305 N.Y. 48 (1953)

Nate L. Crabtree, Respondent,
v.
Elizabeth Arden Sales Corporation, Appellant.

Court of Appeals of the State of New York.
Submitted November 25, 1952.
Decided January 21, 1953.

Crabtree v. Elizabeth Arden Sales Corp., 279 App. Div. 992, affirmed.

APPEAL from a judgment of the Appellate Division of the Supreme Court in the first judicial department, entered April 23, 1952, affirming, by a divided court, a judgment of the Supreme Court in favor of plaintiff, entered in New York County upon a decision of the court at a Trial Term (RABIN, J.), without a jury.

J. Howard Carter, John R. Schoemer, Jr., John J. Macchia and Arthur W. Knapp, Jr., for appellant.

I.

There is no written memorandum of plaintiff's alleged contract of employment sufficient to satisfy the Statute of Frauds. (Carter, Macy Co. v. Matthews, 220 App. Div. 679; Brauer v. Oceanic Steam Navigation Co., 178 N. Y. 339; Friedman & Co. v. Newman, 255N. Y. 340; Standard Oil Co. v. Koch, 260 N. Y. 150; United Press v. New York Press Co., 164 N. Y. 406; Culotta v. Banana Sales Corp., 142 Misc. 149; Watson v. Gugino, 204 N. Y. 535; Martin v. New York Life Ins. Co., 148 N. Y. 117; Miller v. Burlington Mills Ribbon Corp., 304 N. Y. 600; Mesibov, Glinert & Levy v. Cohen Bros. Mfg. Co., 245 N. Y. 305.)

II.

The court below adopted an erroneous measure of damages. (Toplitz v. Ullman, 2 Misc. 130; Griffin v. Oklahoma Nat. Gas Corp., 132 Kan. 843.)

Frank A. Fritz, Frank H. Platt, George Q. Slocum and Anthony T. Antinozzi for respondent.

I.

Plaintiff's employment was for a definite term and did not constitute an employment at will. (Braxton v. Mendelson, 233 N. Y. 122; Ferguson v. De Witt, 230 App. Div. 778; Fellows v. Fairbanks Co., 205 App. Div. 271; Aerated Products Co. v. Godfrey, 290 N. Y. 92; Matter of Aurelio [Cohen] 291 N. Y. 176; Drivas v. Lekas, 292 N. Y. 204; Gressing v. Musical Instrument Sales Co., 222 N. Y. 215; Mason v. New York Produce Exch., 127 App. Div. 282; Breakey v. Lake Placid Co., 271 App. Div. 586.)

II.

The contract of employment is evidenced by writings which together constitute a sufficient memorandum in compliance with the Statute of Frauds. (Marks v. Cowdin, 226 N. Y. 138; Spiegel v. Lowenstein, 162 App. Div. 443; Raubitschek v. Blank, 80 N. Y. 478; Webster v. Zielly, 52 Barb. 482; General Overseas Corp. v. Republic Pictures Int. Corp., 74 F. Supp. 698; Baxter v. Lustberg, 205 App. Div. 673; Doughty v. Manhattan Brass Co., 101 N. Y. 644; Coe v. Tough, 116 N. Y. 273; Delaware Mills v. Carpenter Bros., 200 App. Div. 324; Atlas Shoe Co. v. Lewis, 202 App. Div. 244.)

III.

Plaintiff exercised reasonable care to mitigate damages. There was no abandonment of the employment or waiver of defendant's breach. (Whitmarsh v. Littlefield, 46 Hun 418; Colloraff v. Hickson, Inc., 159 N. Y. S. 177; Milage v. Woodward, 186 N. Y. 252; Howard v. Daly, 61 N. Y. 362; Bassett v. French, 10 Misc. 672; Fuchs v. Koerner, 107 N. Y. 529; Briscoe v. Litt, 19 Misc. 5; McClelland v. Climax Hosiery Mills, 252 N. Y. 347; Toplitz v. Ullman, 2 Misc. 130; Richardson v. Hartmann, 68 Hun 9.)

IV.

Plaintiff is entitled prima facie to the amount of the unpaid salary for the unexpired term of the contract. (Karas v. H. R. Laboratories, 271 App. Div. 530, 297 N. Y. 494; Hollwedel v. Duffy-Mott Co., 263 N. Y. 95; Milage v. Woodward, 186 N. Y. 252; Sinclair v. Positype Corp. of America, 237 App. Div. 525; Howard v. Daly, 61 N. Y. 362; Van Wyck v. Mannino, 256 App. Div. 256; Preager v. Unity Shoemakers Corp., 257 App. Div. 632.)

FULD, J.

In September of 1947, Nate Crabtree entered into preliminary negotiations with Elizabeth Arden Sales Corporation, manufacturers and sellers of cosmetics, looking toward his employment as sales manager. Interviewed on September 26th, by Robert P. Johns, executive vice-president and general manager of the corporation, who had apprised him of the possible opening, Crabtree requested a three-year contract at $25,000 a year. Explaining that he would be giving up a secure well-paying job to take a position in an entirely new field of endeavor — which he believed would take him some years to master — he insisted upon an agreement for a definite term. And he repeated his desire for a contract for three years to Miss Elizabeth Arden, the corporation's president. When Miss Arden finally indicated that she was prepared to offer a two-year contract, based on an annual salary of $20,000 for the first six months, $25,000 for the second six months and $30,000 for the second year, plus expenses of $5,000 a year for each of those years, Crabtree replied that that offer was "interesting". Miss Arden thereupon had her personal secretary make this memorandum on a telephone order blank that happened to be at hand:

"EMPLOYMENT AGREEMENT WITH

NATE CRABTREE               Date Sept 26-1947

At 681 — 5th Ave             6: PM

                 * * *

Begin                             20000.

6 months                        25000.

6 "                                 30000.

                5000. — per year

                     Expense money

            [2 years to make good]

Arrangement with

  Mr Crabtree

By Miss Arden

Present Miss Arden

           Mr John

           Mr Crabtree

           Miss OLeary"

A few days later, Crabtree 'phoned Mr. Johns and telegraphed Miss Arden; he accepted the "invitation to join the Arden organization", and Miss Arden wired back her "welcome". When he reported for work, a "pay-roll change" card was made up and initialed by Mr. Johns, and then forwarded to the payroll department. Reciting that it was prepared on September 30, 1947, and was to be effective as of October 22d, it specified the names of the parties, Crabtree's "Job Classification" and, in addition, contained the notation that "This employee is to be paid as follows:

"First six months of employment           $20,000. per annum

Next six months of employment             25,000.   "        "

After one year of employment                30,000.   "        "

                                   Approved by RPJ [initialed]"

After six months of employment, Crabtree received the scheduled increase from $20,000 to $25,000, but the further specified increase at the end of the year was not paid. Both Mr. Johns and the comptroller of the corporation, Mr. Carstens, told Crabtree that they would attempt to straighten out the matter with Miss Arden, and, with that in mind, the comptroller prepared another "pay-roll change" card, to which his signature is appended, noting that there was to be a "Salary increase" from $25,000 to $30,000 a year, "per contractual arrangements with Miss Arden". The latter, however, refused to approve the increase and, after further fruitless discussion, plaintiff left defendant's employ and commenced this action for breach of contract.

At the ensuing trial, defendant denied the existence of any agreement to employ plaintiff for two years, and further contended that, even if one had been made, the statute of frauds barred its enforcement. The trial court found against defendant on both issues and awarded plaintiff damages of about $14,000, and the Appellate Division, two justices dissenting, affirmed. Since the contract relied upon was not to be performed within a year, the primary question for decision is whether there was a memorandum of its terms, subscribed by defendant, to satisfy the statute of frauds (Personal Property Law, § 31).^[1]

Each of the two payroll cards — the one initialed by defendant's general manager, the other signed by its comptroller — unquestionably constitutes a memorandum under the statute. That they were not prepared or signed with the intention of evidencing the contract, or that they came into existence subsequent to its execution, is of no consequence (see Marks v. Cowdin, 226 N.Y. 138, 145; Spiegel v. Lowenstein, 162 App. Div. 443, 448-449; see, also, Restatement, Contracts, §§ 209, 210, 214); it is enough, to meet the statute's demands, that they were signed with intent to authenticate the information contained therein and that such information does evidence the terms of the contract. (See Marks v. Cowdin, supra, 226 N.Y. 138; BaylesStrong, 185 N.Y. 582, affg. 104 App. Div. 153; Spiegel v. Lowenstein, supra, 162 App. Div. 443, 448; see, also, 2 Corbin on Contracts [1951], pp. 732-733, 763-764; 2 Williston on Contracts [Rev. ed., 1936], pp. 1682-1683.) Those two writings contain all of the essential terms of the contract — the parties to it, the position that plaintiff was to assume, the salary that he was to receive — except that relating to the duration of plaintiff's employment. Accordingly, we must consider whether that item, the length of the contract, may be supplied by reference to the earlier unsigned office memorandum, and, if so, whether its notation, "2 years to make good", sufficiently designates a period of employment.

The statute of frauds does not require the "memorandum to be in one document. It may be pieced together out of separate writings, connected with one another either expressly or by the internal evidence of subject matter and occasion". (Marks v. Cowdin, supra, 226 N.Y. 138, 145; see, also, 2 Williston, op. cit., p. 1671; Restatement, Contracts, § 208, subd. [a].) Where each of the separate writings has been subscribed by the party to be charged, little if any difficulty is encountered. (See, e.g., Marks v. Cowdin, supra, 226 N.Y. 138, 144-145.) Where, however, some writings have been signed, and others have not — as in the case before us — there is basic disagreement as to what constitutes a sufficient connection permitting the unsigned papers to be considered as part of the statutory memorandum. The courts of some jurisdictions insist that there be a reference, of varying degrees of specificity, in the signed writing to that unsigned, and, if there is no such reference, they refuse to permit consideration of the latter in determining whether the memorandum satisfies the statute. (See, e.g., Osborn v. Phelps, 19 Conn. 63; Hewitt Grain & Provision Co. v. Spear, 222 Mich. 608.) That conclusion is based upon a construction of the statute which requires that the connection between the writings and defendant's acknowledgment of the one not subscribed, appear from examination of the papers alone, without the aid of parol evidence. The other position — which has gained increasing support over the years — is that a sufficient connection between the papers is established simply by a reference in them to the same subject matter or transaction. (See, e.g., Frost v. Alward, 176 Cal. 691; Lerned v. Wannemacher, 91 Mass. 412.) The statute is not pressed "to the extreme of a literal and rigid logic" (Marks v. Cowdin, supra, 226 N.Y. 138, 144), and oral testimony is admitted to show the connection between the documents and to establish the acquiescence, of the party to be charged, to the contents of the one unsigned. (See Beckwith v. Talbot, 95 U. S. 289; Oliver v. Hunting, 44 Ch. D. 205, 208-209; see, also, 2 Corbin, op. cit., §§ 512-518; cf. Restatement, Contracts, § 208, subd. [b], par. [iii].)

The view last expressed impresses us as the more sound, and, indeed — although several of our cases appear to have gone the other way (see, e.g., Newbery v. Wall, 65 N.Y. 484; Wilson v. Lewiston Mill Co., 150 N.Y. 314) — this court has on a number of occasions approved the rule, and we now definitively adopt it, permitting the signed and unsigned writings to be read together, provided that they clearly refer to the same subject matter or transaction. (See, e.g., Peabody v. Speyers, 56 N.Y. 230; Raubitschek v. Blank, 80 N.Y. 478; Peck v. Vandemark, 99 N.Y. 29; Coe v. Tough, 116 N.Y. 273; Delaware Mills v. Carpenter Bros., 235 N.Y. 537, affg. 200 App. Div. 324.)

The language of the statute — "Every agreement is void, unless some note or memorandum thereof be in writing, and subscribed by the party to be charged" (Personal Property Law, § 31) — does not impose the requirement that the signed acknowledgment of the contract must appear from the writings alone, unaided by oral testimony. The danger of fraud and perjury, generally attendant upon the admission of parol evidence, is at a minimum in a case such as this. None of the terms of the contract are supplied by parol. All of them must be set out in the various writings presented to the court, and at least one writing, the one establishing a contractual relationship between the parties, must bear the signature of the party to be charged, while the unsigned document must on its face refer to the same transaction as that set forth in the one that was signed. Parol evidence — to portray the circumstances surrounding the making of the memorandum — serves only to connect the separate documents and to show that there was assent, by the party to be charged, to the contents of the one unsigned. If that testimony does not convincingly connect the papers, or does not show assent to the unsigned paper, it is within the province of the judge to conclude, as a matter of law, that the statute has not been satisfied. True, the possibility still remains that, by fraud or perjury, an agreement never in fact made may occasionally be enforced under the subject matter or transaction test. It is better to run that risk, though, than to deny enforcement to all agreements, merely because the signed document made no specific mention of the unsigned writing. As the United States Supreme Court declared, in sanctioning the admission of parol evidence to establish the connection between the signed and unsigned writings. "There may be cases in which it would be a violation of reason and common sense to ignore a reference which derives its significance from such [parol] proof. If there is ground for any doubt in the matter, the general rule should be enforced. But where there is no ground for doubt, its enforcement would aid, instead of discouraging, fraud." (Beckwith v. Talbot, supra, 95 U. S. 289, 292; see, also, Raubitschek v. Blank, supra, 80 N.Y. 478; Freeland v. Ritz, 154 Mass. 257, 259; Gall v. Brashier, 169 F.2d 704, 708-709; 2 Corbin, op. cit., § 512, and cases there cited.)

Turning to the writings in the case before us — the unsigned office memo, the payroll change form initialed by the general manager Johns, and the paper signed by the comptroller Carstens — it is apparent, and most patently, that all three refer on their face to the same transaction. The parties, the position to be filled by plaintiff, the salary to be paid him, are all identically set forth; it is hardly possible that such detailed information could refer to another or a different agreement. Even more, the card signed by Carstens notes that it was prepared for the purpose of a "Salary increase per contractual arrangements with Miss Arden". That certainly constitutes a reference of sorts to a more comprehensive "arrangement," and parol is permissible to furnish the explanation.

The corroborative evidence of defendant's assent to the contents of the unsigned office memorandum is also convincing. Prepared by defendant's agent, Miss Arden's personal secretary, there is little likelihood that that paper was fraudulently manufactured or that defendant had not assented to its contents. Furthermore, the evidence as to the conduct of the parties at the time it was prepared persuasively demonstrates defendant's assent to its terms. Under such circumstances, the courts below were fully justified in finding that the three papers constituted the "memorandum" of their agreement within the meaning of the statute.

Nor can there be any doubt that the memorandum contains all of the essential terms of the contract. (See N. E. D. Holding Co. v. McKinley, 246 N.Y. 40; Friedman & Co. v. Newman, 255 N.Y. 340.) Only one term, the length of the employment, is in dispute. The September 26th office memorandum contains the notation, "2 years to make good". What purpose, other than to denote the length of the contract term, such a notation could have, is hard to imagine. Without it, the employment would be at will (see Martin v. New York Life Ins. Co., 148 N.Y. 117, 121), and its inclusion may not be treated as meaningless or purposeless. Quite obviously, as the courts below decided, the phrase signifies that the parties agreed to a term, a certain and definite term, of two years, after which, if plaintiff did not "make good", he would be subject to discharge. And examination of other parts of the memorandum supports that construction. Throughout the writings, a scale of wages, increasing plaintiff's salary periodically, is set out; that type of arrangement is hardly consistent with the hypothesis that the employment was meant to be at will. The most that may be argued from defendant's standpoint is that "2 years to make good", is a cryptic and ambiguous statement. But, in such a case, parol evidence is admissible to explain its meaning. (See Martocci v. Greater New York Brewery, 301 N.Y. 57, 63; Marks v. Cowdin, supra, 226 N.Y. 138, 143-144; 2 Williston, op. cit., § 576; 2 Corbin, op. cit., § 527.) Having in mind the relations of the parties, the course of the negotiations and plaintiff's insistence upon security of employment, the purpose of the phrase — or so the trier of the facts was warranted in finding — was to grant plaintiff the tenure he desired.

The judgment should be affirmed, with costs.

LOUGHRAN, Ch. J., LEWIS, CONWAY, DESMOND, DYE and FROESSEL, JJ., concur.

Judgment affirmed.

[1] While our opinion is limited to treatment of that question, we have, of course, considered the other points argued.

[444] Before Judges CONFORD, PRESSLER and KING.

Mr. John W. Gilbert argued the cause for appellant.

Messrs. Goldenberg, Mackler & Feinberg, attorneys for respondent (no appearance for argument).

The opinion of the court was delivered by CONFORD, P.J.A.D. (retired and temporarily assigned).

Plaintiff, a retail dealer in coins, brought an action for rescission of a purchase by it from defendant for $500 of a dime purportedly minted in 1916 at Denver. Defendant is a part-time coin dealer. Plaintiff asserts a mutual mistake of fact as to the genuineness of the coin as Denver-minted, such a coin being a rarity and therefore having a market value greatly in excess of its normal monetary worth. Plaintiff's evidence at trial that the "D" on the coin signifying Denver mintage was counterfeited is not disputed by defendant. Although at trial defendant disputed that the coin tendered back to him by plaintiff was the one he sold, the implicit trial finding is to the contrary, and that issue is not raised on appeal.

The trial judge, sitting without a jury, held for defendant on the ground that the customary "coin dealing procedures" were for a dealer purchasing a coin to make his own investigation of the genuineness of the coin and to "assume the risk" of his purchase if his investigation is faulty. The judge conceded that the evidence demonstrated satisfaction of the ordinary requisites of the rule of rescission for mutual mistake of fact that both parties act under a mistake of fact and that the fact be "central" [material] to the making of the contract. The proofs were that the seller had himself acquired this coin and two others of minor value for a total of $450 and that his representative had told the purchaser [445] that he would not sell the dime for less than $500. The principal of plaintiff firm spent from 15 to 45 minutes in close examination of the coin before purchasing it. Soon thereafter he received an offer of $700 for the coin subject to certification of its genuineness by the American Numismatic Society. That organization labelled it a counterfeit, and as a result plaintiff instituted the present action.

The evidence and trial judge's findings establish this as a classic case of rescission for mutual mistake of fact. As a general rule,

* * * where parties on entering into a transaction that affects their contractual relations are both under a mistake regarding a fact assumed by them as the basis on which they entered into the transaction, it is voidable by either party if enforcement of it would be materially more onerous to him than it would have been had the fact been as the parties believed it to be [Restatement, Contracts, § 502 at 961 (1932);^[1] 13 Williston on Contracts (3 ed. 1970), § 1543, 74-75]

By way of example, the Restatement posits the following:

A contracts to sell to B a specific bar of silver before them. The parties supposed that the bar is sterling. It has, however, a much larger admixture of base metal. The contract is voidable by B. [Op. cit. at 964]

Moreover, "negligent failure of a party to know or to discover the facts as to which both parties are under a mistake does not preclude rescission or reformation on account thereof." Restatement, op. cit., § 502 at 977. The law of New Jersey is in accord. See Riviere v. Berla, 89 [446] N.J. Eq. 596, 597 (E. & A. 1918); Dencer v. Erb, 142 N.J. Eq. 422, 429 (Ch. 1948). In the Riviere case relief was denied only because the parties could not be restored to the status quo ante. In the present case they can be. It is undisputed that both parties believed that the coin was a genuine Denver-minted one. The mistake was mutual in that both parties were laboring under the same misapprehension as to this particular, essential fact. The price asked and paid was directly based on that assumption. That plaintiff may have been negligent in his inspection of the coin (a point not expressly found but implied by the trial judge) does not, as noted above, bar its claim for rescission. Cf. Smith v. Zimbalist, 2 Cal. App.2d 324, 38 P.2d 170 (D. Ct. App. 1934).

Defendant's contention that plaintiff assumed the risk that the coin might be of greater or lesser value than that paid is not supported by the evidence. It is well established that a party to a contract can assume the risk of being mistaken as to the value of the thing sold. 13 Williston, Contracts, op. cit., § 1543A at 85. The Restatement states the rule this way:

Where the parties know that there is doubt in regard to a certain matter and contract on that assumption, the contract is not rendered voidable because one is disappointed in the hope that the facts accord with his wishes. The risk of the existence of the doubtful fact is then assumed as one of the elements of the bargain. [Restatement, op. cit., § 502, Comment f. at 964. See also Restatement, Contracts 2d, op. cit., § 296(b), Comment c at 4.]

However, for the stated rule to apply, the parties must be conscious that the pertinent fact may not be true and make their agreement at the risk of that possibility. 17 Am. Jur.2d, Contracts, § 145 at 492. In this case both parties were certain that the coin was genuine. They so testified. Plaintiff's principal thought so after his inspection, and defendant would not have paid nearly $450 for it otherwise. A different case would be presented if the seller were uncertain either of the genuineness of the coin or of its value if genuine, and had accepted the expert buyer's judgment on these matters.

[447] The trial judge's rationale of custom of the trade is not supported by the evidence. It depended upon the testimony of plaintiff's expert witness who on cross-examination as to the "procedure" on the purchase by a dealer of a rare coin, stated that the dealer would check it with magnification and then "normally send it to the American Numismatic Certification Service for certification." This testimony does not in our opinion establish that practice as a usage of trade "having such regularity of observance in a * * * trade as to justify an expectation that it will be observed with respect to the transaction in question," within the intent of the Uniform Commercial Code, N.J.S.A. 12A:1-205(2).^[2]

The cited code provision contemplates that the trade usage is so prevalent as to warrant the conclusion that the parties contracted with reference to, and intended their agreement to be governed by it. Cf. Manhattan Overseas Co. v. Camden Co. Beverage Co., 125 N.J.L. 239, 244 (Sup. Ct. 1940), aff'd 126 N.J.L. 421 (E. & A. 1941). Our reading of the testimony does not indicate any basis for findings either that this was a trade usage within the Code definition at all or that these parties in fact accepted it as such to the extent that they were agreeing that because of it the sale was an "as is" transaction. Indeed, the same witness testified there was a "normal policy" among coin dealers throughout the United States of a "return privilege" for altered coins.

The foregoing conclusions make it unnecessary for us to discuss plaintiff's alternative contention that the contract was "unenforceable" because it constituted an illegal contract to purchase a counterfeit coin. We regard that position as devoid of merit.

Reversed.

[1] No substantial change in the rule was effected by Restatement, Contracts2d, § 294(1), Tent. Dr. No. 10 (1975) at 10. This provides:

(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 § 296.

The exceptions in § 296 are not here applicable.

[2] Note, also, that evidence of a trade usage is not admissible unless the offering party gives the other party advance notice to prevent unfair surprise. N.J.S.A. 12A:1-105(6). Plaintiff received no notice that the judge intended to decide this case on the basis of the alleged trade usage.

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.

ERROR to the district court for the Louisiana district.

The defendant in error filed his petition, or libel, in the court below, stating, that on the 18th day of February, 1815, he purchased of the plaintiffs in error one hundred and eleven hogsheads of tobacco, as appeared by the copy of a bill of parcels annexed, and that the same were delivered to him by the said Laidlaw & Co., and that he was in the lawful and quiet possession of the said tobacco, when, on the 20th day of the said month, the said Laidlaw & Co., by force, and of their own wrong, took possession of the same, and unlawfully withheld the same from the petitioner, notwithstanding he was at all times, and still was, ready to do and perform all things on his part stipulated to be done and performed in relation to said purchase, and had actually tendered to the said Laidlaw & Co. bills of exchange for the amount of the purchase money, agreeably to the said contract; to his damage, &c. Wherefore the petition prayed that the said Laidlaw & Co. might be cited to appear and answer to his plaint, and that judgment might be rendered against them for his damages, &c. And inasmuch as the petitioner did verily believe that the said one hundred and eleven hogsheads of tobacco would be removed, concealed, or disposed of by the [179] said Laidlaw & Co., he prayed that a writ of sequestration might issue, and that the same might be sequestered in the hands of the marshal, to abide the judgment of the court, and that the said one hundred and eleven hogsheads of tobacco might be finally adjudged to the petitioner, together with his damages, &c., and costs of suit, and that the petitioner might have such other and farther relief as to the court should seem meet, &c.

The bill of parcels referred to in the petition was in the following words and figures, to wit:

'Mr. Organ Bo't of Peter Laidlaw & Co. 111 hhds. Tobacco, weighing 120,715 pounds n't. fr. $7,544.69.

'New-Orleans, 18th February, 1815.'

On the 21st of February, 1815, a citation to the said Laidlaw & Co. was issued, and a writ of sequestration, by order of the court, to the marshal, commanding him to sequester 111 hogsheads of tobacco in their possession, and the same so sequestered to take into his (the marshal's) possession, and safely keep, until the farther order of the court; which was duly executed by the marshal. And on the 2d of March, 1815, counsel having been heard in the case, it was ordered, that the petitioner enter into a bond or stipulation, with sufficient sureties in the sum of 1,000 dollars, to the said Laidlaw & Co., to indemnify them for the damages which they might sustain in consequence of prosecuting the writ of sequestration granted in the case.^a

[180] On the 22d of March, 1815, the plaintiffs in error filed their answer, stating that they had no property in the said tobacco claimed by the said petitioner or ownership whatever in the same, nor had they at any time previous to the bringing of said suit; but disclaimed all right, title, interest, and claim, to the said tobacco, the subject of the suit. And on the same day, Messrs. Boorman & Johnston filed their bill of interpleader or intervention, stating that the petitioner having brought his suit, and filed his petition, claiming of the said Laidlaw & Co. 111 hogsheads of tobacco, for which he had obtained a writ of sequestration, when, in truth, the said tobacco belonged to the said Boorman & Johnston, [181] and was not the property of the said Laidlaw & Co., and praying that they, the said Boorman & Johnston, might be admitted to defend their right, title, and claim, to the said tobacco, against the claim and pretensions of the petitioner, the justice of whose claim, under the sale as stated in his petition, was wholly denied, and that the said tobacco might be restored to them, &c.

On the 20th of April, 1815, the cause was tried by a jury, who returned the following verdict, to wit: 'The jury find for the plaintiff, for the tobacco named in the petition, without damages, payable as per contract.' Whereupon the court rendered judgment 'that the plaintiff recover of the said defendants the said 111 hogsheads of tobacco, mentioned in the plaintiff's petition, and sequestered in this suit, with his costs of suit to be taxed; and ordered, that the marshal deliver the said tobacco to the said plaintiff, and that he have execution for his costs aforesaid, upon the said plaintiff's depositing in this court his bills of exchange for the amount of the purchase money endorsed, &c., for the use of the defendants, agreeably to the verdict of the jury.'

On the 29th of April, 1815, the plaintiffs in error filed the following bill of exceptions, to wit: 'Be it remembered, that on the 20th day of April, in the year of our Lord, 1815, the above cause came on for trial before a jury duly sworn and empannelled, the said Peter Laidlaw & Co. having filed a disclaimer, and Boorman and Johnston of the city of New-York, having filed their claim. And now the said Hector [182] M. Organ having closed his testimony, the said claimants, by their counsel, offered Francis Girault, one of the above firm of Peter Laidlaw & Co., as their witness; whereupon the counsel for the plaintiff objected to his being sworn, on the ground of his incompetency. The claimants proved that Peter Laidlaw & Co., before named, were, at the date of the transaction which gave rise to the above suit, commission merchants, and were then known in the city of New-Orleans as such, and that it is invariably the course of trade in said city for commission merchants to make purchases and sales in their own names for the use of their employers; upon which the claimants again urged the propriety of suffering the said Francis Girault to be sworn, it appearing in evidence that the contract was made by Organ, the plaintiff, with said Girault, one of the said firm of Peter Laidlaw & Co. in their own name, and there being evidence that factors and commission merchants do business on their own account as well as for others, and there being no evidence that the plaintiff, at the time of the contract, had any knowledge of the existence of any other interest in the said tobacco, except that of the defendants, Peter Laidlaw & Co. The court sustained the objection, and rejected the said witness. To which decision of the court the counsel for the claimants aforesaid begged leave to except, and prayed that this bill of exceptions might be signed and allowed. And it appearing in evidence in the said cause, that on the night of the 18th of February, 1815, Messrs. Livingston, White, and Shepherd brought from the British fleet the news that a treaty of peace had been signed at Ghent by the American and British commissioners, contained in a letter from Lord Bathurst to the Lord Mayor of London, published in the British newspapers, and that Mr. White caused the same to be made public in a handbill on Sunday morning, 8 o'clock, the 19th of February, 1815, and that the brother of Mr. Shepherd, one of these gentlemen, and who was interested in one-third of the profits of the purchase set forth in said plaintiff's petition, had, on Sunday morning, the 19th of February, 1815, communicated said news to the plaintiff; that the said plaintiff, on receiving said news, called on Francis Girault, (with whom he had been bargaining for the tobacco mentioned in the petition, the evening previous,) said Francis Girault being one of the said house of trade of Peter Laidlaw & Co., soon after sunrise on the morning of Sunday, the 19th of February, 1815, before he had heard said news. Said Girault asked if there was any news which was calculated to enhance the price or value of the article about to be purchased; and that the said purchase was then and there made, and the bill of parcels annexed to the plaintiff's petition delivered to the plaintiff between 8 and 9 o'clock in the morning of that day; and that in consequence of said news the value of said article had risen from 30 to 50 per cent. There being no evidence that the plaintiff had asserted or suggested any thing to the said Girault, calculated to impose upon him with respect to said news, and to induce him to think or believe that it did not exist; and it appearing that the said Girault, when applied to, on the next day, Monday, the 20th of February, 1815, on behalf of the plaintiff, for an invoice of said tobacco, did not then object to the said sale, but promised to deliver the invoice to the said plaintiff in the course of the forenoon of that day; the court charged the jury to find for the plaintiff. Wherefore, that justice, by due course of law, may be done in this case, the counsel of said defendants, for them, and on their behalf, prays the court that this bill of exceptions be filed, allowed, and certified as the law directs.

(Signed,) DOMINICK A. HALL,

District Judge.

New-Orleans, this 3d day of May, 1815.'

On the 29th of April, 1815, a writ of error was allowed to this court, and on the 3d of May, 1815, the defendant in error deposited in the court below, for the use of the plaintiffs in error, the bills of exchange mentioned in the pleadings, according to the verdict of the jury and the judgment of the court thereon, which bills were thereupon taken out of court by the plaintiffs in error.

Feb. 20th.

Mr. C. J. Ingersoll, for the plaintiffs in error. 1. The first question is, whether the sale, under the circumstances of the case, was a valid sale; whether fraud, which vitiates every contract, must be proved by the communication of positive misinformation, or by withholding information when asked. Suppression of material circumstances within the knowledge of the vendee, and not accessible [185] to the vendor, is equivalent to fraud, and vitiates the contract.^b Pothier, in discussing this subject, adopts the distinction of the forum of conscience, and the forum of law; but he admits that fides est servanda.^c The parties treated on an unequal footing, as the one party [186] had received intelligence of the peace of Ghent, at the time of the contract, and the other had not. [187] This news was unexpected, even at Washington, much more at New-Orleans, the recent scene of the [188] most sanguinary operations of the war. In answer to the question, whether there was any news calculated [189] to enhance the price of the article, the vendee was silent. This reserve, when such a question was [190] asked, was equivalent to a false answer, and as much calculated to deceive as the communication of the most fabulous intelligence. Though the plaintiffs in error, after they heard the news of peace, still went on, in ignorance of their legal rights, to complete the contract, equity will protect them. [191] 2. Mr. Girault was improperly rejected as a witness, because he and his partner had disclaimed, and Messrs. Boorman & Johnston, the real owners of the tobacco, had intervened and taken the place of the original defendants. Girault was not obliged to disclose his character of agent, and, as such, he was an admissible witness.^d The tendency of the modern decisions to let objections go to the credibility, and not to the competency of witnesses, ought to be encouraged as an improvement in the jurisprudence on this subject. Besides, the proceedings are essentially in rem, according to the course of the civil law, and that consideration is conclusive as to the admissibility of the witness. 3. The court below had no right to charge the jury absolutely to find for the plaintiff. It was a mixed question of fact and law, which ought to have been left to the jury to decide. 4. There is error in the judgment of the court, in decreeing a deposit of the bills of exchange by the vendee for the tobacco, no such agreement being proved.

Mr. Key contra, 1. Though there be no testimony in the record to show a contract for payment in bills of exchange, still the court may infer that such was the contract from the petition of the plaintiff below, supported as it is by his oath, and uncontradicted, as to this fact, by the defendant's answer. [192] The decree was for a specific performance, and the vendors took the bills out of court. 2. The judge's charge was right, there being no evidence of fraud. The vendee's silence was not legal evidence of fraud, and, therefore, there was no conflict of testimony on this point: it was exclusively a question of law; the law was with the plaintiff; and, consequently, the court did right to instruct the jury to find for the plaintiff. 3. Mr. Girault was an inadmissible witness. He and his partners were general merchants as well as factors. They sold in their own names, and might call the article their own or the property of their principals, as it suited them. But they were parties to the suit, and the intervention of their principals did not abate the suit as to them.^e [193] On every ground, therefore, Mr. Girault was an inadmissible witness. 4. The only real question in the cause is, whether the sale was invalid because the vendee did not communicate information which he received precisely as the vendor might have got it had he been equally diligent or equally fortunate? And, surely, on this question there can be no doubt. Even if the vendor had been entitled to the disclosure, he waived it by not insisting on an answer to his question; and the silence of the vendee might as well have been interpreted into an affirmative as a negative answer. But, on principle, he was not bound to disclose. Even admitting that his conduct was unlawful, in foro conscientiae, does that prove that it was so in the civil forum? Human laws are imperfect in this respect, and the sphere of morality is more extensive than the limits of civil jurisdiction. The maxim of caveat emptor could never have crept into the law, if the province of ethics had been co-extensive with it. There was, in the present case, no circumvention or manoeuvre practised by the vendee, unless rising earlier in the morning, and obtaining by superior diligence and alertness that intelligence by which the price of commodities was regulated, be such. It is a romantic equality that is contended for on the other side. Parties never can be precisely equal in knowledge, either of facts or of the [194] inferences from such facts, and both must concur in order to satisfy the rule contended for. The absence of all authority in England and the United States, both great commercial countries, speaks volumes against the reasonableness and practicability of such a rule.

Mr. C. J. Ingersoll, in reply. Though the record may not show that any thing tending to mislead by positive assertion was said by the vendee, in answer to the question proposed by Mr. Girault, yet it is a case of manoeuvre; of mental reservation; of circumvention. The information was monopolized by the messengers from the British fleet, and not imparted to the public at large until it was too late for the vendor to save himself. The rule of law and of ethics is the same. It is not a romantic, but a practical and legal rule of equality and good faith that is proposed to be applied. The answer of Boorman & Johnston denies the whole of the petition, and consequently denies that payment was to be in bills of exchange; and their taking the bills out of court, ought not to prejudice them. There is nothing in the record to show that the vendors were general merchants, and they disclosed their principals when they came to plead. The judge undertook to decide from the testimony, that there was no fraud; in so doing he invaded the province of the jury; he should have left it to the jury, expressing his opinion merely.

Mr. Chief Justice MARSHALL delivered the opinion of the court.

The question in this case is, whether the intelligence of extrinsic circumstances, which might influence the price of the commodity, and which was exclusively within the knowledge of the vendee, ought to have been communicated by him to the vendor? The court is of opinion that he was not bound to communicate it. It would be difficult to circumscribe the contrary doctrine within proper limits, where the means of intelligence are equally accessible to both parties. But at the same time, each party must take care not to say or do any thing tending to impose upon the other. The court thinks that the absolute instruction of the judge was erroneous, and that the question, whether any imposition was practised by the vendee upon the vendor ought to have been submitted to the jury. For these reasons the judgment must be reversed, and the cause remanded to the district court of Louisiana, with directions to award a venire facias de novo.

Venire de novo awarded.

[a] Sequestration, in the practice of the civil law, is a process to take judicial custody of the res or persona in controversv to abide the event of the suit. It may be applied to real or personal property, the right to which is litigated between the parties, or even to persons, as to a married woman, in a cause of divorce, in order to preserve her from ill treatment on the part of her husband, or to a minor in order to secure him from ill treatment by his parents. Clerke's Prax. Tit. 43. Pothier, de la Proc edure Civile, Partie I, Chap. 3. art. 2. § 1. Code Napoleon, Liv. 3. tit. 11., Des D ep ots et du S equestre, art. 1961. Digest of the Civil laws of Louisiana, 419. The sequestration may be demanded, either in the original petition, or in the progress of the cause at any time before it is set down for hearing by a petition from the party demanding it, with notice to the opposite party, on which the judge, after hearing counsel, pronounces his interlocutory sentence or decree. This sentence is to be provisionally executed notwithstanding an appeal. The sequestration is usually ordered, in possessory actions, where the preliminary proofs of the parties appear to be nearly balanced; where an inheritance consisting of personal effects of great value is in controversy; where there is ground to apprehend that the parties may resort to personal violence in contesting the enjoyment of the mesne profits; in actions of partition, where the property in litigation cannot be quietly enjoyed by the respective owners; and sometimes in cases where the suit is likely to be of long duration. Pothier, Ib. and § 2.

[b] 1 Comyn on Contr. 38. and the authorities there cited.

[c] Pothier, De Vente, Nos. 233 to 241. He considers this question under the four following heads. 1st. Whether good faith obliges the vendor, at least in foro conscientiae, not only to refrain from practising any deception, but also from using any mental reservation? 2d. What reservation binds the party in the civil forum, and to what obligations? 3d. Whether the vendor is bound, at least in foro conscientiae, not to conceal any circumstances, even extrinsic, which the vendee has an interest in knowing? 4th. Whether the vendor may, in foro conscientiae, sometimes sell at a price above the true value of the article. As Pothier's discussion throws great light on this subject, a translation of this part of his admirable treatise may not be unacceptable to the reader.

'ARTICLE I. 233. Although, in many transactions of civil society, the rules of good faith only require us to refrain from falsehood, and permit us to conceal from others that which they have an interest in knowing if we have an equal interest in concealing it from them; yet, in interested contracts, among which is the contract of sale, good faith not only forbids the assertion of falsehood, but also all reservation concerning that which the person with whom we contract has an interest in knowing, touching the thing which is the object of the contract.

'The reason is that equity and justice, in these contracts, consists in equality. It is evident that any reservation, by one of the contracting parties, concerning any circumstance which the other has an interest in knowing, touching the object of the contract, is fatal to this equality: for the moment the one acquires a knowledge of this object superior to the other, he has an advantage over the other in contracting; he knows better what he is doing than the other; and, consequently, equality is no longer found in the contract.

'In applying these principles to the contract of sale, it follows that the vendor is obliged to disclose every circumstance within his knowledge touching the thing which the vendee has an interest in knowing, and that he sins against that good faith which ought to reign in this contract, if he conceals any such circumstance from him.

'This is what Florentinus teaches in the law 43. § 2. Dig. De contr. empt. Dolum malum a se abesse proestare venditor debet, qui non tantum in eo est qui fallendi causd obscur e loquitur, sed etiam qui insidiose, obscure dissimulat.

'234. According to these principles the vendor is obliged not to conceal any of the defects of the article sold, which are within his knowledge, although these defects may not be such as fall within an implied warranty, but even such defects as the vendee would have no right to complain of, if the vendor who had not disclosed them was ignorant of their existence. Cum ex XII. tabulis, says Cicero, (Lib 3. de Off.) satis esset cautum ea praestare quae essent lingu a nuncuipata; a j urisconsultis, etiam reticencioe poena constituta, quidquid enim inest proedio vitii id statuerunt, si venditor sciret, nisi nominatim dictum esset, proestare oportere. The vendor, in this case, is held in id quanti (emptoris) intererit scisse. Dig. l. 4. De act. empt. and this r eservation may sometimes authorize a rescinding of the contract. 1. 11, § 5. Dig. de tit.

'235. This rule ought to be applied, although the vendor, who has concealed the defects in the thing sold, has not sold it for more than its value with these defects. The reason is that he who sells me a thing has no right to require that I should pay the highest price for it, unless I consent to buy it for that price; he has no right to require of me a higher price than that which I voluntarily give, and he ought not to practise any artifice to induce me to consent to buy it at a higher price than I should have been willing to give had I known the defects which he had maliciously concealed.

'236. Good faith obliges the vendor, not only not to conceal any of the intrinsic vices of the thing sold, but generally not to dissemble any circumstance concerning it which might induce the vendee not to buy, or not to buy at so high a price. For example, the vendee may have his action against the vendor if the latter has concealed the existence of a bad neighbourhood to a real estate sold by him, which might have prevented the vendee from purchasing had he known it: Si quis in vendendo proedio confinem celaverit, quem emptor si audisset, empturus non esset. Dig. L. 15. § 8. De contr. empt.

'237. These principles of the Roman jurisconsults, are more accurate and more conformable to justice than the decision of St. Thomas, which permits the vendor to conceal the vices of the thing sold, except in two cases, 1. If the vice be of a nature to cause the vendee some injury; and 2. If the vendor availed himself of his reservation in order to sell the thing at a higher price than it was worth. This decision appears to me to be unjust, since, as the vendor is perfectly at liberty to sell or not to sell, he ought to leave the vendee perfectly at liberty to buy or not to buy, even for a fair price, if that price does not suit the buyer: it is, therefore, unjust to lay a snare for this liberty which the vendee ought to enjoy, by concealing from him the vice of the thing, in order to induce him to buy that which he would not have been willing to buy for the price at which it is sold to him, had he known its defects.

'ARTICLE II. 238. Although it is with respect to the civil forum that the Roman jurisconsults have established the principles which we have stated, touching the obligation of the vendor not to conceal from the vendee any circumstance relative to the thing sold, and although they ought to be exactly followed, in foro conscientioe, yet they are little observed in our tribunals, and the vendee is not easily listened to who complains of the concealment of some vice in the thing sold, unless it be such a defect as falls within the doctrine of implied warranty. The interest of commerce not permitting parties to set aside their contracts with too much facility, they must impute it to their own fault in not having better informed themselves of the defects in the commodities they have purchased.

'239. There are, nevertheless, certain reservations touching the thing sold which have been thought worthy of the attention of the law, and which are obligatory on the vendor in the civil forum; as for instance, when the vendor knows that the thing which he sells does not belong to him, or that it does not irrevocably belong to him, or that it is subject to certain incumbrances, and conceals these facts from the vendee,' &c.

'ARTICLE III. 241. Cicero, in the third book of his Offices, has treated this question in the case of a corn-merchant, who being arrived at Rhodes, in a time of scarcity, before a great number of other vessels loaded with corn, exposes his own for sale: Cicero proposes the question whether this merchant is obliged to inform the buyers that there are a great number of other vessels on their voyage, and near the port? He states, upon this question, the sentiments of two stoic philosophers, Diogenes and Antipater; Diogenes thought that the merchant might lawfully withhold the knowledge which he had of the vessels on the point of arriving, and sell his corn at the current price: Antipater, his disciple, whose decision Cicero appears to adopt, thought, on the contrary, that this dissimulation was contrary to good faith. The reason on which he grounds this opinion is that the concord which ought to exist among men, the affection which we ought to bear to each other, cannot permit us to prefer our private interest to the interest of our neighbour, from whence it follows that, though we may conceal some things from prudence, we cannot conceal, for the sake of profit, facts which those with whom we contract have an interest in knowing. Hoc celandi genus, says he, non aperti, non simplicis, non ingenui; non justi, non viri boni: vertuti potius, obscuri, astuti, fallacis, malitiosi, callidi, veteratoris, vafri.

'This question only concerns the forum of conscience; for there can be no doubt that in the civil forum, the demand of a vendee cannot be listened to who complains that the vendor has not disclosed to him all the extrinsic circumstances relative to the thing sold, whatever interest the vendee might have in knowing them. The decision of Cicero is somewhat difficult to maintain even in the forum of conscience. The greater part of the writers on natural law have considered it as unreasonable.

'These writers are of opinion, that the good faith which ought to govern the contract of sale, only requires that the vendor should represent the thing sold as it is, without dissimulating its defects, and not to sell it above the price which it bears at the time of the contract; that he commits no injustice in selling it at this price, although he knows that the price must soon fall; that he is not obliged to disclose to the vendee a knowledge which he may have of the circumstances that may produce a depression of the price; the vendee having no more right to demand that the vendor should impart this knowledge than that he should give away his property; that if he should do it, it would be merely an act of benevolence, which we are not obliged to exercise except towards those who are in distress, which was not the case with the Rhodians, who were only in want of corn, but were not in want of money to buy it. The profit which the merchant makes in selling it for the price it is worth today, although he is conscious the price will fall to-morrow, is not iniquitous; it is a just recompense for his diligence in reaching the market first, and for the risk which he ran of losing upon his commodities if any accident had prevented his arriving so soon. It is no more forbidden to sell at the current price, without disclosing the circumstances which may cause it to fall, than it is to buy without communicating those which may cause it to rise. And Joseph was never accused of injustice for profiting of the knowledge which he alone had of the years of famine to buy the fifth part of the corn of the Egyptians without warning them of the years of famine that were to follow.

'Notwithstanding these roasons and authorities, I should have some difficulty, in the forum of conscience, in excusing the injustice of a profit which the vendor might derive from concealing a fact which would cause a fall in the price of the commodity, when that fall must be very considerable, and must certainly arrive in a very short period of time, such as that which the merchant knew of the near approach of a fleet to Rhodes laden with corn. In the contract of sale, as well as in other mutually beneficial contracts, equity requires that what the one party gives should be the equivalent of what he receives, and that neither party should wish to profit at the expense of the other. But in the case of the merchant, who, by dissembling the knowledge which he has of this fact, sells his corn at one hundred livres the cask, the market price of the day, can he, without illusion, persuade himself that the article which, in two days, will be worth no more than twenty livres, is the equivalent of one hundred livres which he receives? You will say that it is sufficient if at the time it be worth the price of one hundred livres for which he sells it. I answer, that a thing, which has a present and momentary value of one hundred livres, but which he certainly knows will be reduced in two days to the value of twenty, cannot be seriously regarded by him as truly the equivalent of the money which he receives, and which must always be worth one hundred. Does not his conduct imply, that he wishes, by his reservation, to profit and enrich himself at the expense of the buyers, to induce them to purchase a commodity by which he is certain they must lose in two days four fifths of the original cost?'

The merchant will smile at the rigid morality of this deservedly celebrated writer, who proceeds, in a fourth article, to consider whether the vendor may, in foro conscientia, sometimes sell at a price above the true value of the commodity. After laying down some general rules on this subject, he remarks, that 'they are not adopted in the civil forum, where a vendee is not ordinarily admitted to complain that he has purchased dearer than the true value, it being for the interest of commerce that parties should not be allowed to set aside their contracts with too much facility.' No. 242. In a subsequent part of his treatise he states what are the nature of the frauds that may be committed by the vendee, which he resolves into two classes. 1st. The first consists of any misrepresentation or circumvention which the vendee may employ in order to induce the vendor to sell, or to sell at a less price. 2d. Where the vendee conceals from the vendor the knowledge which he may have, touching the thing sold, and which the vendor may not possess. The former species of fraud, if sufficiently proved, he considers will invalidate the contract even in the civil forum. But the latter he deems only obligatory in foro conscientiae, both because unduly restricting the freedom of commerce, and because the vendor ought to know best the qualities of the articles he sells, and if he does not, it is his own fault. Nos. 294-298. In the fifth part, chap. 2., he considers the subject of the action which is given by the Code, l. 4. tit. 44. De rescind. vend., to the vendor for rescinding the contract on account of enormous lesion, or gross inadequacy of price, which, however, does not extend to merchandise, or other personal property, and, therefore, it is unnecessary to trouble the reader by extending this note to a greater length.

[d] Dixon v. Cooper, 3 Wils. 40. 1 Atk. 248. Benjamin v. Porteus, 2 H. Bl. 590. Mackay v. Rhinelander et al., 1 Johns. Cas. 408. Jones v. Hake, 2 Johns Cas. 60. Burlingame v. Dyer, Johns. Rep. 189.

[e] Intervention is a proceeding by which a third person petitions to be received as a party in a cause, either with the plaintiff or the defendant, and to prosecute the suit jointly with the party whose interests may be connected with his own. It may take place either before or after the cause is at issue, and set down for hearing; either in the court below, or upon appeal. But it cannot operate to retard the adjudication of the principal cause; which may either be determined separately, or the whole controversy may be decided by one and the same judgment. Clerke's Prax. tit. 38, 39. Pothier, De la Proc edure Civile, Partie 1, chap. 2, art. 3. § 3. Code de Proc edure Civile, Partie 1. Liv. 2. tit. 16. De l'Intervention, art. 339, 340. It may take place where the goods of one person are attached as the property or for the debt of another. Clerke's Prax. Ib. In actions of warranty, Pothier, Ib. Partie 1. chap. 2. art. 2. § 2. Code de Proc edure Civile, 1ere Partie Liv. 2. tit. 9. Des Exceptions Dilatoires, art. 183. So also in a suit for separation of property between husband and wife, the creditors of the husband may intervene for the preservation of their rights. Ib. 2 Partie. Liv. 1. tit. 8. Des Separations de Biens, art. 871.

Interest in the subject matter of the suit is a fatal objection to the competency of a witness by the civil law; (Pothier, Id. Partie 2. chap. 3.art. 4. § 3.;) but according to the above authorities, Mr. Girault appears to have been an inadmissible witness, because still a party to the cause notwithstanding the intervention of his principals.

Knollmiller, Herrick, Brown & Arenofsky by Thomas N. Swift, Tempe, for Warren and Gloria Hill.

Johnson & Shelley by Bryn R. Johnson, Mesa, for Ora and Barbara Jones.

OPINION

MEYERSON, Judge.

Must the seller of a residence disclose to the buyer facts pertaining to past termite infestation? This is the primary question presented in this appeal. Plaintiffs Warren G. Hill and Gloria R. Hill (buyers) filed suit to rescind an agreement to purchase a residence. Buyers alleged that Ora G. Jones and Barbara R. Jones (sellers) had made misrepresentations concerning termite damage in the residence and had failed to disclose to them the existence of the damage and history of termite infestation in the residence. The trial court dismissed the claim for misrepresentation based upon a so-called integration clause in the parties' agreement.

Sellers then sought summary judgment on the "concealment" claim arguing that [82] they had no duty to disclose information pertaining to termite infestation and that even if they did, the record failed to show all of the elements necessary for fraudulent concealment. The trial court granted summary judgment, finding that there was "no genuinely disputed issue of material fact and that the law favors the ... defendants." The trial court awarded sellers $1,000.00 in attorney's fees. Buyers have appealed from the judgment and sellers have cross-appealed from the trial court's ruling on attorney's fees.

I. FACTS

In 1982, buyers entered into an agreement to purchase sellers' residence for $72,000. The agreement was entered after buyers made several visits to the home. The purchase agreement provided that sellers were to pay for and place in escrow a termite inspection report stating that the property was free from evidence of termite infestation. Escrow was scheduled to close two months later.

One of the central features of the house is a parquet teak floor covering the sunken living room, the dining room, the entryway and portions of the halls. On a subsequent visit to the house, and when sellers were present, buyers noticed a small "ripple" in the wood floor on the step leading up to the dining room from the sunken living room. Mr. Hill asked if the ripple could be termite damage. Mrs. Jones answered that it was water damage. A few years previously, a broken water heater in the house had in fact caused water damage in the area of the dining room and steps which necessitated that some repairs be made to the floor. No further discussion on the subject, however, took place between the parties at that time or afterwards.

Mr. Hill, through his job as maintenance supervisor at a school district, had seen similar "ripples" in wood which had turned out to be termite damage. Mr. Hill was not totally satisfied with Mrs. Jones's explanation, but he felt that the termite inspection report would reveal whether the ripple was due to termites or some other cause.

The termite inspection report stated that there was no visible evidence of infestation. The report failed to note the existence of physical damage or evidence of previous treatment. The realtor notified the parties that the property had passed the termite inspection. Apparently, neither party actually saw the report prior to close of escrow.

After moving into the house, buyers found a pamphlet left in one of the drawers entitled "Termites, the Silent Saboteurs." They learned from a neighbor that the house had some termite infestation in the past. Shortly after the close of escrow, Mrs. Hill noticed that the wood on the steps leading down to the sunken living room was crumbling. She called an exterminator who confirmed the existence of termite damage to the floor and steps and to wood columns in the house. The estimated cost of repairing the wood floor alone was approximately $5,000.

Through discovery after their lawsuit was filed, buyers learned the following. When sellers purchased the residence in 1974, they received two termite guarantees that had been given to the previous owner by Truly Nolen, as well as a diagram showing termite treatment at the residence that had taken place in 1963. The guarantees provided for semi-annual inspections and annual termite booster treatments. The accompanying diagram stated that the existing damage had not been repaired. The second guarantee, dated 1965, reinstated the earlier contract for inspection and treatment. Mr. Jones admitted that he read the guarantees when he received them. Sellers renewed the guarantees when they purchased the residence in 1974. They also paid the annual fee each year until they sold the home.

On two occasions during sellers' ownership of the house but while they were at their other residence in Minnesota, a neighbor noticed "streamers" evidencing live termites in the wood tile floor near the entryway. On both occasions, Truly Nolen gave a booster treatment for termites. On the [83] second incident, Truly Nolen drilled through one of the wood tiles to treat for termites. The neighbor showed Mr. Jones the area where the damage and treatment had occurred. Sellers had also seen termites on the back fence and had replaced and treated portions of the fence.

Sellers did not mention any of this information to buyers prior to close of escrow. They did not mention the past termite infestation and treatment to the realtor or to the termite inspector. There was evidence of holes on the patio that had been drilled years previously to treat for termites. The inspector returned to the residence to determine why he had not found evidence of prior treatment and termite damage. He indicated that he had not seen the holes in the patio because of boxes stacked there. It is unclear whether the boxes had been placed there by buyers or sellers. He had not found the damage inside the house because a large plant, which buyers had purchased from sellers, covered the area. After investigating the second time, the inspector found the damage and evidence of past treatment. He acknowledged that this information should have appeared in the report. He complained, however, that he should have been told of any history of termite infestation and treatment before he performed his inspection and that it was customary for the inspector to be given such information.

Other evidence presented to the trial court was that during their numerous visits to the residence before close of escrow, buyers had unrestricted access to view and inspect the entire house. Both Mr. and Mrs. Hill had seen termite damage and were therefore familiar with what it might look like. Mr. Hill had seen termite damage on the fence at this property. Mrs. Hill had noticed the holes on the patio but claimed not to realize at the time what they were for. Buyers asked no questions about termites except when they asked if the "ripple" on the stairs was termite damage. Mrs. Hill admitted she was not "trying" to find problems with the house because she really wanted it.

II. CONTRACT INTEGRATION CLAUSE

We first turn to the trial court's ruling that the agreement of the parties did not give buyers the right to rely on the statement made by Mrs. Jones that the "ripple" in the floor was water damage. We find this ruling to be in error. The contract provision upon which the trial court based its ruling reads as follows:

That the Purchaser has investigated the said premises, and the Broker and the Seller are hereby released from all responsibility regarding the valuation thereof, and neither Purchaser, Seller, nor Broker shall be bound by any understanding, agreement, promise, representation or stipulation expressed or implied, not specified herein.

In Lufty v. R.D. Roper & Sons Motor Co., 57 Ariz. 495, 506, 115 P.2d 161, 166 (1941), the Arizona Supreme Court considered a similar clause in an agreement and concluded that "any provision in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid and necessarily constitutes no defense." The court went on to hold that "parol evidence is always admissible to show fraud, and this is true, even though it has the effect of varying the terms of a writing between the parties." 57 Ariz. at 506-507, 115 P.2d at 166; Barnes v. Lopez, 25 Ariz. App. 477, 480, 544 P.2d 694, 697 (1976). In this case, the claimed misrepresentation occurred after the parties executed the contract.^[1] Assuming, for the purposes of this decision, that the integration clause would extend to statements made subsequent to the execution of the contract, the clause could not shield sellers from liability should buyers be able to prove fraud.

III. DUTY TO DISCLOSE

The principal legal question presented in this appeal is whether a seller has a [84] duty to disclose to the buyer the existence of termite damage in a residential dwelling known to the seller, but not to the buyer, which materially affects the value of the property. For the reasons stated herein, we hold that such a duty exists.

This is not the place to trace the history of the doctrine of caveat emptor. Suffice it to say that its vitality has waned during the latter half of the 20th century. E.g., Richards v. Powercraft Homes, Inc., 139 Ariz. 242, 678 P.2d 427 (1984) (implied warranty of workmanship and habitability extends to subsequent buyers of homes); see generally Quashnock v. Frost, 299 Pa.Super. 9, 445 A.2d 121 (1982); Ollerman v. O'Rourke Co., 94 Wis.2d 17, 288 N.W.2d 95 (1980). The modern view is that a vendor has an affirmative duty to disclose material facts where:

1. Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being fraudulent or material;

2. Disclosure would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if nondisclosure amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing;

3. Disclosure would correct a mistake of the other party as to the contents or effect of a writing, evidencing or embodying an agreement in whole or in part;

4. The other person is entitled to know the fact because of a relationship of trust and confidence between them.

Restatement (Second) of Contracts § 161 (1981) (Restatement); see Restatement (Second) of Torts § 551 (1977).

Arizona courts have long recognized that under certain circumstances there may be a "duty to speak." Van Buren v. Pima Community College Dist. Bd., 113 Ariz. 85, 87, 546 P.2d 821, 823 (1976); Batty v. Arizona State Dental Bd., 57 Ariz. 239, 254, 112 P.2d 870, 877 (1941). As the supreme court noted in the context of a confidential relationship, "[s]uppression of a material fact which a party is bound in good faith to disclose is equivalent to a false representation." Leigh v. Loyd, 74 Ariz. 84, 87, 244 P.2d 356, 358 (1952); National Housing Indus. Inc. v. E.L. Jones Dev. Co., 118 Ariz. 374, 379, 576 P.2d 1374, 1379 (1978).

Thus, the important question we must answer is whether under the facts of this case, buyers should have been permitted to present to the jury their claim that sellers were under a duty to disclose their (sellers') knowledge of termite infestation in the residence. This broader question involves two inquiries. First, must a seller of residential property advise the buyer of material facts within his knowledge pertaining to the value of the property? Second, may termite damage and the existence of past infestation constitute such material facts?

The doctrine imposing a duty to disclose is akin to the well-established contractual rules pertaining to relief from contracts based upon mistake. Although the law of contracts supports the finality of transactions, over the years courts have recognized that under certain limited circumstances it is unjust to strictly enforce the policy favoring finality. Thus, for example, even a unilaterial mistake of one party to a transaction may justify rescission. Restatement § 153.

There is also a judicial policy promoting honesty and fair dealing in business relationships. This policy is expressed in the law of fraudulent and negligent misrepresentations. Where a misrepresentation is fraudulent or where a negligent misrepresentation is one of material fact, the policy of finality rightly gives way to the policy of promoting honest dealings between the parties. See Restatement § 164(1).

Under certain circumstances nondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist. For example "[w]hen one conveys a false impression by the disclosure of some facts and the concealment of others, such concealment is in effect a false representation that what is disclosed is the [85] whole truth." State v. Coddington, 135 Ariz. 480, 481, 662 P.2d 155, 156 (App. 1983). Thus, nondisclosure may be equated with and given the same legal effect as fraud and misrepresentation. One category of cases where this has been done involves the area of nondisclosure of material facts affecting the value of property, known to the seller but not reasonably capable of being known to the buyer.

Courts have formulated this "duty to disclose" in slightly different ways. For example, the Florida Supreme Court recently declared that "where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer." Johnson v. Davis, 480 So.2d 625, 629 (Fla. 1985) (defective roof in three-year old home). In California, the rule has been stated this way:

[W]here the seller knows of facts materially affecting the value or desirability of the property which are known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.

Lingsch v. Savage, 213 Cal. App.2d 729, 735, 29 Cal. Rptr. 201, 204 (1963); contra Ray v. Montgomery, 399 So.2d 230 (Ala. 1980); see generally W. Prosser & W. Keeton, The Law of Torts § 106 (5th ed. 1984).^[2] We find that the Florida formulation of the disclosure rule properly balances the legitimate interests of the parties in a transaction for the sale of a private residence and accordingly adopt it for such cases.

As can be seen, the rule requiring disclosure is invoked in the case of material facts.^[3] Thus, we are led to the second inquiry — whether the existence of termite damage in a residential dwelling is the type of material fact which gives rise to the duty to disclose. The existence of termite damage and past termite infestation has been considered by other courts to be sufficiently material to warrant disclosure. See generally Annot., 22 A.L.R.3d 972 (1968).

In Lynn v. Taylor, 7 Kan. App.2d 369, 642 P.2d 131 (1982), the purchaser of a termite-damaged residence brought suit against the seller and realtor for fraud and against the termite inspector for negligence. An initial termite report found evidence of prior termite infestation and recommended treatment. A second report indicated that the house was termite free. The first report was not given to the buyer. The seller contended that because treatment would not have repaired the existing damage, the first report was not material. The buyer testified that he would not have purchased the house had he known of the first report. Under these circumstances, the court concluded that the facts contained in the first report were material. See Hunt v. Walker, 483 S.W.2d 732 (Tenn. App. 1971) (severe damage to the residence by past termite infestation); Mercer v. Woodard, 166 Ga. App. 119, 123, 303 S.E.2d 475, 481-82 (1983) (duty of disclosure extends to fact of past termite damage).

Although sellers have attempted to draw a distinction between live termites^[4] and past infestation, the concept of materiality is an elastic one which is not limited by the termites' health. "A matter is material if it is one to which a reasonable person would attach importance in determining his choice of action in the transaction in question." [86] Lynn v. Taylor, 7 Kan. App.2d at 371, 642 P.2d at 134-35. For example, termite damage substantially affecting the structural soundness of the residence may be material even if there is no evidence of present infestation. Unless reasonable minds could not differ, materiality is a factual matter which must be determined by the trier of fact. The termite damage in this case may or may not be material. Accordingly, we conclude that buyers should be allowed to present their case to a jury.

Sellers argue that even assuming the existence of a duty to disclose, summary judgment was proper because the record shows that their "silence ... did not induce or influence" the buyers. This is so, sellers contend, because Mr. Hill stated in his deposition that he intended to rely on the termite inspection report. But this argument begs the question. If sellers were fully aware of the extent of termite damage and if such information had been disclosed to buyers, a jury could accept Mr. Hill's testimony that had he known of the termite damage he would not have purchased the house.

Sellers further contend that buyers were put on notice of the possible existence of termite infestation and were therefore "chargeable with the knowledge which [an] inquiry, if made, would have revealed." Godfrey v. Navratil, 3 Ariz. App. 47, 51, 411 P.2d 470 (1966) (quoting Luke v. Smith, 13 Ariz. 155, 162, 108 P. 494, 496 (1910)). It is also true that "a party may ... reasonably expect the other to take normal steps to inform himself and to draw his own conclusions." Restatement § 161 comment d. Under the facts of this case, the question of buyers' knowledge of the termite problem (or their diligence in attempting to inform themselves about the termite problem) should be left to the jury.^[5]

By virtue of our holding, sellers' crossappeal is moot. Reversed and remanded.

CONTRERAS, P.J., and YALE McFATE, J. (Retired), concur.

Note: The Honorable Yale McFate, a retired judge of the Court of Appeals, was authorized to participate in the disposition of this matter by the Chief Justice of the Arizona Supreme Court pursuant to Ariz. Const. art. VI, § 20.

[1] Buyers' fraud theory is apparently based on the premise that they were not bound under the contract until a satisfactory termite inspection report was submitted.

[2] There are variations on this same theme. For example, Pennsylvania has limited the obligation of disclosure to cases of dangerous defects. Glanski v. Ervine, 269 Pa.Super. 182, 191, 409 A.2d 425, 430 (1979).

[3] Arizona has recognized that a duty to disclose may arise where the buyer makes an inquiry of the seller, regardless of whether or not the fact is material. Universal Inv. Co. v. Sahara Motor Inn, Inc., 127 Ariz. 213, 215, 619 P.2d 485, 487 (1980). The inquiry by buyers whether the ripple was termite damage imposed a duty upon sellers to disclose what information they knew concerning the existence of termite infestation in the residence.

[4] Sellers acknowledge that a duty of disclosure would exist if live termites were present. Obde v. Schlemeyer, 56 Wash.2d 449, 353 P.2d 672 (1960).

[5] Sellers also contend that they had no knowledge of any existing termite damage in the house. An extended discussion of the facts on this point is unnecessary. Simply stated, the facts are in conflict on this issue.

Alvin A. Simon and Joseph Sachter for appellant.

Herbert L. Ortner and Joel Salon for respondent.

Judges BURKE, SCILEPPI and GIBSON concur with Chief Judge FULD; Judge BERGAN dissents and votes to affirm in a separate opinion in which Judges BREITEL and JASEN concur.

Chief Judge FULD.

The defendant, Loral Corporation, seeks to recover payment for goods delivered under a contract which it had with plaintiff Austin Instrument, Inc., on the ground that the evidence establishes, as a matter of law, that it was forced to agree to an increase in price on the items in question under circumstances amounting to economic duress.

In July of 1965, Loral was awarded a $6,000,000 contract by the Navy for the production of radar sets. The contract contained a schedule of deliveries, a liquidated damages clause applying to late deliveries and a cancellation clause in case of default by Loral. The latter thereupon solicited bids for some 40 precision gear components needed to produce the radar sets, and awarded Austin a subcontract to supply 23 such parts. That party commenced delivery in early 1966.

In May, 1966, Loral was awarded a second Navy contract for the production of more radar sets and again went about soliciting bids. Austin bid on all 40 gear components but, on July 15, a representative from Loral informed Austin's president, Mr. Krauss, that his company would be awarded the subcontract only for those items on which it was low bidder. The Austin officer refused to accept an order for less than all 40 of the gear parts and on the next day he told Loral that Austin would cease deliveries of the parts due under the existing subcontract unless Loral consented to substantial increases in the prices provided for by that agreement — both retroactively for parts already delivered and prospectively on those not yet shipped — and placed with Austin the order for all 40 parts needed under Loral's second Navy contract. Shortly thereafter, Austin did, indeed, stop delivery. After contacting 10 manufacturers of precision gears and finding none who could produce the parts in time to meet its commitments to the Navy,^[1] Loral acceded to Austin's demands; in a letter dated July 22, Loral wrote to Austin that "We have feverishly surveyed other sources of supply and find that because of the prevailing military exigencies, were they to start from scratch as would have to be the case, they could not even remotely begin to deliver on time to meet the delivery requirements established by the Government. * * * Accordingly, we are left with no choice or alternative but to meet your conditions."

Loral thereupon consented to the price increases insisted upon by Austin under the first subcontract and the latter was awarded a second subcontract making it the supplier of all 40 gear parts for Loral's second contract with the Navy.^[2] Although Austin was granted until September to resume deliveries, Loral did, in fact, receive parts in August and was able to produce the radar sets in time to meet its commitments to the Navy on both contracts. After Austin's last delivery under the second subcontract in July, 1967, Loral notified it of its intention to seek recovery of the price increases.

On September 15, 1967, Austin instituted this action against Loral to recover an amount in excess of $17,750 which was still due on the second subcontract. On the same day, Loral commenced an action against Austin claiming damages of some $22,250 — the aggregate of the price increases under the first subcontract — on the ground of economic duress. The two actions were consolidated and, following a trial, Austin was awarded the sum it requested and Loral's complaint against Austin was dismissed on the ground that it was not shown that "it could not have obtained the items in question from other sources in time to meet its commitment to the Navy under the first contract." A closely divided Appellate Division affirmed (35 A D 2d 387). There was no material disagreement concerning the facts; as Justice STEUER stated in the course of his dissent below, "[t]he facts are virtually undisputed, nor is there any serious question of law. The difficulty lies in the application of the law to these facts." (35 A D 2d 392.)

The applicable law is clear and, indeed, is not disputed by the parties. A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will. (See Allstate Med. Labs. v. Blaivas, 20 N Y 2d 654; Kazaras v. Manufacturers Trust Co., 4 N Y 2d 930; Adams v. Irving Nat. Bank, 116 N.Y. 606, 611; see, also, 13 Williston, Contracts [3d ed., 1970], § 1603, p. 658.) The existence of economic duress or business compulsion is demonstrated by proof that "immediate possession of needful goods is threatened" (Mercury Mach. Importing Corp. v. City of New York, 3 N Y 2d 418, 425) or, more particularly, in cases such as the one before us, by proof that one party to a contract has threatened to breach the agreement by withholding goods unless the other party agrees to some further demand. (See, e.g., du Pont de Nemours & Co. v. Hass Co., 303 N.Y. 785; Gallagher Switchboard Corp. v. Heckler Elec. Co., 36 Misc 2d 225; see, also, 13 Williston, Contracts [3d ed., 1970], § 1617, p. 705.) However, a mere threat by one party to breach the contract by not delivering the required items, though wrongful, does not in itself constitute economic duress. It must also appear that the threatened party could not obtain the goods from another source of supply^[3] and that the ordinary remedy of an action for breach of contract would not be adequate.^[4]

We find without any support in the record the conclusion reached by the courts below that Loral failed to establish that it was the victim of economic duress. On the contrary, the evidence makes out a classic case, as a matter of law, of such duress.^[5]

It is manifest that Austin's threat — to stop deliveries unless the prices were increased — deprived Loral of its free will. As bearing on this, Loral's relationship with the Government is most significant. As mentioned above, its contract called for staggered monthly deliveries of the radar sets, with clauses calling for liquidated damages and possible cancellation on default. Because of its production schedule, Loral was, in July, 1966, concerned with meeting its delivery requirements in September, October and November, and it was for the sets to be delivered in those months that the withheld gears were needed. Loral had to plan ahead, and the substantial liquidated damages for which it would be liable, plus the threat of default, were genuine possibilities. Moreover, Loral did a substantial portion of its business with the Government, and it feared that a failure to deliver as agreed upon would jeopardize its chances for future contracts. These genuine concerns do not merit the label "`self-imposed, undisclosed and subjective'" which the Appellate Division majority placed upon them. It was perfectly reasonable for Loral, or any other party similarly placed, to consider itself in an emergency, duress situation.

Austin, however, claims that the fact that Loral extended its time to resume deliveries until September negates its alleged dire need for the parts. A Loral official testified on this point that Austin's president told him he could deliver some parts in August and that the extension of deliveries was a formality. In any event, the parts necessary for production of the radar sets to be delivered in September were delivered to Loral on September 1, and the parts needed for the October schedule were delivered in late August and early September. Even so, Loral had to "work * * * around the clock" to meet its commitments. Considering that the best offer Loral received from the other vendors it contacted was commencement of delivery sometime in October, which, as the record shows, would have made it late in its deliveries to the Navy in both September and October, Loral's claim that it had no choice but to accede to Austin's demands is conclusively demonstrated.

We find unconvincing Austin's contention that Loral, in order to meet its burden, should have contacted the Government and asked for an extension of its delivery dates so as to enable it to purchase the parts from another vendor. Aside from the consideration that Loral was anxious to perform well in the Government's eyes, it could not be sure when it would obtain enough parts from a substitute vendor to meet its commitments. The only promise which it received from the companies it contacted was for commencement of deliveries, not full supply, and, with vendor delay common in this field, it would have been nearly impossible to know the length of the extension it should request. It must be remembered that Loral was producing a needed item of military hardware. Moreover, there is authority for Loral's position that nonperformance by a subcontractor is not an excuse for default in the main contract. (See, e.g., McBride & Wachtel, Government Contracts, § 35.10, [11].) In light of all this, Loral's claim should not be held insufficiently supported because it did not request an extension from the Government.

Loral, as indicated above, also had the burden of demonstrating that it could not obtain the parts elsewhere within a reasonable time, and there can be no doubt that it met this burden. The 10 manufacturers whom Loral contacted comprised its entire list of "approved vendors" for precision gears, and none was able to commence delivery soon enough.^[6] As Loral was producing a highly sophisticated item of military machinery requiring parts made to the strictest engineering standards, it would be unreasonable to hold that Loral should have gone to other vendors, with whom it was either unfamiliar or dissatisfied, to procure the needed parts. As Justice STEUER noted in his dissent, Loral "contacted all the manufacturers whom it believed capable of making these parts" (35 A D 2d, at p. 393), and this was all the law requires.

It is hardly necessary to add that Loral's normal legal remedy of accepting Austin's breach of the contract and then suing for damages would have been inadequate under the circumstances, as Loral would still have had to obtain the gears elsewhere with all the concomitant consequences mentioned above. In other words, Loral actually had no choice, when the prices were raised by Austin, except to take the gears at the "coerced" prices and then sue to get the excess back.

Austin's final argument is that Loral, even if it did enter into the contract under duress, lost any rights it had to a refund of money by waiting until July, 1967, long after the termination date of the contract, to disaffirm it. It is true that one who would recover moneys allegedly paid under duress must act promptly to make his claim known. (See Oregon Pacific R. R. Co. v. Forrest, 128 N.Y. 83, 93; Port Chester Elec. Constr. Corp. v. Hastings Terraces, 284 App. Div. 966, 967.) In this case, Loral delayed making its demand for a refund until three days after Austin's last delivery on the second subcontract. Loral's reason — for waiting until that time — is that it feared another stoppage of deliveries which would again put it in an untenable situation. Considering Austin's conduct in the past, this was perfectly reasonable, as the possibility of an application by Austin of further business compulsion still existed until all of the parts were delivered.

In sum, the record before us demonstrates that Loral agreed to the price increases in consequence of the economic duress employed by Austin. Accordingly, the matter should be remanded to the trial court for a computation of its damages.

The order appealed from should be modified, with costs, by reversing so much thereof as affirms the dismissal of defendant Loral Corporation's claim and, except as so modified, affirmed.

BERGAN, J. (dissenting).

Whether acts charged as constituting economic duress produce or do not produce the damaging effect attributed to them is normally a routine type of factual issue.

Here the fact question was resolved against Loral both by the Special Term and by the affirmance at the Appellate Division. It should not be open for different resolution here.

In summarizing the Special Term's decision and its own, the Appellate Division decided that "the conclusion that Loral acted deliberately and voluntarily, without being under immediate pressure of incurring severe business reverses, precludes a recovery on the theory of economic duress" (35 A D 2d 387, 391).

When the testimony of the witnesses who actually took part in the negotiations for the two disputing parties is examined, sharp conflicts of fact emerge. Under Austin's version the request for a renegotiation of the existing contract was based on Austin's contention that Loral had failed to carry out an understanding as to the items to be furnished under that contract and this was the source of dissatisfaction which led both to a revision of the existing agreement and to entering into a new one.

This is not necessarily and as a matter of law to be held economic duress. On this appeal it is needful to look at the facts resolved in favor of Austin most favorably to that party. Austin's version of events was that a threat was not made but rather a request to accommodate the closing of its plant for a customary vacation period in accordance with the general understanding of the parties.

Moreover, critical to the issue of economic duress was the availability of alternative suppliers to the purchaser Loral. The demonstration is replete in the direct testimony of Austin's witnesses and on cross-examination of Loral's principal and purchasing agent that the availability of practical alternatives was a highly controverted issue of fact. On that issue of fact the explicit findings made by the Special Referee were affirmed by the Appellate Division. Nor is the issue of fact made the less so by assertion that the facts are undisputed and that only the application of equally undisputed rules of law is involved.

Austin asserted and Loral admitted on cross-examination that there were many suppliers listed in a trade registry but that Loral chose to rely only on those who had in the past come to them for orders and with whom they were familiar. It was, therefore, at least a fair issue of fact whether under the circumstances such conduct was reasonable and made what might otherwise have been a commercially understandable renegotiation an exercise of duress.

The order should be affirmed.

Ordered accordingly.

[1] The best reply Loral received was from a vendor who stated he could commence deliveries sometime in October.

[2] Loral makes no claim in this action on the second subcontract.

[3] See, e.g., du Pont de Nemours & Co. v. Hass Co., 303 N.Y. 785, supra; Gallagher Switchboard Corp. v. Heckler Elec. Co., 36 Misc 2d 225, 226, supra; 30 East End v. World Steel Prods. Corp., 110 N. Y. S. 2d 754, 757.

[4] See, e.g., Kohn v. Kenton Assoc., 27 A D 2d 709; Colonie Constr. Corp. v. De Lollo, 25 A D 2d 464, 465; Halperin v. Wolosoff, 282 App. Div. 876; J. R. Constr. Corp. v. Berkely Apts., 259 App. Div. 830; Boss v. Hutchinson, 182 App. Div. 88, 92.

[5] The suggestion advanced that we are precluded from reaching this determination because the trial court's findings of fact have been affirmed by the Appellate Division ignores the question to be decided. That question, undoubtedly one of law (see Cohen and Karger, Powers of the New York Court of Appeals [1952], § 115, p. 492), is, accepting the facts found, did the courts below properly apply the law to them.

[6] Loral, as do many manufacturers, maintains a list of "approved vendors," that is, vendors whose products, facilities, techniques and performance have been inspected and found satisfactory.

350 F.2d 445

Ora Lee WILLIAMS, Appellant, v. WALKER-THOMAS FURNITURE COMPANY, Appellee. William THORNE et al., Appellants, v. WALKER-THOMAS FURNITURE COMPANY, Appellee.

Nos. 18604, 18605.

United States Court of Appeals District of Columbia Circuit

Argued April 9, 1965.

Decided Aug. 11, 1965.

Mr. Pierre E. Dostert, Washington, D. C., counsel for appellants in No. 18,605, argued for all appellants.

Mr. R. R. Curry, Washington, D. C., for appellant in No. 18,604.

Mr. Harry Protas, Washington, D. C., for appellee.

Mr. Gerhard P. Van Arkel (appointed by this court), Washington, D. C., as amicus curiae.

Before Bazelon, Chief Judge, and Danaher and Wright, Circuit Judges.

J. SKELLY WRIGHT, Circuit Judge:

Appellee, Walker-Thomas Furniture Company, operates a retail furniture store in the District of Columbia. During the period from 1957 to 1962 each appellant in these cases purchased a number of household items from Walker-Thomas, for which payment was to be made in installments. The terms of each purchase were contained in a printed form contract which set forth the value of the purchased item and purported to lease the item to appellant for a stipulated monthly rent payment. The contract then provided, in substance, that title would remain in Walker-Thomas until the total of all the monthly payments made equaled the stated value of the item, at which time appellants could take title. In the event of a default in the payment of any monthly installment, Walker-Thomas could repossess the item.

The contract further provided that “the amount of each periodical installment payment to be made by [purchaser] to the Company under this present lease shall be inclusive of and not in addition to the amount of each installment payment to be made by [purchaser] under such prior leases, bills or accounts; and all payments now and hereafter made by [:purchaser] shall be credited pro rata on all outstanding leases, bills and accounts due the Company by [purchaser] at the time each such payment is made.” Emphasis added.) The effect of this rather obscure provision was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. As a result, the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings.

On May 12, 1962, appellant Thorne purchased an item described as a Daveno, three tables, and two lamps, having total stated value of $391.10. Shortly thereafter, he defaulted on his monthly payments and appellee sought to replevy all the items purchased since the first transaction in 1958. Similarly, on April 17, 1962, appellant Williams bought a stereo set of stated value of $514.95.1 She too defaulted shortly thereafter, and appellee sought to replevy all the items purchased since December, 1957. The Court of General Sessions granted judgment for appellee. The District of Columbia Court of Appeals affirmed, and we granted appellants’ motion for leave to appeal to this court.

Appellants’ principal contention, rejected by both the trial and the appellate courts below, is that these contracts, or at least some of them, are unconscionable and, hence, not enforceable. In its opinion in Williams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964), the District of Columbia Court of Appeals explained its rejection of this contention as follows:

“Appellant’s second argument presents a more serious question. The record reveals that prior to the last purchase appellant had reduced the balance in her account to $164. The last purchase, a stereo set, raised the balance due to $678. Significantly, at the time of this and the preceding purchases, appellee was aware of appellant’s financial position. The reverse side of the stereo contract listed the name of appellant’s social worker and her $218 monthly stipend from the government. Nevertheless, with full knowledge that appellant had to feed, clothe and support both herself and seven children on this amount, appellee sold her a $514 stereo set.

“We cannot condemn too strongly appellee’s conduct. It raises serious questions of sharp practice and irresponsible business dealings. A review of the legislation in the District of Columbia affecting retail sales and the pertinent decisions of the highest court in this jurisdiction disclose, however, no ground upon which this court can declare the contracts in question contrary to public policy. We note that were the Maryland Retail Installment Sales Act, Art. 83 §§ 128-153, or its equivalent, in force in the District of Columbia, we could grant appellant appropriate relief. We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar.”

We do not agree that the court lacked the power to refuse enforcement to contracts found to be unconscionable. In other jurisdictions, it has been held as a matter of common law that unconscionable contracts are not enforceable.2 While no decision of this court so holding has been found, the notion that an unconscionable bargain should not be given full enforcement is by no means novel. In Scott v. United States, 79 U.S. (12 Wall.) 443, 445, 20 L.Ed. 438 (1870), the Supreme Court stated:

“ ■>:■ -x- * j£ a contract be unreasonable and unconscionable, but not void for fraud, a court of law will give to the party who sues for its breach damages, not according to its letter, but only such as he is equitably entitled to. * * * ” 3

Since we have never adopted or rejected such a rule,4 the question here presented is actually one of first impression.

Congress has recently enacted the Uniform Commercial Code, which specifically provides that the court may refuse - to enforce a contract which it finds to be unconscionable at the time it was made. 28 D.C.Code § 2-302 (Supp. IV 1965). The enactment of this section, which occurred subsequent to the contracts here in suit, does not mean that the common law of the District of Columbia was otherwise at the time of enactment, nor does it preclude the court from adopting a similar rule in the exercise of its powers to develop the common law for the District of Columbia. In fact, in view of the absence of prior authority-on the point, we consider the congressional adoption of § 2-302 persuasive authority for following the rationale of the cases from which the section is explicitly derived.5 Accordingly, we hold that where the element of unconscionability is present at the time a contract is made, the contract should not be enforced.

Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.6 Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power.7 The manner in which the contract was entered is also relevant to this consideration. Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain.8 But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned9 should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.10

In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made. The test is not simple, nor can it be mechanically applied. The terms are to be considered “in the light of the general commercial background and the commercial needs of the particular trade or case.”11 Corbin suggests the test as being whether the terms are “so extreme as to appear unconscionable according to the mores and business practices of the time and place.” 1 CORBIN, op. cit. supra Note 2.12 We think this formulation correctly states the test to be applied in those cases where no meaningful choice was exercised upon entering the contract.

Because the trial court and the appellate court did not feel that enforcement could be refused, no findings were made on the possible unconscionability of the contracts in these cases. Since the record is not sufficient for our deciding the issue as a matter of law, the cases must be remanded to the trial court for further proceedings.

So ordered.

1

. At the time of this purchase her account showed a balance of $164 still owing from her prior purchases. The total of all the purchases made over the years in Question came to $1,800. The total payments amounted to $1,400.

2

. Campbell Soup Co. v. Wentz, 3 Cir., 172 F.2d 80 (1948); Indianapolis Morris Plan Corporation v. Sparks, 132 Ind.App. 145, 172 N.E.2d 899 (1961); Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69, 84-96, 75 A.L.R.2d 1 (1960). Cf. 1 Corbin, Contracts § 128 (1963).

3

. See Luing v. Peterson, 143 Minn. 6, 172 N.W. 692 (1919); Greer v. Tweed, N.Y. C.P., 13 Abb.Pr., N.S., 427 (1872); Schnell v. Nell, 17 Ind. 29 (1861); and see generally the discussion of the English authorities in Hume v. United States, 132 U.S. 406, 10 S.Ct. 134, 33 L.Ed. 393 (1889).

4

.Wliile some of tbe statements in the court’s opinion in District of Columbia v. Harlan & Hollingsworth Co., 30 App.D.C. 270 (1908), may appear to reject the rule, in reaching its decision upholding the liquidated damages clause in that ease the court considered the circumstances existing at the time the contract was made, see 30 App.D.C. at 279, and applied the usual rule on liquidated damages. See 5 Corbin, Contracts §§ 1054-075 (1964); Note, 72 Yale L.J. 723, 746-755 (1963). Compare Jaeger v. O’Donoghue, 57 App.D.C. 191, 18 F.2d 1013 (1927).

5

. See Comment, § 2-302, Uniform Commercial Code (1962). Compare Note, 45 Ya.L.Rev. 583, 590 (1959), where it is predicted that the rule of § 2-302 will be followed by analogy in cases which involve contracts not specifically covered by the section. Gf. 1 State of New York Law Revision Commission, Report and Record of Hearings on the Uniform Commercial Code 108-110 (1954) (remarks of Professor Llewellyn).

6

. See Henningsen v. Bloomfield Motors, Inc., supra Note 2; Campbell Soup Co. v. Wentz, supra Note 2.

7

. See Henningsen v. Bloomfield Motors, Inc., supra Note 2, 161 A.2d at 86, and authorities there cited. Inquiry into the relative bargaining power of the two parties is not an inquiry wholly divorced from the general question of uneonscionability, since a one-sided bargain is itself evidence of the inequality of the bargaining parties. This fact was vaguely recognized in the common law doctrine of intrinsic fraud, that is, fraud which can be presumed from the grossly unfair nature of the terms of the contract. See the oft-quoted statement of Lord Hardwicke in Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82, 100 (1751) :

11 * * * [Fraud] may be apparent from the intrinsic nature and subject of the bargain itself; such as no man in his senses and not under delusion would make * *

And of. Hume v. United States, supra Note 3, 132 U.S. at 413, 10 S.Ct. at 137, where the Court characterized the English cases as “eases in which one party took advantage of the other’s ignorance of arithmetic to impose upon him, and the fraud was apparent from the face of the contracts.” See also Greer v. Tweed, supra Note 3.

8

. See Restatement, Contracts § 70 (1932); Note, 63 Harv.L.Rev. 494 (1950). See also Daley v. People’s Building, Loan & Savings Ass’n, 178 Mass. 13, 59 N.E. 452, 453 (1901), in which Mr. Justice Holmes, while sitting on the Supreme Judicial Court of Massachusetts, made this observation:

“ * * * Courts are less and loss disposed to interfere with parties making such contracts as they choose, so long as they interfere with no one’s welfare but their own. * * * It will be understood that we are speaking of parties standing in an equal position where neither has any oppressive advantage or power * *

9

. Tliis rule has never been without exception. In eases involving merely the transfer of unequal amounts of the same commodity, the courts have held the bargain unenforceable for the reason that “in such a case, it is clear, that the law cannot indulge in the presumption of equivalence between the consideration and the promise.” 1 Williston, Contracts § 115 (3d cd. 1957).

10

. See the general discussion of “BoilerPlate Agreements” in Llewellyn, Tiie Common Law Tradition 362-371 (1960).

11

. Comment, Uniform Commercial Code § 2-307.

12

. See Henningsen v. Bloomfield Motors, Inc., supra Note 2; Mandel v. Liebman, 303 N.Y. 88, 100 N.E.2d 149 (1951). The traditional test as stated in Greer v. Tweed, supra Note 3, 13 Abb.Pr.,N.S., at 429, is “such as no man in his senses and not under delusion would make on the one hand, and as no honest or fair man would accept, on the other.”

DANAHER, Circuit Judge

(dissenting) :

The District of Columbia Court of Appeals obviously was as unhappy about the situation here presented as any of us can possibly be. Its opinion in the Williams case, quoted in the majority text, concludes: “We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar.”

My view is thus summed up by an able court which made no finding that there had actually been sharp practice. Rather the appellant seems to have known precisely where she stood.

There are many aspects of public policy here involved. What is a luxury to some may seem an outright necessity to others. Is public oversight to be required of the expenditures of relief funds? A washing machine, e. g., in the hands of a relief client might become a fruitful source of income. Many relief clients may well need credit, and certain business establishments will take long chances on the sale of items, expecting their pricing policies will afford a degree of protection commensurate with the risk. Perhaps a remedy when necessary will be found within the provisions of the “Loan Shark” law, D.C.Code §§ 26-601 et seq. (1961).

I mention such matters only to emphasize the desirability of a cautious approach to any such problem, particularly since the law for so long has allowed parties such great latitude in making their own contracts. I dare say there must annually be thousands upon thousands of installment credit transactions in this jurisdiction, and one can only speculate as to the effect the decision in these cases will have.1

I join the District of Columbia Court of Appeals in its disposition of the issues.

1

. However the provision ultimately may be applied or in what circumstances, D.C. Code § 28-2-301 (Supp. IV, 1965) did not become effective until January 1, 1965.

Nager & Korobow for plaintiffs. Keilson & Keilson for defendant.

[190] SOL WACHTLER, J.

On August 31, 1965 the plaintiffs, who are welfare recipients, agreed to purchase a home freezer unit for $900 as the result of a visit from a salesman representing Your Shop At Home Service, Inc. With the addition of the time credit charges, credit life insurance, credit property insurance, and sales tax, the purchase price totaled $1,234.80. Thus far the plaintiffs have paid $619.88 toward their purchase. The defendant claims that with various added credit charges paid for an extension of time there is a balance of $819.81 still due from the plaintiffs. The uncontroverted proof at the trial established that the freezer unit, when purchased, had a maximum retail value of approximately $300. The question is whether this transaction and the resulting contract could be considered unconscionable within the meaning of section 2-302 of the Uniform Commercial Code which provides in part:

"(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

"(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination." (L. 1962, ch. 553, eff. Sept. 27, 1964.)

There was a time when the shield of caveat emptor would protect the most unscrupulous in the marketplace — a time when the law, in granting parties unbridled latitude to make their own contracts, allowed exploitive and callous practices which shocked the conscience of both legislative bodies and the courts.

The effort to eliminate these practices has continued to pose a difficult problem. On the one hand it is necessary to recognize the importance of preserving the integrity of agreements and the fundamental right of parties to deal, trade, bargain, and contract. On the other hand there is the concern for the uneducated and often illiterate individual who is the victim of gross inequality of bargaining power, usually the poorest members of the community.

Concern for the protection of these consumers against overreaching by the small but hardy breed of merchants who would prey on them is not novel. The dangers of inequality of bargaining power were vaguely recognized in the early English common law when Lord HARDWICKE wrote of a fraud, which [191] "may be apparent from the intrinsic nature and subject of the bargain itself; such as no man in his senses and not under delusion would make". The English authorities on this subject were discussed in Hume v. United States (132 U. S. 406, 411 [1889]) where the United States Supreme Court characterized (p. 413) these as "cases in which one party took advantage of the other's ignorance of arithmetic to impose upon him, and the fraud was apparent from the face of the contracts."

The law is beginning to fight back against those who once took advantage of the poor and illiterate without risk of either exposure or interference. From the common-law doctrine of intrinsic fraud we have, over the years, developed common and statutory law which tells not only the buyer but also the seller to beware. This body of laws recognizes the importance of a free enterprise system but at the same time will provide the legal armor to protect and safeguard the prospective victim from the harshness of an unconscionable contract.

Section 2-302 of the Uniform Commercial Code enacts the moral sense of the community into the law of commercial transactions. It authorizes the court to find, as a matter of law, that a contract or a clause of a contract was "unconscionable at the time it was made", and upon so finding the court may refuse to enforce the contract, excise the objectionable clause or limit the application of the clause to avoid an unconscionable result. "The principle", states the Official Comment to this section, "is one of the prevention of oppression and unfair surprise". It permits a court to accomplish directly what heretofore was often accomplished by construction of language, manipulations of fluid rules of contract law and determinations based upon a presumed public policy.

There is no reason to doubt, moreover, that this section is intended to encompass the price term of an agreement. In addition to the fact that it has already been so applied (Matter of State of New York v. ITM, Inc., 52 Misc 2d 39; Frostifresh Corp. v. Reynoso, 52 Misc 2d 26, revd. 54 Misc 2d 119; American Home Improvement v. MacIver, 105 N. H. 435), the statutory language itself makes it clear that not only a clause of the contract, but the contract in toto, may be found unconscionable as a matter of law. Indeed, no other provision of an agreement more intimately touches upon the question of unconscionability than does the term regarding price.

Fraud, in the instant case, is not present; nor is it necessary under the statute. The question which presents itself is whether or not, under the circumstances of this case, the sale of a freezer unit having a retail value of $300 for $900 ($1,439.69 including [192] credit charges and $18 sales tax) is unconscionable as a matter of law. The court believes it is.

Concededly, deciding the issue is substantially easier than explaining it. No doubt, the mathematical disparity between $300, which presumably includes a reasonable profit margin, and $900, which is exorbitant on its face, carries the greatest weight. Credit charges alone exceed by more than $100 the retail value of the freezer. These alone, may be sufficient to sustain the decision. Yet, a caveat is warranted lest we reduce the import of section 2-302 solely to a mathematical ratio formula. It may, at times, be that; yet it may also be much more. The very limited financial resources of the purchaser, known to the sellers at the time of the sale, is entitled to weight in the balance. Indeed, the value disparity itself leads inevitably to the felt conclusion that knowing advantage was taken of the plaintiffs. In addition, the meaningfulness of choice essential to the making of a contract can be negated by a gross inequality of bargaining power. (Williams v. Walker-Thomas Furniture Co., 350 F.2d 445.)

There is no question about the necessity and even the desirability of installment sales and the extension of credit. Indeed, there are many, including welfare recipients, who would be deprived of even the most basic conveniences without the use of these devices. Similarly, the retail merchant selling on installment or extending credit is expected to establish a pricing factor which will afford a degree of protection commensurate with the risk of selling to those who might be default prone. However, neither of these accepted premises can clothe the sale of this freezer with respectability.

Support for the court's conclusion will be found in a number of other cases already decided. In American Home Improvement v. MacIver (supra) the Supreme Court of New Hampshire held that a contract to install windows, a door and paint, for the price of $2,568.60, of which $809.60 constituted interest and carrying charges and $800 was a salesman's commission was unconscionable as a matter of law. In Matter of State of New York v. ITM, Inc. (supra) a deceptive and fraudulent scheme was involved, but standing alone, the court held that the sale of a vacuum cleaner, among other things, costing the defendant $140 and sold by it for $749 cash or $920.52 on time purchase was unconscionable as a matter of law. Finally, in Frostifresh Corp. v. Reynoso (supra) the sale of a refrigerator costing the seller $348 for $900 plus credit charges of $245.88 was unconscionable as a matter of law.

[193] One final point remains. The defendant argues that the contract of June 15, 1966, upon which this suit is based, constitutes a financing agreement and not a sales contract. To support its position, it points to the typed words "Refinance of Freezer A/C #6766 and Food A/C #56788" on the agreement and to a letter signed by the plaintiffs requesting refinance of the same items. The request for "refinancing" is typed on the defendant's letterhead. The quoted refinance statement is typed on a form agreement entitled "Star Credit Corporation — Retail Instalment Contract". It is signed by the defendant as "seller" and by the purchasers as "buyer". Above the signature of the buyers, they acknowledge "receipt of an executed copy of this RETAIL INSTALMENT CONTRACT". The June 15, 1966 contract by defendant is on exactly the same form as the original contract of August 31, 1965. The original, too, is entitled "Star Credit Corporation — Retail Instalment Contract". It is signed, however, by "Your Shop At Home Service, Inc." Printed beneath the signatures is the legend "Duplicate for Star". In substance and effect, the agreement of June 25, 1966 constitutes a novation and replacement of the earlier agreement. It is, in all respects, as it reads, a "Retail Instalment Contract".

Having already paid more than $600 toward the purchase of this $300 freezer unit, it is apparent that the defendant has already been amply compensated. In accordance with the statute, the application of the payment provision should be limited to amounts already paid by the plaintiffs and the contract be reformed and amended by changing the payments called for therein to equal the amount of payment actually so paid by the plaintiffs.