation of the contract, which is a very different thing from the purpose of the man who engaged the cab—namely, to see the race—being held to be the foundation of the contract. Each case must be judged by its own circumstances. In each case one must ask oneself, first, what, having regard to all the circumstances, was the foundation of the contract? Secondly, was the performance of the contract prevented? Thirdly, was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract? If all these questions are answered in the affirmative (as I think they should be in this case), I think both parties are discharged from further performance of the contract. I think that the coronation procession was the foundation of this contract, and that the non-happening of it prevented the performance of the contract; and, secondly, I think that the [752] non-happening of the procession, to use the words of Sir James Hannen in Baily v. De Crespigny^[34] , was an event “of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, and that they are not to be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened." The test seems to be whether the event which causes the impossibility was or might have been anticipated and guarded against. It seems difficult to say, in a case where both parties anticipate the happening of an event, which anticipation is the foundation of the contract, that either party must be taken to have anticipated, and ought to have guarded against, the event which prevented the performance of the contract. In both Jackson v. Union Marine Insurance Co.^[35] and Nickoll v. Ashton^[28] the parties might have anticipated as a possibility that perils of the sea might delay the ship and frustrate the commercial venture: in the former case the carriage of the goods to effect which the charterparty was entered into; in the latter case the sale of the goods which were to be shipped on the steamship which was delayed. But the Court held in the former case that the basis of the contract was that the ship would arrive in time to carry out the contemplated commercial venture, and in the latter that the steamship would arrive in time for the loading of the goods the subject of the sale. I wish to observe that cases of this sort are very different from cases where a contract or warranty or representation is implied, such as was implied in The Moorcock^[36] , and refused to be implied in Hamlyn v.Wood,^[29] But The Moorcock^[36] is of importance in the present case as shewing that whatever is the suggested implication—be it condition, as in this case, or warranty or representation—one must, in judging whether the implication ought to be made, look. not only at the words of the contract, but also at the surrounding facts and the knowledge of the parties of those facts. There seems to rile to be ample [753] authority for this proposition. Thus in Jackson v. Union Marine Insurance Co.^[37] , in the Common Plead, the question of whether the object of the voyage had been frustrated by the delay of the ship was left as a question of fact to the jury, although there was nothing in the charterparty defining the time within which the charterers were to supply the cargo of iron rails for San Francisco, and nothing on the face of the charterparty to indicate the importance of time in the venture; and that was a case in which, as Bramwell B. points out in his judgment at p.148, Taylor v. Caldwell^[1] was a strong authority to support the conclusion arrived at in the judgment—that the ship not arriving in time for the voyage contemplated, but at such time as to frustrate the commercial venture, was not only breach of the contract but discharged the charterer, though he had such an excuse that no action would lie. And, again. in Harris v. Dreesman^[38] the vessel had to be loaded as no particular time was mentioned, within a reasonable time; and, in judging of a reasonable time, the Court approved of evidence, being given that the defendants, the charterers, to the knowledge of the plaintiffs, had no control over the colliery from which both parties knew that the coal was to come; and that, although all that was said in the charterparty was that the vessel should proceed to Spital Tongue's Spout (the spout of the Spital Tongue's Colliery), and there take on board from the freighters a full and complete cargo of coals, and five tons of coke, and although there was no evidence to prove any custom in the port as to loading vessels in turn. Again it was held in Mumford v. Gething^[39] that, in construing a written contract of service under which A. was to enter the employ of B., oral evidence is admissible to shew in what capacity A. was to, serve B. See also Price v. Mouat.^[40] The rule seems to be that which is laid down in Taylor on Evidence, vol. ii. s. 1082:

"It may be laid down as a broad and distinct rule of law that extrinsic evidence of every material fact which will enable the Court to ascertain the nature and qualities of the subject-matter of the instrument, or, in other words, to identify the [754] persons and things to which the instrument refers, must of necessity be received."

And Lord Campbell in his judgment says:

"I am of opinion that, when there is a contract for the sale of a specific subject-matter, oral evidence may be received, for the purpose of shewing what that subject-matter was, of every fact within the knowledge of the parties before and at the time of the contract."

See per Campbell C.J., Macdonald v. Longbottom.^[41] It seems to me that the language of Willes J. in Lloyd v. Guibert^[42] points in the same direction. I myself am clearly of opinion that in this case, where we have to ask ourselves whether the object of the contract was frustrated by the non-happening of the coronation and its procession on the days proclaimed, parol evidence is admissible to shew that the subject of the contract was rooms to view the coronation procession, and was so to the knowledge of both parties. When once this is established, I see no difficulty whatever in the case. It is not essential to the application of the principle of Taylor v. Caldwell^[1] that the direct subject of the contract should perish or fail to be in existence at the date of performance of the contract. It is sufficient if a state of things or condition expressed in the contract and essential to its performance perishes or fails to be in existence at that time. In the present case the condition which fails and prevents the achievement of that which was, in the contemplation of both parties, the foundation of the contract, is not expressly mentioned either as a condition of the contract or the purpose of it; but I think for the reasons which I have given that the principle of Taylor v. Caldwell^[1] ought to be applied. This disposes of the plaintiff's claim for £50 unpaid balance of the price agreed to be paid for the use of the rooms. The defendant at one time set up a cross-claim for the return of the £25 he paid at the date of the contract. As that claim is now withdrawn it is unnecessary to say anything about it. I have only to add that the facts of this case do not bring it within the principle laid down in Stubbs v. Holywell Ry. Co.^[43] ; that in the case of contracts falling directly within the rule of [755] Taylor v. Caldwell^[1] the subsequent impossibility does not affect rights already acquired, because the defendant had the whole of June 24 to pay the balance, and the public announcement that the coronation and processions would not take place on the proclaimed days was made early on the morning of the 24th, and no cause of action could accrue till the end of that day. I think this appeal ought to be dismissed.

ROMER L.J. With some doubt I have also come to the conclusion that this case is governed by the principle on which Taylor v. Caldwell^[1] was decided, and accordingly that the appeal must be dismissed. The doubt I have felt was whether the parties to the contract now before us could be said, under the circumstances, not to have had at all in their contemplation the risk that for some reason or other the coronation processions might not take place on the days fixed, or, if the processions took place, might not pass so as to be capable of being viewed from the rooms mentioned in the contract; and whether, under this contract, that risk was not undertaken by the defendant. But on the question of fact as to what was in the contemplation of the parties at the time, I do not think it right to differ from the conclusion arrived at by Vaughan Williams L.J., and (as I gather) also arrived at by my brother Stirling. This being so, I concur in the conclusions arrived at by Vaughan Williams L.J. in his judgment, and I do not desire to add anything to what he has said so fully and completely.

STIRLING L.J. said he had had an opportunity of reading the judgment delivered by Vaughan Williams L.J., with which he entirely agreed. Though the case was one of very great difficulty, he thought it came within the principle of Taylor v. Caldwell.^[1]

Appeal dismissed.

Solicitors: Cecil Bisgood; M. Grunebaum.

NOTE.—For other cases arising out of the postponement of the coronation, See the next following case; Elliott v. Crutchley, ante, p. 476, and Herne Bay Steam Boat Co. v. Hutton, ante, p. 683.

[1] 3 B. & S. 826.

[2] (1889) 14 P. D. 64.

[3] 3 B. & S. at p. 833.

[4] (1858) E. B. & E. 746.

[5] (1867) L. R. 2 C.P. 651.

[6] (1868) L. R.4 C. P. 1.

[7] (1869) L. R. 4 Q. B. 180.

[8] (1876) 1 Q. B. D. 258.

[9] [1901] 2 K. B. 126.

[10] (1646) Al. 26.

[11] (1814) 3 M. & S. 267; 15 R. R. 485.

[12] (1844) 13 M. & W. 487.

[13] (1846) 15 M. & W. 253.

[14] (1859) 1 E. & E. 853. 

[15] (1867) L. R. 2 Q. B. 580.

[16] (1880) 14 Ch. D. 603.

[17] 14 P. D. 64.

[18] (1888) 20 Q. B. D. 576, 579, 580,582.

[19] [1891] 1 Q. B. 544, 548, 551.

[20] [1891] 2 Q. B. 488, 491-2.

[21] [1899] 1 Q. B. 436, 441

[22] [1903] 88 L.T. 90; 67 J.P. 51: post, p. 760 (note).

[23] 88 L. T. 90; 67 J. P. 51.

[24] [1897] 2 Q. B. 445.

[25] 3 B. & S. at p. 832.

[26] [1901] 2 K. B. 126, 137.

[27] 14 P. D. 64, 68.

[28] [1901] 2 K. B.126.

[29] [1891] 2 Q. B. 488.

[30] L. R. 2 C. P. 651.

[31] L. R. 4, Q. B. 180.

[32] 1 Q. B. D. 258. 

[33] [1901] 2 K. B.126.

[34] L. R. 4 Q. B. 185.

[35] (1873) L. R. 8 C. P. 572.

[36] 14 P. D. 64.

[37] L. R. 8 C. P. 572; (1874) 10 C. P: 125; 42 L. J. (C.P.) 284.

[38] (1854) 23 L. J. (Ex.) 210.

[39] (1859) 7 C. B. (N.S.) 305.

[40] (1862) 11 C. B. (N.S.) 508.

[41] (1859) 1 E. & E. 977, at p. 983.

[42] (1865) 35 L. J. (Q.B.) 74, 75.

[43] (1867) L. R.. 2 Ex. 311.

[L. A. No. 18738.

In Bank.

Oct. 31, 1944.]

CAROLINE A. LLOYD et al., Respondents, v. WILLIAM J. MURPHY, Appellant.

Chas. W. Rollinson and Wm. Roy Ives for Appellant.

Albert W. Leeds for Respondents.

Schultheis & Laybourne and Clifford E. Royston as Amici Curiae on behalf of Respondents.

TRAYNOR, J.

August 4, 1941, plaintiffs leased to defendant for a five-year term beginning September 15, 1941, certain premises located at the corner of Almont Drive and Wilshire Boulevard in the city of Beverly Hills, Los Angeles County, “for the sole purpose of conducting thereon the business of displaying and selling new automobiles (including the servicing and repairing thereof and of selling the petroleum products of a major oil company) and for no other purpose whatsoever without the written consent of the lessor” except “to make an occasional sale of a used automobile.” Defendant agreed not to sublease or assign without plaintiffs’ written consent. On January 1,1942, the federal government ordered that the sale of new automobiles be discontinued. It modified this order on January 8, 1942, to permit sales to those engaged in military activities, and on January 20, 1942, it established a system of priorities restricting sales to persons having preferential ratings of A-l-j or higher. On March 10, 1942, defendant explained the effect of these restrictions on his business to one of the plaintiffs authorized to act for the others, who orally waived the restrictions in the lease as to use and subleasing and offered to reduce the rent if defendant should be unable to operate profitably. Nevertheless defendant vacated the premises on March 15, 1942, giving oral notice of repudiation of the lease to plaintiffs, which was followed by a written notice on March 24, 1942. Plaintiffs affirmed in writing on March 26th their oral waiver and, failing to persuade defendant to perform his obligations, they rented the property to other tenants pursuant to their powers under the lease in order to mitigate damages. On May 11, 1942, plaintiffs brought this action praying for declaratory relief to determine their rights under the lease, and for judgment for unpaid rent. Following a trial on the merits, the court found that the leased premises were located on one of the main traffic arteries of Los Angeles County; that they were equipped with gasoline pumps and in general adapted for the maintenance of an automobile service station; that they contained a one-story storeroom adapted to many commercial purposes; that plaintiffs had waived the restrictions in the lease and granted defendant the right to use the premises for any legitimate purpose and to sublease to any responsible party; that defendant continues to carry on the business of selling and servicing automobiles at two other places. Defendant testified that at one of these locations he sold new automobiles exclusively and when asked if he were aware that many new automobile dealers were continuing in business replied: “Sure. It is just the location that I couldn’t make a go, though, of automobiles.” Although there was no finding to that effect, defendant estimated in response to inquiry by his counsel, that 90 per cent of his gross volume of business was new car sales and 10 per cent gasoline sales. The trial court held that war conditions had not terminated defendant’s obligations under the lease and gave judgment for plaintiffs, declaring the lease as modified by plaintiffs’ waiver to be in full force and effect, and ordered defendant to pay the unpaid rent with interest, less amounts received by plaintiffs from re-renting. Defendant brought this appeal, contending that the purpose for which the premises were leased was frustrated by the restrictions placed on the sale of new automobiles by the federal government, thereby terminating his duties under the lease.

Although commercial frustration was first recognized as an excuse for nonperformance of a contractual duty by the courts of England (Krell v. Henry [1903] 2 K.B. 740 [C.A.]; Blakely v. Muller, 19 T.L.R. 186 [K.B.]; see MeElroy and Williams, The Coronation Cases, 4 Mod.L.Rev. 241) its soundness has been questioned by those courts (see Maritime National Fish, Ltd., v. Ocean Trawlers, Ltd. [1935] A.C. 524, 528-29, 56 L.Q.Rev. 324, arguing that Krell v. Henry, supra, was a misapplication of Taylor v. Caldwell, 3 B.&S 826 [1863], the leading case on impossibility as an excuse for nonperformance), and they have refused to apply the doctrine to leases on the ground that an estate is conveyed to the lessee, which carries with it all risks (Swift v. McBean, 166 L.T.Rep. 87 [1942] 1 K.B. 375; Whitehall Court v. Ettlinger, 122 L.T.Rep. 540, (1920) 1 KB. 680, [1919] 89 L.J. [KB.] N.S. 126; 137 A.L.R. 1199, 1224; see collection and discussion on English cases in Wood v. Bartolino,—N.M.—[146 P.2d 883, 886-87]). Many courts, therefore, in the United States have held that the tenant bears all risks as owner of the estate (Ctisack Co. v. Pratt, 78 Colo. 28 [239 P. 22, 44 A.L.R. 55] ; Yellow Cab Co. v. Stafford-Smith Cos., 320 111. 294 [150 N.E. 670, 43 A.L.R. 1173]), but the modern cases have recognized that the defense may be available in a proper ease, even in a lease. As the author declares in 6 Williston, Contracts (rev. ed. 1938), § 1955, pp. 5485-87, “The fact that lease is a conveyance and not simply a continuing contract and the numerous authorities enforcing liability to pay rent in spite of destruction of leased premises, however, have made it difficult to give relief. That the tenant has been relieved, nevertheless, in several cases indicates the gravitation of the law toward a recognition of the principle that fortuitous destruction of the value of performance wholly outside the contemplation of the parties may excuse a promisor even in a lease. . . .

“Even more clearly with respect to leases than in regard to ordinary contracts the applicability of the doctrine of frustration depends on the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into.”

The principles of frustration have been repeatedly applied to leases by the courts of this state (Brown v. Oshiro, 58 Cal.App.2d 190 [136 P.2d 29]; Davidson v. Goldstein, 58 CaLApp. 2d Supp. 909 [136 P.2d 665]; Grace v. Croninger, 12 Cal. App.2d 603 [55 P.2d 940]; Knoblaugh v. McKinney, 5 Cal.App.2d 339 [42 P.2d 332]; Industrial Development & Land Co. v. Goldschmidt, 56 Cal.App. 507 [206 P. 134] ; Burke v. San Francisco Breweries, Ltd., 21 Cal.App. 198 [131 P. 83]) and the question is whether the excuse for nonperformance is applicable under the facts of the present case.

Although the doctrine of frustration is akin to the doctrine of impossibility of performance (see Civ. Code, § 1511; 6 Cal.Jur. 435-450; 4 Cal.Jur Ten-year Supp. 187-192; Taylor V. Caldwell, supra) since both have developed from the commercial necessity of excusing performance in cases of extreme hardship, frustration is not a form of impossibility even under the modern definition of that term, which includes not only cases of physical impossibility but also cases of extreme impracticability of performance (see Mineral Park Land Co. v. Howard, 172 Cal. 289, 293 [156 P. 458, L.R.A. 1916F 1] ; Christin v. Superior Court, 9 Cal.2d 526, 533 [71 P.2d 205, 112 A.L.R 1153] ; 6 Williston, op. cit. supra, § 1935, p. 5419; Rest., Contracts, § 454, comment a., and Cal.Ann. p. 254). Performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration (Krell v. Henry, supra; Blakely v. Muller, supra; Marks Realty Co. v. Hotel Hermitage Co., 170 App.Div. 484 [156 N.Y.S. 179] ; 6 Williston, op. cit. supra, §§1935, 1954, pp. 5477, 5480; Restatement, Contracts, § 288).

The question in cases involving frustration is whether the equities of the case, considered in the light of sound public policy, require placing the risk of a disruption or complete destruction of the contract equilibrium on defendant or plaintiff under the circumstances of a given case (Fibrosa Spolka Akcyjina v. Fairbairn Lawson Combe Barbour, Ltd. [1942], 167 L.T.R. [H.L.] 101, 112-113; see Smith, Some Practical Aspects of the Doctrine of Impossibility, 32 IlLL.Rev. 672, 675; Patterson, Constructive Conditions in Contracts, 42 Columb.L.Rev. 903, 949; 27 Cal.L.Rev. 461), and the answer depends on whether an unanticipated circumstance, the risk of which should not be fairly thrown on the promisor, has made performance vitally different from what was reasonably to be expected (6 Williston, op. cit. supra, § 1963, p. 5511; Restatement, Contracts, § 454). The purpose of a contract is to place the risks of performance upon the promisor, and the relation of the parties, terms of the contract, and circumstances surrounding its formation must be examined to determine whether it can be fairly inferred that the risk of the event that has supervened to cause the alleged frustration was not reasonably foreseeable. If it was foreseeable there should have been provision for it in the contract, and the absence of such a provision gives rise to the inference that the risk was assumed.

The doctrine of frustration has been limited to cases of extreme hardship so that businessmen, who must make their arrangements in advance, can rely with certainty on their contracts (Anglo-Northern Trading Co. v. Emlyn Jones and Williams, 2 K.B. 78; 137 A.L.R. 1199, 1216-1221). The courts have required a promisor seeking to excuse himself from performance of his obligations to prove that the risk of the frustrating event was not reasonably foreseeable and that the value of counterperformance is totally or nearly totally destroyed, for frustration is no defense if it was foreseeable or controllable by the promisor, or if counterperformance remains valuable. (La Cumbre Golf & Country Club v. Santa Barbara Hotel Co., 205 Cal. 422, 425 [271 P. 476] ; Johnson v. Atkins, 53 Cal.App.2d 430, 434 [127 P.2d 1027] ; Grace v. Croninger, 12 Cal.App.2d 603, 606-607 [55 P.2d 940] ; Industrial Development & Land Co. v. Goldschmidt, 56 Cal.App. 507, 511 [206 P. 134] ; Burke v. San Francisco Breweries, Ltd., 21 Cal.App. 198, 201 [131 P. 83] ; Megan v. Updike Grain Corp. (C.C.A. 8), 94 F.2d 551, 553; Herne Bay Steamboat Co. v. Hutton [1903], 2 K.B. 683; Leiston Gas Co. v. Leiston Cum Sizewell Urban District Council [1916], 2.K.B. 428; Raner v. Goldberg, 244 N.Y. 438 [155 N.E. 733] ; 6 Williston, op. cit. supra, §§ 1939, 1955, 1963; Restatement, Contracts, § 288.)

Thus laws or other governmental acts that make performance unprofitable or more difficult or expensive do not excuse the duty to perform a contractual obligation (Sample v. Fresno Flume etc. Co., 129 Cal. 222, 228 [61 P. 1085] ; Klauber v. San Diego St. Car Co., 95 Cal. 353, 358 [30 P. 555] ; Texas Co. v. Hogarth Shipping Co., 256 U.S. 619, 630 [41 S.Ct. 612, 65 L.Ed. 1123] ; Columbus Ry. Power & Light Co. v. Columbus, 249 U.S. 399, 414 [39 S.Ct. 349, 63 L.Ed. 669] ; Thomson v. Thomson, 315 Ill. 521, 527 [146 N.E. 451] ; Commonwealth v. Bader, 271 Pa. 308, 312 [114 A. 266] ; Commonwealth v. Neff, 271 Pa. 312, 314 [114 A. 267]; London & Lancashire Ind. Co. v. Columbiana County, 107 OhioSt. 51, 64 [140 N.E. 672] ; see 6 Williston, op. cit. supra, §§ 1955, 1963, pp. 5507-09). It is settled that if parties have contracted with reference to a state of war or have contemplated the risks arising from it, they may not invoke the doctrine of frustration to escape their obligations (Northern Pac. Ry. Co. v. American Trading Co., 195 U.S. 439, 467-68 [25 S.Ct. 84, 49 L.Ed. 269] ; Primos Chemical Co. v. Fulton Steel Corp. (D.C.N.Y.), 266 F. 945, 948; Krulewitch v. National Importing & Trading Co., 195 App.Div. 544 [186 N.Y.S. 838, 840] ; Smith v. Morse, 20 La.Ann. 220, 222; Lithflux Mineral & Chem. Works v. Jordan, 217 Ill.App. 64, 68; Mederios v. Hill, 8 Bing. 231, 131 Eng.Rep. 390, 392; Bolckow V. & Co. v. Compania Minera de Sierra Minera, 115 L.T.R. [K.B.] 745, 747).

At the time the lease in the present case was executed the National Defense Act (Public Act No. 671 of the 76th Congress [54 Stats. 601], §2A), approved June 28, 1940, authorizing the President to allocate materials and mobilize industry for national defense, had been law for more than a year. The automotive industry was in the process of conversion to supply the needs of our growing mechanized army and to meet lend-lease commitments. Iceland and Greenland had been occupied by the army. Automobile sales were soaring because the public anticipated that production would soon be restricted. These facts were commonly known and it cannot be said that the risk of war and its consequences necessitating restriction of the production and sale of automobiles was so remote a contingency that its risk could not be foreseen by defendant, an experienced automobile dealer. Indeed, the conditions prevailing at the time the lease was executed, and the absence of any provision in the lease contracting against the effect of war, gives rise to the inference that the risk was assumed. Defendant has therefore failed to prove that the possibility of war and its consequences on the production and sale of new automobiles was an unanticipated circumstance wholly outside the contemplation of the parties.

Nor has defendant sustained the burden of proving that the value of the lease has been destroyed. The sale of automobiles was not made impossible or illegal but merely restricted and if governmental regulation does not entirely prohibit the business to be carried on in the leased premises but only limits or restricts it, thereby making it less profitable and more difficult to continue, the lease is not terminated or the lessee excused from further performance (Brown v. Oshiro, supra, p. 194; Davidson v. Goldstein, supra, p. 918; Grace v. Croninger, supra, p. 607; Industrial Development & Land Co. v. Goldschmidt, supra; Burke v. San Francisco Brewing Co., supra, p. 202; First National Bank of New Rochelle v. Fairchester Oil Co., 267 App.Div. 281 [45 N.Y.S.2d 532, 533] ; Robitzek Inv. Co., Inc. v. Colonial Beacon Oil Co., 265 App.Div. 749 [40 N.Y.S.2d 819, 824] ; Colonial Operating Corp. v. Hannon Sales & Service, Inc., 265 App. Div. 411 [39 N.Y.S.2d 217, 220] ; Byrnes v. Balcolm, 265 App.Div. 268 [38 N.Y.S.2d 801, 803]; Deibler v. Bernard Bros. Inc., 385 Ill. 610 [53 N.E.2d 450, 453] ; Wood v. Bartolino, —N.M.— [146 P.2d 883, 886, 888, 890]). Defendant may use the premises for the purpose for which they were leased. New automobiles and gasoline continue to be sold. Indeed, defendant testified that he continued to sell new automobiles exclusively at another location in the same county.

Defendant contends that the lease is restrictive and that the government orders therefore destroyed its value and frustrated its purpose. Provisions that prohibit subleasing or other uses than those specified affect the value of a lease and are to be considered in determining whether its purpose has been frustrated or its value destroyed (see Owens, The Effect of the War Upon the Rights and Liabilities of Parties to a Contract, 19 California State Bar Journal 132, 143). It must not be forgotten, however, that “The landlord has not covenanted that the tenant shall have the right to carry on the contemplated business or that the business to which the premises are by their nature or by the terms of the lease restricted shall be profitable enough to enable the tenant to pay the rent but has imposed a condition for his own benefit; and, certainly, unless and until he chooses to take advantage of it, the tenant is not deprived of the use of the premises.” (6 Williston, Contracts, op. cit. supra, § 1955, p. 5485; see, also, People v. Klopstock, 24 Cal.2d 897, 901 [151 P.2d 641].) In the present lease plaintiffs reserved the rights that defendant should not use the premises for other purposes than those specified in the lease or sublease without plaintiffs’ written consent. Far from preventing other uses or subleasing they waived these rights, enabling defendant to use the premises for any legitimate purpose and to sublease them to any responsible tenant. This waiver is significant in view of the location of the premises on a main traffic artery in Los Angeles County and their adaptability for many commercial purposes. The value of these rights is attested by the fact that the premises were rented soon after defendants vacated them. It is therefore clear that the governmental restrictions on the sale of new cars have not destroyed the value of the lease. Furthermore, plaintiffs offered to lower the rent if defendant should be unable to operate profitably, and their conduct was at all times fair and cooperative.

The consequences of applying the doctrine of frustration to a leasehold involving less than a total or nearly total destruction of the value of the leased premises would be undesirable. Confusion would result from different decisions purporting to define “substantial” frustration. Litigation would be encouraged by the repudiation of leases when lessees found their businesses less profitable because of the regulations attendant upon a national emergency. Many leases have been affected in varying degrees by the widespread governmental regulations necessitated by war conditions.

The cases that defendant relies upon are consistent with the conclusion reached herein. In Industrial Development & Land Co. v. Goldschmidt, supra, the lease provided that the premises should not be used other than as a saloon. When national prohibition made the sale of alcoholic beverages illegal, the court excused the tenant from further performance on the theory of illegality or impossibility by a change in domestic law. The doctrine of frustration might have been applied, since the purpose for which the property was leased was totally destroyed and there was nothing to show that the value of the lease was not thereby totally destroyed. In the present case the purpose was not destroyed but only restricted, and plaintiffs proved that the lease was valuable to defendant. In Grace v. Croninger, supra, the lease was for the purpose of conducting a “saloon and cigar store and for no other purpose” with provision for subleasing a portion of the premises for bootblack purposes. The monthly rental was $650. It was clear that prohibition destroyed the main purpose of the lease, but Since the premises could be used for bootblack and cigar store purposes, the lessee was not excused from his duty to pay the rent. In the present case new automobiles and gasoline may be sold under the lease as executed and any legitimate business may be conducted or the premises may be subleased under the lease as modified by plaintiff’s waiver. Colonial Operating Corp. v. Hannon Sales & Service, Inc., 34 N.Y.S.2d 116, was reversed in 265 App.Div. 411 [39 N.Y.S. 2d 217], and Signal Land Corp. v. Loecher, 35 N.Y.S.2d 25; Schantz v. American Auto Supply Co., Inc., 178 Misc. 909 [36 N.Y.S.2d 747]; and Canrock Realty Corp. v. Vim Electric Co., Inc., 37 N.Y.S.2d 139, involved government orders that totally destroyed the possibility of selling the products for which the premises were leased. No case has been cited by defendant or disclosed by research in which an appellate court has excused a lessee from performance of his duty to pay rent when the purpose of the lease has not been totally destroyed or its accomplishment rendered extremely impracticable or where it has been shown that the lease remains valuable to the lessee.

The judgment is affirmed.

Gibson, C. J., Shenk, J., Curtis, J., Edmonds, J., Carter, J., and Schauer, J., concurred.

Appellant’s petition for a rehearing was denied November 28, 1944.