Jacob F. Keller

v.

Jacob Holderman.

Where defendant gave plaintiff his check for three hundred dollars for a silver watch, worth fifteen, but the whole transaction was a mere frolic and banter, the one party not expecting to buy the watch nor he the other to sell it, it was held that no recovery could be had upon the check, notwithstanding defendant had retained the watch, and did not offer to return it until the trial.

Submitted on briefs Apr. 17, 1863.Decided May 12, 1863.

Error to Berrien Circuit.

Action by Holderman against Keller upon a check for $300, drawn by Keller upon a banker at Niles, and not honored. The cause was tried without a jury, and the Circuit Judge found as facts, that the check was given for an old silver watch, worth about $15, which Keller took and kept till the day of trial, when he offered to return it to the plaintiff, who refused to receive it. The whole transaction was a frolic and banter--the plaintiff not expecting to sell, nor the defendant intending to buy the watch at the sum for which the check was drawn. The defendant when he drew the check had no money in the banker's hands, and had intended to insert a condition in the check that would prevent his being liable upon it; but as he had failed to do so, and had retained the watch, the judge held him liable, and judgment was rendered against him for the amount of the check. 

[249]

W. A. Moore, for plaintiff in error.

James Brown, for defendant in error.

MARTIN CH. J.:

When the court below found as a fact that “the whole transaction between the parties was a frolic and a banter, the plaintiff not expecting to sell, nor the defendant intending to buy the watch at the sum for which the check was drawn,” the conclusion should have been that no contract was ever made by the parties, and the finding should have been that no cause of action existed upon the check to the plaintiff. 

The judgment is reversed, with costs of this court and of the court below. 

The other justices concurred.

Appeal from circuit court, Milwaukee county.

[18 N.W. 172]

Jenkins, Winkler & Smith, for respondent, J. H. Moulton.

Finches, Lynde & Miller, for appellants, Charles J. Kershaw and another.

TAYLOR, J.

The complaint of the respondent alleges that the appellants were dealers in salt in the city of Milwaukee, including salt of the Michigan Salt Association; that the respondent was a dealer in salt in the city of La Crosse, and accustomed to buy salt in large quantities, which fact was known to the appellants; that on the nineteenth day of September, 1882, the appellants, at Milwaukee, wrote and posted to the respondent at La Crosse a letter, of which the following is a copy:

“MILWAUKEE, September 19, 1882.

J. H. Moulton, Esq., La Crosse, Wis.--DEAR SIR: In consequence of a rupture in the salt trade, we are authorized to offer Michigan fine salt, in full car-load lots of 80 to 95 bbls., delivered at your city, at 85c. per bbl., to be shipped per C. & N. W. R. R. Co. only. At this price it is a bargain, as the price in general remains unchanged. Shall be pleased to receive your order.

+----------------------------------+¦Yours truly,¦C. J. KERSHAW & SON.”¦+----------------------------------+

 

The balance of the complaint reads as follows:

“And this plaintiff alleges, upon information and belief, that said defendants did not send said letter and offer by authority of, or as agents of, the Michigan Salt Association, or any other party, but on their own responsibility. And the plaintiff further shows that he received said letter in due course of mail, to-wit, on the twentieth day of September, 1882, and that he, on that day, accepted the offer in said letter contained, to the amount of two thousand barrels of salt therein named, and immediately, and on said day, sent to said defendants at Milwaukee a message by telegraph, as follows:

‘LA CROSSE, September 20, 1882.

To C. J. Kershaw & Son, Milwaukee, Wis.: Your letter of yesterday, received and noted. You may ship me two thousand (2,000) barrels Michigan fine salt, as offered in your letter. Answer.

J. H. MOULTON.'

“That said telegraphic acceptance and order was duly received by said defendants on the twentieth day of September, 1882, aforesaid; that two thousand barrels of said salt was a reasonable quantity for this plaintiff to order in response to said offer, and not in excess of the amount which the defendants, from their knowledge of the business of the plaintiff, might reasonably expect him to order in response thereto.

[18 N.W. 173]

That although said defendants received said acceptance and order of this plaintiff on said twentieth day of September, 1882, they attempted, on the twenty-first day of September, 1882, to withdraw the offer contained in their said letter of September 19, 1882, and did, on said twenty-first day of September, 1882, notify this plaintiff of the withdrawal of said offer on their part; that this plaintiff thereupon demanded of the defendants the delivery to him of two thousand barrels of Michigan fine salt, in accordance with the terms of said offer, accepted by this plaintiff as aforesaid, and offered to pay them therefor in accordance with said terms, and this plaintiff was ready to accept said two thousand barrels, and ready to pay therefor in accordance with said terms. Nevertheless, the defendants utterly refused to deliver the same, or any part thereof, by reason whereof this plaintiff sustained damage to the amount of eight hundred dollars.

Wherefore the plaintiff demands judgment against the defendants for the sum of eight hundred dollars, with interest from the twenty-first day of September, 1882, besides the costs of this action.”

To this complaint the appellants interposed a general demurrer. The circuit court overruled the demurrer, and from the order overruling the same the defendants appeal to this court.

The only question presented is whether the appellant's letter, and the telegram sent by the respondent in reply thereto, constitute a contract for the sale of 2,000 barrels of Michigan fine salt by the appellants to the respondent at the price named in such letter. We are very clear that no contract was perfected by the order telegraphed by the respondent in answer to appellants' letter. The learned counsel for the respondent clearly appreciated the necessity of putting a construction upon the letter which is not apparent on its face, and in their complaint have interpreted the letter to mean that the appellants by said letter made an express offer to sell the respondent, on the terms stated, such reasonable amount of salt as he might order, and as the appellants might reasonably expect him to order, in response thereto. If in order to entitle the plaintiff to recover in this action it is necessary to prove the allegations, then it seems clear to us that the writings between the parties do not show the contract. It is not insisted by the learned counsel for the respondent that any recovery can be had unless a proper construction of the letter and telegram constitute a binding contract between the parties. The alleged contract being for the sale and delivery of personal property of a value exceeding $50, is void by the statute of frauds, unless in writing. Section 2308, Rev. St. 1878. The counsel for the respondent claims that the letter of the appellants is an offer to sell to the respondent, on the terms mentioned, any reasonable quantity of Michigan fine salt that he might see fit to order, not less than one car-load. On the other hand, the counsel for the appellants claim that the letter is not an offer to sell any specific quantity of salt, but simply a letter such as a business man would send out to customers or those with whom he desired to trade, soliciting their patronage. To give the letter of the appellants the construction claimed for it by the learned counsel for the respondent, would introduce such an element of uncertainty into the contract as would necessarily render its enforcement a matter of difficulty, and in every case the jury trying the case would be called upon to determine whether the quantity ordered was such as the appellants might reasonably expect from the party. This question would necessarily involve an inquiry into the nature and extent of the business of the person to whom the letter was addressed, as well as to the extent of the business of the appellants. So that it would be a question of fact for the jury in each case to determine whether there was a binding contract between the parties. And this question would not in any way depend upon the language used in the written contract, but upon proofs to be made outside of the writings. As the only communications between the parties, upon which a contract can be

[18 N.W. 174]

predicated, are the letter and the reply of the respondent, we must look to them, and nothing else, in order to determine whether there was a contract in fact. We are not at liberty to help out the written contract, if there be one, by adding by parol evidence additional facts to help out the writing so as to make out a contract not expressed therein. If the letter of the appellants is an offer to sell salt to the respondent on the terms stated, then it must be held to be an offer to sell any quantity at the option of the respondent not less than one car-load. The difficulty and injustice of construing the letter into such an offer is so apparent that the learned counsel for the respondent do not insist upon it, and consequently insist that it ought to be construed as an offer to sell such quantity as the appellants, from their knowledge of the business of the respondent, might reasonably expect him to order. Rather than introduce such an element of uncertainty into the contract, we deem it much more reasonable to construe the letter as a simple notice to those dealing in salt that the appellants were in a condition to supply that article for the prices named, and requesting the person to whom it was addressed to deal with them. This case is one where it is eminently proper to heed the injunction of Justice FOSTER in the opinion in Lyman v. Robinson, 14 Allen, 254: “That care should always be taken not to construe as an agreement letters which the parties intended only as preliminary negotiations.”

We do not wish to be understood as holding that a party may not be bound by an offer to sell personal property, where the amount or quantity is left to be fixed by the person to whom the offer is made, when the offer is accepted and the amount or quantity fixed before the offer is withdrawn. We simply hold that the letter of the appellants in this case was not such an offer. If the letter had said to the respondent we will sell you all the Michigan fine salt you will order, at the price and on the terms named, then it is undoubtedly the law that the appellants would have been bound to deliver any reasonable amount the appellant might have ordered, possibly any amount, or make good their default in damages. The case cited by the counsel decided by the California supreme court ( Kleler v. Ybarru, 3 Cal. 147) was an offer of this kind with an additional limitation. The defendant in that case had a crop of growing grapes, and he offered to pick from the vines and deliver to the plaintiff, at defendant's vineyard, so many grapes then growing in said vineyard as the plaintiff should wish to take during the present year at 10 cents per pound on delivery. The plaintiff, within the time and before the offer was withdrawn, notified the defendant that he wished to take 1,900 pounds of his grapes on the terms stated. The court held there was a contract to deliver the 1,900 pounds. In this case the fixing of the quantity was left to the person to whom the offer was made, but the amount which the defendant offered, beyond which he could not be bound, was also fixed by the amount of grapes he might have in his vineyard in that year. The case is quite different in its facts from the case at bar. The cases cited by the learned counsel for the appellant, (Beaupre v. R. & A. Tile Co. 21 Minn. 155, and Kinghorne v. Montreal Tel. Co. U. C.,18 Q. B. 60,) are nearer in their main facts to the case at bar, and in both it was held there was no contract. We, however, place our opinion upon the language of the letter of the appellants, and hold that it cannot be fairly construed into an offer to sell to the respondent any quantity of salt he might order, nor any reasonable amount he might see fit to order. The language is not such as a business man would use in making an offer to sell to an individual a definite amount of property. The word “sell” is not used. They say, “we are authorized to offer Michigan fine salt,” etc., and volunteer an opinion that at the terms stated it is a bargain. They do not say, we offer to sell to you. They use general language proper to be addressed generally to those who were interested in the salt trade. It is clearly in the nature of an advertisement or business circular, to attract the attention of those interested in that business

[18 N.W. 175]

to the fact that good bargains in salt could be had by applying to them, and not as an offer by which they were to be bound, if accepted, for any amount the persons to whom it was addressed might see fit to order. We think the complaint fails to show any contract between the parties, and the demurrer should have been sustained.

The order of the circuit court is reversed, and the cause remanded for further proceedings, according to law.

[784] Russell H. McMains, McMains & Constant, Corpus Christi, Gibson Gayle, Jr., James B. Sales, Fulbright & Jaworski, Richard B. Miller, Richard P. Keeton, Miller, Keeton, Bristow & Brown, Houston, William R. Edwards, Edwards & Terry, Corpus Christi, for appellant.

Joseph D. Jamail, Jamail & Kolius, John L. Jeffers, G. Irvin Terrell, Randall A. Hopkins, Baker & Botts, W. James Kronzer, Law Offices of W. James Kronzer, Harry M. Reasoner, Vinson & Elkins, Houston, Luther H. Soules, III, Soules & Reed, San Antonio, Royal H. Brin, Jr., Thomas C. Unis, Strasburger & Price, Dallas, Louis S. Muldrow, Waco, for appellee.

Before WARREN, JACK SMITH and SAM BASS, JJ.

OPINION

WARREN, Justice.

This is an appeal from a judgment awarding Pennzoil damages for Texaco's tortious interference with a contract between Pennzoil and the "Getty entities" (Getty Oil Company, the Sarah C. Getty Trust, and the J. Paul Getty Museum).

The jury found, among other things, that:

(1) At the end of a board meeting on January 3, 1984, the Getty entities intended to bind themselves to an agreement providing for the purchase of Getty Oil stock, whereby the Sarah C. Getty Trust would own 4/7th of the stock and Pennzoil the remaining 3/7th; and providing for a division of Getty Oil's assets, according to their respective ownership if the Trust and Pennzoil were unable to agree on a restructuring of Getty Oil by December 31, 1984;

(2) Texaco knowingly interfered with the agreement between Pennzoil and the Getty entities;

(3) As a result of Texaco's interference, Pennzoil suffered damages of $7.53 billion;

(4) Texaco's actions were intentional, willful, and in wanton disregard of Pennzoil's rights; and,

(5) Pennzoil was entitled to punitive damages of $3 billion.

The main questions for our determination are: (1) whether the evidence supports the jury's finding that there was a binding contract between the Getty entities and Pennzoil, and that Texaco knowingly induced a breach of such contract; (2) whether the trial court properly instructed the [785] jury on the law pertinent to the case; (3) whether the evidence supported the jury's damage awards; (4) whether the trial court committed reversible error in its admission and exclusion of certain evidence; (5) whether the conduct and posture of the trial judge denied Texaco a fair trial; and (6) whether the judgment violates certain articles of the United States Constitution.

Though many facts are disputed, the parties' main conflicts are over the inferences to be drawn from, and the legal significance of, these facts. There is evidence that for several months in late 1983, Pennzoil had followed with interest the well-publicized dissension between the board of directors of Getty Oil Company and Gordon Getty, who was a director of Getty Oil and also the owner, as trustee, of approximately 40.2% of the outstanding shares of Getty Oil. On December 28, 1983, Pennzoil announced an unsolicited, public tender offer for 16 million shares of Getty Oil at $100 each.

Soon afterwards, Pennzoil contacted both Gordon Getty and a representative of the J. Paul Getty Museum, which held approximately 11.8% of the shares of Getty Oil, to discuss the tender offer and the possible purchase of Getty Oil. In the first two days of January 1984, a "Memorandum of Agreement" was drafted to reflect the terms that had been reached in conversations between representatives of Pennzoil, Gordon Getty, and the Museum.

Under the plan set out in the Memorandum of Agreement, Pennzoil and the Trust (with Gordon Getty as trustee) were to become partners on a 3/7ths to 4/7ths basis respectively, in owning and operating Getty Oil. Gordon Getty was to become chairman of the board, and Hugh Liedtke, the chief executive officer of Pennzoil, was to become chief executive officer of the new company.

The Memorandum of Agreement further provided that the Museum was to receive $110 per share for its 11.8% ownership, and that all other outstanding public shares were to be cashed in by the company at $110 per share. Pennzoil was given an option to buy an additional 8 million shares to achieve the desired ownership ratio. The plan also provided that Pennzoil and the Trust were to try in good faith to agree upon a plan to restructure Getty Oil within a year, but if they could not reach an agreement, the assets of Getty Oil were to be divided between them, 3/7ths to Pennzoil and 4/7ths to the Trust.

The Memorandum of Agreement stated that it was subject to approval of the board of Getty Oil, and it was to expire by its own terms if not approved at the board meeting that was to begin on January 2. Pennzoil's CEO, Liedtke, and Gordon Getty, for the Trust, signed the Memorandum of Agreement before the Getty Oil board meeting on January 2, and Harold Williams, the president of the Museum, signed it shortly after the board meeting began. Thus, before it was submitted to the Getty Oil board, the Memorandum of Agreement had been executed by parties who together controlled a majority of the outstanding shares of Getty Oil.

The Memorandum of Agreement was then presented to the Getty Oil board, which had previously held discussions on how the company should respond to Pennzoil's public tender offer. A self-tender by the company to shareholders at $110 per share had been proposed to defeat Pennzoil's tender offer at $100 per share, but no consensus was reached.

The board voted to reject recommending Pennzoil's tender offer to Getty's shareholders, then later also rejected the Memorandum of Agreement price of $110 per share as too low. Before recessing at 3 a.m., the board decided to make a counter-proposal to Pennzoil of $110 per share plus a $10 debenture. Pennzoil's investment banker reacted to this price negatively. In the morning of January 3, Getty Oil's investment banker, Geoffrey Boisi, began calling other companies, seeking a higher bid than Pennzoil's for the Getty Oil shares.

When the board reconvened at 3 p.m. on January 3, a revised Pennzoil proposal was presented, offering $110 per share plus a $3 "stub" that was to be paid after the sale of a Getty Oil subsidiary ("ERC"), from the [786] excess proceeds over $1 billion. Each shareholder was to receive a pro rata share of these excess proceeds, but in any case, a minimum of $3 per share at the end of five years. During the meeting, Boisi briefly informed the board of the status of his inquiries of other companies that might be interested in bidding for the company. He reported some preliminary indications of interest, but no definite bid yet.

The Museum's lawyer told the board that, based on his discussions with Pennzoil, he believed that if the board went back "firm" with an offer of $110 plus a $5 stub, Pennzoil would accept it. After a recess, the Museum's president (also a director of Getty Oil) moved that the Getty board should accept Pennzoil's proposal provided that the stub be raised to $5, and the board voted 15 to 1 to approve this counter-proposal to Pennzoil. The board then voted themselves and Getty's officers and advisors indemnity for any liability arising from the events of the past few months. Additionally, the board authorized its executive compensation committee to give "golden parachutes" (generous termination benefits) to the top executives whose positions "were likely to be affected" by the change in management. There was evidence that during another brief recess of the board meeting, the counter-offer of $110 plus a $5 stub was presented to and accepted by Pennzoil. After Pennzoil's acceptance was conveyed to the Getty board, the meeting was adjourned, and most board members left town for their respective homes.

That evening, the lawyers and public relations staff of Getty Oil and the Museum drafted a press release describing the transaction between Pennzoil and the Getty entities. The press release, announcing an agreement in principle on the terms of the Memorandum of Agreement but with a price of $110 plus a $5 stub, was issued on Getty Oil letterhead the next morning, January 4, and later that day, Pennzoil issued an identical press release.

On January 4, Boisi continued to contact other companies, looking for a higher price than Pennzoil had offered. After talking briefly with Boisi, Texaco management called several meetings with its in-house financial planning group, which over the course of the day studied and reported to management on the value of Getty Oil, the Pennzoil offer terms, and a feasible price range at which Getty might be acquired. Later in the day, Texaco hired an investment banker, First Boston, to represent it with respect to a possible acquisition of Getty Oil. Meanwhile, also on January 4, Pennzoil's lawyers were working on a draft of a formal "transaction agreement" that described the transaction in more detail than the outline of terms contained in the Memorandum of Agreement and press release.

On January 5, the Wall Street Journal reported on an agreement reached between Pennzoil and the Getty entities, describing essentially the terms contained in the Memorandum of Agreement. The Pennzoil board met to ratify the actions of its officers in negotiating an agreement with the Getty entities, and Pennzoil's attorneys periodically attempted to contact the other parties' advisors and attorneys to continue work on the transaction agreement.

The board of Texaco also met on January 5, authorizing its officers to make an offer for 100% of Getty Oil and to take any necessary action in connection therewith. Texaco first contacted the Museum's lawyer, Lipton, and arranged a meeting to discuss the sale of the Museum's shares of Getty Oil to Texaco. Lipton instructed his associate, on her way to the meeting in progress of the lawyers drafting merger documents for the Pennzoil/Getty transaction, to not attend that meeting, because he needed her at his meeting with Texaco. At the meeting with Texaco, the Museum outlined various issues it wanted resolved in any transaction with Texaco, and then agreed to sell its 11.8% ownership in Getty Oil.

That evening, Texaco met with Gordon Getty to discuss the sale of the Trust's shares. He was informed that the Museum had agreed to sell its shares to Texaco. Gordon Getty's advisors had previously warned him that the Trust shares might be "locked out" in a minority position if Texaco [787] bought, in addition to the Museum's shares, enough of the public shares to achieve over 50% ownership of the company. Gordon Getty accepted Texaco's offer of $125 per share and signed a letter of his intent to sell his stock to Texaco, as soon as a California temporary restraining order against his actions as trustee was lifted.

At noon on January 6, Getty Oil held a telephone board meeting to discuss the Texaco offer. The board voted to withdraw its previous counter-proposal to Pennzoil and unanimously voted to accept Texaco's offer. Texaco immediately issued a press release announcing that Getty Oil and Texaco would merge.

Soon after the Texaco press release appeared, Pennzoil telexed the Getty entities, demanding that they honor their agreement with Pennzoil. Later that day, prompted by the telex, Getty Oil filed a suit in Delaware for declaratory judgment that it was not bound to any contract with Pennzoil. The merger agreement between Texaco and Getty Oil was signed on January 6; the stock purchase agreement with the Museum was signed on January 6; and the stock exchange agreement with the Trust was signed on January 8, 1984.

INSUFFICIENCY OF THE EVIDENCE

In Points of Error 46 through 56, Texaco contends that the evidence at trial was legally and factually insufficient to support the jury's answers to Special Issues 1 and 2.

The parties agree that in our review, we are required to apply the substantive law of New York and the procedural law of Texas.

There are two standards of review for questions attacking the sufficiency of the evidence: (1) legal insufficiency and (2) factual insufficiency review. In reviewing legal insufficiency points or "no evidence" points, we must consider only the evidence tending to support the finding, viewing it in the light most favorable to the finding, giving effect to all reasonable inferences that may properly be drawn from that evidence, and disregarding all contrary or conflicting evidence. King v. Bauer, 688 S.W.2d 845 (Tex.1985); Garza v. Alviar, 395 S.W.2d 821 (Tex.1965). A "no evidence" point must be sustained if we find a complete absence of evidence of probative force or only a scintilla of evidence to support the finding, or if the evidence tending to support the finding must be disregarded because it is legally incompetent. If there is more than a scintilla of probative evidence to support the finding, the point must be overruled. Calvert, "No Evidence" and "Insufficient Evidence" Points of Error, 38 Texas L.Rev. 361 (1960).

In reviewing factual insufficiency points, we must consider all of the evidence in the record that is relevant to the fact finding being challenged. In re King's Estate, 150 Tex. 662, 244 S.W.2d 660 (1951). We must sustain a "factual insufficiency" point if we determine that the finding of a vital fact is so contrary to the great weight and preponderance of the evidence as to be clearly wrong. Id., 150 Tex. at 664-65, 244 S.W.2d at 661; Calvert, 38 Tex.L.Rev. 361.

Texaco argues first that there was no evidence or there was insufficient evidence to support the jury's answers to Special Issue No. 1. The jury found that the Trust, the Museum, and Getty Oil Company intended to bind themselves to an agreement with Pennzoil containing certain enumerated terms at the end of the Getty Oil Company board meeting on January 3, 1984. Texaco claims that not only is there insufficient evidence of any intent to be bound but also that the "agreement" referred to in Special Issue No. 1 is too indefinite to be a legally enforceable contract.

Second, Texaco asserts that the evidence is legally and factually insufficient to support the jury's answer to Special Issue No. 2, which inquired whether Texaco knowingly interfered with any agreement that the jury had found between Pennzoil and the Getty entities. Texaco contends that there is insufficient evidence that it had actual knowledge of a legally enforceable contract, or that Texaco actively induced a breach of the alleged contract. Texaco further asserts that the alleged contract was [788] not valid and enforceable, because it was based on a mutual mistake, because it would violate SEC Rule 10b-13 and the statute of frauds, and because it would be a breach by Gordon Getty and by the Getty Oil directors of their fiduciary duties; thus, Texaco argues, the alleged contract will not support a tort action for inducement of breach.

SPECIAL ISSUE NO. 1

Texaco contends that under controlling principles of New York law, there was insufficient evidence to support the jury's finding that at the end of the Getty Oil board meeting on January 3, the Getty entities intended to bind themselves to an agreement with Pennzoil.

Pennzoil responds that the question of the parties' intent is a fact question, and the jury was free to accept or reject Texaco's after-the-fact testimony of subjective intent. Pennzoil contends that the evidence showed that the parties intended to be bound to the terms in the Memorandum of Agreement plus a price terms of $110 plus a $5 stub, even though the parties may have contemplated a later, more formal document to memorialize the agreement already reached. Pennzoil also argues that the binding effect of the Memorandum of Agreement was conditioned only upon approval of the board, not also upon execution of the agreement by a Getty signator.

Under New York law, if parties do not intend to be bound to an agreement until it is reduced to writing and signed by both parties, then there is no contract until that event occurs. Scheck v. Francis, 26 N.Y.2d 466, 311 N.Y.S.2d 841, 260 N.E.2d 493 (1970). If there is no understanding that a signed writing is necessary before the parties will be bound, and the parties have agreed upon all substantial terms, then an informal agreement can be binding, even though the parties contemplate evidencing their agreement in a formal document later. Municipal Consultants & Publishers, Inc. v. Town of Ramapo, 47 N.Y.2d 144, 417 N.Y.S.2d 218, 220, 390 N.E.2d 1143, 1145 (1979); R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74 (2d Cir.1984).

If the parties do intend to contract orally, the mere intention to commit the agreement to writing does not prevent contract formation before execution of that writing, Winston v. Mediafare Entertainment Corp., 777 F.2d 78, 80 (2d Cir.1985), and even a failure to reduce their promises to writing is immaterial to whether they are bound. Schwartz v. Greenberg, 304 N.Y. 250, 107 N.E.2d 65 (1952).

However, if either party communicates the intent not to be bound before a final formal document is executed, then no oral expression of agreement to specific terms will constitute a binding contract. Winston, 777 F.2d at 80; R.G. Group, 751 F.2d at 74.

Thus, under New York law, the parties are given the power to obligate themselves informally or only by a formal signed writing, as they wish. R.G. Group, 751 F.2d at 74. The emphasis in deciding when a binding contract exists is on intent rather than on form. Reprosystem, B.V. v. SCM Corp., 727 F.2d 257, 261 (2d Cir.), cert. denied, 469 U.S. 828, 105 S.Ct. 110, 83 L.Ed.2d 54 (1984).

It is the parties' expressed intent that controls which rule of contract formation applies. To determine intent, a court must examine the words and deeds of the parties, because these constitute the objective signs of such intent. Winston, 777 F.2d at 80; R.G. Group, 751 F.2d at 74. Only the outward expressions of intent are considered—secret or subjective intent is immaterial to the question of whether the parties were bound. Porter v. Commercial Casualty Insurance Co., 292 N.Y. 176, 54 N.E.2d 353 (1944).

Several factors have been articulated to help determine whether the parties intended to be bound only by a formal, signed writing: (1) whether a party expressly reserved the right to be bound only when a written agreement is signed; (2) whether there was any partial performance by one party that the party disclaiming the contract accepted; (3) whether all essential terms of the alleged contract had been [789] agreed upon; and (4) whether the complexity or magnitude of the transaction was such that a formal, executed writing would normally be expected. Winston, 777 F.2d at 80; R.G. Group, 751 F.2d at 76.

Evaluating the first factor, Texaco contends that the evidence of expressed intent not to be bound establishes conclusively that there was no contract at the time of Texaco's alleged inducement of breach. Texaco argues that this expressed intent is contained in (1) the press releases issued by the Getty entities and Pennzoil, which stated that "the transaction is subject to execution of a definitive merger agreement"; (2) the phrasing of drafts of the transaction agreement, which Texaco alleges "carefully stated that the parties' obligations would become binding only `after the execution and delivery of this Agreement'"; and (3) the deliberate reference by the press releases to the parties' understanding as an "agreement in principle."

In its brief, Texaco asserts that, as a matter of black letter New York law, the "subject to" language in the press release established that the parties were not then bound and intended to be bound only after signing a definitive agreement, citing Banking & Trading Corp. v. Reconstruction Finance Corp., 147 F.Supp. 193, 204 (S.D.N.Y.1956), aff'd, 257 F.2d 765 (2d Cir. 1958). The court in that case stated that "if the agreement is expressly subject to the execution of a formal contract, this intent must be respected and no contract found until then." However, the court went on to say that where intent is less sharply expressed, the trier of fact must determine it as best he can. Id. at 204-05. Although the intent to formalize an agreement is some evidence of an intent not to be bound before signing such a writing, it is not conclusive. Id. at 204. The issue of when the parties intended to be bound is a fact question to be decided from the parties' acts and communications. Id.; see Chromalloy American Corp. v. Universal Housing Systems of America, Inc., 495 F.Supp. 544, 550 (S.D.N.Y.1980), aff'd, 697 F.2d 289 (2d Cir.1982).

The press release issued first by Getty, then by Pennzoil, on January 4, 1984, stated:

Getty Oil Company, The J. Paul Getty Museum and Gordon Getty, as Trustee of the Sarah C. Getty Trust, announced today that they have agreed in principle with Pennzoil Company to a merger of Getty Oil and a newly formed entity owned by Pennzoil and the Trustee.

In connection with the transaction, the shareholders of Getty Oil ... will receive $110 per share cash plus the right to receive a deferred cash consideration in a formula amount. The deferred consideration will be equal to a pro rata share of the ... proceeds, in excess of $1 billion,... of ERC Corporation, ... and will be paid upon the disposition. In any event, under the formula, each shareholder will receive at least $5 per share within five years.

Prior to the merger, Pennzoil will contribute approximately $2.6 billion in cash and the Trustee and Pennzoil will contribute the Getty Oil shares owned by them to the new entity. Upon execution of a definitive merger agreement, the ... tender offer by a Pennzoil subsidiary for shares of Getty Oil stock will be withdrawn.

The agreement in principle also provides that Getty Oil will grant to Pennzoil an option to purchase eight million treasury shares for $110 per share.

The transaction is subject to execution of a definitive merger agreement, approval by the stockholders of Getty Oil and completion of various governmental filing and waiting period requirements.

Following consummation of the merger, the Trust will own 4/7ths of the ... stock of Getty Oil and Pennzoil will own 3/7ths. The Trust and Pennzoil have also agreed in principle that following consummation of the merger they will endeavor in good faith to agree upon a plan for restructuring Getty Oil [within a year] and that if they are unable to reach such an agreement then they will cause a division of assets of the company. (Emphasis added.)

[790] Any intent of the parties not to be bound before signing a formal document is not so clearly expressed in the press release to establish, as a matter of law, that there was no contract at that time. The press release does refer to an agreement "in principle" and states that the "transaction" is subject to execution of a definitive merger agreement. But the release as a whole is worded in indicative terms, not in subjunctive or hypothetical ones. The press release describes what shareholders will receive, what Pennzoil will contribute, that Pennzoil will be granted an option, etc.

The description of the transaction as subject to a definitive merger agreement also includes the need for stockholder approval and the completion of various governmental filing and waiting requirements. There was evidence that this was a paragraph of routine details, that the referred to merger agreement was a standard formal document required in such a transaction under Delaware law, and that the parties considered these technical requirements of little consequence.

There is also an arguable difference between a "transaction" being subject to various requirements and the formation of the agreement itself being dependent upon completion of these matters. In F. W. Berk & Co. v. Derecktor, 301 N.Y. 110, 92 N.E.2d 914 (1950), cited in Texaco's brief, the defendant's very acceptance of the plaintiff's order was made subject to the occurrence of certain events. The court defined the phrase "subject to" as being the equivalent of "conditional upon or depending on" and held that making the acceptance of an offer subject to a condition was not the kind of assent required to make it a binding promise. However, making the acceptance of an offer conditional, or expressly making an agreement itself conditional, is a much clearer expression of an intent not to be bound than the use of the more ambiguous word "transaction."

Other cases cited by Texaco involved writings that specifically stated that no party would be committed until a written contract was executed. See, e.g., Reprosystem, B.V., 727 F.2d at 260 (draft agreements clearly stated that formal execution was required before the contract would have any binding effect); Chromalloy American Corp., 495 F.Supp. at 547-48 (letter of intent stated that neither party would be committed until a contract was executed). Yet, despite the clear language of reservation in those cases, the parties' intent to be bound was still evaluated as a question of fact to be determined from all the circumstances of the case. Reprosystem, B. V., 727 F.2d at 261-62; Chromalloy American Corp., 495 F.Supp. at 550.

So it is here. Regardless of what interpretation we give to the conditional language in the press release, we conclude that it did not so clearly express the intent of the parties not to be bound to conclusively resolve that issue, as Texaco asserts.

Texaco also contends that explicit language of reservation in drafts of Pennzoil's transaction agreement indicates the parties' expressed intent not to be bound without a signed writing. Texaco asserts that "Pennzoil's lawyers carefully stated that the parties' obligations would become binding only `after the execution and delivery of this Agreement.'"

That assertion is not accurate. In fact, "after the execution and delivery of this Agreement" was merely used as an introductory phrase before each party's obligations were described, e.g., after the execution and delivery of this Agreement, Pennzoil shall terminate the tender offer;... Pennzoil and the Company shall terminate all legal proceedings; ... the Company shall purchase all shares held by the Museum; etc. Other clauses in the transaction agreement did not contain that phrase, e.g., the Company hereby grants to Pennzoil the option to purchase up to 8 million shares of treasury stock; on or prior to the effective date, Pennzoil and the Trustee shall form the merging company; etc.

A reasonable conclusion from reading the entire drafts is that the phrase "after the execution and delivery of this Agreement" was used chiefly to indicate the timing of various acts that were to occur, and not to impose an express precondition to [791] the formation of a contract. Compare Reprosystem, B.V., 727 F.2d at 262 ("when executed and delivered," the agreement would become "a valid and binding agreement"). Again, the language upon which Texaco relies does not so clearly express an intent not to be bound to resolve that issue or to remove the question from the ambit of the trier of fact.

Next, Texaco states that the use of the term "agreement in principle" in the press release was a conscious and deliberate choice of words to convey that there was not yet any binding agreement. Texaco refers to defense testimony that lawyers for Getty Oil and the Museum changed the initial wording of the press release from "agreement" to "agreement in principle" because they understood and intended that phrase to mean that there was no binding contract with Pennzoil.

Texaco cites Mine Safety Appliance Co. v. Energetics Science, Inc., No. 75 Civ. 4925, slip op. at 3, n. 2 (S.D.N.Y., Feb. 5, 1980), an unreported case where the court in dicta characterized an agreement in principle as "a far cry from a final contract." However, the court in that case acknowledged that intent to be bound was a fact issue. A motion to declare an alleged agreement binding and enforceable was denied, because the court found that a question of material fact had been raised on whether the non-movants intended to be bound. In another of Texaco's cited cases, Debreceni v. Outlet Co., 784 F.2d 13, 18 (1st Cir.1986), an offer was subject to the execution of definitive agreements of sale, and the agreement itself provided that it would become a binding obligation only after execution. Applying New York law, the court stated that the parties would not be bound until a written agreement was executed if that was their intention.

Pennzoil and Texaco presented conflicting evidence at trial on the common business usage and understanding of the term "agreement in principle." Texaco's witnesses testified that the term is used to convey an invitation to bid or that there is no binding contract. Pennzoil's witnesses testified that when business people use "agreement in principle," it means that the parties have reached a meeting of the minds with only details left to be resolved. There was testimony by Sidney Petersen, Getty Oil's chief executive officer, that an "agreement in principle" requires the parties to proceed to try to implement the details of the agreement in good faith, and that that was the case with the agreement in principle with Pennzoil.

The jury was the sole judge of the credibility of the witnesses and was entitled to accept or reject any testimony it wished, as well as to decide what weight to give the testimony. Rego Co. v. Brannon, 682 S.W.2d 677, 680 (Tex.App.—Houston [1st Dist] 1984, writ ref'd n.r.e.). There was sufficient evidence at trial on the common business usage of the expression "agreement in principle" and on its meaning in this case for the jury reasonably to decide that its use in the press release did not necessarily establish that the parties did not intend to be bound before signing a formal document.

A second factor that may indicate whether the parties intended to be bound only by a signed, formal writing is whether there was partial performance by one party that the party disclaiming the contract accepted. Winston, 777 F.2d at 80; R.G. Group, 751 F.2d at 76.

Texaco asserts that there was no partial performance that would indicate an intent to be bound, but conversely, that the conduct of the parties here was inconsistent with the existence of a binding contract.

Texaco points out that Pennzoil amended its tender offer statement with the SEC on January 4, stating its intent to withdraw the tender offer "if" a definitive merger agreement was executed. Pennzoil filed a copy of the press release to update its SEC statement. Texaco claims that Pennzoil would have been required to withdraw the tender offer under SEC rule 10b-13, 17 C.F.R. § 240.10b-13 (1985), if a binding contract had existed on that date. These contentions will be discussed later in this opinion. Texaco also argues that Getty Oil and the other Getty entities demonstrated a belief that no contract existed yet by actively [792] soliciting other bids for the purchase of Getty Oil and by representing to Texaco that they were free to deal.

Pennzoil points out that Texaco's alleged interference with Pennzoil's agreement occurred scarcely 48 hours after the agreement came into existence, and there was very little time for any performance under the agreement to have occurred. Pennzoil asserts that there was affirmative partial performance nevertheless, in that representatives of Pennzoil and the Trust worked to coordinate the issuance of a joint press release, as provided by the Memorandum of Agreement upon approval of the plan, and also in that Pennzoil made arrangements to have $1 billion in cash available for the payment of the Museum's shares in escrow.

Other than the preliminary financial arrangements made by Pennzoil, we find little relevant partial performance in this case that might show that the parties believed that they were bound by a contract. However, the absence of relevant part performance in this short period of time does not compel the conclusion that no contract existed. Texaco has pointed out that there was some conduct inconsistent with the existence of an intent to be bound to a contract. But partial performance, and on the other hand, conduct that is inconsistent with an intent to be bound, are again merely circumstances that the finder of fact could consider in reaching a decision on whether the parties intended to be bound. The evidence on the parties' conduct was presented to the jury, which could either accept or reject the inferences the parties asked it to draw from these facts.

The next factor showing intent to be bound is whether there was agreement on all essential terms of the alleged agreement. Texaco contends that numerous items of "obvious importance" were still being negotiated at the time Pennzoil claims a contract had been formed.

First, Texaco asserts that there was no agreement on which party would buy the Museum's stock. Pennzoil contends that its contract was formed on January 3, and that intent to be bound must be determined as of that date. The jury specifically found, in response to Special Issue No. 6, that at the end of the January 3 board meeting, the Getty Oil Company, the Museum, the Trust, and Pennzoil each intended to be bound to an agreement that provided that Getty Oil would purchase the Museum's shares forthwith as provided in the Memorandum of Agreement. There is evidence in the record to support this finding.

The Copley notes of the Getty Oil board meeting (made by Ralph Copley, General Counsel, and Secretary of the Board of Getty Oil) reflect that at the board meeting on January 3, all but one of Getty's directors voted to accept "the Pennzoil proposal," provided that the price being paid per share was $110 plus a minimum $5 stub. The testimony is sharply conflicting on exactly what the "Pennzoil proposal" was that the board approved, as are the inferences that could be drawn from the record of that board meeting.

Texaco's witnesses testified that the Getty board approved only a price proposal by Pennzoil, a basis upon which to negotiate further, and not the other terms originally presented to the board in the Memorandum of Agreement, which Texaco contends was rejected by the board and never considered again after that first vote. Pennzoil's evidence showed that the only "Pennzoil proposal" before the board was the terms contained in the Memorandum of Agreement, which among other things provided that Getty Oil was to buy the Museum's shares. The Memorandum of Agreement was signed by representatives of Pennzoil and of the Museum and the Trust, holders of a majority of Getty's shares, and was subject only to approval of the board of Getty Oil. The terms described in the press release issued by the Getty entities and then by Pennzoil the next day correspond to those contained in the Memorandum of Agreement except for the higher price term.

It was the jury's task to judge the credibility of the witnesses, to resolve conflicts in the factual evidence, and to decide which inferences to draw from the evidence presented. LeMaster v. Fort Worth Transit Co., 138 Tex. 512, 160 S.W.2d 224 [793] (1942). The reviewing court may not substitute its own opinion for that of the jury on these matters. We find that there was sufficient evidence to support the jury's finding that at the end of the Getty Oil board meeting on January 3, the parties had reached agreement on Getty's purchase of the Museum's shares.

There was evidence that the parties were made aware, on January 4, that Getty's purchase of the Museum's shares might trigger a tax penalty applicable to sales of stock between charitable trusts and related entities. It was agreed that this possibility had to be explored, and further discussions developed the alternative of having Pennzoil, rather than Getty Oil, buy the Museum's shares. The Museum's attorney drafted an escrow agreement to effect Pennzoil's purchase of those shares. There was testimony that Pennzoil also began making arrangements to have the necessary cash available in escrow.

There is sufficient evidence to refute Texaco's assertion that the question of who would buy the Museum's shares was a significant open issue that the parties had not agreed upon at the time Pennzoil contends, and the jury found, the parties intended to be bound. Nor does the conflicting evidence of events after January 3 compel the conclusion that the parties considered it a problem that Pennzoil, rather than Getty Oil, would be buying the Museum's shares.

There was evidence that the Museum's main concerns were price protection and that its shares would be purchased at once. The Museum's attorney suggested that any potential tax problem could be avoided by having Pennzoil buy its shares, and she drafted an escrow agreement for effecting this. Pennzoil's witnesses testified that Pennzoil did not object to this change of mechanics from the original agreement. Under the alleged agreement, Pennzoil was to purchase 24 million shares, and Pennzoil's CEO testified that it made no difference to Pennzoil which 24 million shares it bought. Although one of Getty's attorneys had expressed an objection to Pennzoil's buying the Museum shares, he also objected to Getty Oil itself buying those shares, as provided in the Memorandum of Agreement. There was concern, he said, that if Pennzoil and the Trust acquired control of Getty before buying all outstanding shares, the remaining public shares would not be bought at the same price. However, the Memorandum of Agreement and the press release both stated the same price to be paid to all selling shareholders. There was also testimony that the attorneys representing Getty Oil, the Museum, and the Trust agreed on January 5 that it was better to have Pennzoil rather than Getty buy the Museum's shares.

Texaco lists the extent of the Museum's "top up" price protection as another open issue showing the lack of the parties' intent to be bound.

The "top up" provision in the Memorandum of Agreement guaranteed that the Museum would receive a higher price per share than specified if anyone buying at least 10 percent of the stock paid a higher price for those shares. This provision effectuated the Museum's requirement of price protection for the sale of its Getty shares, should Pennzoil or the company pay another shareholder a higher price. Pennzoil's president acknowledged that Pennzoil was bound to the "top up" clause in the Memorandum of Agreement, which was signed by Pennzoil and the Museum, and which Pennzoil alleges became a binding contract upon its approval, with a higher price term, by the Getty board on January 3. Though no "top up" clause appeared in the first draft of the transaction agreement, such provisions were contained in subsequent drafts. The evidence as a whole does not support Texaco's contention that the parties did not reach agreement on price protection for the Museum, or that it remained a significant open issue.

Next, Texaco argues that the parties never resolved a number of questions relating to the payment of Getty's first quarter dividend and to the $5 stub that was to be part of the consideration for the Getty Oil shares. The stub represented the minimum payment shareholders were to receive [794] within 5 years from the excess proceeds from the sale of ERC.

Getty's outside counsel, Winokur, testified that open issues remained on who would control the sale, who would guarantee payment of the stub in the event of liquidation, how "net proceeds" would be defined, and what ERC's dividend policy would be under the new ownership. Pennzoil points out that the Copley notes of the board meeting do not show that the Getty Oil board expressed any concern over the mechanics of the ERC sale before it approved the Pennzoil proposal on January 3. Pennzoil's CEO testified that none of the parties ever brought up these matters at all before the agreement was made, and that Pennzoil was never told that resolution of such questions was essential to the agreement. There was evidence that the Getty entities' main concern was the price that shareholders would receive for their shares, and that questions over the exact mechanics of achieving that price were no obstacle to reaching agreement on the transaction.

Nor does the evidence show that Getty's first quarter dividend was an important unresolved issue. There was evidence that Pennzoil did not object to paying the dividend, and that there were customary ways of handling such questions in a merger situation. Pennzoil considered the amount involved insignificant in relation to the magnitude of the entire transaction. The jury was entitled to resolve the contradicting testimony on the significance of these matters and to decide the implications on the question of the parties' intent.

Texaco also asserts, again based on the testimony of its witness Winokur, that the parties never reached agreement on whether the definitive agreement would ensure that once Pennzoil and the Trust acquired control, they could not avoid the commitment to purchase the remaining outstanding public shares.

Pennzoil's witnesses testified that Pennzoil considered itself bound to the terms of the Memorandum of Agreement after the Getty board approved the transaction on January 3. The Memorandum of Agreement was signed by representatives of Pennzoil, the Trust, and the Museum before it was presented to the Getty board. The terms of the Memorandum of Agreement provided for the purchase of all outstanding shares at the same price.

As stated above, there was conflicting evidence on whether the board approved the transaction contemplated by the Memorandum of Agreement with a higher price term, or whether, as Texaco contends, it approved only a price proposal that was to form the basis for further negotiations. The press release issued the morning after the board meeting listed essentially the same terms as the Memorandum of Agreement, with the exception of price per share, in describing the transaction agreed upon in principle by the parties. All selling shareholders were to receive the same price. There was evidence that the board was concerned chiefly with the price per shares it could achieve for all the shareholders of Getty, and not with the mechanics of the transaction.

There was sufficient evidence for the jury to believe that the board approved more than just a price proposal, i.e., the Memorandum of Agreement terms modified by a higher price term. The jury could reasonably infer that, by those terms, Pennzoil and the Trust had agreed to pay the same price for all outstanding shares. There was very little evidence, other than Winokur's conjecture, that Pennzoil sought any "out" to its obligations under the agreement conflicting with the interests expressed by Getty.

Finally, Texaco contends that Pennzoil never agreed to honor Getty's employee benefit plans and provide adequate termination provisions.

There was testimony that Pennzoil did not anticipate terminating any employees, because Getty Oil was to continue in existence and would require all its employees under the new ownership of Pennzoil and the Trust. Given that scenario, there was no urgency in including provisions for employee termination benefits in the Memorandum of Agreement, press release, or [795] transaction agreement drafts, according to Pennzoil's evidence. Pennzoil's CEO testified that, given that there were no plans to fire anyone, there was no necessity to include termination benefits in the agreement, and that it was a "non-problem." Standard provisions on employee benefits were in fact drafted by one of the Getty attorneys and were sent over to Pennzoil's lawyers for incorporation into the transaction agreement.

There was sufficient evidence for the jury to conclude that the parties had reached agreement on all essential terms of the transaction with only the mechanics and details left to be supplied by the parties' attorneys. Although there may have been many specific items relating to the transaction agreement draft that had yet to be put in final form, there is sufficient evidence to support a conclusion by the jury that the parties did not consider any of Texaco's asserted "open items" significant obstacles precluding an intent to be bound.

The fourth factor that Texaco discusses as showing that the parties did not intend to be bound before executing a formal contract is the magnitude and complexity of the transaction. There is little question that the transaction by which Getty Oil was to be taken private by the Trust and Pennzoil involved an extremely large amount of money. It is unlikely that parties to such a transaction would not have expected a detailed written document, specifically setting out the parties' obligations and the exact mechanics of the transaction, whether it was to be executed before the parties intended to be bound or only to memorialize an agreement already reached.

We agree with Texaco that this factor tends to support its position that the transaction was such that a signed contract would ordinarily be expected before the parties would consider themselves bound. However, we cannot say, as a matter of law, that this factor alone is determinative of the question of the parties' intent.

The trial of this case lasted many weeks, with witnesses for both sides testifying extensively about the events of those first days of January 1984. Eyewitnesses and expert witnesses interpreted and explained various aspects of the negotiations and the alleged agreement, and the jury was repeatedly made aware of the value of Getty Oil's assets and how much money would be involved in the company's sale. There was testimony on how the sale of the company could be structured and on the considerations involved in buying and restructuring, or later liquidating, the company. But there was also testimony that there were companies that in the past had bound themselves to short two-page acquisition agreements involving a lot of money, and Getty's involvement banker testified that the Texaco transaction included "one page back-of-the-envelope kinds of agreements" that were formalized. The Memorandum of Agreement containing the essential terms of the Pennzoil/Getty agreement was only four pages long.

Although the magnitude of the transaction here was such that normally a signed writing would be expected, there was sufficient evidence to support an inference by the jury that that expectation was satisfied here initially by the Memorandum of Agreement, signed by a majority of shareholders of Getty Oil and approved by the board with a higher price, and by the transaction agreement in progress that had been intended to memorialize the agreement previously reached.

The record as a whole demonstrates that there was legally and factually sufficient evidence to support the jury's finding in Special Issue No. 1 that the Trust, the Museum, and the Company intended to bind themselves to an agreement with Pennzoil at the end of the Getty Oil board meeting on January 3, 1984. Point of Error 46 is overruled.

Texaco next claims that even if the parties intended to bind themselves before a definitive document was signed, no binding contract could result because the terms that they intended to include in their agreement were too vague and incomplete to be enforceable as a matter of law. Texaco attacks the terms, found by the jury, of the alleged agreement as being so uncertain as [796] to render the alleged contract fatally indefinite.

Where a question of the parties' intent is determinable by written agreement, the question is one of law for the court. Marinas of the Future, Inc. v. City of New York, 87 A.D.2d 270, 450 N.Y.S.2d 839, 844 (App.Div.1982). As discussed above, however, the parties' intent here is not conclusively discernible from their writings alone; therefore, extrinsic evidence of relevant events is properly considered on the question of that intent. St. Regis Paper Co. v. Hubbs & Hastings Paper Co., 235 N.Y. 30, 138 N.E. 495 (1923). Further, the case at bar is distinguishable from those cited by Texaco that involved writings stating specifically that certain essential terms were "to be agreed upon" in the future. See, e.g., Joseph Martin, Jr., Delicatessen, Inc. v. Schumacher, 52 N.Y.2d 105, 436 N.Y. S.2d 247, 417 N.E.2d 541 (1981); Willmott v. Giarraputo, 5 N.Y.2d 250, 184 N.Y.S.2d 97, 157 N.E.2d 282 (1959).

For a contract to be enforceable, the terms of the agreement must be ascertainable to a reasonable degree of certainty. Candid Productions, Inc. v. International Skating Union, 530 F.Supp. 1330, 1333 (S.D.N.Y.1982). The question of whether the agreement is sufficiently definite to be enforceable is a difficult one. The facts of the individual case are decisively important. Mason v. Rose, 85 F.Supp. 300, 311 (S.D.N. Y.1948), aff'd, 176 F.2d 486 (2d Cir.1949). "The agreement need not be so definite that all the possibilities that might occur to a party in bad faith are explicitly provided for, but it must be sufficiently complete so that parties in good faith can find in the agreement words that will fairly define their respective duties and liabilities." Id. On review, the agreement must be sufficiently definite for the court to be able to recognize a breach and to fashion a remedy for that breach. Candid Productions, Inc., 530 F.Supp. at 1333-34.

Texaco does not assert that a specific essential term was completely omitted from the agreement, but rather alleges very briefly why the terms of the agreement found by the jury are fatally incomplete. Texaco cites to the lack of description of the mechanics of various aspects of the transaction, e.g., how and when the determined price would be paid to shareholders, how the agreed stock ownership ratio was to be achieved, how a potential tax penalty on Getty's purchasing the Museum shares would be resolved, and what limitations, if any, existed on the option granted to Pennzoil to buy 8 million shares of Getty Oil stock.

Texaco's attempts to create additional "essential" terms from the mechanics of implementing the agreement's existing provisions are unpersuasive. The terms of the agreement found by the jury are supported by the evidence, and the promises of the parties are clear enough for a court to recognize a breach and to determine the damages resulting from that breach. Point of Error 47 is overruled.

SPECIAL ISSUE NO. 2

Texaco's next points of error concern the jury's finding in Special Issue No. 2 that Texaco knowingly interfered with the agreement, if so found, between Pennzoil and the Getty entities. Texaco contends that the evidence is legally and factually insufficient to show that Texaco had actual knowledge of any agreement, that it actively induced breach of the alleged contract, and that the alleged contract was valid and capable of being interfered with.

First, Texaco asserts that Pennzoil failed to prove that Texaco had actual knowledge that a contract existed.

New York law requires knowledge by a defendant of the existence of contractual rights as an element of the tort of inducing a breach of that contract. Hornstein v. Podwitz, 254 N.Y. 443, 173 N.E. 674 (1930). However, the defendant need not have full knowledge of all the detailed terms of the contract. Guard-Life Corp. v. S. Parker Hardware Manufacturing Corp., 50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445 (1980); Gold Medal Farms, Inc. v. Rutland County Co-operative Creamery, Inc., 10 A.D.2d 584, 9 A.D.2d 473, 195 N.Y.S.2d 179, 185 (App.Div.1959).

[797] There is even some indication that a defendant need not have an accurate understanding of the exact legal significance of the facts giving rise to a contractual duty, but rather may be liable if he knows those facts, but is mistaken about whether they constitute a contract. Restatement (Second) of Torts § 766, comment i (1977); see Entertainment Events, Inc. v. Metro-Goldwyn-Mayer Inc., No. 74 Civ. 2959, slip op. at 15 (S.D.N.Y., May 31, 1978).

For example, the commentary to the Restatement (Second) of Torts describes the knowledge requirement as follows:

Actor's knowledge of other's contract. To be subject to liability ... the actor must have knowledge of the contract with which he is interfering.... [I]t is not necessary that the actor appreciate the legal significance of the facts giving rise to the contractual duty ... If he knows those facts, he is subject to liability even though he is mistaken as to their legal significance and believes that the agreement is not legally binding....

Sec. 766, comment i. New York's highest court has followed the principles and precepts embodied in the Restatement in this developing area of tort law. See, e.g., Guard-Life Corp., 50 N.Y.2d 183, 428 N.Y. S.2d 628, 406 N.E.2d 445.

The element of knowledge by the defendant is a question of fact, and proof may be predicated on circumstantial evidence. See American Cyanamid Co. v. Elizabeth Arden Sales Corp., 331 F.Supp. 597 (S.D.N.Y.1971). Since there was no direct evidence of Texaco's knowledge of a contract in this case, the question is whether there was legally and factually sufficient circumstantial evidence from which the trier of fact reasonably could have inferred knowledge.

Texaco argues that the writings known to Texaco and the verbal assurances it was given are matters of undisputed fact that do not add up to actual knowledge of a binding contract. It states that the only written evidence known to Texaco was the Memorandum of Agreement, the January 4 press release, and the January 2 "Dear Hugh" letter from Gordon Getty to Hugh Liedtke, Pennzoil's CEO. Texaco contends that these writings confirm the absence of a binding agreement.

First, it argues that the only reasonable conclusion that Texaco could draw from inconsistencies in the Memorandum of Agreement and the subsequent press release was that there was no binding agreement. Texaco points out that the Memorandum of Agreement provides for Pennzoil to amend its tender offer, but the press release states that Pennzoil was to withdraw the tender offer. The Memorandum of Agreement contains a price of $110 per share, whereas the press release states a price of $110 plus a $5 stub. Finally, Texaco argues that the failure of the press release to report who would buy the Museum shares was inconsistent with the Memorandum of Agreement's provision for Getty Oil's purchase of those shares.

Pennzoil responds that a comparison of the Memorandum of Agreement with the press release compels the conclusion that the Memorandum of Agreement was approved by the Getty Oil board with a price increment. We disagree that either of the parties' interpretations is the only possible interpretation of these two writings. Where different inferences may reasonably be drawn from the evidence, the question is one for the jury. LeMaster v. Fort Worth Transit Co., 138 Tex. 512, 160 S.W.2d 224.

Based on the other evidence at trial, different inferences could have been drawn from the fact that the press release did not state exactly the same information contained in the Memorandum of Agreement. One of Getty's lawyers testified that the Memorandum was phrased in such a way as to be "the last word," binding on Getty Oil. Before it was ever presented to the board, the Memorandum of Agreement had been signed by Pennzoil and representatives of the Trust and the Museum, who together owned a majority of the stock of Getty. The Memorandum of Agreement, which was written to become binding upon Getty Oil board approval, was presented to the board, and on the morning after the board meeting, the Getty press release announced that the Getty entities had reached [798] an agreement in principle with Pennzoil on essentially the same terms as the Memorandum of Agreement, but listed a higher price to be paid per share. The press release appeared on the Dow Jones "broad tape" under the headline "Getty Oil Announces Merger."

Though defense witnesses testified that Texaco was told that the board had completely rejected the Memorandum of Agreement, the jury did not have to believe this testimony and could reasonably have decided that when Texaco compared the two writings, it saw that the Memorandum of Agreement had been approved by the board after a renegotiation of the price and a change in the structure of effectuating the purchase of Getty (amending versus withdrawing the tender offer). Nor is the press release's silence on who would buy the Museum's shares a fatal inconsistency. Silence generally implies consistency rather than contradiction.

Texaco also asserts that the fact that the Memorandum of Agreement was expressly subject to board approval, along with the fact that the document's signature line for Getty Oil was blank, were unmistakable signals to Texaco that the Memorandum of Agreement was not a final contract. We agree such an inference could arise.

However, we find that a contrary inference is also reasonable, given the other evidence in this case. The discussion above, pertaining to a comparison of the Memorandum of Agreement with the Getty press release, is also applicable to Texaco's contentions here. There was testimony that the Memorandum of Agreement was written in such a way as to become binding upon board approval. Getty's press release announcing the transaction between Pennzoil and the Getty entities, and outlining basically the Memorandum of Agreement terms, was issued the next morning after the board meeting. Since the price announced in the press release was higher, it was not surprising that Getty Oil, after presumably negotiating that higher price, did not sign the original Memorandum of Agreement, which would have given shareholders a lower price per share. But the jury could reasonably infer from the Getty announcement of the terms of the agreement in principle reached with Pennzoil, that the terms of the Memorandum of Agreement had been approved by the board with a higher price. It was for the jury to decide what weight to give to the evidence, and where conflicting inferences were possible from the evidence, it was the jury's task to choose between them. LeMaster, 138 Tex. 512, 160 S.W.2d 224.

Texaco's next contention is that the unambiguous wording of the press release, i.e., the "subject to" and agreement "in principle" language, demonstrated that there was no contract. We disagree that the press release is unambiguous, and our discussion above of the press release's use of the terms: agreement "in principle," and "subject to" a definitive agreement, applies equally here. That language did not in itself preclude the existence of a contract, nor a jury finding of Texaco's knowledge of one.

Next, Texaco acknowledges that it was given the "Dear Hugh" letter from Gordon Getty to Pennzoil's CEO along with other writings relevant to the dealings with Pennzoil. But Texaco claims that the Trust's advisors indicated that the letter did not restrict the Trust's freedom to go forward with Texaco. The "Dear Hugh" letter was dated January 2, 1984, and was signed by Gordon Getty as trustee. It stated:

Dear Hugh:

This is to confirm the understanding between us relating to the Plan dated January 2, 1984 that is being presented to the Board of Getty Oil Company today.

Subject only to my fiduciary obligations, I agree that I will support the Plan before the Board and will oppose any alternative proposals or other arrangements submitted to the Board that do not provide for your participation in Getty Oil Company on the same basis as outlined in the Plan.

Subject only to my fiduciary obligations, if the Board does not approve the Plan [799] today, I will execute a Consent to remove that board and to replace the directors with directors who will support the best interests of the shareholders, as reflected in the Plan.

Subject only to my fiduciary obligations, I will also use my best efforts to urge the J. Paul Getty Museum to execute a Consent to the same effect....

Texaco contends that because the letter contained the reservation that its promises were "subject only to [Gordon Getty's] fiduciary duties," it did not give Texaco notice of any binding contractual relations. There was testimony that the advisors of Gordon Getty and the Trust told Texaco that the Trust was free to deal and that the letter was not an obstacle, because it contained the restrictive "subject only to my fiduciary obligations."

At the very least, the letter reaffirms other evidence that indicated how important the decisions made at the January 2-3 Getty board meeting were to the question of whether there was a contract with Pennzoil, and implies what the likely outcome of the board vote was. The letter was signed by a shareholder who, as trustee, controlled over 40 percent of the company's voting stock. It confirmed an understanding between Pennzoil and the trustee that the latter would not only support the Memorandum of Agreement before the board of Getty Oil and oppose any other proposals that would not include Pennzoil, but that he would also execute a Consent to remove the board and replace the directors if the Pennzoil plan was not approved. Under Delaware law, the holders of a majority of a company's stock could agree in writing to take action binding on the board without formal board approval.

Given the Trust's large ownership percentage in Getty, the jury could reasonably decide that Texaco knew that the "Dear Hugh" letter's promises were not insignificant on whether the Pennzoil proposal had been approved. In late autumn of 1983, the well-publicized dissension between Gordon Getty and members of the Getty Oil board resulted in the Trust and Museum executing a previous Consent, which amended Getty Oil's bylaws to require that all significant board action, including agreements to merge or to sell Getty's assets, had to have the approval of 14 of 16 directors. There was testimony that the company had been a candidate for a takeover struggle even before the Consent, but that that further confirmed and publicized it. Since Gordon Getty had so recently executed a Consent to resolve his difficulties with the Getty board, and specifically his conflicts with Getty CEO Sidney Petersen, a reader of the "Dear Hugh" letter would know that the promise of a Consent was not an idle threat, but rather made Gordon Getty's undertaking to obtain board approval for the Pennzoil plan much more certain.

Texaco acknowledges that the writings it saw relating to a possible agreement with Pennzoil were the Memorandum of Agreement, the press release, and the "Dear Hugh" letter. Based on these documents, it is clear that Getty board approval was a critical element in determining whether the Getty entities had a binding agreement with Pennzoil. Texaco's evidence of its lack of knowledge about what decisions were made at the January 2-3 board meeting must be contrasted with the circumstantial evidence that could have persuaded the jury that Texaco was aware that the Pennzoil proposal had been approved.

Texaco contends that it received repeated verbal assurances, both by principals and representatives of the Getty entities, that there was no binding contract with Pennzoil and that the Getty entities were free to deal with Texaco.

On January 3, one of Getty Oil's investment advisors, Geoffrey Boisi, called Texaco to say that the Getty board would meet that day and to get an expression of interest in Getty's sale. Boisi stated that Getty was seeking bids from potential purchasers other than Pennzoil. Texaco expressed its interest in receiving more information, and Boisi agreed to keep Texaco informed.

Texaco called Boisi back early on the next morning, when the Getty press release was issued and appeared on the Dow [800] Jones broad tape under the headline "Getty Oil Announces Merger." Boisi had not yet arrived for work when Texaco called, so he returned the call later that morning "as a courtesy" to explain the appearance of the announcement concerning Pennzoil. There was testimony that Texaco expressed heightened interest in Getty's sale. Boisi testified that he told Texaco that the agreement in principle with Pennzoil was subject to execution of a definitive agreement, that no definitive agreement had been signed yet, that there was just a handshake on price with other issues still open, and that there was no binding deal with Pennzoil.

Texaco's chairman, John McKinley, testified that Texaco talked to two investment banking firms that day, First Boston and Morgan Stanley, who wanted to represent Texaco in making a bid for Getty, and that they all knew that the situation was open for bids. Getty's investment bankers called Texaco back on the afternoon of January 4 and told McKinley again that Getty wanted to receive bids and would be pleased to receive a proposal from Texaco.

There was testimony that on January 4 and 5, Getty's CEO, another Getty director, and the Museum's lawyer, all stated to Texaco that there was no deal yet with Pennzoil, that no definitive contract had been signed, that Getty was not bound yet, that open issues remained in the negotiations with Pennzoil, and that Getty and the Museum were free to hear an offer. There was testimony that when Texaco made its offer on the evening of January 5, Gordon Getty and his advisors stated that the Trust also had no binding agreement with Pennzoil. There was also testimony that Texaco was assured again during final negotiations on its definitive agreement, which contained indemnities against any liability to Pennzoil, that the Getty board had rejected the Memorandum of Agreement and that there was no binding contract with Pennzoil.

Texaco asserts that this evidence shows that it made repeated efforts, in the absence of any duty to do so, to determine whether an offer would interfere with any pre-existing contract. Texaco witnesses testified that Texaco was repeatedly told that there was no binding contract with Pennzoil, and it accepted those assurances.

Pennzoil responds that there was legally and factually sufficient evidence to support the jury's finding of knowledge, because the jury could reasonably infer that Texaco knew about the Pennzoil deal from the evidence of (1) how Texaco carefully mapped its strategy to defeat Pennzoil's deal by acting to "stop the train" or "stop the signing"; (2) the notice of a contract given by a January 5 Wall Street Journal article reporting on the Pennzoil agreement—an article that Texaco denied anyone at Texaco had seen; (3) the knowledge of an agreement that would arise from comparing the Memorandum of Agreement with the Getty press release; (4) the demands made by the Museum and the Trust for full indemnity from Texaco against any claims by Pennzoil arising out of the Memorandum of Agreement; and (5) the Museum's demand that, even if the Texaco deal fell through, the Museum would be guaranteed the price Pennzoil had agreed to pay for the Museum's shares. Pennzoil contends that these circumstances indicated Texaco's knowledge of Pennzoil's deal too strongly to be overcome by Texaco's "self-serving verbal protestations at trial" that Texaco was told and believed that there was no agreement.

First, Pennzoil argues that an inference of Texaco's knowledge of its agreement arises from Texaco's carefully mapped strategy to dismantle each component of the Pennzoil deal. Pennzoil speculates that if Texaco had believed that there was no binding contract, it would have simply announced a public tender offer for 100 percent of Getty's shares. But a tender offer would not bring in all of Getty's stock if Pennzoil already had a binding agreement (the signed Memorandum of Agreement, approved by the Getty board with a higher price term) with the Trust and the Museum, who together held a majority of Getty shares. This would mean that Texaco could acquire only the remaining public shares through a tender offer and would be left with a minority interest in Getty Oil. So instead, Pennzoil argues, Texaco developed [801] a strategy to approach first the Museum, then the Trust, and finally the Getty board, with a higher price than Pennzoil had agreed to pay to persuade them to avoid that deal.

There was evidence that the public announcement of Getty's agreement in principle with Pennzoil had attracted Texaco's attention and prompted it to move quickly. Top executives of Texaco cut short their vacations and returned to New York because of Texaco's interest in Getty, and Texaco assembled its in-house financial planning group on January 4. A series of meetings were held throughout the day to study the Getty situation and Pennzoil's part in it. There were indications that the structure of the Pennzoil plan was examined in detail, and Texaco notes showed calculations on such matters as the price per barrel of Getty oil that Pennzoil would be paying and on Pennzoil's financing of this purchase. Getty's press release was reviewed, and extensive notes were made on "who pays and who gets what" under the Pennzoil plan.

Other Texaco notes admitted into evidence implied that Texaco believed it had "24 hours" to "stop the train" and "take care of Liedtke [Pennzoil's CEO]." Texaco's chairman testified that "the train" probably meant Pennzoil, and that "stop" meant that prompt action was necessary. Texaco recognized that under the Pennzoil plan, if an agreement on restructuring couldn't be reached within one year, Getty's "assets [were] to be divided!" (emphasis in original Texaco note).

There was evidence that Texaco had strong motivation to acquire Getty's extensive oil reserves. Texaco's own proven reserves had been declining steadily, and its recent exploration and development costs had been the highest in the industry. Texaco witnesses explained that the high finding costs were attributable mainly to a recent increase in exploration investment and that over a longer period, its average finding costs were much lower. But there was also evidence that it would be much less expensive for Texaco to buy Getty's large proven reserves than to find such reserves on its own. The purchase of Getty Oil would and did double Texaco's worldwide oil reserves. Texaco knew that under the Pennzoil plan, Getty's valuable reserves were to be divided between the Trust and Pennzoil if that partnership did not work out within one year.

On January 4, Texaco decided that it wanted to pursue its interest in Getty, but also decided that it needed outside advice on strategy and tactics. It retained First Boston, an aggressive investment banking firm that already had contacts with the Museum's counsel, Martin Lipton. On the evening of January 4, a number of strategy meetings were held to discuss how Texaco could best acquire Getty Oil.

There was evidence that Texaco considered Lipton to be a "key person" in its strategy, and that the Museum had to be approached first. Lipton had previously represented Texaco and knew McKinley and Texaco's lawyers and investment bankers. Once Texaco secured the Museum shares, it planned to "talk to Gordon."

Texaco notes indicate that it knew that there would be a "problem to get Gordon on base first." Texaco knew that under the Trust instrument, the trustee was authorized to sell its Getty Oil shares only to avoid a loss. Texaco also knew that Gordon Getty did not want the Trust's shares to be in a minority position at Getty Oil, and Texaco's notes read: "create concern that he [Gordon Getty] will take a loss"; "if there's a tender offer and Gordon doesn't tender, then he could wind up with [worthless] paper"; and finally, "pressure."

Texaco's last step was to get the Getty board's support. Texaco knew that many Getty board members were hostile to Gordon Getty, and Texaco had a report that Getty did not like Pennzoil's price. But Texaco also knew that the board could not take major corporate action, since the Consent, without the agreement of 14 of 16 directors, and some directors owed loyalty to Gordon Getty. It was therefore important to secure the agreement with the Trust and the Museum before Texaco's proposal went to the Getty board.

[802] We find that an inference could arise that Texaco had some knowledge of Pennzoil's agreement with the Getty entities, given the evidence of Texaco's detailed studies of the Pennzoil plan, its knowledge that some members of the Getty board were not happy with Pennzoil's price, and its subsequent formulation of strategy to "stop the [Pennzoil] train" and "take care of Liedtke."

Pennzoil contends that the jury could also draw an inference of Texaco's knowledge of its agreement from the evidence relating to a Wall Street Journal article dated January 5. That article reported on the terms of the Pennzoil/Getty merger and referred to an "agreement" 17 times.

In answer to an interrogatory, Texaco swore that no one working on matters related to Getty Oil or Pennzoil had seen the Wall Street journal article. Pennzoil argues that the jury could have disbelieved this representation that no one at Texaco had read the article, published in a major daily business newspaper, about the company that Texaco wanted to acquire.

This is an acceptable inference, given the evidence. Texaco's president, Alfred DeCrane, testified that he read the Wall Street Journal regularly, but he did not recall whether he read the article about the Getty/Pennzoil agreement on January 5. Getty's investment advisor, Boisi, testified that Texaco's chairman, McKinley, "may have" mentioned the article to him in their conversations. McKinley testified that several people at Texaco took the Wall Street Journal at the office, but that his own copy was delivered to his home. He testified that he did not see the article, and claimed that it was not mentioned at the Texaco board meeting that day, although the status of Pennzoil's negotiations with Getty was discussed by the board. Based on this testimony, the jury could reasonably have believed that the testimony of some of these witnesses was less than truthful, and that someone at Texaco connected with these events had seen the article, and that Texaco thus had further knowledge of the Pennzoil agreement.

Finally, Pennzoil points out that certain demands made by the Museum and the Trust also gave Texaco knowledge of their contractual obligations to Pennzoil.

The Museum demanded, as a condition of any sale of its shares to Texaco, full indemnity against any liability to Pennzoil arising from the Memorandum of Agreement. It also refused to give any written representation or warranty that selling its shares to Texaco would not result in a breach of the Memorandum of Agreement. Finally, the Museum insisted that, even if the Texaco purchase of Getty was not consummated, Texaco had to guarantee that the Museum would be paid a minimum price of $112.50 (the present value of Pennzoil's price of $110 plus a $5 stub to be paid within five years) for its shares. Texaco's witnesses testified that these demands were accompanied by assurances that the Museum had no binding contract with Pennzoil, but other evidence showed that the Museum refused to sell its shares unless these conditions were met.

Texaco's president, DeCrane, testified that when he saw the draft of Texaco's definitive agreement, he asked specifically about the indemnity and whether relevant documents had been reviewed. He said that his counsel told him that Texaco's only exposure would be litigation fees. When he asked about the warranty clause, he was told that the Museum's refusal to give a full warranty was consistent with what Texaco had been told about the Museum's position.

Texaco's chairman testified that it was a matter of concern to him that the Museum would not warrant its sale of stock against Pennzoil claims, but that Texaco accepted it that way. McKinley testified that it alerted him to check with his legal advisors, who reassured him. There is no evidence that Texaco received any statement in writing from any of the parties that they were free to deal with Texaco.

The jury could reasonably infer that Texaco was given knowledge of the Pennzoil agreement from this evidence. Though an indemnity does not necessarily imply liability, [803] Texaco was confronted here with the parties' specific demands for protection against claims by Pennzoil, with the refusal to warrant that the sale to Texaco would not breach the Memorandum of Agreement, and with the requirement that the Museum be guaranteed the Pennzoil price if Texaco's purchase was not consummated. The evidence showed that the Museum and the Trust considered these conditions essential, and that Texaco knew that they would not sell their shares without such protection.

Finally, Texaco cites American Cyanamid Co. v. Elizabeth Arden Sales Corp., 331 F.Supp. 597, as controlling authority to show that Pennzoil did not prove the required element of knowledge of a contract here. Though many of the facts of that case appear to be similar to the instant one, we find the case at bar to be distinguishable. Pennzoil correctly points out that the question of the defendant's knowledge is one of fact, and the holding in American Cyanamid was based on certain findings of fact. One defendant there was held to be not liable because the only information it was found to have possessed showed on its face that there was no binding contract. The plaintiff had contended that certain background negotiations between the parties made an incomplete writing a binding contract, but that defendant was found to have no knowledge of those circumstances.

Here, Texaco presented evidence that it was told repeatedly that Pennzoil had no binding agreement with the Getty interests. But there was other circumstantial evidence, as discussed above, from which the jury could conclude that Texaco did indeed have knowledge of the parties' obligations to Pennzoil.

The jury was not required to accept Texaco's version of events in this case, and this Court may not substitute its own interpretation of the evidence for the decision of the trier of fact. There was legally and factually sufficient evidence to support an inference by the jury that Texaco had the required knowledge of an agreement. Point of Error 49 is overruled.

The second major issue Texaco raises under Special Issue No. 2 is that the evidence was legally and factually insufficient to show that Texaco actively induced breach of the alleged Pennzoil/Getty contract.

A necessary element of the plaintiff's cause of action is a showing that the defendant took an active part in persuading a party to a contract to breach it. State Enterprises, Inc. v. Southridge Cooperative Section 1, Inc., 18 A.D.2d 226, 238 N.Y.S.2d 724 (App.Div.1963). Merely entering into a contract with a party with the knowledge of that party's contractual obligations to someone else is not the same as inducing a breach. P.P.X. Enterprises, Inc. v. Catala, 17 A.D.2d 808, 232 N.Y.S.2d 959 (App.Div.1962). It is necessary that there be some act of interference or of persuading a party to breach, for example by offering better terms or other incentives, for tort liability to arise. State Enterprises, Inc., 238 N.Y.S.2d at 726; Cosmopolitan Film Distributors, Inc. v. Feuchtwanger Corp., 226 N.Y.S.2d 584, 591 (Sup.Ct.1962). The issue of whether a defendant affirmatively took steps to induce the breach of an existing contract is a question of fact for the jury. See State Enterprises, Inc., 238 N.Y.S.2d at 726.

Texaco contends that it did not actively procure the alleged breach and that the required inducement did not occur. Texaco argues that it merely responded to a campaign of active solicitation by Getty Oil and the Museum, who were dissatisfied by the terms of Pennzoil's offer.

There was testimony that on January 2, Getty's investment advisor, Boisi, was instructed to seek a higher price for Getty's shares than Pennzoil had offered. Early on the morning of January 3, Boisi contacted Texaco's president, DeCrane, among others, to tell him that the Getty Oil board was meeting that day and to get a specific expression of interest in Getty's sale. DeCrane told Boisi that Texaco was interested in more information and to keep him informed.

That afternoon, Boisi told the Getty board of directors that he had been calling [804] other potential bidders and that some of those contacts had expressed interest in Getty's sale. After the board recessed, Boisi talked with some of the board members in more detail about his conversations and told them he thought that Getty could get more than Pennzoil's $110 per share.

Later in the evening on January 3, despite Boisi's report of other interest in Getty, the board of Getty Oil voted 15 to 1 to accept "the Pennzoil proposal," provided that the price per share be increased to $110 plus a minimum $5 stub. Pennzoil accepted the higher price, and the board was told that Pennzoil had accepted its counter-proposal. Yet, one of Getty's directors testified, for the defendant, that the board's consensus at that time was to encourage the overall bidding process. Petersen, the chairman of Getty, told Boisi to continue to search for a better price.

On January 4 Texaco called Boisi early in the morning. Getty Oil issued its press release that morning, and it appeared on the Dow Jones broad tape under the headline "Getty Oil Announces Merger." Boisi was not in his office yet, but returned the call later that morning to explain the press release. Boisi testified that he told DeCrane that the Getty board had voted on a price with Pennzoil; that no definitive merger contract had been signed yet, so there was no binding agreement; and that open issues remained for negotiation. Boisi testified that Texaco expressed a heightened degree of interest in Getty, and Texaco's witnesses testified that Texaco's interest in Getty increased as Texaco got more information.

As discussed above, Texaco assembled its in-house financial planning group, which worked all day on January 4 to study Getty and the Pennzoil situation and then reported to management. The evidence of Texaco's strong motivation to acquire Getty's reserves, given Texaco's own declining reserves and high finding costs, is also relevant here. There was testimony that in the afternoon of January 4, Texaco decided to pursue its interest in Getty, and it hired First Boston investment bankers to advise it on the most effective strategy to purchase Getty. Meetings with Texaco executives and First Boston advisors continued through the evening.

There was testimony for Texaco that on January 4, other representatives of the Getty entities told Texaco that Getty Oil wanted to receive bids and would be pleased to hear a proposal from Texaco. These representatives included one of Getty's directors, another Getty advisor from its investment bankers Goldman Sachs, and Getty's chairman. There was testimony that Texaco and its advisors were told that there were other potential competitors for Getty and that Texaco should put its "best shot" forward.

The evidence discussed above on Texaco's calculated formulation and implementation of its ideal strategy to acquire Getty is also inconsistent with its contention that it was merely the passive target of Getty's aggressive solicitation campaign and did nothing more than to accept terms that Getty Oil and the Museum had proposed. The evidence showed that Texaco knew it had to act quickly, and that it had "24 hours" to "stop the train." Texaco's strategy was to approach the Museum first, through its "key person" Lipton, to obtain the Museum's shares, and then to "talk to Gordon." It knew that the Trust instrument permitted Gordon Getty to sell the Trust shares only to avoid a loss, and it knew of the trustee's fear of being left in a powerless minority ownership position at Getty Oil. Texaco notes indicated a deliberate strategy to "create concern that he will take a loss"; "if there's a tender offer and Gordon doesn't tender, then he could wind up with paper"; and "pressure." This evidence contradicts the contention that Texaco passively accepted a deal proposed by the other parties.

Texaco then implemented its plan by contacting the Museum's lawyer, Lipton, arranging for a meeting on the evening of January 5 to discuss an offer by Texaco for Getty Oil. Lipton ordered his associate, on her way to join the meeting of attorneys drafting Pennzoil's transaction agreement, to not attend that meeting, because he needed her assistance in the meeting with [805] Texaco. At the Texaco meeting, Lipton reviewed an outline of points that the Museum wanted covered in any sale of its Getty shares to Texaco; for example, it wanted price protection and an indemnity against any claim brought by Pennzoil. Texaco agreed to the Museum's demands, and the Museum agreed to sell. Lipton testified that though he asked repeatedly about price, the Texaco officers at that time would say only that Texaco's chairman, McKinley, wanted to do the talking about price.

Texaco then contacted the Trust to arrange for a meeting between Texaco's chairman, McKinley, and Gordon Getty, the trustee. There was evidence that the initial meeting did not go well, and Lipton was asked to go over to Gordon Getty's hotel suite to speak with the trustee. Lipton testified that he went over because all the parties wanted to act together, and it was his understanding from Texaco that it wanted the Museum, the Trust, and the company to each "desire" a proposal from Texaco and express that desire. After talking to Gordon Getty, Lipton joined the Texaco people in the lobby and told them that the trustee did want to receive a proposal. When McKinley went back to Gordon Getty's suite, the trustee accepted Texaco's offer before McKinley could even name the price. Texaco initially offered the Getty entities $125 per share, compared to Pennzoil's price of $110 plus a $5 stub (present value $112.50), and eventually paid $128 per share.

Texaco argues that its testimony shows that Getty Oil and the Museum were the real moving forces that eventually led to the Texaco contract. However, we find that there is legally and factually sufficient evidence in the record to support the jury's finding that Texaco actively induced the breach of the Getty entities' agreement with Pennzoil.

Texaco also contends that Getty's shopping for bids constituted a breach of an implied "no-shop" provision of Pennzoil's alleged contract before Texaco ever entered the picture. We reject this contention. It was no defense that Getty was not happy with the Pennzoil price, or might have been dissatisfied with the agreement. See Gold Medal Farms, Inc., 195 N.Y.S.2d at 185. We overrule Points of Error 48 and 50, contending that there was no evidence or factually insufficient evidence to support the jury's finding that Texaco knowingly induced the breach of Pennzoil's agreement.

VALIDITY OF THE CONTRACT

Texaco's last contention regarding the sufficiency of the evidence is that Pennzoil failed to prove that the alleged contract was valid and enforceable, so there could be no interference. Texaco argues that the alleged contract would have violated SEC Rule 10b-13; that it would have violated state law governing fiduciary duties of directors, controlling stockholders, and trustees; that it would have been unenforceable because of mutual mistake; and that it would have violated the statute of frauds.

Pennzoil responds that because it made a prima facie showing that it had a binding contract, it was Texaco's burden to affirmatively plead and prove any defense that challenged the validity of that contract. Tex.R.Civ.P. 94, 279; see, e.g., Mabry v. Priester, 161 Tex. 173, 338 S.W.2d 704 (1960) (illegality); Durham v. Uvalde Rock Asphalt Co., 599 S.W.2d 866, 869 (Tex.Civ. App.—San Antonio 1980, no writ) (mutual mistake); Mann v. Fender, 587 S.W.2d 188 (Tex.Civ.App.—Waco 1979, writ ref'd n.r. e.); (statute of frauds). Pennzoil argues that Texaco waived its defenses based on invalidity because it failed to plead some of them and failed to obtain jury findings to support the defenses it did plead.

Rule 94, Texas Rules of Civil Procedure, requires the defendant to plead and prove affirmative defenses such as fraud, estoppel, illegality, statute of frauds, and any other matter constituting an avoidance or affirmative defense. Unless the affirmative defense is established as a matter of law, the burden is also on the defendant to obtain jury findings to establish the necessary elements of its affirmative defense. See, e.g., Oilwell Division, United States [806] Steel Corp. v. Fryer, 493 S.W.2d 487, 490 (Tex.1973).

We find that Texaco has waived its claim of mutual mistake, Durham, 599 S.W.2d at 869, and insufficiency under the statute of frauds, Tex.R.Civ.P. 94, because these affirmative defenses were not properly alleged in Texaco's amended trial pleadings. In its appellate brief, Texaco alleges generally that a mutual mistake about the possible tax treatment of the Museum's shares would have made the agreement unenforceable. Texaco's amended pleading alleges only a mistake by Pennzoil and Gordon Getty, and not one mutually shared by all the parties. There was also no request for a jury issue on the question of mistake, nor was the statute of frauds asserted in Texaco's operative pleadings. These contentions are waived, and Points of Error 55 and 56 are overruled.

Illegality as an affirmative defense is not limited to contracts prohibited by law, but also includes contracts rendered unenforceable because of some failure to comply with the law. Mabry, 161 Tex. at 176., 338 S.W.2d at 706.

Texaco contends that the alleged contract would have been void as violating SEC Rule 10b-13, which provides that once a party has publicly announced a tender offer, the offeror may not buy stock of the target company, except through the tender offer, for as long as the tender offer remains open. 17 C.F.R. § 240.10b-13 (1985). Texaco alleges that any contract made in violation of the rule is void.

Texaco points out that even under Pennzoil's version of the facts, Pennzoil allegedly contracted to buy the Museum's shares immediately and the public shares later at $110 plus a $5 stub per share—a higher price than the $100 tender offer price—at a time when the tender offer was still open. Texaco claims that this constituted a per se violation of the rule, whether or not any shareholder received a special benefit from the purchase occurring outside the tender offer. But Texaco also argues that the Museum did receive a substantial benefit that the public shareholders did not, in that it was to have received payment for its shares "immediately," which could possibly have been months before the public shareholders would be paid. Texaco contends that this timing difference could have amounted to millions of dollars in interest, and it was exactly this kind of treatment favoring large shareholders that the SEC rule was designed to prevent.

Rule 10b-13 was promulgated to protect the interests of shareholders who have already tendered their shares pursuant to a publicly announced tender offer, by prohibiting the offeror from making purchases outside the tender offer on different terms. Wellman v. Dickinson, 475 F.Supp. 783, 833 (S.D.N.Y.1979), aff'd, 682 F.2d 355 (2d Cir.1982), cert. denied, 460 U.S. 1069, 103 S.Ct. 1522, 75 L.Ed.2d 946 (1983); Heine v. Signal Companies, Inc., [1976-77 Transfer Binder] Fed.Sec.L.Rep. (CCH) par. 95,898 (S.D.N.Y. March 4, 1977). In particular, the rule seeks to prevent outside purchases by the offeror at a different price than that stated in the tender offer. Wellman, 475 F.Supp. at 833.

The rule itself provides a mechanism by which an exemption from its coverage can be obtained. In subsection (d), it provides that the rule will not prohibit a transaction if the Commission, upon written request or on its own motion, exempts the transaction as not constituting a manipulative, fraudulent, or deceptive device, act, or practice as comprehended by the purpose of the section. 17 C.F.R. § 10b-13(d). The emphasis is thus on applying the rule to further its stated purposes.

Although Texaco is not a party whom the rule is intended to protect in any way, it complains that Pennzoil's transaction violated the rule, was automatically void for that reason, and therefore could not give rise to an action for tortious interference. The express exemption provision of the rule negates the suggestion that any infraction of the rule automatically makes the transaction void. If the transaction is only voidable, Texaco has no standing to assert the rule, and we may not speculate [807] on whether a proper party would have successfully asserted it.

We disagree with Texaco's contention that it was irrelevant that Pennzoil might have obtained an exemption from the prohibitions of the rule, because it did not. Pennzoil had no control over the timing of Texaco's interference with its agreement with Getty entities. If an exemption had been obtained, the rule would not have prevented the purchase of Getty shares outside the tender offer, and Texaco's argument about the invalidity of the agreement for this reason fails.

With the purpose of rule 10b-13 in mind, we note that the agreement called for the same price to be paid per share for all selling shareholders, and that these terms were announced to the public in the press release and appeared in newspaper articles two weeks before the date Pennzoil would have been able to begin buying any tendered shares under the original $100 tender offer. There was testimony that the Museum, and indeed all parties, insisted that all shareholders were to be treated equally in the Pennzoil transaction, and that the parties all proceeded on this assumption. Pennzoil points out that if the Museum had been paid for its shares before the public shareholders, any benefit that it might have received from having its shares purchased sooner would have been offset by payment of Getty's first quarter dividend to those remaining shareholders. There was testimony that there were customary ways of handling the payment of regular dividends in a merger situation.

In any event, Pennzoil amended its SEC tender offer statement on January 4 to incorporate the information about its agreement with the Getty entities contained in the press release and to state that the tender offer at $100 would be withdrawn upon the execution of the definitive merger contract. Texaco's contention in Point of Error 51 that the alleged contract would have been void under rule 10b-13 is overruled.

Next, Texaco claims that the alleged contract would have violated Delaware state law governing the fiduciary duties of various parties. Texaco contends that agreeing to a contract that provided for the sale of Getty at a "bargain basement" price would have been a breach by Gordon Getty of his fiduciary duty as a controlling shareholder, and also a breach by the Getty Oil directors of their fiduciary duty to Getty stockholders.

Gordon Getty, as trustee, owned approximately 40.2 percent of the shares of Getty Oil. In addition to the fact that this does not constitute legal "control" of the corporation, the record does not support Texaco's implication that Gordon Getty had de facto control of Getty Oil, in spite of the Trust's large ownership percentage. On the contrary, the record evinces Gordon Getty's continual conflicts with the Getty Oil board of directors and management, which acted independently of and sometimes without the knowledge of Gordon Getty.

The jury found, in response to a special issue, that the agreed price was a fair price for the Getty shares. There was evidence that at the January 2 Getty Oil board meeting, the Trust and Museum had both been willing to sell at $110 or above. The Trust and the Museum had received opinions from their investment bankers that $110 plus the minimum $5 stub was a fair price. Prior to that board meeting, there had been discussions of having the company itself propose a self-tender to its shareholders at $110 per share to respond to Pennzoil's $100 tender offer.

Though the Getty entities eventually sold to Texaco at a higher price per share than they had agreed to accept from Pennzoil, that fact alone does not prove that selling to Pennzoil would have been a breach of fiduciary duty to the minority shareholders. There was evidence that public minority stockholders, with no direct claim to a company's assets, are primarily interested in the return on their investment, i.e., in realizing a profit from the increase in market value of their shares. Pennzoil's price represented a significant premium over the previous trading price of Getty's shares.

[808] The test of fairness in a merger situation is that a minority shareholder receives the substantial equivalent in value of what he had before. Sterling v. Mayflower Hotel Corp., 33 Del.Ch. 293, 93 A.2d 107, 114 (1952). Thus, the fairness of the price that the public minority shareholders received is not to be judged by the pro rata value of Getty's assets, as Texaco implies, but rather by the value of the shares in the hands of those minority shareholders, who had no direct right to the company's assets. In the two years before the Pennzoil agreement, Getty stock had traded at $83 per share or less, and the jury found that $110 plus the $5 stub was a fair price. Agreeing to sell to Pennzoil at this price did not constitute a breach of fiduciary duty to the minority shareholders.

Finally, Texaco argues that the Getty directors had an obligation to exercise informed business judgment and to maximize Getty Oil's sale value, based on the information available to them. It claims that agreeing to any implied no-shop provision or good faith obligation to complete negotiations with Pennzoil would have breached its duty to get the highest price possible for the Getty Oil shares.

Under Delaware law, the directors of a corporation owe a fiduciary duty of care to the corporation and its shareholders in carrying out their managerial roles. Smith v. Van Gorkom, 488 A.2d 858, 872-73 (Del.1985). The business judgment rule is based on a presumption that in making a business decision, the directors acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. Id. at 872. Whether the board's business judgment is an informed one depends on whether the directors informed themselves prior to making a business decision, of all material information reasonably available to them. Id. Additionally, if a board takes anti-takeover measures, there is always the suspicion that the board may be acting primarily in its own interests and not in those of the corporation and shareholders. Revlon v. MacAndrews & Forbes Holding Inc., 506 A.2d 173, 180 (Del., 1986). Absent an abuse of discretion, the judgment of directors in making a business decision will be respected by the courts. Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984).

The evidence supports the jury finding that the agreed price between Pennzoil and the Getty entities was a fair one. There is also sufficient evidence that the directors were informed on the other aspects of the transaction and exercised their business judgment in approving the Pennzoil proposal. A majority of Getty's shareholders had approved the transaction before it was presented to the board. Getty's investment advisor informed the board that he had been calling other companies and had received some indications of interest, though he had no specifics at that time. In smaller meetings with some individual board members, Texaco's name was mentioned as a possible bidder. When the meeting resumed, the board decided to present a higher price to Pennzoil, which had agreed to go that high if the board came back "firm." The board approved Pennzoil's proposal, provided that the price be raised to $110 plus a $5 stub. The board also voted themselves indemnities and "golden parachutes." Pennzoil accepted and conveyed its acceptance to the board, which then adjourned. One of Pennzoil's lawyers testified that after the meeting, he shook hands with some of the Getty directors, who congratulated him on their deal. Investment advisors for the Trust and Museum gave fairness opinions on the Pennzoil price. Getty itself announced the terms of the transaction in a press release the next morning.

The evidence shows that the board made an informed decision to enter the agreement with Pennzoil. It had notice of other companies' interest, but there is some evidence that the board might have thought it more prudent to commit to a sure thing, rather than to speculate on whether other offers would eventually materialize. Getty's CEO was quoted in Fortune magazine some months later, "it was a bird-in-the-handish situation. We approved the deal but we didn't favor it." Once the agreement was made, Getty could [809] not evade it, citing fiduciary duty, just because a higher offer came along. See Smith, 488 A.2d at 888. Points of Error 52, 53, and 54 are overruled.

ALLEGED ERRORS IN THE COURT'S CHARGE

Texaco's first 45 points of error complain of the court's jury charge. These 45 points fall into three basic categories: (1) points asserting that the special issues assume a disputed fact; (2) points asserting that the instructions are improperly "personalized" to the parties and evidence; and (3) points asserting that the instructions prejudice Texaco.

Initially, Texaco claims that the trial court erred in improperly commenting on the case to the jury panel ("this is the largest civil case ever filed in Harris County"), in refusing its requested instruction to ameliorate the harm, and alternatively in refusing to grant Texaco's motion for mistrial.

During voir dire, the trial court made the following statements:

But this isn't your average civil case. This is the largest civil case ever filed in anyone's knowledge in Harris County.

And you prospective jurors are here to be examined by the attorneys and by myself to see whether you will be the ones who will hear the largest case ever filed in Harris County.

At this time, I am going to ask the attorneys—

MR. KEETON: Your Honor, may we approach the bench?

(Conference at the bench)

MR. KEETON: Your Honor, on behalf of Texaco, we object to the continued reference of largest case. You will note that the agreed statement has struck that because that has a—

THE COURT: I have not mentioned the amount.

MR. KEETON: I understand, but you said it's the largest case, Your Honor, that's ever been filed in Harris County. That tends, in our view, to give credence to the claim, and we ask the Court to refrain from such statements, if your Honor please, and to adhere to what is stated in the agreed statement, please.

MR. JAMAIL: I don't see that you are prohibited from saying what you want to say. This statement is something different than what you are talking about—

MR. KEETON: We view, Your Honor, that as a comment by the Court that we think is not proper.

THE COURT: I think that's a fair request. I will abide by that.

MR. KEETON: Thank you, Your Honor.

MR. MILLER: We would like also, Your Honor, for—in view of the Court's comments, for the Court to advise the jury that when he says this is the largest case, what he means is that this is a case in which the largest damages are being claimed, and it may or may not be the largest case when the case is over with.

MR. JAMAIL: Your Honor, I object to that.

THE COURT: Mr. Miller, I think that if I do that, it will just throw the spotlight on it. That will bring us right back to the largest case.

MR. MILLER: The only thing we want to be sure is that the jury, the fact that a large number of jurors having been summoned is not because of the size of the case; is because of the length of the case, the length that it is likely to last, and it has nothing to do with the amount of damages.

THE COURT: I am not going to tell them about the amount of damages.

In other words, the amount of the punitive damages. I am merely going to tell them the rest of it which is the length of the case.

MR. MILLER: That's fine. We want our objection but—

MR. KEETON: Well, Your Honor, I want to make a formal motion for mistrial because of the comment that has been made up to now and let's get another panel.

THE COURT: Your motion—your oral motion for mistrial is denied.

[810] A presiding judge is vested with broad discretion in the manner in which he controls the trial of the case. Thus, reversal should not be ordered absent a showing of impropriety, probable prejudice, and the rendition of an improper verdict. Texas Employers Insurance Association v. Draper, 658 S.W.2d 202, 209 (Tex.App.— Houston [1st Dist.] 1983, no writ).

In the instant case, the remarks were made prior to jury selection. Texaco has failed to show how such remarks prejudiced it in this trial. Consequently, we cannot say that the remarks amounted to such a denial of Texaco's rights as was reasonably calculated to cause and probably did cause rendition of an improper judgment. Tex.R.App.P. 81(b)(1); see Meat Producers, Inc. v. McFarland, 476 S.W.2d 406, 414 (Tex.Civ.App.—Dallas 1972, writ ref'd n.r.e.).

Further, Texaco's first point is not argued in any of its grouped briefing points, and Texaco cites no authority to support this point. Tex.R.Civ.P. 414(e) (now Tex.R.App.P. 74(f)) requires a party to include such discussion of the authorities as is deemed necessary to make the points complained of clear. Texaco's failure to cite to any authority constitutes a waiver of the point. O'Dowd v. Johnson, 666 S.W.2d 619, 620 (Tex.App.—Houston [1st Dist.] 1984, writ ref'd n.r.e.).

Texaco's first point of error is overruled.

In its second point of error, Texaco claims that Special Issue No. 3 (damages) improperly assumes that Texaco "knowingly interfer[ed]" with an agreement, thus suggesting an affirmative answer to Special Issue No. 2.

Special Issue No. 3 asked the jury the following:

What sum of money, if any, do you find from a preponderance of the evidence would compensate Pennzoil for its actual damages, if any, suffered as a direct and natural result of Texaco's knowingly interfering with the agreement between Pennzoil and the Getty entities, if any?

Answer in dollars and cents.

Texaco objects to the omission of conditional language after the phrase "knowingly interfering." It contends that as worded, Special Issue No. 3 assumes a disputed fact, i.e., that Texaco "knowingly interfer[ed]" with the agreement between the Getty entities and Pennzoil; this disputed fact was the subject of Special Issue No. 2. At trial, Texaco objected to Special Issue No. 3, in part, on the following ground:

The issue should have the phrase "after interfering, if it did so" because the issue is submitted to the jury without predicate and is otherwise a comment on the weight of the evidence suggesting that Texaco had, in fact, knowingly interfered with the agreement.

Pennzoil responds that the omission of any words of condition, such as "Texaco's knowingly interfering, if you have so found," (as suggested by the court) was inadvertent. The trial judge expressed his desire to include such language; however, when typed, the issue failed to include the requested language, and no objection was apparently lodged until Texaco filed its written objections to the charge on November 14, 1985.

Nonetheless, Pennzoil responds that Special Issue No. 3 does not assume a fact because (1) the "if any" language contained at the end of the sentence modifies the entire phrase "Texaco's knowingly interfering with the agreement between Pennzoil and the Getty entities"; therefore, the entire phrase is made conditional; and (2) even if Special Issue No. 3 were construed grammatically as an assumption of the fact of Texaco's interference, the error, if any, was harmless.

It is arguable that the "if any" language used in the issue modifies the entire verbal (gerund) phrase: "Texaco's knowingly interfering with the agreement between Pennzoil and the Getty entities."

In the instant case, the phrase "Texaco's knowingly interfering with the agreement between Pennzoil and the Getty entities" is a gerund phrase. "[I]nterfering" is the gerund used as the object of the preposition "of," which precedes the possessive noun "Texaco's." The final "if any" is a [811] phrase modifying the entire gerund phrase, thereby making conditional the fact of Texaco's "knowingly interfering with the agreement...." We do not agree that Special Issue No. 3 assumes the disputed issue of fact as alleged by Texaco.

Additionally, Tex.R.Civ.P. 277 provides that the court in its charge shall not "comment directly on the weight of the evidence or advise the jury of the effect of their answers." Thus, special issues are to be framed so as to avoid assuming the truth of a material, controverted issue of fact. Alvarez v. Missouri-Kansas-Texas Railroad Co., 683 S.W.2d 375, 377 (Tex.1984). However, even if the wording of a special issue constitutes an implied comment, not every such comment is cause for reversal. Id.; Mason v. Yellow Cab & Baggage Co., 153 Tex. 344, 269 S.W.2d 329, 330 (1954); Texas Employers Insurance Association v. McKay, 146 Tex. 569, 210 S.W.2d 147, 149 (1948). To warrant reversal, the comment must be one that "was reasonably calculated to cause and probably did cause rendition of an improper judgment...." Tex.R.App.P. 81(b)(1); Alvarez, 683 S.W.2d at 377. To determine whether an alleged error in the charge is reversible, this Court must consider the pleadings, evidence, and the charge in its entirety. Island Recreational Development Corp. v. Republic of Texas Savings Association, 710 S.W.2d 551 (Tex.1986).

Reversal is not mandated where under the circumstances of the case, including the charge as a whole, the force of the comment may be so weak that it is either not a comment at all or may be said to be harmless. Mason, 269 S.W.2d at 330.

In Texas Employers Insurance Association v. McKay, 146 Tex. 569, 210 S.W.2d 147, the court was faced with a similar problem. In McKay, the alleged comment consisted of a reference to the plaintiff's "injury," without the qualifying phrase "if any" in a defensive issue. Appellant asserted that the use of "injury" without the conditional "if any" assumed the existence of a disputed fact. The court was "satisfied from the very terms of the charge itself, considered as a whole, that the error... was not one which ... was reasonably calculated to cause and probably did cause the rendition of an improper judgment.... Tex.R.Civ.P. 434 [(repealed) (now Tex.R. App.P. 81(b))]."

The reviewing court based its holding on the following: (1) the court gave an elaborate preliminary admonition to the jury to answer the issues upon the general instructions and the evidence; (2) the court gave full definitions to guide the jury in its determination of the issues; (3) the court gave separate special issues regarding injuries sustained; and (4) the use of the conditional language "if any" was present 14 separate times in 12 issues and prior to the offending issue. Finally, the court noted that the repetition of "injury, if any" obviously emphasized the undetermined status of the injury question. See also Alvarez, 683 S.W.2d at 377 (issue constituted a harmless comment, which was not a proper ground for reversal).

As previously noted, in viewing the charge as a whole, the final "if any" conditional language of Special Issue No. 3 reasonably appears to qualify the entire phrase "Texaco's knowingly interfering with the agreement between Pennzoil and the Getty entities." Consequently, the jury could not assume this fact. Additionally, the trial court here, as in McKay, gave preliminary instructions to the jury to "consider only the evidence introduced" in arriving at their answers. Also, before the jury ever reached the contested Special Issue No. 3, it was required to answer Special Issue No. 2. Special Issue No. 2, with accompanying instructions, inquired whether Texaco "knowingly interfered with the agreement between Pennzoil and the Getty entities ...?" Unless plaintiff obtained an affirmative answer to Special Issue No. 2, its answer to Special Issue No. 3 was meaningless. Finally, Special Issue No. 4, the charge's other reference to Texaco's conduct, conditioned "Texaco's actions" with the "if any" language. As in McKay, every other mention of Texaco's "interference," except for Special Issue No. 3, contained the conditional language, thereby indicating [812] that the court was not assuming that disputed issue of fact.

Special Issue No. 3 could have been better worded. However, as articulated by the Texas Supreme Court, "in an already complicated field like that of special issues, we cannot strain too hard for perfection without ultimate damage to the whole jury system in civil cases." Alvarez, 683 S.W.2d at 378 (quoting Mason, 269 S.W.2d at 331).

Point of Error No. 2 is overruled.

In Points of Error 3 through 6, Texaco contends that the trial court erred in submitting Special Issue No. 1.

Special Issue No. 1 asked:

Do you find from a preponderance of the evidence that at the end of the Getty Oil board meeting of January 3, 1984, Pennzoil and each of the Getty entities, to wit, the Getty Oil Company, the Sarah C. Getty Trust and the J. Paul Getty Museum, intended to bind themselves to an agreement that included the following terms:

a. all Getty Oil shareholders except Pennzoil and the Sarah C. Getty Trust were to receive $110 per share, plus the right to receive a deferred cash consideration from the sale of ERC Corporation of at least $5 per share within five years;

b. Pennzoil was to own 3/7ths of the stock of Getty Oil and the Sarah C. Getty Trust was to own the remaining 4/7ths of the stock of Getty Oil; and

c. Pennzoil and the Sarah C. Getty Trust were to endeavor in good faith to agree upon a plan for restructuring Getty Oil on or before December 31, 1984, and if they were unable to reach such agreement then they would divide the assets of Getty Oil between them also on a 3/7ths-4/7ths basis.

Answer: "We do" or "We do not."

The accompanying instructions to the Special Issues No. 1 state:

1. An agreement may be oral, it may be written or it may be partly written and partly oral. Where an agreement is fully or partially in writing, the law provides that persons may bind themselves to that agreement even though they do not sign it, where their assent is otherwise indicated.

2. In answering Issue No. 1, you should look to the intent of Pennzoil and the Getty entities as outwardly or objectively demonstrated to each other by their words and deeds. The question is not determined by the parties' secret, inward, or subjective intentions.

3. Persons may intend to be bound to an agreement even though they plan to sign a more formal and detailed document at a later time. On the other hand, parties may intend not to be bound until such a document is signed.

4. There is no legal requirement that parties agree on all the matters incidental to their agreement before they can intend to be bound. Thus, even if certain matters were left for future negotiations, those matters may not have been regarded by Pennzoil and the Getty entities as essential to their agreement, if any, on January 3. On the other hand, you may find that the parties did not intend to be bound until each and every term of their transaction was resolved.

5. Every binding agreement carries with it a duty of good faith performance. If Pennzoil and the Getty entities intended to be bound at the end of the Getty Oil board meeting of January 3, they were obliged to negotiate in good faith the terms of the definitive merger agreement and to carry out the transaction.

6. Modification or discussions to modify an agreement may not defeat or nullify a prior intention to be bound. Parties may always, by mutual consent and understanding, add new provisions spelling out additional terms that were not included in their original agreement.

In Point of Error No. 3, Texaco contends that Special Issue No. 1 improperly assumes that the three listed terms (a-c) constitute the sole essential terms to the alleged "agreement," thereby commenting on the weight of the evidence. Texaco alleges that by its wording, Special Issue No. 1 allowed the jury to return an affirmative answer on the contract element (intent [813] to be bound) even if there were other terms essential to any of the parties and not yet agreed upon. Additionally, Texaco argues that Special Issue No. 1 should have asked whether the three listed elements were the only essential terms to the contract and if not, whether there were other essential terms.

Under New York law, parties are free to enter into a binding contract without "memorializing their agreement in a fully executed document." Winston v. Mediafare Entertainment Corp., 777 F.2d 78, 80 (2d Cir.1985). This right to contract orally remains although the parties contemplate a formal writing to evidence their agreement; consequently, the mere intention to commit the agreement to writing will not prevent contract formation prior to execution. Id.; R.G. Group, Inc. v. Horn & Hardart Co., 751 F.2d 69, 74 (2d Cir.1984). The intent of the parties determines the time of the contract formation. Winston, 777 F.2d at 80.

In determining whether the parties intended to enter a contractual agreement, New York law applies an objective test, looking "to the objective manifestations of the intent of the parties as gathered by their expressed words and deeds." Brown Brothers Electrical Contractors, Inc. v. Beam Construction Corp., 41 N.Y.2d 397, 393 N.Y.S.2d 350, 352, 361 N.E.2d 999, 1001 (1977). Several factors are relied upon when ascertaining intent:

(1) whether there has been an express reservation of the right not to be bound in the absence of a writing; (2) whether there has been partial performance of the contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract usually committed to writing.

Winston, 777 F.2d at 80.

In the instant case, the question of whether the parties had agreed to all the essential terms is one of the factors considered in determining the controlling issue, submitted by Special Issue No. 1, i.e., whether the parties intended to be bound to their agreement at the conclusion of the January 3, 1984 board meeting. Texaco's argument erroneously focuses on the three listed elements and dismisses the fact that as worded, Special Issue No. 1 presents a broad submission of that controlling issue of the case.

By its argument, Texaco ignores the fact that Tex.R.Civ.P. 277, as amended in 1973, authorizes the trial court, in its discretion, to submit controlling issues broadly. Island Recreational Development Corp., 710 S.W.2d at 554; Lemos v. Montez, 680 S.W.2d 798, 801 (Tex.1984). The trial court is not required to submit each fact question separately and distinctly. Alvarez, 683 S.W.2d at 377.

Issues that are merely evidentiary should not be submitted. Making the distinction between evidentiary and controlling issues rests within the discretion of the court and will not be disturbed on appeal, unless there is a showing of probable harm. Stalder v. Bowen, 373 S.W.2d 824, 828 (Tex.Civ.App.—Dallas 1963, writ ref'd n.r. e.).

Additionally, Tex.R.Civ.P. 277 states in pertinent part:

It shall be discretionary with the Court whether to submit separate questions with respect to each element of a case or to submit issues broadly. It shall not be objectionable that a question is general or includes a combination of elements or issues.

In Special Issue No. 1, the jury was asked a controlling question in the case—whether Pennzoil and the Getty entities had an intent to be bound. By its broad submission and accompanying explanatory instructions, Special Issue No. 1 required the jury to determine that all elements essential to the agreement had been resolved, including the three listed elements, before the jury could answer affirmatively.

The trial court did not err in submitting Special Issue No. 1 broadly, as is authorized by Tex.R.Civ.P. 277.

In Points of Error 4 through 6, Texaco argues that the assumption established in Special Issue No. 1, that the three listed elements constitute the sole elements to [814] the contract formation, is aggravated by the use of the word "agreement" in a manner that signals that an "agreement" is less than a "binding contract." Consequently, Texaco requested: (1) that the word "agreement" be defined as "a legally binding agreement consisting of a meeting of the minds of the agreeing parties to all essential terms and conditions and to which agreement the parties then intend to be bound," and (2) that the word "contract" be substituted for "agreement" and defined as "a legally binding agreement consisting of a meeting of the minds of the contracting parties to all essential terms and conditions and to which agreement the parties then intend to be bound." These requests were refused and objections to their omission were overruled.

Texaco's basic argument is that the court's refusal to substitute "contract" for "agreement" and its refusal to give a "proper legal definition" to "agreement" left the jury with no guidance as to what the words and phrases mean.

Definitions of terms used in a charge are proper when they would aid the jurors. Since jurors are presumed to have average intelligence, the court is not required to convert the charge into a dictionary. Texas Employers Insurance Association v. Hamor, 97 S.W.2d 1041, 1041 (Tex.Civ.App.— Amarillo 1936, no writ). Ordinary words used in their common meaning need not be defined. West Texas State Bank v. Tri-Service Drilling Co., 339 S.W.2d 249, 256 (Tex.Civ.App.—Eastland 1960, writ ref'd n.r.e.).

In the instant case, the accompanying instructions present the applicable New York law regarding contract formation. Additionally, the word "agreement" was before the jury as an ordinary word, used in its ordinary meaning, pursuant to the trial court's charge:

When words are used in this Charge in a sense which varies from the meaning commonly understood, you are given a proper legal definition which you are bound to accept in place of any other definition or meaning.

Consequently, no definition for the word "agreement" was necessary. Mann v. Fender, 587 S.W.2d 188, 199 (Tex.Civ.App. —Waco 1979, writ ref'd n.r.e.) ("oral agreement" was not used in any special issue in a particular legal sense); West Texas State Bank, 339 S.W.2d at 256 ("approve" and "agree" are words of common usage).

Additionally, Texaco's objection to the use of "agreement" on the grounds that it allowed the jury "to find such an agreement, without finding a binding agreement" was properly overruled, as was its requested definitions of "agreement" and alternatively, "contract," as "legally binding agreement[s]." Whether an agreement is legally enforceable or binding is a question of law; therefore, the jury may not be called upon to construe the legal effect of an instrument. Trinity University Insurance Co. v. Ponsford Brothers, 423 S.W.2d 571, 575 (Tex.1968); Wirtz v. Orr, 533 S.W.2d 468, 471 (Tex.Civ.App.— Eastland 1976, writ ref'd n.r.e.).

The trial court is afforded considerable discretion in determining what issues and instructions are proper in submitting its charge. Tex.R.Civ.P. 277; Members Mutual Insurance Co. v. Muckelroy, 523 S.W.2d 77, 83 (Tex.Civ.App.—Houston [1st Dist.] 1975, writ ref'd n.r.e.). Generally, the trial court should submit appropriate instructions, when requested. However, the failure to do so is not reversible error per se. Tex.R.Civ.P. 277; Island Recreational Development Corp., 710 S.W.2d at 555.

Special Issue No. 1 properly submitted the controlling issue of "intent to be bound." When the totality of the case is considered, we find no reversible error. See Island Recreational Development Corp., 710 S.W.2d at 555. Texaco's Points of Error 3 through 6 are overruled.

In its next four points of error (7 through 10) Texaco claims that Special Issue No. I (intent to be bound) and Instruction No. I improperly emphasize Pennzoil's "Contract" theory. The specific points read as follows:

Point of Error No. 7:

The trial court erred in refusing Texaco's Requested Special Issue No. 100 (intent [815] to be bound) and instead submitting Special Issue No. 1, since Texaco's requested special issue was the proper inquiry.

Point of Error No. 8:

The trial court erred in refusing Texaco's Requested Special Issue No. 101-D (intent to be bound and without approval of a definite merger agreement) and instead submitting Special Issue No. 1, since Texaco's requested special issue was the proper inquiry.

Point of Error No. 9:

The trial court erred in overruling Texaco's objection to Special Issue No. 1, and in denying Texaco's motions for judgment and judgment n.o.v., because Special Issue No. 1 fails to inquire as to the existence of a present intention to be bound.

Point of Error No. 10:

The trial court erred in submitting Instruction No. 1 to Special Issue No. 1 (agreement may be oral or written) over Texaco's timely objection that the instruction improperly suggests that the parties to the alleged agreement did not intend to insist upon a written contract before being bound, directly commenting on the weight of the evidence.

In points of error 7 and 8, Texaco contends that the trial court erred in refusing its Requested Special Issues Nos. 100 and 101-D, which it argues were the "proper" issues. Requested Special Issues No. 100 and 101-A asked:

Special Issue No. 100

Do you find from a preponderance of the evidence that the Getty Oil Company, the Museum, the Trust, and Pennzoil at the end of the Getty Oil Company Board of Director's meeting on January 3, 1984, each intended to be bound to a contract without all the parties executing a written definitive merger agreement?

Answer "Yes" for each entity below which did intend to be bound without an executed definitive merger agreement. Otherwise, answer "No."

Getty Oil Company: _____The Museum: _____The Trust: _____Pennzoil: _____

Special Issue No. 101-A

Do you find from a preponderance of the evidence that a written definitive Merger Agreement was submitted to the Getty Oil Company Board of Directors on or before January 3, 1984?

Answer "Yes" or "No." _____

Pennzoil points out that Texaco has failed to brief these points of error. Texaco has filed a cross-reference with this Court in which it asserts that Points 7-8 are argued at pages 17-19, and 23-24 of its brief. However, our reading of these pages negates its contention.

Points of error that are not supported by argument and authorities are waived. Tex.R.App.P. 74(f); Trenholm v. Ratcliff, 646 S.W.2d 927, 934 (Tex.1983); O'Dowd v. Johnson, 666 S.W.2d 619, 620 (Tex.App.—Houston [1st Dist.] 1984, writ ref'd n.r.e.). Having failed to brief points 7-8, Texaco has waived any allegation of error, but in the interest of judicial economy we will consider its argument.

In determining whether alleged error in the jury charge is reversible, this Court must consider the pleadings, the evidence, and the charge in its entirety. Error is reversible only if, "when viewed in the light of the totality of these circumstances, it amounted to such a denial of the rights of the complaining party as was reasonably calculated and probably did cause the rendition of an improper judgment." Island Recreational Development Corp., 710 S.W.2d at 555; Tex.R.App.P. 81(b)(1).

In the instant case, the controlling issue of intent to be bound was broadly submitted in Special Issue No. 1. Instruction No. 3 states:

Persons may intend to be bound to an agreement even though they plan to sign a more formal and detailed document at a later time. On the other hand, parties may intend not to be bound until such a document is signed.

[816] Under Texas law, the trial court has considerable discretion in deciding which issues are proper. Tex.R.Civ.P. 277; Members Mutual Insurance Co., 523 S.W.2d at 83. Pursuant to rule 277, where the broad form of submission is adopted, as here, "the extent of the jury's consideration of the elements comprising the controlling issue becomes a matter of evidence and argument, subject to appropriate instruction of the court." Members Mutual Insurance Co., 523 S.W.2d at 82.

Texaco's requested issues consist of evidentiary elements that are subsumed within the controlling issue submitted, Special Issue No. 1, "intent to be bound." Whether the parties intended to be bound without executing a definitive agreement and whether a definitive agreement was submitted to be board on January 3 are factors to be considered in determining intent. See Winston, 777 F.2d at 80.

The court here elected to submit broadly the controlling issue of "intent to be bound." Consequently, all of the elements comprising "intent to be bound," including those requested above, were a matter of evidence and argument, subject to the appropriate instructions given here, e.g., Instruction No. 3. See Members Mutual Insurance Co., 523 S.W.2d at 82.

In light of the totality of the circumstances, the denial of the requested issues did not amount to a denial of Texaco's rights as was reasonably calculated to cause the rendition of an improper judgment. See Island Recreational Development Corp., 710 S.W.2d at 555. Points of Error 7 and 8 are overruled.

Texaco argues in Point of Error No. 9 that the phrase "intended to bind themselves to an agreement," contained in Special Issue No. 1, is ambiguous. Consequently, it allowed the jury to return an affirmative answer even if it found an "agreement to agree," which is unenforceable under New York law. Specifically, Texaco contends that Special Issue No. 1 fails to establish a definite time frame as to when the parties, Pennzoil and the Getty entities, would be bound.

Special Issue No. 1 asks, in pertinent part:

Do you find from a preponderance of the evidence that at the end of the Getty Oil board meeting of January 3, 1984, Pennzoil and each of the Getty entities, to wit, the Getty Oil Company, the Sarah C. Getty Trust and the J. Paul Getty Museum, intended to bind themselves to an agreement that included the following terms.... (Emphasis added.)

Texaco's argument is without merit because it fails to consider the fact that the phrase, "at the end of the Getty Oil Board meeting of January 3, 1984," clearly establishes the "time frame" of when the parties intended to bind themselves, i.e., the intent to be bound was established at the end of the board meeting on January 3, 1984.

Additionally, Instruction Nos. 3-5 focus the jury's attention on the time frame in question, the end of the January 3, 1984 meeting. These instructions read as follows:

3. Persons may intend to be bound to an agreement even though they plan to sign a more formal and detailed document at a later time. On the other hand, parties may intend not to be bound until such a document is signed.

4. There is no legal requirement that parties agree on all the matters incidental to their agreement before they can intend to be bound. Thus, even if certain matters were left for future negotiations, those matters may not have been regarded by Pennzoil and the Getty entities as essential to their agreement, if any, on January 3. On the other hand, you may find that the parties did not intend to be bound until each and every term of their transaction was resolved.

5. Every binding agreement carries with it a duty of good faith performance. If Pennzoil and the Getty entities intended to be bound at the end of the Getty Oil board meeting of January 3, they were obliged to negotiate in good faith the terms of the definite merger agreement and to carry out the transaction.

(Emphasis added.)

In its 10th point of error, Texaco contends that the defects in Special Issue No. [817] 1 are aggravated by the following Instruction No. 1:

Instruction No. 1

An agreement may be oral, it may be written or it may be partly written and partly oral. Where an agreement is fully or partially in writing, the law provides that persons may bind themselves to that agreement even though they do not sign it, where their assent is otherwise indicated.

Texaco argues that the instruction suggests that the parties did not intend to insist upon a written contract prior to being bound, and therefore, it is a direct comment on the weight of the evidence, i.e., that the parties intended to be bound on January 3, 1984, although they had no written agreement.

Tex.R.Civ.P. 277 provides in pertinent part:

In submitting the case, the court shall submit such explanatory instructions and definitions as shall be proper to enable the jury to render a verdict.

* * * * * *

... [T]he court's charge shall not be objectionable on the ground that it incidentally constitutes a comment on the weight of the evidence or advises the jury of the effect of their answers where it is properly a part of an explanatory instruction or definition.

While the trial court may not comment on the weight of the evidence, "it may incidentally comment where the comment is necessary or proper as part of an explanatory instruction or definition." Mader v. Aetna Casualty & Surety Co., 683 S.W.2d 731, 733 (Tex.App.—Corpus Christi 1984, no writ). Trial courts have considerable discretion in deciding which instructions are necessary and proper. Johnson v. Whitehurst, 652 S.W.2d 441, 449 (Tex.App. —Houston [1st Dist.] 1983, writ ref'd n.r. e.). However, an improper comment on the weight of the evidence occurs in either an instruction or an issue when the trial court indicates an opinion about the accuracy of the facts in inquiry. Armes v. Campbell, 603 S.W.2d 249, 251 (Tex.Civ.App.—El Paso 1980, writ ref'd n.r.e.).

In the instant case, we find is nothing in the language of Instruction No. 1 that suggests the court's opinion on whether the parties did or did not intend to be bound at the end of the January 3, 1984 meeting. Instruction No. 1 instructs the jury about the applicable law. See Winston, 777 F.2d at 80. However, even if an incidental comment were implied, such comment was permissible pursuant to Tex.R. Civ.P. 277. When the totality of the case is considered, i.e., the pleadings, evidence, and the charge in its entirety (particularly the remaining instructions given in connection with Special Issue No. 1), there is no reversible error.

Texaco's 9th and 10th points of error are overruled.

In its 11th, 12th, and 13th points of error, Texaco claims that Instruction No. 2 to Special Issue No. 1 (intent to be bound) improperly instructs the jury that they "should" consider only Pennzoil's evidence.

The points of error follow:

Point of Error No. 11:

The trial court erred in submitting Instruction No. 2 to Special Issue No. 1 (parties' intent should be determined from their words and deeds manifested to each other) over Texaco's timely objection that the instruction improperly limits the jury's consideration to those items, directly commenting on the weight of the evidence.

Point of Error No. 12:

The trial court erred in refusing Texaco's request for, and overruling Texaco's objection to the omission of, Texaco's Requested Instruction D (factors relevant to intention to be bound) because the instruction correctly states the law and is proper.

Point of Error No. 13:

The trial court erred in overruling Texaco's objection to Instruction No. 2 to Special Issue No. 1 (intent to be bound) and denying Texaco's Requested Instruction A (determine intent from words, deeds, and circumstances).

[818] Texaco contends that Instruction No. 2 to Special Issue No. 1 is legally flawed because it mandates, through the use of the word "should" and the phrase "to each other," that the jury limit its consideration to evidence favorable to Pennzoil. Instruction No. 2 states:

In answering Issue No. 1, you should look to the intent of Pennzoil and the Getty entities as outwardly or objectively demonstrated to each other by their words and deeds. The question is not determined by the parties' secret, inward, or subjective intentions.

(Emphasis added.)

Webster's New Collegiate Dictionary defines "should" (as used in this instruction) as expressing an obligation, propriety, or expediency.

In the instant case, the term "should" instructs the jury that it is "obliged" or "compelled" to look to the intent of Pennzoil and the Getty entities as manifested by their words and deeds to each other. Texaco asserts that the court erroneously included words of limitations, "to each other," which mandate the jury's consideration of manifestations of intent between the parties only, and preclude the consideration of manifestations of intent to other parties such, as (1) a rule 14D-1 filing with the SEC, and (2) certain post-board meeting conversations between Getty and Texaco on January 4-6, 1984.

While the instruction limits the jury's consideration of evidence to manifestations of intent made "to each other," thereby excluding evidence of meetings between only Texaco and Getty, unknown to Pennzoil, the instruction does not preclude the jury from considering the evidence of intent, such as the press releases and the SEC filing, that was made public.

Under New York law, it is well established that the existence of a binding contract is not dependent upon the subjective intent of the parties. Brown Brothers Electrical Contractors, Inc., 41 N.Y.2d 397, 393 N.Y.S.2d 350, 361 N.E.2d 999. Rather, it is the objective manifestations of the intent of the parties, as expressed by words and deeds, that determine whether the parties have actually entered into a contract. Id., 393 N.Y.S.2d at 352, 361 N.E.2d at 1001; see also Winston, 777 F.2d at 80; R.G. Group, Inc., 751 F.2d at 74.

"[M]utual assent must be manifested by one party to the other...." Porter v. Commercial-Casualty Insurance Co., 292 N.Y. 176, 54 N.E.2d 353, 356 (1944) (emphasis added). The Restatement (Second) of Contracts, § 19(2) states: "The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents." (Emphasis added.)

The instruction allows the jury to consider all overt, objective manifestations while denying consideration of secret or subjective manifestations. The SEC filing and the press release were outward, objective manifestations; conversations between Texaco and Getty, to which Pennzoil was not a party, were subjective, secret manifestations that were properly precluded from consideration.

Texaco's argument is without merit.

Texaco next contends in Points of Error 12 and 13 that the trial court erred in refusing its request for and in overruling its objection to the omission of Requested Instructions A and D.

The requested instructions state:

Requested Instruction A

In answering Issue No. 1 you may look to the intent of Pennzoil, the Trust, the Museum and the Getty Oil Company as manifested by their words and deeds and by the existing circumstances.

Requested Instruction D

You are instructed that, although an oral or unsigned written agreement may be a binding contract if the parties so intend, it is not binding if any party intends to be bound to a contract only if there is a complete written document containing all the terms which have been agreed to and which document has been signed by all the parties. In such instance, none of [819] the parties will be bound until the signing occurs, even when all the parties have otherwise agreed on all the essential terms of the proposed contract.

Various factors are relevent to the determination of whether or not any of the parties intended to be bound without or prior to execution of a written definitive agreement. No single factor is decisive, but each provides significant guidance. Among the factors you may consider as evidence of intent to be bound only after execution of a written agreement are: (1) whether a party reserved the right to be bound only when a written agreement is signed, either orally during negotiations or in drafts of documents that condition the making of a binding agreement upon execution of the document; (2) whether there were any open issues that remained to be negotiated or settled; (3) whether the contract concerns complex and substantial business matters; and, (4) whether the situation is such that signed written agreements are standard or customary.

Texaco argues that by not including instructions that the jury should consider "all surrounding circumstances," particularly the four listed in Requested Instruction D, the court limited the jury's consideration of all relevant evidence and focused the jury's attention upon evidence favorable to Pennzoil.

It is noted that at trial, Texaco propounded Requested Instruction D, which was refused, and then filed specific objections to the refusal. In both instances, the requested instruction listed the following as one of the four circumstances to be considered: "(3) whether the contract concerns complex and substantial business matters." However, on appeal, Texaco argues that these four factors should have been submitted, but omits the number (3) factor and substitutes the following: "(b) whether there was partial performance indicative of agreement...."

Objections made on appeal that do not conform to those made at trial are waived. Conner v. Bean, 630 S.W.2d 697, 701 (Tex.App.—Houston [1st Dist.] 1981, writ ref'd n.r.e.). As Texaco's argument regarding Requested Instruction D does not conform to its objection at trial, it is waived. However, for the reasons previously stated, we will discuss and consider Texaco's complaint.

Tex.R.Civ.P. 277 provides that the trial court "shall submit such explanatory instructions and definitions as shall be proper to enable the jury to render a verdict...." Explanatory instructions are the tools that aid the jury in rendering a just and proper verdict, and as such, should be submitted when in the sole discretion of the trial judge, they will help the jury to understand the meaning and effect of the law and the presumption thereby created. Southern Pacific Transportation Co. v. Garrett, 611 S.W.2d 670, 674 (Tex.Civ.App.—Corpus Christi 1980, no writ).

Under New York law, the intent of the parties is discerned by looking to the parties' words and deeds that constitute objective signs in a given set of circumstances. See Winston, 777 F.2d at 80. Restatement (Second) of Contracts § 27 comment C (1981) suggests eight factors that "may be helpful in determining whether a contract has been concluded....":

The extent to which express agreement has been reached on all the terms to be included, whether the contract is of a type usually put in writing, whether it needs a formal writing for its full expression, whether it has few or many details, whether the amount involved is large or small, whether it is a common or unusual contract, whether a standard form of contract is widely used in similar transactions, and whether either party takes any action in preparation for performance during the negotiations.

These may be shown by "oral testimony or by correspondence or other preliminary or partially complete writings." Id.

In our case, Texaco chose only four of the suggested eight factors to be submitted [820] to the jury. Additionally, the four listed in Texaco's requested instruction are not the four often suggested in the case law. (It omitted "partial performance.") Finally, Texaco's requested "by the existing circumstances" language had the potential of allowing the jury erroneously to consider secret, subjective intentions.

Given these considerations and the trial court's broad discretion in submitting instructions, there was no reversible error in the court's denial of Requested Instructions A and D.

Texaco's Points of Error 11, 12, and 13 are overruled.

In its 14th point of error, Texaco argues that Instruction No. 4 to Special Issue No. 1 is misleading, incomplete, and a direct comment on the weight of the evidence. Specifically, it contends that Instruction No. 4: (1) fails to inform the jury that before there can be a contract, the parties have to agree to all material matters; (2) fails to inform the jury that if any element considered by any party is left for future consideration, there is no contract; (3) fails to inform the jury that even if the parties intend to be bound before resolution of "each and every" item, they cannot be bound until there is a resolution of "each and every" material item of the agreement; and (4) personalizes the parties, which personalization "nudges" the jury to adopt Pennzoil's position.

Instruction No. 4 states:

There is no legal requirement that parties agree on all the matters incidental to their agreement before they can intend to be bound. Thus, even if certain matters were left for future negotiations, those matters may not have been regarded by Pennzoil and the Getty entities as essential to their agreement, if any, on January 3. On the other hand, you may find that the parties did not intend to be bound until each and every term of their transaction was resolved.

At trial, Texaco objected as follows:

Instruction No. 4 is a direct comment on the weight of the evidence and is therefore improper because it personalizes the instruction to the party's case and thereby unduly emphasizes evidence favorable to Pennzoil.

We first note that Texaco's argument on appeal is different from its trial objection. As noted previously, it is well-settled that a party is confined to the objection made at trial and that he will not be allowed to enlarge his complaint on appeal. Tex.R.Civ.P. 274; Perez v. Baker Packers, 694 S.W.2d 138, 141-42 (Tex.App.—Houston [14th Dist.] 1985, writ ref'd n.r.e.); Conner, 630 S.W.2d at 701. Consequently, Texaco has waived all allegations of error regarding Instruction No. 4, except for the complaint of "personalization."

Texaco contends that Special Issue No. 1 fails to inquire whether there was agreement on all material issues and that Instruction No. 4 fails to tell the jury that there must be agreement on all material terms and that the parties cannot be bound until resolution of each material item. New York law does not contemplate such a specific formalistic rule:

Under the Uniform Commercial Code [2-204(3)], if the parties have intended to contract, and if an appropriate remedy may be fashioned, a contract for sale does not fail for indefiniteness if terms, even important terms, are left open ... It is no longer true that dispute over material terms inevitably prevents formation of a binding contract. What is true ... is that when a dispute over material terms manifests a lack of intention to contract, no contract results.

J. Baranello & Sons v. Hausmann Industries, Inc., 571 F.Supp. 333, 340-41 (E.D.N. Y.1983) (emphasis added); see also Restatement (Second) of Contracts § 33 comment A ("[T]he actions of the parties may show conclusively that they intended to conclude a binding agreement even though one or more terms are missing or are left to be agreed upon."); Kleinschmidt Division of SCM Corp. v. Futuronics Corp., 41 N.Y.2d 972, 395 N.Y.S.2d 151, 152, 363 N.E.2d 701, [821] 702 (1977) ("A contract for sale does not fail for indefiniteness if terms, even important terms, are left open."); V'Soske v. Barwick, 404 F.2d 495, 500 (2d Cir.1968), cert. denied, 394 U.S. 921, 89 S.Ct. 1197, 22 L.Ed.2d 454 (1969), ("[A]ll terms contemplated... need not be fixed with complete... certainty for a contract to have legal efficacy."); Camrex Contractors v. Reliance Marine Applicators, Inc., 579 F.Supp. 1420, 1427 (E.D.N.Y.1984); Reprosystem, B.V., 522 F.Supp. at 1275 ("[W]hile there is no enforceable agreement if the parties have not agreed on the essential terms, ... in New York and across the country a binding contract can be formed despite `material open issues.'").

Texaco also argues that Instruction No. 4 should have informed the jury that if any matter left for future negotiations was considered essential by any party, there was no contract.

Instruction No. 4 advises the jury that a contract can exist even though the parties have left certain "incidental" matters for future negotiations. It goes on to say that even if certain matters left for future negotiations, those matters may not have been regarded by the parties as essential to their agreement, if any. (Emphasis added.) This implies that essential items could not be left open. The instruction is a correct statement of the law and of the facts that Pennzoil, as plaintiff, had to prove. There is no requirement that the court additionally instruct the jury specifically on the converse, i.e., that a contract does not exist if essential items are left for future negotiations. Group Life & Health Insurance Co. v. Turner, 620 S.W.2d 670, 674 (Tex. App.—Dallas 1981, no writ) (no requirement that an affirmative statement be stated negatively). Additionally, the final sentence ("[o]n the other hand, you may find that the parties did not intend to be bound until each and every term of their transaction was resolved") clearly supplies relief to Texaco's objection by advising the jury that the parties here may not have intended to be bound until all terms were resolved.

Finally, Texaco contends that Instruction No. 4 "personalizes" the parties, which personalization impermissibly "nudges" the jury to adopt Pennzoil's position that any terms to be negotiated after the January 3, 1984 board meeting were merely "incidental" to the contract. (Again, we note that this is the only argument properly preserved on appeal under this point of error). Texaco's complaint here is with the second sentence of Instruction No. 4: "Thus, even if certain matters were left for future negotiations, those matters may not have been regarded by Pennzoil and the Getty entities as essential to their agreement, if any, on January 3."

We note that Texaco cites no authority directly on point that would support its argument that the "personalization" here was improper.

Courts frequently "personalize" or "individualize" the charge so as to make the law contained in the charge applicable to the facts in the case and more easily understood by the jury. See Herrera v. Balmorhea Feeders, Inc., 539 S.W.2d 84, 88 (Tex. Civ.App.—El Paso 1976, writ ref'd n.r.e.). Problems arise when the instruction deviates from "enabl[ing] the jury to render a verdict," Tex.R.Civ.P. 277, to actually misstating the law or misguiding the jury. Jackson v. Fontaine's Clinics, Inc., 499 S.W.2d 87 (Tex.1973). The following cases, cited by Texaco, evidence such improper and impermissible deviations:

1. Lemos v. Montez, 680 S.W.2d 798. (The court held that in light of the fact that the supreme court had previously defined "unavoidable accident," an appended definition of the term impermissibly "tilted" or "nudged" the jury thereby commenting on the weight of the evidence.)

2. Gulf Coast State Bank v. Emenhiser, 562 S.W.2d 449, 453 (Tex.1978). (It is impermissible to marshal the facts or parties' contentions into an instruction and then to instruct the jury to find for one party if it believed certain facts to be true.)

[822] 3. Owen Development Co. v. Calvert, 157 Tex. 212, 302 S.W.2d 640, 643 (1957). (An issue, which tied the jury to a 31-day time period, singled out and gave prominence to the testimony of an interested witness.)

4. McLeroy v. Stocker, 505 S.W.2d 615, 618 (Tex.Civ.App.—Houston [1st Dist.] 1974, no writ). (An instruction on "unavoidable accident," which appeared on a page preceding the first special issue, was probably considered by the jury as a direction to first consider the question of unavoidable accident, thereby commenting on the weight of the evidence.)

Our case is distinguishable from these cases. Instruction No. 4 is a true statement of the law; it personalizes the law to the parties without misleading the jury. Consequently, we find no error that was reasonably calculated to prejudice Texaco.

Texaco's 14th point of error is overruled.

In its 15th and 31st points of error, Texaco claims that Instruction No. 5 to Special Issue No. 1 (intent to be bound) is a "surplus" instruction that improperly emphasizes Pennzoil's "duty to negotiate" theory.

Instruction No. 5 states:

Every binding agreement carries with it a duty of good faith performance. If Pennzoil and the Getty entities intended to be bound at the end of the Getty Oil board meeting of January 3, they were obliged to negotiate in good faith the terms of the definitive merger agreement and to carry out the transaction.

Texaco objected to Instruction No. 5 as follows:

Instruction No. 5 is an improper instruction because it does not assist the jury in its consideration of its answer to Special Issue No. 1. It is irrelevant to the inquiry posed in Special Issue No. 1 as to whether the parties intended to be bound. Instead, this is merely a judicial comment to negate Texaco's evidence indicating no intention to be bound by virtue of the ongoing negotiations. It assumes a finding of some prior intention to be bound since only in those circumstances does any obligation to negotiate in good faith arise. No such instruction need or should be given.

Texaco presents four basic arguments:

(1) the instruction misstates New York law; (2) it is unnecessary surplusage; (3) it comments on the weight of the evidence because it assumes the existence of a binding contract; and (4) it attempts to avoid New York law that allegedly holds that an agreement in principle, subject to the execution of definitive documents, is not an enforceable contract.

Texaco first argues that Instruction No. 5 is a misstatement of the law because it erroneously converts the post-contractual duty of "good-faith performance" into a pre-contractual duty of "good-faith negotiation." It urges that this instruction abrogates its defense (to the tort of interference with prospective contractual relations) by erasing the distinction between pre-contractual and post-contractual conduct.

Tex.R.Civ.P. 277 provides that the trial court may give such explanatory instructions and definitions as shall be proper to enable the jury to render a verdict. A "proper" instruction is one that assists the jury and is legally correct. First State Bank & Trust Co. v. George, 519 S.W.2d 198, 207 (Tex.Civ.App.—Corpus Christi 1974, writ ref'd n.r.e.). An instruction that misstates the law or misleads the jury would not meet this standard. Jackson, 499 S.W.2d at 90.

Under New York law, there exists a duty of good faith and fair dealing that is read into every contract and requires a party not to act in a manner that defeats the purpose of the agreement. Candid Productions, Inc., 530 F.Supp. at 1334-35. "Where the parties are under a duty to perform that is definite and certain the courts will enforce a duty of good faith, including good faith negotiation, in order that a party not escape from the obligation he has contracted to perform." Teachers Insurance & Annuity Association of America v. Butler, 626 F.Supp. 1229, [823] 1231-32 (S.D.N.Y.), stay granted, 803 F.2d 61 (2d Cir.1986).

In the instant case, the "duty of good faith performance" language contained in Instruction No. 5 is stated to arise from the parties' agreement. It is worded clearly, instructing the jury that a duty of good faith performance on the part of the Getty entities and Pennzoil arose post-contractually, i.e., only if the jury found an intent to be bound on January 3. Thus, Instruction No. 5 is not a misstatement of the law.

Texaco next argues that Instruction No. 5 is mere surplusage because nothing in Special Issue No. 1 (intent to be bound) relates to a "good faith duty to negotiate," and consequently, this is the precise type of instruction that has been condemned by the Texas Supreme Court.

While trial courts are authorized to submit instructions that will enable the jury to reach a verdict, they should refuse to submit unnecessary instructions even if they are correct statements. Samsel v. Diaz, 659 S.W.2d 143, 144 (Tex.App.—Corpus Christi 1983, no writ); First State Bank & Trust Co., 519 S.W.2d at 207. The submission of unnecessary instructions may be so prejudicial that it requires reversal. Boaz v. White's Auto Store, 141 Tex. 366, 172 S.W.2d 481 (1943); Samsel, 659 S.W.2d at 145.

Instruction No. 5 is a correct statement of the law. It was submitted to aid the jury in answering Special Issue No. 1, which asks whether Getty and Pennzoil intended to be bound to an agreement at the end of the January 3, 1984 meeting. Texaco asserts that because a good faith obligation to perform does not arise unless there is a binding contract, this instruction was unnecessary surplusage.

The cases cited by Texaco are inapposite. In each instance, the court condemned the requested instruction because it deviated from or elaborated upon (1) court-promulgated instructions or (2) standard instructions.

In Fleishman v. Guadiano, 651 S.W.2d 730, 731 (Tex.1983), cited by Texaco, the court endorsed its previous instruction, promulgated in Turner v. General Motors Corp., 584 S.W.2d 844 (Tex.1979), and held that a requested additional instruction on "sole cause" would deflect the jury's attention to contributory negligence when it was considering whether a ladder in question was defectively designed.

In Acord v. General Motors Corp., 669 S.W.2d 111, 116 (Tex.1984), the Texas Supreme Court held that although the contested instruction given was a correct statement of the law, it constituted harmful error because it was a direct comment on the weight of the evidence. The Acord court indicated that the singling out of the law in such a way as to favor one side constitutes a comment on the weight of the evidence and is harmful error.

In Lemos, 680 S.W.2d at 801, the court found that an appended instruction to a previously-approved definition of "unavoidable accident" was wrong. The court indicated that its reversal and remand was based upon (1) the incorrectness of the instruction, and (2) the fact that it impermissibly titled or nudged the jury "one way or the other."

In First International Bank v. Roper Corp., 686 S.W.2d 602, 604 (Tex.1985), a products liability case cited by Texaco, the trial court embellished the standard definition of "producing cause" by adding a definition of "sole cause." The Texas Supreme Court held that the additional instruction, although correct as to the definition of "sole cause," was improper surplusage in this type of case, because it placed undue emphasis on the parents' negligence when the jury was considering the existence of a defect and its relationship to the injurious event.

In our case, Instruction No. 5 to Special Issue No. 1 advises the jury of a post-contractual duty; Special Issue No. 1 inquires into the existence of a contract. Thus, it seems that Instruction No. 5 was unnecessary to enable the jury to determine this [824] contract element. However, even though the instruction was unnecessary, we find that its inclusion was not so prejudicial as to require reversal. Tex.R.App.P. 81(b)(1).

The "character" of the negotiations between Pennzoil and Getty after the January 3 board meeting is hotly contested by both sides. Pennzoil asserts that the negotiations after January 3 were merely to formalize the implementing details of the contract already reached. Texaco contends that the fact that the parties continued to negotiate after January 3 on allegedly essential issues showed that no binding agreement had been reached.

Instruction No. 4 to Special Issue No. 1 advised the jury that the parties may not have intended to be bound until all negotiations were resolved. On the other hand, Instruction No. 5 advised the jury that the subsequent negotiations may have been exemplary of the parties' post-contractual duty of good faith effort to complete the details of what had been agreed to before. Consequently, the combined effect of Instructions 4 and 5 was to focus the jury upon the controlling issue, whether the parties had an intent to be bound.

Texaco further complains that the instruction was a comment on the weight of the evidence, because it assumes the existence of a binding contract and negates Texaco's evidence that the on-going negotiations indicate that there no intention to be bound. By its use of the conditional language, "If Pennzoil and the Getty entities intended to be bound ...," Instruction No. 5 does not assume the existence of any agreement; thus, it is not an improper judicial comment aimed at negating Texaco's evidence.

Finally, Texaco contends that Instruction No. 5 was offered for the purpose of neutralizing the January 4, 1984 Getty press release. This contention was not raised at trial. A party may not enlarge on appeal the objections made at trial. Conner, 630 S.W.2d at 701.

However, even if this argument had been preserved, it is without merit. Specifically, Texaco contends that by using the identical "definitive merger agreement" language, in Instruction No. 5, the court neutralized the language, allegedly favorable to Texaco's position, of the press release ("the agreement in principle is subject to execution of a definitive merger agreement").

Throughout the trial, the phrases "definitive merger agreement," "formal agreement," and "definitive agreement" were used repeatedly to refer to the document that would be the final written agreement between the parties. There was some evidence that "definitive merger agreement" could also refer to a formal boilerplate merger document required under Delaware law in all mergers. In its discretion, the court chose to use the phrase "definitive merger agreement" rather than one of the other terms used. We do not find that the use of this term was so prejudicial as to require reversal.

Texaco's Points of Error 15 and 31 are overruled.

In its 16th and 17th points of error, Texaco urges that Instruction No. 6 to Special Issue No. 1 (intent to be bound) improperly assumes the existence of an "agreement" and an "original agreement."

Instruction No. 6 states:

Modifications or discussions to modify an agreement may not defeat or nullify a prior intention to be bound. Parties may always, by mutual consent and understanding, add new provisions spelling out additional terms that were not included in their original agreement.

Texaco objected to Instruction No. 6 at trial as follows:

Instruction No. 6 is a direct comment on the weight of the evidence because it uses the term "do," rather than "may" and it fails to include a balancing instruction to the effect that modifications or discussions to modify may show an intention not to be bound. In this regard the Instruction unduly and unfairly comments on the weight of the evidence and favors Pennzoil's evidence. There is no [825] need to submit any such issue to aid the jury in their answer to Special No. 1.

If Instruction No. 6 is to be given in some form, Texaco requests that the following be added as the last sentence to the instruction: "On the other hand, such modifications or discussions to modify an agreement may show an intent not to be bound."

Texaco first contends that Instruction No. 6 was "surplus" and assumes the existence of an "agreement," thereby directly commenting on the weight of the evidence. It asserts that the trial court should have changed the instruction to include alternative directions that modifications could indicate an intent not to be bound. Specifically, Texaco contends that this instruction signaled the jury that it could find an intent to be bound even though there was on-going discussion regarding the purchase of the Museum shares.

Tex.R.Civ.P. 277 authorizes the court to submit explanatory instructions that are "proper" to enable the jury to reach a verdict. An instruction is "proper" if there is support for it in the evidence or the inferences to be drawn therefrom and if the instruction might aid the jury in answering the issues. Mejia v. Liberty Mutual Insurance Co., 544 S.W.2d 690, 691 (Tex.Civ.App.—Houston [14th Dist.] 1976, no writ).

In the instant case, evidence was presented that indicated that following the January 3 meeting, the parties discussed modifying details of the agreement, for example that Pennzoil rather than Getty Oil should would purchase the Museum shares. Consequently, this instruction aided the jury in answering Special Issue No. 1 by explaining the possible significance of the post-January 3 negotiations.

Additionally, even if Instruction No. 6 were surplus or unnecessary, its submission was not so prejudicial as to require reversal. To be an improper comment, the court must indicate an opinion as to the verity or accuracy of the facts. Samsel v. Diaz, 659 S.W.2d at 147. Instruction No. 6 refers to no facts; therefore, it is not a comment on the weight of the evidence. Id.

Texaco additionally argues in Point of Error 16 that Instruction No. 6 directly comments on the weight of the evidence by assuming the existence of an "agreement." Pennzoil correctly points out that this objection is not the same lodged at trial. As such, it is waived. Tex.R.Civ.P. 274.

Even if Texaco's objection had been properly preserved, its alleged error is without merit. Instruction No. 6 was submitted to aid the jury in determining whether the evidence proved an intent to be bound. The instruction correctly states the significance of post-agreement modifications on the question of the parties' prior intent to be bound, which prior intent was the subject of Special Issue No. 1. Additionally, throughout the remainder of the charge, the term "agreement" was modified with the conditional language "if any" or "if you have so found" numerous times. Consequently, it is unlikely that a juror would believe that the trial court assumed the existence of an agreement in Instruction No. 6. See Texas Employers Insurance Association v. McKay, 210 S.W.2d at 148-49.

Additionally, we note that Texaco's requested addition to Instruction No. 6 uses "agreement" in the same manner as now complained of, and that contrary to Texaco's contention, Instruction 6 uses "may" rather than "do."

Texaco also argues that because the trial court charged the jury that modifications may not defeat the agreement, it should have charged the jury that "a realization by the parties that modifications have to be made to material terms will defeat the formation of an `agreement,'" and that "a realization by the parties that new material terms have to be added to which the parties have not agreed, can defeat the formation of such an `agreement.'"

[826] This argument is waived for two reasons: (1) Texaco made no objection at trial on this ground ("[the instruction] fails to include a balancing instruction to the effect that modifications or discussion to modify may show an intent not to be bound"), Tex.R. Civ.P. 274; and (2) Texaco failed to request such explanatory instruction, Tex.R.Civ.P. 279.

Finally, Texaco argues that the trial court erred in denying its requested additional language to Instruction No. 6: "On the other hand, such modifications or discussions to modify an agreement may show an intention not to be bound."

In issuing explanatory instructions, the trial court is given wide discretion to determine the sufficiency of the explanations. K-Mart Corp. Store No. 7441 v. Trotti, 677 S.W.2d 632, 636 (Tex.App.—Houston [1st Dist.] 1984, writ ref'd n.r.e.). In deciding whether there has been an abuse of discretion, this Court may not substitute its judgment for that of the trial court but must decide only whether the court's action was arbitrary or unreasonable. Id.

Texaco's requested addition to Instruction No. 6 was not correct. Under New York law, negotiations on new provisions of an agreement do not defeat the agreement. Rose v. Spa Realty Associates, 42 N.Y.2d 338, 397 N.Y.S.2d 922, 928, 366 N.E.2d 1279 (1977). Parties may vary the terms of the agreement or add new ones by mutual agreement. "[T]his has no effect upon the validity of any contract, formal or informal." Corbin on Contracts, § 30 at 111-12 (1963) (emphasis added). Texaco's requested addition to Instruction No. 6 was properly denied.

Points of Error 16 and 17 are overruled.

Texaco next alleges that Instruction No. 1 to Special Issue No. 2 (knowing interference) improperly marshals Pennzoil's evidence on inducement and signals the jury that an "agreement" existed.

Special Issue No. 2 asks:

Do you find from a preponderance of the evidence that Texaco knowingly interfered with the agreement between Pennzoil and the Getty entities, if you have so found?

Answer: "We do" or "We do not."

The accompanying Instruction No. 1 states:

Knowledge of a fact can be shown either by direct evidence of what it knew or what it was told, or by indirect or circumstantial evidence. A fact may be established by indirect or circumstantial evidence when the fact is fairly and reasonably inferred from other facts proven in the case.

In order to find that Texaco interfered with the agreement, if any, inquired about above, it must be shown by a preponderance of the evidence that Texaco wanted to cause the breach, or to prevent the performance of this agreement, or that Texaco knew that a breach or failure to perform would occur as a result of its actions. (Emphasis added.)

Texaco complains of the underlined portion of the instruction. Texaco asserts that the use of the demonstrative adjective "this" before "agreement" aggravated the harmful effect of this allegedly improper instruction, because it instructed the jury that the court believed that an enforceable agreement did exist. Texaco's argument regarding the implications of the court's use of "this" is (1) waived (because there was no such objection made at trial, Tex.R. Civ.P. 274), and (2) erroneous, both conceptually and grammatically. In this context, the use of "this" did not instruct the jury that the court believed an enforceable contract did exist. As used, "this" is a demonstrative adjective modifying the noun "agreement." The function of a demonstrative adjective is to "designate" or "point out" something close at hand, near in thought, or something that has just been mentioned.

Texaco next argues that Instruction No. 1 constituted a direct comment on the weight of the evidence in that it marshaled [827] the evidence for the jury and individualized the instruction to Texaco's conduct. In support of this argument, Texaco relies exclusively upon Gulf Coast State Bank v. Emenhiser, 562 S.W.2d 449 (Tex. 1978), but that case does not support Texaco's contention.

Gulf Coast involved an action to recover funds that proved to be uncollectible. The trial court submitted four special instructions in which it recited the duties of a collecting bank, stated the legal effect of certain facts, directed the jury to find for the defendants if it believed certain facts, and asked the jury whether it "found for defendants." The reviewing court stated that it was "not permissible for the trial court to marshal the facts or parties' contentions in an instruction, and then instruct the jury to find for one party if they believed certain facts to be true." Id. at 453 (emphasis added). Reversal was required, because the court repeatedly instructed the jury that if it found certain facts, then it should find for the defendants. Individualization of the parties was never discussed in that case.

In the instant case, Instruction No. 1 advised the jury of the law and the burden of proof in assessing Special Issue No. 2 (knowledge). Actually, this instruction favored Texaco by informing the jury of Pennzoil's burden of proof, i.e., Pennzoil had to prove, by a preponderance of the evidence, that Texaco's interference was intentional. "The Court, in its charge to the jury, must so present its charge as to make the law contained in the charge applicable to the facts in the case." Herrera v. Balmorhea Feeders, Inc., 539 S.W.2d 84, 88 (Tex.Civ.App.—El Paso 1976, writ ref'd n.r.e.). This is what the trial court did.

Texaco's 18th point of error is overruled.

In Texaco's 19th point of error, it complains that Instruction No. 2 to Special Issue No. 2 (knowing interference) improperly emphasizes Pennzoil's evidence on knowledge of a contract.

Instruction No. 2 to Special Issue No. 2 states:

In order to find that Texaco had knowledge of the agreement, if any, it is not necessary that Texaco had an accurate understanding of the legal significance of the facts which produced the agreement. If Texaco knew the facts that gave rise to the agreement, then it knew of the agreement, even if it did not believe that those facts gave rise to an agreement, and even if it believed that any agreement that did exist violated the law. You may also find that Texaco knew of the agreement, if any, if you find that Texaco intentionally or willfully refused to ascertain the facts or if it exercised bad faith. Texaco is also charged with all the knowledge, if any, of its agents and representatives, whether communicated to each other or not.

At trial, Texaco objected to Instruction No. 2 in pertinent part, as follows:

The first two sentences of Instruction 2 are an incorrect statement of the law. Texaco requests that the following instruction be included in the charge to the jury in lieu of these sentences:

In order to find that Texaco knowingly interfered with the contract between the Getty Oil Company, the Trust, the Museum and Pennzoil, if any, it is necessary that Texaco had actual knowledge of the existence of such a contract. In order to have "actual knowledge" of a contract, a party must know that a contract exists. If a party should have known that a contract exists, he does not have "actual knowledge" of that contract.

The first two sentences of Instruction No. 2 are a direct comment on the weight of the evidence in that they imply that Texaco did not have an accurate understanding of the legal significance of the facts in its possession and that Texaco did know of the existence of the agreement.

Texaco contends that a portion of the second sentence in Instruction No. 2 ("[i]f Texaco knew the facts that gave rise to the agreement, then it knew of the agreement....") is incomplete, misleading, [828] and a direct comment on the weight of the evidence. It contends that the court should have given a "balanced" instruction "that if there were facts required for a binding contract that were not known to Texaco then Texaco did not have actual knowledge of the contract."

Under New York law, to recover on its claim of tortious interference with contract, Pennzoil had to establish that Texaco had knowledge of the agreement between the Getty entities and Pennzoil. But it was not necessary that Texaco have full knowledge of the detailed terms of the contract, Gold Medal Farms, Inc., 10 A.D.2d 584, 9 A.D.2d 473, 195 N.Y.S.2d 179. The instruction reflects the description of the knowledge requirement articulated in the Restatement (Second) of Torts § 766. The tort of inducing a breach of contract is a developing area of tort law, and New York courts have looked to the Restatement (Second) for guidance in this area. Section 766, comment i, focuses on the knowledge requirement, providing that although the defendant must know the facts giving rise to the contractual duty, it need not necessarily have an accurate understanding of the legal significance of those facts.

In the instant case, the first and second sentences of Instruction No. 2 instructed the jury that in order for Texaco to be liable, Texaco must have had "knowledge" of the facts giving rise to the contract and not necessarily of the legal ramifications of those facts. We find this to be an acceptable instruction on the element of knowledge.

Texaco's argument, that the instruction should have been balanced, is without merit. This argument is made for the first time on appeal and is therefore waived. Tex.R.App.P. 274. Even if this argument could be inferred from Texaco's trial objections, it is without merit, because there is no requirement that a negative instruction be given in addition to the affirmative one the trial court gave. Tex.R. Civ.P. 277; Saint Paul Mercury Indemnity Co. v. Tarver, 272 S.W.2d 795, 799 (Tex. Civ.App.—Eastland 1954, writ ref'd n.r.e.).

Texaco also asserts, for the first time on appeal, that the instruction's use of the article "the" in the phrase "the agreement" in the first two sentences of Instruction No. 2 is a signal to the jury that the court believed there was an agreement.

In the contested first two sentences of Instruction No. 2, the phrase "the agreement" is used four times. The first time it is used, it is conditioned by the phrase "if any." The latter part of the second sentence uses the indefinite phrases "an agreement" and "any agreement." The entire charge states the conditional "the agreement, if any" numerous times. It is unlikely that the jury rendered an improper verdict because the court here failed to qualify "the agreement."

Finally, Texaco contends that Instruction No. 2 "nudges" the jury toward favoring Pennzoil by emphasizing the significance of the evidence concerning Texaco's investigation of the contract. Texaco presents no argument on this point. Additionally, as noted by Pennzoil, at trial this "nudges" objection was made to the third sentence of Instruction 2; the substance of the argument presented in point 19 refers to the second sentence of the instruction. In its reply brief, Texaco counters Pennzoil by alleging that this "nudges" trial objection was aimed at the whole instruction. However, the trial objection states: "The third sentence in Instruction No. 2 `nudges'...." Texaco's argument presents nothing for review. Point of Error 19 is overruled.

In its 20th and 21st points of error, Texaco claims that Instruction No. 3 to Special Issue No. 2 (knowing interference) improperly emphasizes Pennzoil's evidence on inducement and virtually directs an affirmative answer to Special Issue No. 2.

Instruction No. 3 to Special Issue No. 2 states:

A party may interfere with an agreement by persuasion [sic] alone, by offering better terms, by giving an indemnity against damage claims to the party or parties [829] induced to breach, or by any act interfering with the performance of a legal duty arising from the agreement, such as the duty of good faith performance.

Texaco argues that the court erred in submitting Instruction No. 3, because (1) as written in the disjunctive, the court made it possible for the jury to answer Special Issue No. 2 negatively only if it found that Texaco committed none of the actions, and (2) it is "tailored to dovetail" with Pennzoil's evidence supporting inducement by Texaco. Texaco points out that it offered better terms and gave an indemnity; consequently, this instruction is in effect a direction by the court to the jury to return an affirmative answer.

What is missing in Texaco's argument is any allegation that the instruction, listing possible ways of interfering with an agreement, is a misstatement of the law. Indeed, each of the four acts has been identified as constituting tortious interference under New York law: (1) persuasion (Guard-Life Corp. v. S. Parker Hardware Manufacturing Corp., 50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445; Restatement (Second) of Torts, § 768, Comment "e" (1979)); (2) offering better terms (Gold Medal Farms, 195 N.Y.S.2d at 185); (3) indemnity (American Law Book Co. v. Edward Thompson Co., 41 Misc. 396, 84 N.Y.S. 225, 226 (Sup.Ct.1903)); (4) interference with performance of a legal duty arising from the agreement (Morris v. Blume, 55 N.Y.S.2d 196, 199 (Sup.Ct.), aff'd, 269 A.D. 832, 56 N.Y.S.2d 414 (App.Div.1945)).

Texaco has failed to cite any authority to suggest the court erred in listing four possible specific acts of tortious interference. The only case cited, Lemos, 680 S.W.2d 798, is not supportive. The court there found reversible error in the use of an instruction defining "unavoidable accident," because (1) the instruction was incorrect, and (2) it was appended to an already correct definition as set forth in a prior decision and the Texas Pattern Jury Charges. In the instant case, the instruction is a correct statement of the law.

Points of Error 20 and 21 are overruled.

In Points of Error 22, 23, 24, and 25, Texaco claims that Instruction Nos. 4 and 5 to Special Issue No. 2 (knowing interference) improperly emphasize Pennzoil's evidence in response to Texaco defenses, are unnecessary to the issue presented and constitute direct comments on the weight of the evidence.

Instruction No. 4 to Special Issue No. 2 states:

A competitor has no privilege and is not permitted to interfere with the agreements of those with whom it is in competition. Also, a party is not justified in interfering with the agreement of another simply because it is advancing its own business interests.

Texaco objected to Instruction No. 4 on the following grounds:

Instruction No. 4 is an incorrect statement of the law, since a party is fully justified in interfering with an agreement with another party that is voidable or is terminable at will.

Instruction No. 4 is a direct comment on the weight of the evidence in that it unduly emphasizes evidence which may be relevant to Texaco's intent and does so in a negative manner.

Texaco first contends that this instruction seeks "to collapse the pre-contractual and post-contractual New York torts" by forcing the jury to find liability for the post-contractual tort based on proof of a pre-contractual tort, thus depriving Texaco of the defenses it could have asserted to the pre-contractual tort. It also urges that this instruction was obviously unhelpful in answering Special Issue No. 2.

Pennzoil responds that this instruction was essential to "undo any confusion" presented by Texaco's evidence of business competition because "competition" is only a defense to interference with prospective contractual relations.

Instruction No. 4 is a correct statement of the law. A party's status as a competitor [830] does not protect him from the consequences of interference with an existing contract. Guard-Life Corp., 428 N.Y.S.2d at 631, 406 N.E.2d at 448; see also Restatement (Second) of Contracts § 768(2):

The fact that one is a competitor of another for the business of a third person does not prevent his causing a breach of an existing contract with the other from being an improper interference if the contract is not terminable at will.

Additionally, because the evidence raised the issue of the ramifications of business competition, it was proper to instruct the jury regarding the law in this area. Tex.R.Civ.P. 277. Finally, there were no pleadings seeking relief for interference with a prospective contract, or alleging that the contract was terminable at will; thus the omission of these two exceptions to the general rule was correct.

Instruction No. 5 to Special Issue No. 2 states:

You may find that Texaco knowingly interfered with the Pennzoil agreement, if any, even though the Getty Oil directors, the Museum's President, and Gordon P. Getty, Trustee, were fiduciaries. If those fiduciaries intended to be bound to an agreement with Pennzoil on January 3, they could not avoid that agreement by later seeking or accepting a higher price or a more beneficial arrangement with a third party.

Texaco contends that this instruction is incomplete, misleading, and constitutes a direct comment on the weight of the evidence. Specifically, it contends that the instruction erroneously uses the language "even though," which serves as a direct comment by the court that it did not approve Texaco's argument that the alleged agreement between Pennzoil and Getty violated all fiduciary obligations of the parties and was therefore unenforceable.

Where a breach of fiduciary obligation occurs, the contract entered is valid and enforceable where the bona fide purchaser takes without notice of fraud or misuse by the directors. See Cross Properties, Inc. v. Brook Realty Co., 37 A.D.2d 193, 322 N.Y.S.2d 773, 781 (App.Div.1971), aff'd 31 N.Y.2d 938, 340 N.Y.S.2d 928, 293 N.E.2d 95 (1972); see also Restatement (Second) of Trusts § 284 (1959):

(1) If the trustee in breach of trust transfers trust property to, or creates a legal interest in the subject matter of the trust in, a person who takes for value and without notice of the breach of trust and who is not knowingly taking part in an illegal transaction, the latter holds the interest so transferred or created free of the trust and is under no liability to the beneficiary.

In its reply brief, Texaco asserts that any agreement entered into by a board to foreclose bidding is unenforceable, citing Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del.1986). However, the facts in Revlon are distinguishable. The Revlon board, having before it two bids, rejected the latest offer of one entity and authorized negotiations with the other parties interested in acquiring Revlon. One bidder was privy to certain financial data. The court determined that the board breached its primary duty when it entered into a lock-up agreement on the basis of impermissible considerations at the expense of the shareholders. Consequently, the lock-up agreement could not be sustained.

In our case, the negotiations and alleged agreement with Pennzoil occurred prior to Texaco's offer, so the Revlon case does not control. A reasonable construction of Instruction No. 5 would be that the court sought to advise the jury that the parties' fiduciary obligations were not relevant to the "interference" issue.

Additionally, Texaco's argument, that the use of the "even though" language was an impermissible comment, is without merit. While the use of "even though" language was held to be an impermissible comment in Gulf Insurance Co. v. [831] Vela, 361 S.W.2d 904, 906-907 (Tex.Civ. App.—Austin 1962, writ ref'd n.r.e.), the error was mitigated with the 1973 amendment to Rule 277 that liberalized the practice of giving explanatory instructions. The court in Forney v. Memorial Hospital, 543 S.W.2d 705, 708 (Tex.Civ.App.—Beaumont 1976, writ ref'd n.r.e.), in allowing such "even though" language, articulated that "the test by which an instruction is measured is ... whether it is a misstatement as to the law applicable to the facts." Id.

In the instant case, Instruction No. 5 is a correct statement of the law applicable to the facts of the case, i.e., fiduciaries cannot breach a binding contract for a better offer.

Points of Error 22, 23, 24, and 25 are overruled.

In Point of Error No. 26, Texaco claims that Instruction No. 2 to Special Issue No. 3 improperly directs the jury to consider Pennzoil's evidence on damages.

Instruction No. 2 to Special Issue No. 3 states:

Pennzoil must prove its damages, if any, with a reasonable degree of certainty. This does not, however, require proof as to an absolute mathematical certainty if a wrong has been done from which monetary loss results, you may make a just and reasonable estimate of damages based on relevant data, including opinion evidence, even if the extent of injury cannot be proven precisely. Damages cannot be remote or contingent. (Emphasis added.)

Texaco asserts that the instruction constitutes a direct comment on the weight of the evidence by directing the jury to consider "opinion evidence," that was presented by Pennzoil only.

The charge to the jury must be sufficient to enable the jury to make an assessment of damages on the proper grounds and legal principles. Jackson v. Fontaine's Clinics, Inc., 499 S.W.2d 87, 90 (Tex.1973); Osoba v. Bassichis, 679 S.W.2d 119, 121-22 (Tex.App.—Houston [14th Dist.] 1984, writ ref'd n.r.e.). Instruction No. 2 is a correct statement of the applicable principles, i.e., the fact that damages in a tort action cannot be ascertained with absolute mathematical certainty does not bar recovery if they can be approximately fixed. See Steitz v. Gifford, 280 N.Y. 15, 19 N.E.2d 661 (1939). Additionally, in the highly specialized field of oil and gas, expert testimony that is free of conjecture and speculation is proper and necessary to determine and estimate damages. Amoco Production Co. v. Alexander, 594 S.W.2d 467, 477, 622 (Tex.Civ.App.—Houston [1st Dist.] 1979), modified on other grounds, 622 S.W.2d 563 (Tex.1981).

The instruction here does not mandate that the jury accept the expert opinion testimony. Rather, by its use of "may" (meaning "have permission to"), the instruction allows the jury to consider all of the evidence, opinion or otherwise.

Point of Error No. 26 is overruled.

Texaco's remaining points of error pertaining to the charge argue that the charge contains numerous errors of substantive law. Its first grouping of points of error complains of the failure to submit special issues on essential elements.

Specifically, Texaco urges that Pennzoil failed to submit a special issue that would support a finding of a valid, binding contract (Points of Error Nos. 27-28); and that Pennzoil failed to submit a special issue on actual knowledge of the alleged contract (Point of Error Nos. 29-30, 35).

Texaco contends that Special Issue No. 2 failed to submit the element of "knowledge" to the jury. Special Issue No. 2 asked:

Do you find from a preponderance of the evidence that Texaco knowingly interfered with the agreement between Pennzoil, and the Getty entities, if you have so found?

Texaco contends that this issue collapses the second and third elements of Pennzoil's [832] cause of action—knowledge and inducement.

Texaco again presents a grammar argument, insisting that as framed ("knowingly" modifies "interfered"), the "knowledge" element is converted into knowledge of the acts of interference, rather than knowledge of the contract with Pennzoil. This argument is without merit. As used in this issue, "knowingly" is an adverb modifying the verb "interfered," and answering the question "how?" [did Pennzoil interfere with the agreement?]. A reasonable reading is that the issue asks about interference, with knowledge of the agreement.

Texaco also argues that, even if properly worded, Instruction No. 2 to Special Issue No. 2 erroneously tells the jury that it can answer affirmatively, without a finding of "knowledge" as defined by New York law. Instruction No. 2 states:

In order to find that Texaco had knowledge of the agreement, if any, it is not necessary that Texaco had an accurate understanding of the legal significance of the facts which produced the agreement. If Texaco knew the facts that gave rise to the agreement, then it knew of the agreement, even if it did not believe that those facts gave rise to an agreement and even if it believed that any agreement that did exist violated the law. You may also find that Texaco knew of the agreement, if any, if you find that Texaco intentionally or willfully refused to ascertain the facts or if it exercised bad faith. Texaco is also charged with all the knowledge, if any, of its agents and representatives, whether communicated to each other or not.

Texaco contends that this instruction presents a "should have known" standard that is insufficient under New York law. Roulette Records, Inc. v. Princess Production Corp., 15 A.D.2d 335, 338, 224 N.Y. S.2d 204, 207 (App.Div.), aff'd, 12 N.Y.2d 815, 236 N.Y.S.2d 65, 187 N.E.2d 132 (1962). Because of such argument, Texaco requested the following Special Issue No. 105 and Instruction F, which were denied:

Special Issue No. 105

Do you find from a preponderance of the evidence that at the time of the execution of the Texaco Museum Stock Purchase Agreement, Texaco had actual knowledge of a contract among the Getty Oil Company, the Museum, the Trust, and Pennzoil?

Answer "Texaco had actual knowledge" or "Texaco did not have actual knowledge."

Texaco Instruction: F

In order to find that Texaco knowingly interfered with the contract between the Getty Oil Company, the Trust, the Museum, and Pennzoil, if any, it is necessary that Texaco had actual knowledge of the existence of such a contract. In order to have "actual knowledge" of a contract, a party must know that a contract exists. If a party should have known that a contract exists, he does not have "actual knowledge" of that contract.

The requested issue and instruction were properly denied because Instruction No. 2 to Special Issue No. 2 adequately describes the knowledge requirement of the tort of inducing a breach of contract. See Gold Medal Farms, Inc., 195 N.Y.S.2d at 185; Restatement (Second) of Torts § 766, comment i. Points of Error 27 through 30, and 35 are overruled.

In Points of Error 32, 33, and 34, Texaco argues that Special Issue No. 2 and the accompanying instructions conflict with applicable New York law. It contends that the third sentence of Instruction No. 2 creates a "duty to investigate" that is contrary to New York law. Appellant requested an instruction that would have told the jury that a party had no duty to investigate concerning the existence of a contract beyond the information in its possession and any representations by parties to the contract.

In Kelly v. Central Hanover Bank, 11 F.Supp. 497 (S.D.N.Y.1935), rev'd on other [833] grounds, 85 F.2d 61 (2d Cir.1936), the court held that a negligent failure to investigate further would not lead to liability for interference with a contract, but did imply that a willful refusal to ascertain the facts would be more culpable.

I need not now determine whether knowledge that there were outstanding debentures would have led an ordinarily prudent man of [the defendant's] financial experience, ... to inquire whether they contained any, and if so what, restrictive covenants. Even if an ordinarily prudent man would have made such inquiry, [the defendants'] failure so to do cannot be attributed and is not charged to be due to any intentional or willful refusal to ascertain the facts.

At the best, there would be a negligent interference with contractual rights which, unlike an intentional invasion thereof, does not evidence bad faith and therefore does not call for an extension of equity jurisdiction beyond that heretofore established. In all of the cases cited in which specific performance of a contract was decreed against a third person, full knowledge on the part of the defendant of the plaintiff's contractual rights was proved. In granting such relief, the courts ordinarily stress the defendant's lack of good faith.

Kelly, 11 F.Supp. at 513 (emphasis added); see also Entertainment Events v. MGM, No. 74 Civ. 2959.

In this case, the court did not submit a charge on "negligent interference." Rather, it submitted an "intentional or willful refusal to ascertain the facts" or "lack of good faith" factor, as implied in Kelly. As such, the charge is an acceptable description of New York law.

Finally, Texaco contends that the third sentence comments on the weight of the evidence, because there is no evidence to support its submission. This argument is waived because there was no corresponding trial objection. Points of Error 32 through 34 are overruled.

In Points of Error 36 through 39, Texaco claims that Instruction No. 2 to Special Issue No. 2 conflicts with applicable law, which would not attribute to Texaco knowledge possessed by the Getty entities or Getty agents. It attacks the fourth sentence of Instruction No. 2 to Special Issue No. 2: "Texaco is also charged with all the knowledge, if any, of its agents and representatives, whether communicated to each other or not." Texaco fails to argue or cite to any supporting authority as to why the fourth sentence allegedly misstates the law. Consequently, that contention is waived. Tex.R.App.P. 74(f); Richardson v. Office Buildings, 704 S.W.2d 373, 375-76 (Tex.App.—Houston [14th Dist.] 1985, no writ).

Texaco next argues that because the words "agents" and "representatives" are not defined or qualified in Instruction No. 2, confusion is created as to "whose" knowledge can be attributed to appellant, i.e., alleging that knowledge of the Getty entities can also be attributed to Texaco. It urges that the harm in this was manifested when, on November 18, during jury deliberations, the jury asked whether "Texaco [was] liable for the actions of Lipton [the Museum's attorney], Winokur [Getty Oil's attorney], and Boisi [Getty Oil's investment banker]."

In response to this inquiry, the court instructed the jury as follows:

The court is unable in any way to specifically answer your question other than to advise you that you are to follow the Instruction of the Court, the Special Issues as encompassed in the Court's charge and the evidence as received in your court.

Texaco initially agreed to this instruction, ("This is fine with us Your Honor"), but the following day, requested the following instruction, which was denied:

The Court now instructs you that a party is only responsible for the actions of its own employees, agents or representatives acting within the scope of their employment.

Tex.R.Civ.P. 285 concerns the jury's communication with the court. Tex.R.Civ.P. [834] 286 provides that the jury may receive further instructions, "but no instruction shall be given except in conformity with the rules relating to the charge." Tex.R.Civ.P. 274 is such a rule "relating to the charge."

Tex.R.Civ.P. 274 provides that a party objecting to the charge must point out the objection or it is waived. In the instant case, Texaco failed to object to the instruction given until one day later. Consequently, such failure to object constitutes a waiver. See George Pharis Chevrolet, Inc. v. Polk, 661 S.W.2d 314, 317-18 (Tex.App.— Houston [1st Dist.] 1983, no writ).

Finally, Texaco argues that the harm of Instruction No. 2 is magnified by Pennzoil's statements during voir dire and closing argument, that Texaco could be held liable for the knowledge and conduct of the Getty entities or agents. The complained of statements during voir dire are:

You may be curious as to why Texaco is the only party here.... It's because they have indemnified Getty. They own Getty. They are the only necessary party to this action.

Whatever would befall Getty under the indemnity, it's Texaco's responsibility.

The complained of statements in closing argument are:

[Y]ou are to consider not just Texaco but also the circumstances and I suggest to you, these Getty people. And there was only one way that Texaco acquired Getty Oil Company. Indemnities. They were essential.

They [Texaco] bought and paid for this lawsuit when they gave the indemnities.

And they ask, you know, you don't see Getty in here, you don't see the Museum in here, you don't see the Trust in here. For what purpose?

For what purpose, Jury?

After they've guaranteed them and protected them from this very contingency, Pennzoil's lawsuit.

Well, why would there by any question in having them here, or for what reason?

Except for the voir dire shown above, Texaco failed to object to the argument. Where no objection is made, the general rule is that any impropriety is waived. Standard Fire Insurance v. Reese, 584 S.W.2d 835 (Tex.1979).

Furthermore, Texaco did not object to the voir dire argument until almost one week later. In both instances, however, reversal must come from an evaluation of the entire case, Luna v. North Star Dodge Sales, Inc., 667 S.W.2d 115, 120 (Tex.1984), and reversal is mandated only when the argument was so prejudicial that an instruction to disregard would not have removed the prejudice produced. Southern Pacific Co. v. Hubbard, 297 S.W.2d 120, 125 (Tex.1957).

The Texas Supreme Court set out the test for evaluating jury argument in Standard Fire Insurance Co. v. Reese, 584 S.W.2d at 839. The complainant must prove:

(1) an error (2) that was not invited or provoked, (3) that was preserved by the proper trial predicate, such as an objection, a motion to instruct, or a motion for mistrial, and (4) was not curable by an instruction, a prompt withdrawal of the statement, or a reprimand by the judge. 3 McDonald, Texas Civil Practice sec. 13.17.2 (1970). There are only rare instances of incurable harm from improper argument. The complainant has the further burden to prove (5) that the argument by its nature, degree and extent constituted reversibly harmful error. How long the argument continued, whether it was repeated or abandoned and whether there was cumulative error are proper inquiries. All of the evidence must be closely examined to determine (6) the argument's probable effect on a material finding. (7) Importantly, a reversal must come from an evaluation of the whole case, which begins with the voir dire and ends with the closing argument. The record may show that the cause is weak, strong, or very close. From all of these factors, the complainant must show that the probability that the improper argument caused harm is [835] greater than the probability that the verdict was grounded on the proper proceedings and evidence. Aultman v. Dallas Ry. & Term. Co., 152 Tex. 509, 260 S.W.2d 596 (1953). Rules 434, 503, Tex. R.Civ.P.

Texaco has failed to show how it was harmed by the complained-of argument. In all practicality, these few statements, buried within 4 ½ months of testimony, had little or no effect on the jury's verdict. We also disagree that the reference to charging Texaco with the knowledge of its agents confused the jury to such an extent that reversal is required.

Points of Error 36, 37, 38, and 39 are overruled.

In Points of Error 40-41, Texaco contends that Special Issue No. 3 and the accompanying instructions do not present the proper measure of damages. It contends that the proper measure was the stock price differential.

Special Issue No. 3 asks:

What sume of money, if any, do you find from a preponderance of the evidence would compensate Pennzoil for its actual damages, if any, suffered as a direct and natural result of Texaco's knowingly interfering with the agreement between Pennzoil and the Getty entities, if any?

Instruction No. 1 to Special Issue No. 3 states:

1. The measure of damages in this case is the amount necessary to put Pennzoil in as good a position as it would have had if its agreement with the Getty entities, if any, had been performed.

The instruction as given is a correct statement of the benefit of the bargain measure of damages for breach of contract under New York law. Dillon v. Magner, 29 A.D.2d 759, 760, 287 N.Y.S.2d 519, 521 (App.Div.1968); Hutchins v. Bethel Methodist Home, 370 F.Supp. 954, 964 (S.D.N.Y. 1974). Additionally, Texaco requested practically the same language in Requested Instruction J: "The measure of damages in this case is the amount necessary to put Pennzoil in as good a position as it would have had if its agreement, if any, with the Getty Oil Company, the Museum, and the Trust had been performed." Consequently, Texaco may not complain on appeal, when the instruction given is substantially the same as that requested. Dailey v. Wheat, 681 S.W.2d 747, 757 (Tex.App.— Houston [14th Dist.] 1984, writ ref'd n.r.e.). Nor may Texaco invite error by encouraging the court to submit an instruction and then complain on appeal. New Trends, Inc. v. Stafford-Lowdon Co., 537 S.W.2d 778, 783 (Tex.Civ.App.—Fort Worth 1976, writ ref'd n.r.e.).

Texaco next complains of the denial of the following Requested Instruction K:

The measure of damages in this case is the difference, if any, between the fair market value of 3/7 of the stock of Getty Oil Company, less $112.50 per share. Fair market value is the price a willing buyer would pay a willing seller.

An instruction is proper if it finds support in any evidence or inferences therefrom and if it would aid the jury in answering the special issues. Atlantic Mutual Insurance Co. v. Middleman, 661 S.W.2d 182, 187 (Tex.Civ.App.—San Antonio 1983, writ ref'd n.r.e.); Mejia v. Liberty Mutual Insurance Co., 544 S.W.2d 690, 691 (Tex.Civ.App.—Houston [14th Dist.] 1976, no writ). Texaco's requested instruction K contains the measure of damages for breach of contract to purchase stock, but it is an incorrect measure of damage in a tortious interference case.

Points of Error 40 and 41 are overruled.

In Points of Error 42-45, Texaco claims that Special Issue No. 4 and instructions to Special Issue Nos. 4 and 5 conflict with the standards for punitive damages under applicable law.

Special Issue Nos. 4 & 5, relating to punitive damages, ask:

No. 4

Do you find from a preponderance of the evidence that Texaco's actions, if any, [836] were intentional, willful and in wanton disregard of the rights of Pennzoil, if any?

If and only if you have answered Special Issue No. 4 "We do", then you are to answer Special issue No. 5.

No. 5

What sum of money, if any, is Pennzoil entitled to receive from Texaco as punitive damages?

The accompanying instruction states:

Punitive damages means an amount that you may in your discretion award as an example to others and as a penalty or by way of punishment, in addition to any amount you may have found as actual damages.

It is not necessary to show that Texaco was motivated by ill will or hatred of Pennzoil.

In assessing punitive damages, if any, you may take into account not merely the act or acts of Texaco itself. You may also take into account all the circumstances, including Texaco's motives and the extent of damages, if any, suffered by Pennzoil.

Pursuant to a jury request, the following definition of "wanton disregard" was given:

Wanton is used in its ordinary sense and synonymous with reckless or heedless disregard of the rights of others.

Texaco objected to Special Issue Nos. 4 and 5 and the accompanying instructions and requested the following:

You are instructed that you should find no punitive damages if you believe that Texaco acted on advice of counsel.

You are instructed that a party acts "maliciously" if its conduct was morally culpable, was motivated by evil and reprehensible motives, or was outrageous.

Texaco contends that Special Issue No. 4 is an incorrect statement of New York law, because under said law, before there can be an award of punitive damages, there must be a finding of actual malice or ill will, and moral culpability or reprehensible motives. For support of this assertion, Texaco relies upon Guard-Life Corp., 67 A.D.2d at 659, 412 N.Y.S.2d at 625. Pertinent here is the following language from the Appellate Division's decision in Guard-Life:

There is no evidence here of "actual malice or ill will" (Anthony v. George T. Bye, Inc., 243 App.Div. 390, 391, 217 N.Y.S. 222, 223), a wrong "morally culpable" or "actuated by evil and reprehensible motives" (Walker v. Sheldon, 10 NY2d 401, 404, 223 N.Y.S.2d 488, 490, 179 N.E.2d 497, 498) or a wrongful act "done willfully, wantonly or maliciously" (Huschle v. Battelle, 33 A.D.2d 1017, 308 N.Y.S.2d 235). To the contrary, the record shows that defendant's motive was to secure an advantageous business relationship for itself.

Texaco contends that in addition to finding a willful, wanton act, the jury must also find (1) actual malice or ill will and (2) a wrong, morally culpable or actuated by evil and reprehensible motives.

Texaco's interpretation of the Appellate Division's opinion in Guard-Life is erroneous. Guard-Life does not mandate a finding of each of the above. In Universal City Studios, Inc. v. Nintendo Co., 615 F.Supp. 838, 863 (D.C.N.Y.1985), the court upheld an award of punitive damages pursuant to a finding of tortious interference with a contract. The court wrote:

In New York:

exemplary damages are recoverable in all actions ex delicto based upon tortious acts which involve ingredients of malice, fraud, oppression, insult, wanton or reckless disregard of the plaintiff's rights, or other circumstances of aggravation, as a punishment of the defendant and admonition to others.

36 N.Y.Jur.2d sec. 176 (1984); Giblin v. Murphy, 97 A.D.2d 668, 469 N.Y.S.2d 211, (3d Dept.1983). See also Le Mistral, Inc. v. Columbia Broadcasting System, 61 A.D.2d 491, 402 N.Y.S.2d 815 [837] (1st Dept.1978). Punitive damages are awarded "not for the unintended result of an intentional act, but for the conscious disregard of the rights of others ..." Hartford Acc. v. Village of Hempstead, 48 N.Y.2d 218, 422 N.Y.S.2d 47, 53, 397 N.E.2d 737, 743 (Ct.App.1979).

The court later referred to the defendant's "reckless disregard" of plaintiff's rights and the "wantonness of the conduct involved." See also Hornstein v. Podwitz, 254 N.Y. 443, 173 N.E. 674.

It appears that there is no requisite "laundry list" of adjectives defining a defendant's behavior in a tortious interference action, but a jury finding that the defendant's conduct was intentional, willful, and in wanton disregard of appellee's rights is sufficient to support a punitive damages award.

Texaco next argues that the jury should have been instructed that no punitive damages are recoverable where a defendant acted on the advice of counsel. Under New York law, acting on the advice of counsel is only one factor to be considered "in the context of the totality of the circumstances." Universal City Studios, Inc., 615 F.Supp. at 862 (citing Central Soya Co. v. George A. Hormel & Co., 723 F.2d 1573, 1577 (Fed.Cir.1983)). Pennzoil asserts that Texaco failed to present evidence of its advice of counsel and punitive damages and that the court thus did not err in refusing the requested instruction. See Atlantic Mutual Insurance Co. v. Middleman, 661 S.W.2d 182. There was other evidence of Texaco's reliance on advice of counsel, but, in any event, the instruction was not required because it incorrectly stated New York law.

Points of Error 42 through 45 are overruled.

ALLEGED ERRORS IN THE COURT'S EVIDENTIARY RULINGS

Texaco's Points of Error 70 through 79 complain of the trial court's wrongful admission of evidence and of its wrongful exclusion of admissible evidence. To obtain reversal of a judgment based on error in the admission or exclusion of evidence, an appellant must show error that was calculated to cause and probably did cause rendition of an improper judgment. Tex.R. App.P. 81(b)(1). Reversible error does not usually occur in connection with rulings on questions of evidence unless the whole case turns on the particular evidence admitted or excluded. Atlantic Mutual Insurance Co. v. Middleman, 661 S.W.2d 182, 185 (Tex.App.—San Antonio 1983, writ ref'd n.r.e.).

Texaco's 70th point of error complains that Pennzoil's witness, Dr. Thomas D. Barrow, was allowed to give improper legal opinions. It specifically alleges that Dr. Barrow was allowed to testify that a binding agreement had been reached between the Getty entities and Pennzoil, as follows:

Based on the evidence that I have seen and only as an experienced executive who served on boards, I would come to the conclusion that the Getty board had reached an agreement with Pennzoil.

* * * * * *

It would appear to me that the intent of the parties was clearly evidenced by their agreement and that I've seen nothing in what I have read that would indicate anything to the contrary.

Before either of the above statements were made, Dr. Barrow testified that he had read the "Copley notes," the Memorandum of Agreement between Getty Oil, the Museum, the Trust, and Pennzoil, and the press release issued by Getty Oil on January 4. Dr. Barrow qualified his testimony by stating that "his opinions were given only as an experienced executive who served on boards," based on what he had read in the aforementioned documents.

Rule 702, Texas Rules of Evidence, concerning testimony by experts, provides:

Testimony by Experts

If scientific, technical, or other specialized knowledge will assist the trier of [838] fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise.

Under the rule, given the limitations the witness placed on his testimony, we find no reversible error.

Texaco's Point of Error 71 contends that Pennzoil's CEO, Liedtke, was allowed to testify, in a purely conclusory manner, that Pennzoil had reached a binding contract with Getty Oil, even though the bulk of his testimony was not based on personal knowledge.

Texaco argues that Liedtke's following testimony about the Copley notes was inadmissible: (1) that the words "accept the Pennzoil proposal provided that the amount being paid relating to ERC be $5 per share" meant acceptance of everything in the Memorandum of Agreement except the price term, and (2) provisions in the notes relating to executive compensation "means Getty Oil thought they had a deal with us."

Contrary to Texaco's contention, Liedtke did not testify that Getty Oil and Pennzoil had a binding contract, nor did he testify about events of which he had no knowledge. He testified to what certain parts of the Copley notes, which he had read, meant to him. In fact, many witnesses, both for Texaco and Pennzoil, gave their opinion of whether there was a binding agreement based on their interpretation of statements or events.

We find that the testimony complained of was admissible under rule 701, Tex.R. Evid.^[1]

In its 72nd point of error, Texaco complains of the exclusion of testimony relating to a January 5 conference between Getty Oil and Pennzoil lawyers. In its bill of exceptions, Getty's lawyer Winokur testified that at the meeting, Getty's lawyers told Pennzoil lawyers that Pennzoil "can't buy the Museum shares because of Rule 10b-13."^[2]

When Pennzoil's lawyer Cialone asked if rule 10b-13 applied, Winokur said that one of Getty Oil's lawyers responded:

Yes, because it applies not only to transactions which actually take place while there is a tender but to purchases that are arranged while a tender is in progress. And if you were to arrange now to buy the Museum shares that arrangement would have been made during the time the tender offer was outstanding.

Cialone asked if that was correct, and Pennzoil lawyer Hertz responded, "Yes, I think he's right. I think he's right as to what the rule says." He then asked Getty Oil attorney Katz what he would do; Katz answered that he would call his partner (a former SEC lawyer) to see what could be done. Cialone then asked him to call his partner.

Texaco also offered deposition testimony relating to this same discussion from Pennzoil attorney Hertz and Getty Oil attorney Katz.

Pennzoil attorney Hertz's testimony concerning the January 5 lawyers' meeting essentially consisted of the following questioning by Texaco lawyers:

Question: Did you volunteer information to any other representative of Pennzoil concerning the matter of Pennzoil offering to purchase shares of a stockholder during the existence of the tender offer but outside the tender offer?

[839] Answer: I did not volunteer it.

Question: Did you discuss that with any representatives of Pennzoil?

Answer: Yes.

Question: With whom?

Answer: I think it was Mr. Cialone.

Getty attorney Katz's testimony was somewhat more detailed. He related his memory of the January 5 conversation with Cialone as follows:

Answer: In addition to having substantive business objections to an acquisition of the Museum's shares by Pennzoil, I raised the question with Joe (Cialone) as to how Pennzoil could agree to acquire— Pennzoil or the Company acting basically at the request of Pennzoil—could agree to acquire the Museum shares as part of the overall transaction, which was what had been suggested by both Pennzoil, as well as the Museum and the Trust.

In view of the pending tender offer, I told Joe that in my view it was a clear violation of Rule 10(b)13 for Pennzoil or for the company acting at the behest of Pennzoil to agree to acquire the Museum shares during the pendency of this tender offer.

Question: What was Mr. Cialone's response?

Answer: At first, it didn't seem to worry him and we raised this concern, but he didn't seem troubled.

Later he came back and he asked me, `Are you really concerned about this?' And I said, `Literally, it would be doing exactly what the rule on its face prohibits,' and he said to me, `Well, what would you do?'

And I said, `I would call Harvey Pitt, who is my partner in the Washington office who is general counsel to the SEC and who is very familiar with this type of regulation, and I would get his advice, but I would not go ahead without consulting with more people in my firm and do a transaction which, to me, violated the rule.'

I said to Joe, `Do you want me to call Harvey? I will call him if you want me to,' and he said, `Fine.'

* * * * * *

Question: Did you say anything about going ahead with the transaction without some analysis of this problem?

Answer: I had previously communicated to Joe that, putting aside 10(b)13 concerns, that we did not believe that the board would authorize a transaction where the Museum would be treated differently than the other shareholders of the company, and that meant not only in terms of the consideration the Museum would receive, but when they would receive it.

Texaco contends that this evidence was offered to negate Pennzoil's intent to be bound, and was improperly excluded. It argues that the testimony was offered to prove that Pennzoil believed it had not yet entered and could not enter a binding agreement until its pending tender offer was withdrawn. The agreement and intent to be bound, if there was such an intent, had been formed two days previously.

The testimony does not support a conclusion that the Pennzoil lawyers by reason of the above after-the-fact conversations, did not consider Pennzoil to be bound by the agreement. The testimony only shows only that Pennzoil lawyers were alerted by Getty Oil lawyers to the possibility that while the tender offer was in effect, the purchase of the Museum stock by Pennzoil might violate an SEC rule. Rule 403, Tex. R.Evid., authorizes exclusion of testimony that is not, on balance, sufficiently probative to justify admissibility. The trial judge properly excluded the proffered evidence.

In Point of Error 73, Texaco complains of the exclusion of the complaint Pennzoil filed in the Delaware Chancery Court in which Pennzoil sought equitable relief. Texaco argues that paragraph 16 of the complaint explicitly recognizes that a Getty Oil board meeting would have had to be held on Friday, January 6, before a definitive merger agreement could have been executed.

Paragraph 16 of the complaint provides:

During the evening of January 3 and through the day of January 4, lawyers [840] for Pennzoil and the Trustee prepared a draft of an implementing agreement. Discussions concerning the draft implementing agreement were held between representatives of all parties throughout the day. On the evening of January 4, Pennzoil and the Trustee submitted their draft implementing agreement to the Museum and Getty. During the late afternoon and evening of January 5, lawyers for the Trustee, Getty and Pennzoil met and revised the draft implementing agreement. These efforts were concluded at 1:00 a.m. Friday, January 6. At no time did any of the lawyers or any of the parties suggest any modification of any of the substantive terms regarding the number of shares to be purchased, the price or the form of consideration agreed to by the Getty board on Tuesday, January 3. Thus, by 1:00 A.M., Friday, January 6, the implementing agreement was substantially complete, except for certain technical matters that Pennzoil's and Getty's representatives agreed could be resolved in time for board meetings and execution before the end of the day Friday.

Texaco's specific complaint concerns the last sentence in the paragraph. It contends that this sentence confirms Texaco's position that additional action by the Getty directors was necessary before the parties would be bound.

Pleadings in other actions that contain statements inconsistent with the party's present position are receivable as admissions. St. Paul Fire & Marine Insurance Co. v. Murphree, 357 S.W.2d 744, 747 (Tex. 1962). Rule 801(e)(2), Tex.R.Evid., provides that admissions by a party-opponent are not hearsay statements and thus are admissible.

The Pennzoil complaint filed in Delaware is not inconsistent with Pennzoil's position that a binding agreement was effected on January 3. A reasonable reading of the sentence suggests that work was being done on an "implementing agreement" and that the only matters left to be resolved prior to board meetings were "certain technical matters." Additionally, earlier in the paragraph, there is an express qualification: "At no time did any of the lawyers or any of the parties suggest any modifications of any of the substantive terms regarding the number of shares to be purchased, the price or the form or consideration agreed to by the Getty board on Tuesday, January 3." This is consistent with Pennzoil's position. Thus it is not an admission. The trial judge properly excluded the complaint.

Additionally, error, if any, would be harmless under rule 81(b)(1), Tex.R. App.P., because the same evidence contained in the petition, i.e., that the parties were doing additional work on an implementing contract with a view toward formally executing it on January 6, was presented to the jury throughout the trial.

In Texaco's 74th through 78th points of error, it claims that Pennzoil was allowed to introduce inadmissible hearsay to prove the existence of a contract.

First, it claims that the trial court improperly admitted affidavits of Martin Siegel, the Trust's investment banker, and Charles Cohler, a Trust lawyer, and the transcribed oral argument of Cohler, all from a California temporary injunction suit. We find no merit to this claim because both Cohler and Siegel testified at the trial of this case, and their trial testimony did not conflict with that previously given during the California hearing. Texaco correctly contends that the documents came within no exception to the hearsay rule and were thus inadmissible. But rather than prejudice Texaco, it appears to have reinforced its contention that there were other matters to attend to before the contract between Pennzoil and the Getty entities would become binding. There is no harmful error. Tex.R.App.P. 81(b)(1).

Texaco next claims that notes made by Getty Oil general counsel Ralph Copley of the January 3 Getty Oil board of [841] directors meeting were improperly admitted.

Pennzoil initially offered only that part of the notes pertaining to the 15-1 vote of the board on the Pennzoil proposal. Texaco properly objected to the notes being admitted into evidence, but after its objection was overruled, it offered the remaining portion of the notes into evidence. Thereafter, Texaco read the unoffered part of the notes to the jury, and had several of its officers testify about their impressions of the notes.

During voir dire, Texaco's counsel told the jury panel of the notes' existence, explained the significance of the notes, and promised the jury that they would be informed of the notes' contents. Finally, in his closing argument, Texaco's counsel vouched for the veracity and reliability of the notes.

A party to an appeal may not complain of improper evidence offered by the other side when it introduced the same or similar evidence. McInnes v. Yamaha Motor Corp. U.S.A., 673 S.W.2d 185, 188 (Tex.1984), cert. denied, 469 U.S. 1107, 105 S.Ct. 782, 83 L.Ed.2d 777 (1985). There is no error.

Texaco next complains of the admission into evidence of a handwritten note regarding the January 3 Getty board meeting made by C. Stedman Garber, Getty Oil treasurer. The note was allegedly made by Garber during or after a phone conversation with Copley or Bland (Getty vice-president). The note contains the Pennzoil proposal as approved by the Getty Board on January 3. This evidence is in the record from many different witnesses, and is particularly cumulative of part of the Copley notes. The Garber note does not say or indicate that the agreement was complete or binding, but merely that the board, with the exception of Chauncy Medberry, agreed that the "deal should be done." Any error was harmless. Id. at 188.

Texaco urges that the trial court erred in allowing Sidney Petersen, Getty Oil CEO, to testify that a Saudi Arabian businessman told him that "Gordon Getty told him (the Saudi) that it was a `done deal,'" implying that Pennzoil and the Getty entities had a binding agreement. Though Texaco claims that it lodged an objection that was overruled, we can find neither an objection nor a court ruling. In absence of an objection, the complaint is waived. Wilfin, Inc. v. Williams, 615 S.W.2d 242, 244 (Tex.Civ.App.—Dallas 1981, writ ref'd n.r.e.).

Texaco next urges that a Fortune magazine article written by reporter Peter Nulty was hearsay and that its admission into evidence was error. In the article, Nulty quotes Getty CEO Petersen as saying "[w]e thought there was a better deal out there, but it was a bird-in-the-handish situation. We approved the deal but we didn't favor it."

We agree with Texaco's contention that the magazine article was hearsay. However, such articles may become admissible if properly verified. In Sherrill v. Estate of Plumley, 514 S.W.2d 286 (Tex. Civ.App.—Houston [1st Dist.] 1974, writ ref'd n.r.e.), an authority relied on by Texaco, this Court held an obituary appearing in a newspaper to be hearsay and inadmissible under the business records act, Tex. Rev.Civ.Stat.Ann. art. 3737e (Vernon 1964), because it was not shown at trial that the author had personal knowledge of the matters contained in the article.

By contrast, in this case, the article's author testified that he interviewed Petersen and that even though he could not swear that the quote contained the exact words of Petersen, it was essentially correct. Petersen admitted that he may have said, "yes, we have an agreement in principle with Pennzoil but we thought there were better things around."

In Southern Savings & Loan Association v. Lewis, 536 S.W.2d 677 (Tex.Civ.App. —Waco 1976, writ ref'd n.r.e.), the court held that exhibits that were otherwise inadmissible as hearsay were properly admitted [842] after a witness who was familiar with the data contained in them had testified about the correctness of the information in the documents.

Rule 803(5), Tex.R.Evid., adopted September 1, 1983, changed the existing rule regarding past recollection recorded, by providing that a memorandum or record may be read into evidence, but may not be received as an exhibit unless offered by the adverse party. Apparently the rules committee felt that there was a danger that the jury would give undue weight or credence to the written document if it were admitted as an exhibit.

We are of the opinion that oral evidence of the Petersen statement was admissible to impeach Petersen and as a past recollection recorded, but that the court erroneously admitted the article itself into evidence. However, we perceive no error because the same evidence as the Petersen quote was admitted and used extensively in questioning other witnesses, without objection by Texaco. An objection to evidence is waived by permitting other witnesses to testify without objection to the same complained of evidence. City of Houston v. Riggins, 568 S.W.2d 188, 190 (Tex.Civ.App.—Tyler 1978, writ ref'd n.r. e.).

Texaco's final complaint of the evidentiary rulings claims that the court erred in excluding testimony of William Weitzel, Texaco's general counsel, that he and Morris Kramer, outside counsel to Texaco, advised the Texaco board and management before Texaco contracted with Getty Oil that there was no binding agreement between Pennzoil and the Getty entities. The record is replete with testimony of Texaco management (DeCrane, president; McKinley, CEO; Kinnear, vice-chairman of the board) that each, as well as the board of directors as a body, was advised, before they entered into the Getty merger, that Pennzoil had no binding contract with the Getty entities.

The exclusion of evidence is harmless where the evidence is merely cumulative of other evidence in the record. Reina v. General Accident Fire & Life Assurance Corp., 611 S.W.2d 415, 417 (Tex.1981).

If there was any error, it was harmless. Tex.R.App.P. 81(b)(1).

Texaco's Points of Error 70 through 79 are overruled.

ALLEGED DENIAL OF A FAIR TRIAL

In Points of Error 80 through 85, Texaco claims that it was denied due process and was denied a fair trial because of the posture or actions of the trial judges.

In its Point of Error 80, Texaco contends that:

The trial court and Judge Jordan erred in denying Texaco's motion to recuse or disqualify Judge Farris, letting stand an impermissible appearance of bias and depriving Texaco of its right to a fair trial.

On March 7, 1984, after the filing of the lawsuit, Pennzoil's lead counsel, Joseph Jamail, contributed $10,000 to presiding Judge Farris' campaign fund. On or about October 1, 1984, Texaco filed its motion for recusal or disqualification, asserting that such campaign contribution coupled with Jamail's services on Judge Farris' steering committee created an "appearance of impropriety." Judge Farris declined to recuse himself, and pursuant to rule 18a, Tex.R.Civ.P., the matter was assigned to Judge E.E. Jordan to determine whether Judge Farris should preside over the case. After conducting a hearing, Judge Jordan refused to recuse or disqualify Judge Farris. Texaco first argues that the failure to recuse Judge Farris was error under Texas law.

Under Texas law, the basis for the disqualification of a judge is contained in Article V, Section 11 of the Texas Constitution, which prohibits a judge from sitting in a case where he may be interested, or where he is related to a party by affinity or consanguinity in a degree prescribed by law, or where he was counsel in the case. In [843] the instant case, neither Texaco's trial motion nor its argument on appeal contains any of these constitutional grounds. Rather, it argues that the grounds for recusal rest in Canon 3C of the Code of Judicial Conduct (reprinted in Tex.Rev.Civ.Stat. Ann. Appendix B to Title 14 [Vernon Supp. 1987]), which provides:

(1) A judge should disqualify himself in a proceeding in which his impartiality might reasonably be questioned, including, but not limited to, instances where:

(a) he has a personal bias or prejudice concerning a party....

In support of this argument, Texaco relies upon McLeod v. Harris, 582 S.W.2d 772 (Tex.1979). This reliance is misplaced because McLeod dealt exclusively with the procedural method to be followed when a motion to recuse has been filed. The court held that in all instances where a motion to recuse has been filed in a suit, it is mandatory that the judge in whose court the motion is filed must request the administrative judge to assign another judge to hear the motion for recusal.

Texaco argues that, on McLeod's authority, at least two courts have held that Canon 3C provides the grounds for judicial disqualification: Robb v. Robb, 605 S.W.2d 390 (Tex.Civ.App.—El Paso 1980, no writ), and Manges v. Garcia, 616 S.W.2d 380 (Tex.Civ.App.—San Antonio 1981, no writ). Neither case supports Texaco's argument.

In Robb, the court was presented with a situation in which a trial judge refused to appoint another judge to hear a motion for recusal. The motion was based upon allegations of bias and prejudice due to campaign contributions by attorneys representing appellee. Without addressing the merits of the motion, the appellate court concluded that based upon McLeod, the trial judge erred procedurally in failing to obtain another judge to rule on the motion.

In Manges, the trial court judge had recused himself from all matters involving relator Manges. Manges asserted that the judge was under a duty to act in the case unless he was precluded from so doing because of one of the impediments enumerated in Article V, Section 11 of the Texas Constitution. The appellate court held that Canon 3C contemplates that a judge's refusal to sit may be based upon a reason not included in the constitution. To force a litigant before a judge who maintained a personal bias against the litigant would raise significant due process question.

However, the exact question presented here, whether campaign contributions constitute the "appearance of impropriety" such that recusal is warranted under Canon 3C, has been considered by the San Antonio Court of Appeals and the Texas Supreme Court.

In River Road Neighborhood Association v. South Texas Sports, Inc., 673 S.W.2d 952 (Tex.App.—San Antonio 1984, no writ), and Rocha v. Ahmad, 662 S.W.2d 77 (Tex.App.—San Antonio 1983, no writ), motions to recuse were filed against appellate justices because they had accepted campaign contributions from one of the litigant's attorneys. In River Road, the contributions amounted to 21.7% and 17.1% of the total campaign contributions received by the justices. Speaking from an en banc court in Rocha, Chief Justice Cadena stated:

It is not surprising that attorneys are the principal source of contributions in a judicial election. We judicially know that voter apathy is a continuing problem, especially in judicial races and particularly in contests for a seat on an appellate bench. A candidate for the bench who relies solely on contributions from nonlawyers must reconcile himself to staging a campaign on something less than a shoestring. If a judge cannot sit on a case in which a contributing lawyer is involved as counsel, judges who have been elected would have to recuse themselves in perhaps a majority of the cases filed in their courts. Perhaps the next step would be to require a judge to recuse himself in any case in which one of the lawyers had refused to contribute or, [844] worse still, had contributed to that judge's opponent.

Rocha, 662 S.W.2d at 78.

Additionally, both parties before this Court cite Manges v. Guerra, 673 S.W.2d 180 (Tex.1984), a case in which the appellee filed motions to recuse against three Texas Supreme Court justices. The opinion does not specify that the basis on which the recusal was sought was the receipt of political contributions. See Kilgarlin & Bruch, Disqualification and Recusal of Judges, 17 St. Mary's L.J. 599, 638 (1986); Calvert, Disqualification of Judges, 47 Tex.B.J. 1330, 1337-38 (1984). In denying the motions, the supreme court noted that the challenged justices were qualified under Article V, Section 11 of the Texas Constitution. Manges v. Guerra, 673 S.W.2d at 185. In interpreting the Manges opinion, former Chief Justice Calvert articulated at page 1337:

The opinion seems to the writer to leave not the slightest doubt that the only grounds for disqualification of a judge are those listed in art. 5, sec. 11, of the Constitution, and the grounds set out in Canon 3C(1) should not be considered in the future as grounds for disqualification.

Texaco's Canon 3C argument is overruled.

Texaco next argues that the failure to recuse Judge Farris was error under the Due Process Clause of the United States Constitution.

The United States Supreme Court has recognized that most matters relating to judicial disqualification do not rise to a constitutional level, and that only in extreme cases would disqualification on the basis of bias and prejudice be constitutionally required. Aetna Life Insurance Co. v. Lavoie, 475 U.S. 813, 106 S.Ct. 1580, 1585, 89 L.Ed.2d 823 (1986). Yet, Texaco argues that disallowing recusal of Judge Farris, because Article V, Section 11 of the Texas Constitution provides the sole basis for judicial disqualification in Texas, violated Texaco's due process rights.

The due process clause entitles a person to neutrality in adjudicative proceedings in both civil and criminal cases. Marshall v. Jerrico, Inc., 446 U.S. 238, 242, 100 S.Ct. 1610, 1613, 64 L.Ed.2d 182 (1980). This neutrality helps to guarantee "that life, liberty, or property will not be taken on the basis of an erroneous or distorted conception of the facts or the law" while preserving "both the appearance and reality of fairness." Id.

Fairness requires an absence of actual bias, and our legal system has always endeavored to prevent even the probability of unfairness. In re Murchison, 349 U.S. 133, 136, 75 S.Ct. 623, 625, 99 L.Ed. 942 (1955). As articulated by the Murchison court:

To this end no man can be a judge in his own case and no man is permitted to try cases where he has an interest in the outcome. That interest cannot be defined with precision. Circumstances and relationships must be considered. This Court has said, however, that "Every procedure which would offer a possible temptation to the average man as a judge ... not to hold the balance nice, clear, and true between the State and the accused denies the latter due process of law." Tumey v. State of Ohio, 273 U.S. 510, 532, 47 S.Ct. 437, 444, 71 L.Ed. 749. Such a stringent rule may sometimes bar trial by judges who have no actual bias and who would do their very best to weight the scales of justice equally between contending parties. But to perform its high function in the best way "justice must satisfy the appearance of justice." Offutt v. United States, 348 U.S. 11, 14, 75 S.Ct., 11, 13 [99 L.Ed. 11].

Id.

In the instant case, Texaco argues that Jamail's $10,000 campaign contribution presented the appearance of bias and prejudice; therefore, the refusal to recuse Judge Farris was a violation of Texaco's constitutional rights. In support of this argument, Texaco relies heavily upon Commonwealth Coatings Corp. v. Continental Casualty Co., 393 U.S. 145, 150, 89 S.Ct. 337, 340, 21 L.Ed.2d 301 (1968), asserting that the "refusal [845] to disqualify Judge Farris is in direct conflict with that Supreme Court authority." However, Commonwealth is distinguishable from the present case.

Commonwealth was an appeal from an arbitration award rendered by a three-member panel. One of the arbitrators had a "sporadic" business relationship with the prime contractor, which relationship went so far as to include the rendering of services on the very projects involved in the lawsuit. These facts were never revealed to the petitioner until after the award was made. 393 U.S. at 146, 89 S.Ct. at 338.

In holding that the award should be set aside, the Commonwealth court based its decision upon Tumey v. Ohio, 273 U.S. 510, 47 S.Ct. 437, 71 L.Ed. 749 (1927), a case also cited by Texaco. In Tumey, the court reversed convictions rendered by a mayor of a town because a small part of the mayor's income consisted of court fees and costs collected by him acting in a judicial capacity. The Tumey court held that the due process clause would not permit any "procedure which would offer a possible temptation to the average man as a judge to forget the burden of proof required to convict the defendant, or which might lead him not to hold the balance nice, clear and true between the state and the accused." Tumey, 273 U.S. at 532, 47 S.Ct. at 444. The Tumey court also noted that a decision should be set aside where there is "the slightest pecuniary interest" on the part of the judge. 273 U.S. at 524, 47 S.Ct. at 441.

Finally, the Commonwealth court noted:

It is true that arbitrators cannot sever all their ties with the business world, since they are not expected to get all their income from their work deciding cases, but we should, if anything, be ever more scrupulous to safeguard the impartiality of arbitrators than judges, since the former have completely free rein to decide the law as well as the facts and are not subject to appellate review.

393 U.S. at 148-149, 89 S.Ct. at 339.

The facts of the instant case do not parallel Commonwealth. Judge Farris neither participated with Pennzoil in the case' being tried nor enjoyed even "the slightest pecuniary interest" in the outcome of the trial as did the arbitrator in Commonwealth.

The instant case presents mere allegations of bias and prejudice. As in Aetna, these allegations "are insufficient to establish any constitutional violation." 106 S.Ct. at 1586. There is no evidence in the record that Judge Farris was either biased or prejudiced in any manner or that he was acting as judge in his own case or enjoyed any pecuniary interest in the outcome of the case. Texaco's Point of Error 80 is overruled.

In its Point of Error 81, Texaco alleges that:

[t]he trial court abused its discretion in denying Texaco's Motion for Mistrial and in allowing Texaco's Motion for New Trial to be overruled by operation of law because the substitution of Solomon Casseb, Jr., for Judge Farris denied Texaco its due process right to a fair trial.

Texaco first argues that the trial disruption caused by Judge Farris' ill health violated Texaco's right to a due and orderly trial under Article I, Section 15 of the Texas Constitution. This argument is not presented in a point of error; consequently, it is waived. Kirkman v. City of Amarillo, 508 S.W.2d 933 (Tex.Civ.App.—Amarillo 1974, writ ref'd n.r.e.).

Judge Farris presided over the trial from July 9 to October 22, 1985, at which time he was forced to step down because of ill health. Judge Casseb presided over the remainder of the trial proceedings. This included the preparation of the charge, attention to Texaco's motions for judgment and judgment n.o.v., and to its motion for new trial.

Texaco first argues that Judge Casseb's late substitution and his denial of Texaco's motion for mistrial constitute error under Texas law. It argues that because Judge Casseb was unfamiliar with the previous testimony given in the preceding three [846] months' worth of testimony, i.e., all of Pennzoil's evidence and a portion of Texaco's, his unfamiliarity with the evidence prejudiced the preparation of the charge and the post-trial motions.

Tex.R.Civ.P. 18 provides for the substitution of judges:

If the judge dies, resigns, or becomes unable to hold court during the session of court duly convened for the term, and the time provided by law for the holding of said court has not expired, such death, resignation, or inability on the part of the judge shall not operate to adjourn said court for the term, but such court shall be deemed to continue in session. If a successor to such judge shall qualify and assume office during the term, or if a judge be transferred to said district from some other judicial district, he may continue to hold said court for the terms provided, and all motions undisposed of shall be heard and determined by him, and statements of facts and bills of exception shall be approved by him. If the time for holding such court expires before a successor shall qualify, and before a judge can be transferred to said district from some other judicial district, then all motions pending, including those for new trial, shall stand as continued in force until such successor has qualified and assumed office, or a judge has been transferred to said district who can hold said court, and thereupon such judge shall have power to act thereon at the succeeding term, or on an earlier day in vacation, on notice to all parties to the motion, and such orders shall have the same effect as if rendered in term time. The time for allowing statement of facts and bills of exception from such orders shall date from the time the motion was decided.

Appellate courts in Texas have repeatedly approved the substitution of judges. In Bickham v. Herrin Transportation Co., 344 S.W.2d 953 (Tex.Civ.App.—Houston 1961, no writ), this Court approved a substitution and the resulting actions by the court's denial of appellant's motion for new trial. The first judge heard most of the evidence, and the second judge, over objection of the appellant, heard the balance of the evidence and presided over the preparation of the charge and argument of counsel. Then the first judge returned and accepted the verdict from the jury and ruled on the motion for new trial. This Court noted that the record failed to indicate (1) that appellant requested the first judge to read the testimony that he had not heard; (2) that he was presented with a transcript thereof; or (3) that he heard the testimony. This Court held that in the absence of such showing, "it will be presumed that he became sufficiently familiar with the testimony of witnesses whom he did not hear...." Furthermore, the appellant failed to show any abuse of discretion or harm because the court of appeals "is required to pass upon the same and has the same power as the trial judge to do so. Rule 434, T.R.C.P." Id. at 959.

In Weiser v. Hampton, 445 S.W.2d 224, 229 (Tex.Civ.App.—Houston [1st Dist.] 1969, writ ref'd n.r.e.), the appellant urged that it was error for the presiding judge, who did not sit at trial, to overrule appellant's motion to disregard jury findings. The court held "while it is obvious that the judge who heard the evidence would be in a better position to pass on the motion, it would not be unreasonable to suppose that another judge would be able to do so after hearing the arguments of counsel." Id.

Although appellate courts have repeatedly approved of the substitution of judges, Texaco argues that the case of Rutherford v. Rutherford, 554 S.W.2d 829 (Tex.Civ. App.—Amarillo, no writ), is supportive of its contention that a substitution here was error. Rutherford involved a bench trial in which the first judge heard part of the evidence and made known the judgment he would render. The second judge, as finder of fact, heard part of the evidence and rendered judgment based thereon. The court held that it was reversible error to render a final judgment "without a consideration [847] of all of the evidence adduced on the matter." Id. at 832.

In the instant case, the jury was the finder of facts, not Judge Casseb. Judge Casseb heard much of Texaco's evidence, and although he admitted at the charge conference that he "did not read the full parts of this evidence," he did have available to him a transcription of all the evidence adduced prior to his appointment to which he could refer for confirmation of relevant and material matters upon which the parties disagreed. Judge Casseb heard extensive preliminary argument by both parties of the evidence taken prior to his assignment. He presided over the preparation of the charge, and the charge does properly present the applicable law and is supported in the evidence.

Texaco has failed to show any abuse of discretion or harm caused by Judge Casseb's substitution. Texaco's argument, that the substitution and denial of the mistrial were error under Texas law, is without merit.

Texaco next argues that if the Texas Rules of Civil Procedure allow for this substitution, then the rules are unconstitutional under the due process clause.

For support, Texaco relies upon Mathews v. Eldridge, 424 U.S. 319, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976), in which the Supreme Court identified three factors that must be weighed in determining whether a state procedural rule, in this case rule 18, comports with the requirement of due process:

First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.

424 U.S. at 335, 96 S.Ct. at 903.

Texaco argues (1) that its private property interest at stake here is its very right to exist; (2) that Judge Casseb's substitution created a risk of deprivation because of his unfamiliarity with large portions of the testimony, and (3) that a new trial in this case is the only "additional procedural safeguard" that would eliminate the risk of deprivation created by the late substitution.

Texaco's due process argument centers on the court's denial of its new trial motion, asserted in its Points of Error 82-84. Such a motion is addressed to the sound discretion of the court, and the court's action thereon will not be disturbed absent a showing of abuse. Alkas v. United Savings Association, 672 S.W.2d 852 (Tex. App.—Corpus Christi 1984, no writ); Neunhoffer v. State, 440 S.W.2d 395 (Tex.Civ. App.—San Antonio 1969, writ ref'd n.r.e.).

In Bickham, this Court held that appellant failed to show harm as a result of a substituted judge's passing on the sufficiency of the evidence because this Court "is required to pass upon the same and has the same power as the trial judge...." 344 S.W.2d at 959. In the instant case, there is no harm because Texaco's allegations of error in its new trial motion are now under review by this Court. We find no denial of due process. Texaco's Point of Error 81 is overruled.

In its next three points of error, Texaco asserts that:

The trial court erred in refusing to hear Texaco's motion for new trial unless Texaco waived its rights to a qualified judge because that condition violates the Due Process Clause of the United States Constitution, amend. V (applicable to Texas through Amend. XIV, § 1), and the Texas Constitution, Art. I, § 19.

The trial court erred in allowing Texaco's motion for new trial to be overruled by operation of law because that action violated the Due Process and Equal Protection Clauses of the United States Constitution.

The trial court erred in denying Texaco a hearing on the motion for new trial with regard to Texaco's complaints of newly discovered evidence and jury misconduct.

[848] On January 9, 1986, Texaco filed its motion for new trial alleging, in part, that Judge Casseb's qualifications as a retired judge were in question. On February 13, Texaco applied for a hearing on the motion for new trial, and additionally alleged jury misconduct. The hearing was set for February 20, at which time the following occurred:

THE BAILIFF: All rise. The 151st District Court is now in session, the Honorable Solomon Casseb, Jr., presiding.

THE COURT: Good morning, ladies and gentlemen.

ALL COUNSEL: Good morning, Your Honor.

THE COURT: You may be seated.

In Cause No. 85-05905, Pennzoil Company versus Texaco, Inc. in the 151st Judicial District Court of Harris County, Texas, this Court would like to ascertain at this time and would like a reply from each of the respective firms of record representing Texaco, Incorporated if they still at this time question and challenge the right and authority of Solomon Casseb, Jr. to preside over—as a Judge to preside over any hearings at this time in this cause.

MR. McMAINS: Your Honor, I'm Russell McMains with the firm of Edwards, McMains, Constant and Terry.

We have not intended by setting or requesting the setting of this motion for hearing or by any of the other papers that we filed with the Court to waive our challenge on the disqualification issue which, in point and in fact, is part of the Newly Discovered Evidence Complaint that is contained in our Motion for New Trial and supported by the affidavits for which we requested an evidentiary hearing today.

THE COURT: And you're taking the position—

MR. McMAINS: The answer to your question is yes.

THE COURT: All right. Any other firms?

MR. BOIES: Your Honor, David Boies from Cravath, Swaine and Moore. We likewise continue our challenge.

MR. SALES: Jim Sales of Fulbright and Jaworski. We do continue the challenge.

THE COURT: Any others?

MR. PETERSEN: Your Honor, Michael Petersen for Miller-Keeton. Mr. Miller and Mr. Keeton are on their way and should be here shortly. We join in the motion of our co-counsel and continue the challenge.

MR. JAMAIL: We have no challenge to the qualifications of this Judge.

THE COURT: As I understand, you still challenge the qualifications of Solomon Casseb as a Judge or otherwise to preside over this cause and to hear all motions on file in this cause at this time?

MR. McMAINS: That is our position, but we have been repudiated at this point.

THE COURT: I understand that.

That still being your position, this Court then is going to let the law take its course and y'all are excused.

On February 24, four days later, Texaco's motion for new trial was overruled by operation of law.

Texaco argues that Judge Casseb's refusal to conduct a hearing on the new trial motion contravened Texas case law and the due process and equal protection clauses of the U.S. Constitution. Texaco therefore requests that this Court remand for a hearing on the motion for new trial.

In its Point of Error 84, Texaco first argues that the trial court erred in not conducting an evidentiary hearing and in denying its new trial motion when juror misconduct was alleged and supported by affidavit. Specifically, Texaco urges that the following statements by juror Shannon shows that juror Shannon conducted an independent investigation into issues not in evidence and that the trial court considered an annual report that was not in evidence:

Well, in point of fact, Texaco never made this argument [that the damages was claim [849] was exorbitant] until the very end of the trial in final arguments because it could be easily rebutted by their own annual report. Texaco's worth, when you subtract liabilities from assets, is still in excess of twenty-three billion dollars. This figure they're getting that the verdict is more than the company's worth is when you take the number of shares of stock and multiply it times the current stock price and that is somewhat less than ten billion but they have assets over liabilities [of] twenty-three billion dollars. Their own annual reports give these figures and if that would have been brought into court it could have been easily proven. (Emphasis added.)

The sole accompanying affidavit of Richard E. Miller, counsel for Texaco, states in pertinent part:

Neither Texaco's annual report nor Shannon's net worth calculation, as expressed by him in this interview, was in evidence. Shannon has stated to me that he did not consult any source outside the evidence.

10. During the deliberations on the afternoon of November 18, 1985, the jury asked the following question: "Was the Texaco annual report put into evidence, and if so, can we have a copy?" The parties then agreed that the annual report was not in evidence. This question, coupled with Shannon's statement quoted in Paragraph 9 above, indicates that the jury considered the annual report or information from the annual report even though it was not in evidence.

11. I have attempted to interview the jury members with regard to whether the Texaco annual report or information from that report was considered by the jury in its deliberations. I have not been able to reach all jurors; several have refused to speak to me or my partners about anything relating to the trial; those to whom I have spoken deny that information from the annual report was discussed during the deliberation of the jury.

It is within the discretion of the trial court to conduct a hearing on a new trial motion when the motion presents solely questions of law. Moore v. Mauldin, 428 S.W.2d 808 (Tex.1968); University of Texas v. Morris, 163 Tex. 130, 352 S.W.2d 947 (1962), cert. denied, 371 U.S. 953, 83 S.Ct. 511, 9 L.Ed.2d 503 (1963). However, Texaco asserts that the following are questions of fact requiring an evidentiary hearing: (1) Judge Casseb was not qualified as a retired judge, and (2) there was jury misconduct during voir dire and in deliberation.

The argument regarding Judge Casseb's qualifications is addressed under Point of Error 85.

JURY MISCONDUCT

Texaco's allegations do not constitute jury misconduct as a matter of law, pursuant to the 1983 amendment to Tex.R.Civ.P. 327 and Tex.R.Evid. 606(b). Prior to the adoption of the new rules of evidence in Texas and specifically amended rule 327(b), a party complaining of jury misconduct had to show (1) that the misconduct occurred; (2) that it was material; and, (3) that based on the record as a whole, the misconduct probably resulted in harm to the complaining party. See Redinger v. Living, Inc., 689 S.W.2d 415, 419 (Tex.1985). Only overt acts of the jury were considered, and any testimony concerning the jury's mental processes was disregarded. Strange v. Treasure City, 608 S.W.2d 604, 606 (Tex.1980). However, the new rule 327(b), and Tex.R. Evid. 606(b), prohibit jurors from testifying as to matters or statements that occurred during jury deliberations.

Tex.R.Evid. 606(b) states:

Upon an inquiry into the validity of a verdict or indictment, a juror may not testify as to any matters or statement occurring during the course of the jury's deliberations or to the effect of anything upon his or any other juror's mind or emotions as influencing him to assent to or dissent from the verdict or indictment or concerning his mental processes in connection therewith, except that a juror [850] may testify whether any outside influence was improperly brought to bear upon any juror. Nor may his affidavit or evidence of any statement by him concerning a matter about which he would be precluded from testifying be received for these purposes. (Emphasis added.)

Likewise, Tex.R.Civ.P. 327(b) provides:

A juror may not testify as to any matter or statement occurring during the course of the jury's deliberations or to the effect of anything upon his or any other juror's mind or emotions as influencing him to assent to or dissent from the verdict concerning his mental processes in connection therewith, except that a juror may testify whether any outside influence was improperly brought to bear upon any juror. Nor may his affidavit or evidence of any statement by him concerning a matter about which he would be precluded from testifying be received for these purposes.

(Emphasis added.)

Under both rules, all testimony is now excluded when juror misconduct is alleged, unless it can be shown that an "outside influence" was brought to bear. Robinson Electric Supply v. Cadillac Cable Corp., 706 S.W.2d 130 (Tex.App.—Houston [14th Dist.] 1986, writ ref'd n.r.e.).

The "outside influence" requirement is so new that there is very little Texas case law interpreting it. In Robinson, the Texas Fourteenth Court of Appeals declined to hold the jury's consideration of matters not in evidence, the calculation of prejudgment interest during deliberations, to be "outside influence." In Clancy v. Zale Corp., 705 S.W.2d 820, 828 (Tex.App.—Dallas 1986, no writ), the court declined to hold certain statements made by jurors during deliberations to be "outside influence." The Clancy court noted several instances in which "outside influence" had been found pursuant to rule 606(b), Fed.R.Evid.; for example, tampering with evidence, conversation between the judge and a juror, and a threat to a juror. Id. at 829. The Clancy court held that by its wording, Tex.R.Evid. 606(b) mandates that an "outside influence" "must emanate from outside the jury and its deliberations." See Clancy, 705 S.W.2d at 829.

In the instant case, Texaco fails to allege such "outside influence" in its new trial motion or on appeal. Rather, Texaco relies upon the 1979 Texas Supreme Court case of Hensley v. Salinas, 583 S.W.2d 617 (Tex.1979), in which the court held that it was error for the trial court to deny a hearing where questions of fact were alleged in a motion for new trial, which questions, if true, would entitle the movant to a new trial. The question of fact alleged in Hensley was not juror misconduct but whether the new trial movant had actually "completely rejected" an agreed judgment. Hensley is not on point.

The new trial motion here fails as a matter of law to demonstrate any "outside influence." The sole supporting affidavit of Texaco's trial counsel concedes that the jurors that were contacted denied that the annual report was ever considered during deliberations. This presents no evidence of juror misconduct during deliberations. Consequently, the trial court was under no duty to conduct a hearing. See Caterpillar Tractor Co. v. Boyett, 674 S.W.2d 782, 793 (Tex.App.—Corpus Christi 1984, no writ).

Furthermore, the affidavit in support of Texaco's allegation of juror misconduct during deliberation is insufficient as a matter of law. Tex.R.Civ.P. 327(a) provides:

When the ground of a motion for new trial, supported by affidavit, is misconduct of the jury or of the officer in charge of them, or because of any communication made to the jury, or that a juror gave an erroneous or incorrect answer on voir dire examination, the court shall hear evidence thereof from the jury or others in open court, and may grant a new trial if such misconduct proved, or [851] the communication made, or the erroneous or incorrect answer on voir dire examination, be material, and if it reasonably appears from the evidence both on the hearing of the motion and the trial of the case and from the record as a whole that injury probably resulted to the complaining party.

Rule 327(a) mandates that the court hear evidence of juror misconduct if it is properly presented. In the instant case, the sole affidavit in support of juror misconduct during deliberations was provided by Texaco's counsel. This affidavit was insufficient under rule 327(a). "An affidavit by a non-juror is insufficient to establish material jury misconduct because the affidavit is based upon hearsay." Clancy, 705 S.W.2d at 828.

Likewise, Texaco's allegation of juror misconduct during voir dire is without merit. Texaco first asserts juror misconduct in juror Shannon's failure to respond to Texaco's question "If you have any reason to believe, whether its [sic] philosophical or whether its [sic] political, whether it's religious, for whatever reason whether I've asked the question or not, any reason to believe that you could not sit in this important case and sit as a fair juror ... then you need to let us know." Juror Shannon failed to inform the court that his wife had lost her job as a result of a corporate takeover; Texaco asserts this is juror misconduct.

For erroneous or false answers given on voir dire to entitle a party to a new trial, there must be a concealment by the juror. Dunn v. Sears Roebuck & Co., 371 S.W.2d 731, 735 (Tex.Civ.App.— Houston 1963, writ ref'd n.r.e.). Before there can be concealment, the questions asked must call for disclosure; the questions asked must be direct and specific. Id.; Roy L. Jones Truck Line v. Johnson, 225 S.W.2d 888, 896 (Tex.Civ.App.—Galveston 1949, writ ref'd n.r.e.). A catch-all question asking "was there anything in" the juror's experience "that would cause [them] to lean one way or the other in this type of case" does not meet the requirement of specificity. 4 R. McDonald, Texas Civil Practice in District & County Courts § 11.10.3 (1983); see also Roy L. Jones Truck Line, 225 S.W.2d at 896.

In the instant case, the question asked was not so direct or specific as to require juror Shannon to reveal the fact that his wife had lost her job in a corporate takeover. Although harm is suggested, no harm has been shown. In addition, as a matter of law, the question was insufficient to elicit the information Texaco complains it should have received. Id.

Texaco next alleges juror misconduct in juror Lawler's failure to answer the following questions: "Is anybody here on the panel that's left or any member of your family that's ever had any business dealings with Texaco? ... Any business relationship with Texaco? You or your employers or members of your family?" Texaco asserts that juror misconduct occurred because juror Lawler failed to inform the court that his father-in-law was a Texaco employee.

The affidavit in support of Texaco's new trial motion states:

6. After the jury's verdict was returned, Texaco learned for the first time that the jury's presiding juror, Richard Lawler, was related by marriage to a long-time Texaco employee, Jimmie R. Paull. I interviewed Mr. Paull on December 9, 1985, and learned for the first time that he is the father of Cheryl Paull, Mr. Lawler's wife, that he and his daughter are estranged, and that he has not seen his daughter since 1977, when Mr. Lawler and his daughter were married. He has neither seen nor spoken to his son-in-law during this period and he has never seen or spoken to his two grandchildren. Attached hereto in support of these points is the affidavit of Jimmie R. Paull.

7. Juror Lawler should have divulged this information in the voir dire examination of the jury panel in response to the following question from Mr. Jamail:

[852] Is anybody here on the panel that's left or any member of your family that's ever had any business dealings with Texaco?... any business relationship with Texaco? You or your employers or members of your family?

8. Lawler responded but only that his employer had a "lot of business with Texaco." He did not mention his father-in-law's long-time employment. When I interviewed Mr. Lawler after the verdict and asked him about his father-in-law, he told me he did not learn his father-in-law was a Texaco employee until two months into the trial or later, and that this was the reason he did not disclose his relationship with Texaco. This relationship between Lawler and his father-in-law was relevant to Texaco's consideration of whether Juror Lawler was qualified to serve on the jury. Had Texaco been aware of this information, which would have a tendency to bias Lawler against Texaco, it would have moved to excuse Lawler for cause. Had that motion not been granted, Texaco would have used one of its preemptory [sic] challenges to excuse Lawler.

The affidavit fails as a matter of law to establish concealment. By its own wording, the affidavit establishes that juror Lawler did not know the work relationship between his father-in-law and Texaco until the trial was two months old. Failure to disclose information about which a juror had no knowledge or had forgotten at the time of voir dire does not constitute concealment. McDonough Brothers v. Lewis, 464 S.W.2d 457, 466 (Tex.Civ.App.— San Antonio 1971, writ ref'd n.r.e.).; see also Childers v. Texas Employers Insurance Association, 154 Tex. 88, 273 S.W.2d 587, 588 (1954).

Texaco's Point of Error 84 is overruled.

In its Points of Error 82 and 83, Texaco argues that Judge Casseb violated Texaco's constitutional rights of due process and equal protection in failing to hold a hearing on its new trial motion and by announcing his intention to allow Texaco's motion to be overruled by operation of law.

The United States Supreme Court has consistently held that the fundamental requirement of due process is the opportunity to be heard "at a meaningful time and in a meaningful manner." Mathews v. Eldridge, 424 U.S. 319, 333, 96 S.Ct. 893, 902, 47 L.Ed.2d 18 (1976). However, due process is flexible and calls for procedural protections as a particular situation demands. Id. at 334, 96 S.Ct. at 902.

Tex.R.Civ.P. 329b(c) provides:

In the event an original or amended motion for new trial or a motion to modify, correct or reform a judgment is not determined by written order signed within seventy-five days after the judgment was signed, it shall be considered overruled by operation of law on expiration of that period.

Pursuant to this rule, Texaco's right to be heard at "a meaningful time and in a meaningful manner" is not obviated. Rather, by its time constraints, rule 329(b) in fact "expedites" Texaco's right to be heard on appeal by automatically overruling a new trial motion on which there has been no ruling made. By this procedural method, Texaco's rights have been preserved and transferred to this Court for consideration. See James v. Appel, 192 U.S. 129, 24 S.Ct. 222, 48 L.Ed. 377 (1904). Texaco's Points of Error 82 and 83 are overruled.

In its Point of Error 85, Texaco asserts that:

The presiding judge erred in denying Texaco an evidentiary hearing on its motion to disqualify Solomon Casseb Jr., denying Texaco its constitutional and statutory rights to a qualified judge.

Texaco contends that in derogation of rule 18a, it was not afforded a hearing on its motion to disqualify Judge Casseb, which motion alleged that Judge Casseb was not properly qualified to preside as judge in this action and that he had not taken the oath of office. To understand [853] Texaco's contention, we briefly review the procedural history of this area of the case.

When Judge Farris became ill, Judge Stovall, Presiding Judge of the Second Administrative Judicial District, assigned Judge Casseb to preside over the remainder of the trial, which ended with a judgment on December 10, 1985. On January 9, 1986, Texaco filed its motion to disqualify based upon a New York Times article quoting Judge Casseb's son, who allegedly stated that Judge Casseb had not met the judicial service time requirement to be eligible for retirement in Texas before he was assigned this case.

When the motion to recuse was filed, Judge Casseb refused to voluntarily recuse himself, but forwarded the motion to Judge Stovall, as mandated by rule 18a of the Texas Rules of Procedure. Texaco requested Judge Stovall to hear the motion himself or assign another judge and to authorize discovery of documents relevant to the motion. On January 21, 1986, the matter was presented to Judge Stovall at a status conference, at which time copies of Chief Justice Hill's certification of Judge Casseb were presented. This documentation established that Judge Casseb had completed the necessary 12 years of credited service and was entitled to retire and receive pension. This certificate was dated May 20, 1985, several months before Judge Casseb's assignment to the case.

Texaco proceeded to seek discovery of the supporting documentation leading up to Judge Casseb's certification. Pennzoil opposed the discovery, contending that it exceeded the bounds of rule 18a. Pennzoil asserted then and asserts on appeal that the attack on Judge Casseb's qualifications to serve on this case on the grounds that he had not met the certification requirements (12 years of service) could only be brought in a quo warranto proceeding in which the State would be a party.

On January 27, Judge Stovall denied the recusal motion, noting that Judge Casseb was assigned as a "retired judge on October 22, 1985. The grounds for disqualification asserted only the question of his qualification as a retired judge. Because the date of his certification as a retired judge was May 1985, no further hearing is necessary or appropriate." Texaco then sought leave to file a writ of mandamus with the Texas Fourteenth Court of Appeals and the Texas Supreme Court, requesting the courts to require Judge Stovall to hold another hearing on the recusal motion. Both courts denied Texaco's motions.

Under Texas law, because Judge Casseb was not holding judicial office at the time of his retirement in May 1985, he could qualify as a retired judge only if he had accrued 12 years service time. Tex.Rev. Civ.Stat.Ann. Title 110B § 44.101(a)(2) (Vernon 1987). This service credit could come from two sources: (1) "membership service"; and (2) "military service." §§ 41.001(6) and 43.001.

Judge Casseb served as judge of the 57th District Court for eight years and three months in the 1960's; he served in the military during World War II. Texaco asserts that based upon his son's comments in the New York Times, the addition of these two "credits" will not equal 12 years, despite the certification by Chief Justice Hill.

Texaco argues that this is a situation authorizing a collateral attack on Judge Casseb because: (1) quo warranto is not an exclusive remedy; (2) rule 18a provides for recusal based upon "any disability"; and (3) the de facto officer doctrine, related to Pennzoil's quo warranto assertion, is not applicable because Judge Casseb was not holding "an office."

Tex.Government Code §§ 74.031 and 74.032 (Vernon 1987) (formerly Tex.Rev.Civ. Stat.Ann. art. 200a, §§ 5 and 5a) provide for the assignment of a retired judge to fill a district court:

§ 74.031. Assignment of Judges

Judges may be assigned in the manner provided by this Chapter to hold district court when:

[854] (1) the regular judge of the district court is absent or is disabled or disqualified for any cause;

(2) the regular judge of the district court is present or is trying cases as authorized by the constitution and laws of this State, or

(3) the office of district judge is vacant.

§ 74.032. Judges Subject to Assignment

The following judges may be assigned as provided by this chapter by the presiding judge of the administrative district in which the assigned judge resides:

(1) a regular district judge in this state;

(2) a district judge who is a retiree under Subtitle E, Title 110B, Revised Statutes, and who has consented to be subject to assignment; and

(3) a former district judge who:

(A) is not more than 70 years of age;

(B) was elected at a general election or appointed by the governor, and has not been defeated for reelection or removed from office by impeachment, the supreme court, the governor on address of the legislature, the State Commission on Judicial Conduct, or the abolishment of the judge's court by the legislature; and

(C) certifies to the presiding judge a willingness to serve and to comply with the prohibitions relating to the practice of law imposed on a retired judge by Section 44.005, Title 110B, Revised Statutes.

Furthermore, Tex.Rev.Civ.Stat.Ann. Title 110B § 41.001(4) (Vernon Supp.1987) defines a "retiree" as "one who receives an annuity based on service that was credited to the persons."

Texaco first argues that a quo warranto proceeding would not be a proper vehicle here because pursuant to Tex.R.Civ.P. 782, quo warranto is not exclusive and is to be cumulative of any existing remedy, i.e., a rule 18a recusal proceeding. However, Texaco cites no authority allowing for such a collateral attack where the qualifications of the judge to function as a judge, i.e., a retired judge, are challenged in a rule 18a proceeding.

In Texas, it has been held consistently that a collateral attack upon the qualifications of a district judge cannot be sustained. When a judge is holding office under color of title by appointment and discharging the duties of the office, his "acts are conclusive as to all persons interested and cannot be attacked in a collateral proceeding, even though the person acting as judge lacks the necessary qualifications and is incapable of legally holding the office." Tart v. State, 642 S.W.2d 244, 246 (Tex.App.—Houston [14th Dist.] 1982, no pet.) (citing Ex parte Lefors, 171 Tex.Crim. 229, 347 S.W.2d 254 (1961). "If the appellant desires to challenge such authority, he must bring a direct action through a quo warranto proceeding." Id., 642 S.W.2d at 246; see also Keen v. State, 626 S.W.2d 309 (Tex.Crim.App.1981); Archer v. State, 607 S.W.2d 539 (Tex.Crim.App.1980), cert. denied, 452 U.S. 908, 101 S.Ct. 3037, 69 L.Ed.2d 410 (1981). The State is an indispensable party in a quo warranto proceeding, which must be brought in the State's name. Lewis v. Drake, 641 S.W.2d 392 (Tex.App.—Dallas 1982, no writ). The basis for this rule of law is a matter of public policy.

Public officers should be free to perform their duties without their authority questioned incidentally in litigation between other parties. They should not be called on to defend their authority unless a proper legal officer of the State has determined that the question raised is serious and deserves judicial consideration....

Id., at 395.

In the instant case, the certification by Chief Justice Hill establishes Judge Casseb's retirement status. An attack on this certification is an attack on Judge Casseb's authority to function as a retired [855] judge. Consequently, such authority can only be challenged by a quo warranto proceeding, which is beyond the capacity of a rule 18a proceeding.

Texaco also argues that Judge Casseb is not protected from collateral attack because he did not hold an office. As such, the de facto officer doctrine related to the quo warranto theory is not applicable. Furthermore, Texaco argues that where there is a de jure officeholder (Judge Farris), there can be no de facto officeholder. Finally, Texaco contends that the record fails to establish that Judge Casseb ever took the oath of office upon resumption of his duties as a retired judge.

Texaco cites no applicable authority for any of the preceding assertions. First of all, Texaco's entire de facto argument is refuted in the case of Tart v. State, 642 S.W.2d at 244, which involved a retired judge. In Tart, the appellant challenged the validity of the authority of the retired judge, who presided at the trial, on the basis that he had been assigned to another district court and therefore, had no authority to hold a hearing or enter an order in the court of record. In relying upon Ex parte Lefors and the cases cited therein, the Texas Fourteenth Court of Appeals held that such attack could only be brought through a quo warranto hearing. The Fourteenth Court of Appeals declined to make a distinction between retired judges and duly-elected judges, noting that the assignment of the retired judge to the district court gave him "all the powers of a judge thereof."

Furthermore, Texaco's oath of office claims are without merit. The cases cited by Texaco concern the appointment of "special judges" who are required to take the oath of office before assignment. "A retired district judge who elects to continue in his judicial capacity is not a `special judge,' but is still a district judge." Olivares v. State, 693 S.W.2d 486, 489 (Tex.Civ.App.—San Antonio 1985, writ dism'd); Tart, 642 S.W.2d at 246; Tex. Gov't Code § 74.032 (Vernon 1987). Absent some showing to the contrary, it will be presumed that the assignment was properly made pursuant to all statutory requirements. Buchanan v. State, 471 S.W.2d 401 (Tex.Crim.App.), cert. denied, 405 U.S. 930, 92 S.Ct. 984, 30 L.Ed.2d 804 (1972).

We hold that the proper method to attack the judicial qualifications of a retired judge is through a quo warranto proceeding, not a collateral attack under rule 18a that provides for a recusal procedure.

The remaining question is whether Judge Stovall erred in failing to conduct a hearing on the recusal motion.

Judge Stovall held a "status conference" with all counsel on January 21, 1986. Judge Casseb's certification was presented to Judge Stovall, who ultimately determined that no additional hearing was merited.

Texaco argues that in addition to the January 21 status conference, Judge Stovall should have conducted a further hearing, pursuant to rule 18a, citing McLeod v. Harris, 582 S.W.2d 772 (Tex. 1979). In McLeod, the supreme court held that pursuant to the following language from Tex.Rev.Civ.Stat.Ann. art. 200a, § 6 (Vernon 1977), the trial court has a mandatory duty to request that the presiding judge assign another judge to hear the motion to recuse:

A district judge shall request the Presiding Judge to assign a judge of the Administrative District to hear any motions to recuse such district judge from a case pending in his court.

While rule 18a does mandate a hearing on a motion to recuse, such requirement is not triggered unless the recusal motion states valid grounds for disqualification. In Gaines v. Gaines, 677 S.W.2d 727, 731 (Tex.App.—Corpus Christi 1984, no writ), the court held that the contentions raised were without merit because "[o]n his motion to disqualify, appellant does not establish enough information to warrant referral of the motion to the presiding judge," citing [856] McClenan v. State, 661 S.W.2d 108 (Tex.Crim.App.1983).

In the instant case, the challenge to Judge Casseb's qualification as judge on this case was a challenge to his qualification to serve as a retired judge on any case; the only proper proceeding for review of such was a quo warranto proceeding. Consequently, Texaco's rule 18a motion was inadequate. Therefore, no additional hearing was mandated.

Furthermore, no due process violation is evidenced. Texaco has been afforded a hearing on its allegations by Judge Stovall, the Texas Fourteenth Court of Appeals, the Texas Supreme Court, and this Court. The procedure chosen by appellant was not the proper proceeding; Texas law does not permit such a collateral attack on a judge's qualifications.

Texaco's Point of Error 85 is overruled.

ALLEGED CONSTITUTIONAL ERRORS

In Points of Error 86 through 90, Texaco claims that it was denied certain rights under the supremacy clause, the commerce clause, the full faith and credit clause, and the due process clause of the United States Constitution.

Texaco's points of error that the judgment violates the supremacy, commerce, full faith and credit, and due process clauses of the United States Constitution were not raised until its motion for judgment n.o.v. Pennzoil asserted in its reply to the motion for judgment n.o.v. and asserts on appeal that appellant has waived these defenses because they were not timely pled. Texaco responds that because Pennzoil's claim was based in tort and not on a statute, there was no pleading requirement to raise a constitutional issue. We note that Texaco's sole authority for such proposition, Pennington v. Singleton, 606 S.W.2d 682 (Tex.1980), is distinguishable from our case.

In Pennington, plaintiff brought suit alleging common law fraud. The trial court held that although plaintiff failed to prove common law fraud, he did prove a cause of action under the Texas Deceptive Trade Practices Act. On appeal, the court of appeals initially affirmed the judgment. However, in his motion for rehearing, defendant alleged that the treble damages provision of the DTPA could not be constitutionally applied because it had not been pled. The court of appeals agreed and reversed the judgment and rendered judgment that plaintiff take nothing.

On appeal to the Texas Supreme Court, petitioner Pennington alleged that Singleton should not be entitled to challenge the constitutionality of the DTPA because he did not raise the argument until his motion for rehearing, citing cases that hold that the unconstitutionality of a statute is an affirmative defense that is waived if not pled at trial. The supreme court noted that "because Pennington's petition alleged common law fraud and did not mention the DTPA, the applicability of these cases is questionable." Id. at 688.

Texaco asserts that such holding means that "when a plaintiff's claim is not based on a statute, there is no pleading requirement to raise a constitutional issue"; consequently, it argues that it has not waived its complaint.

The constitutionality of a statute is an affirmative defense that must be timely pled; otherwise, it is waived. State v. Scott, 460 S.W.2d 103, 107 (Tex.1970), cert. denied, 402 U.S. 1012, 91 S.Ct. 2188, 29 L.Ed.2d 435 (1971). The instant case does not involve constitutional objections to a statute, it involves constitutional objections to the judgment rendered. The initial question to be answered is whether the Texaco timely asserted its constitutional objections.

Constitutional objections may be waived by a failure to raise them at a proper time. Curtis Publishing Co. v. Butts, 388 U.S. 130, 144, 87 S.Ct. 1975, 1985, 18 L.Ed.2d 1094 (1967). In Michel v. State, 350 U.S. 91, 99, 76 S.Ct. 158, 163, 100 [857] L.Ed. 83 (1955), the Supreme Court held that the test for making a claim to a constitutional right is whether the defendant has had a reasonable opportunity to have the issue heard and determined by the court. "No procedural principle is more familiar to this Court than that a constitutional right may be forfeited in criminal as well as civil cases by the failure to make timely assertion of that right." Michel v. State, 350 U.S. at 99, 76 S.Ct. at 163 (quoting Yakus v. United States, 321 U.S. 414, 444, 64 S.Ct. 660, 677, 88 L.Ed. 834 (1944)).

However, in some instances, "the mere failure to interpose such a defense prior to the announcement of a decision that might support it cannot prevent a litigant from later invoking such a ground." Curtis Publishing Co., 388 U.S. at 143, 87 S.Ct. at 1985 (1967). An effective waiver must be one of a known right or privilege. Almost without exception, this requirement of a knowing and intelligent waiver has been applied only to those rights that the constitution guarantees to a criminal defendant in order to preserve a fair trial. Schneckloth v. Bustamonte, 412 U.S. 218, 236-237, 93 S.Ct. 2041, 2052, 36 L.Ed.2d 854 (1973). However, in Curtis, the United States Supreme Court applied this standard in a civil action.

Curtis involved the defamation of a public figure. The defendant-petitioner had asserted no constitutional defenses prior to the verdict. However, after the plaintiff obtained a verdict, the Supreme Court announced its decision in New York Times Co. v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964), which for the first time held that the first amendment requires proof of actual malice before a public official is entitled to recover damages for a defamatory falsehood. Consequently, the defendant presented this constitutional defense to the trial court, which rejected the claim as did the court of appeals.

Plaintiff-respondent made two arguments before the United States Supreme Court in support of his contention that petitioner-defendant's failure to raise the constitutional defense, articulated in New York Times, amounted to a knowing waiver: (1) the general state of the law at the time of the Curtis trial was such that the defendant should have seen "the handwriting on the wall," i.e., that New York Times merely drew from earlier precedents in state law and that there were intimations in an earlier opinion that some applications of libel law might be in conflict with the first amendment; and (2) some of defendant's lawyers were involved in the New York Times litigation and should have been alerted to the constitutional contentions.

In rejecting these arguments, the Supreme Court noted several factors that pointed to the justice of its decision. Primary to this consideration was the fact that the constitutional objection raised was a previously unrecognized constitutional right. Furthermore, the constitutional objection was raised early enough so that the United States Supreme Court was given an opportunity to observe the attitude of the courts below regarding these issues, noting that although the New York Times decision was before the trial judge, he found it inapplicable, and that "[i]t was almost certain that he would have rebuffed any effort to interpose general constitutional defenses at the time of trial." 388 U.S. at 145, fn. 10, 87 S.Ct. at 1986, fn. 10. Finally, the Supreme Court noted that the constitutional protection that was allegedly waived,

safeguards a freedom which is the `matrix, the indispensable condition, of nearly every other form of freedom.'

Where the ultimate effect of sustaining a claim of waiver might be an imposition on that valued freedom [of speech], we are unwilling to find waiver in circumstances which fall short of being clear and compelling.

Id. at 145, 87 S.Ct. at 1986.

The present case is distinguishable from the Curtis case. Texaco has alleged no previously unrecognized constitutional objection and there is no first amendment objection lodged. Rather, the arguments presented are as follows: (1) [858] Supremacy Clause: the agreement violated SEC Rule 10b-13; such a void agreement will not support a cause of action for tortious interference; the judgment redefines New York law, bringing it into conflict with the federal regulatory scheme under the Williams Act; (2) Commerce Clause: the judgment will "chill" interstate tender offers and therefore restrain interstate commerce; (3) Full Faith and Credit Clause: Texas failed to respect the basic policy decisions of New York whose substantive law was applicable here; and (4) Due Process Clause: the judgment amounts to an "arbitrary assertion of power."

Many of these assertions encompass previously made arguments on appeal but now are couched in constitutional terms. Texaco's supremacy clause, commerce clause, and due process clause arguments are waived because these assertions could have been pled timely. However, we consider Texaco's full faith and credit clause argument because it could not have been addressed until judgment was entered.

The full faith and credit clause, article IV, § 1 of the United States Constitution, requires each state to give effect to the official acts of the other states. Nevada v. Hall, 440 U.S. 410, 421, 99 S.Ct. 1182, 1188, 59 L.Ed.2d 416 (1979). A judgment that is entered in one state must be respected in another, provided that the first state had subject matter jurisdiction and jurisdiction over the parties. In certain limited situations, the courts of one state must apply the statutory laws of another state, subject to the forum's own interest in furthering its public policy. Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S.Ct. 2965, 2979, 86 L.Ed.2d 628 (1985).

In the instant case, there is no dispute that the governing substantive law was New York law. The sole objection here is that the court erroneously applied and often misstated the governing law. This argument is simply a re-urging of Texaco's previous assertions that are now couched in constitutional terms. Since we have determined that the trial court properly applied New York law, Texaco's argument is without merit.

Finally, Texaco argues that the judgment rendered undermines federal interests by deterring the initiation of contests for corporate control across the country. Texaco argues that such resulting restraint on interstate commerce is in derogation of the commerce clause.

Texaco relies solely upon Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982), which is not on point. In MITE, the United States Supreme Court struck down an Illinois statute that required a tender offeror to notify the secretary of state and the target company of its intent to make a tender offer and the material terms of the offer 20 business days before the offer expired. Id. at 636, 102 S.Ct. at 2637. During that 20-day period, the offeror could not communicate its offer to the shareholders, but the target company could disseminate information to its shareholders, many of whom lived out of state, regarding the pending offer.

The court held that for several reasons, the statute was unconstitutional under the commerce clause. The court noted that because only 27% of the target company shareholders lived in the state, any transaction regarding communication of the offer to its shareholders would be interstate commerce; thus, the statute sought to prevent MITE from making its offer and concluding interstate transactions not only with the Illinois shareholders, but also with those out of state. If Illinois could impose such regulations on interstate commerce, so might other states, which would "thoroughly stifl[e]" interstate commerce in securities transactions generated by tender offers. Id. at 642, 102 S.Ct. at 2640.

The court determined also that on its face, the Illinois statute applied even if not one of the target company's shareholders lived in Illinois; the commerce clause precludes the application of a state statute to commence wholly outside the state's borders. Finally, the court held the Illinois [859] statute imposed an excessive burden on commerce in relation to the local interests served by the statute. The court noted:

The effects of allowing the Illinois Secretary of State to block a nationwide tender offer are substantial. Shareholders are deprived of the opportunity to sell their shares at a premium. The reallocation of economic resources to their highest valued use, a process which can improve efficiency and competition, is hindered. The incentive the tender offer mechanism provides incumbent management to perform well so that stock prices remain high is reduced.

Id. at 643, 102 S.Ct. at 2641.

The instant case does not involve a statute by which the State attempts to regulate tender offers. This cause of action is for tortious interference with a contract. Judgment was not rendered because Texaco won in a competitive tender offer situation. Rather, it was rendered pursuant to the jury's finding that Texaco had tortiously interfered with a binding agreement. A judgment based upon such a finding will not deter the "invitation of contests for corporate control throughout the country"; however, it should deter tortious interference with a binding agreement between parties.

Additionally, Texaco's commerce clause argument is one that could have been pled prior to judgment. Texaco had full knowledge of the cause of action filed against it. Its position throughout trial and this appeal has been that the facts prove a competitive tender offer situation only, and any judgment rendered against Texaco would "chill" corporate tender offers. The fact that the jury accepted Pennzoil's position rather than Texaco's does not afford Texaco an opportunity to belatedly assert new defenses. Because Texaco waited until after judgment to urge this argument, it is waived.

Points of Error 86, 87, 88, 89, and 90 are overruled.

DAMAGES

In its 57th through 69th points of error, Texaco claims that the evidence was legally and factually insufficient to support the jury's compensatory and punitive damage awards.

Texaco attacks Pennzoil's use of a replacement cost model to prove its compensatory damages. It urges that: (1) the court should have instructed the jury that the correct measure of Pennzoil's compensatory damages was the difference between the market price and contract price of Getty stock at the time of the breach; (2) the punitive damages award is contrary to New York law and public policy; (3) the punitive and compensatory damages are excessive; (4) and prejudgment interest should not have been allowed.

In a cause involving a tortious interference with an existing contract, New York courts allow a plaintiff to recover the full pecuniary loss of the benefits it would have been entitled to under the contract. Guard-Life Corp. v. S. Parker Hardware Manufacturing Corp., 50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445 (1980). The plaintiff is not limited to the damages recoverable in a contract action, but instead is entitled to the damages allowable under the more liberal rules recognized in tort actions. Id.

New York courts have cited and relied extensively on the Restatement (Second) of Torts in deciding damages issues, compensatory as well as punitive.

Section 774A of the Restatement (Second) of Torts (1977), reads in pertinent part:

(1) One who is liable to another for interference with a contract ... is liable for damages for

(a) the pecuniary loss of the benefits of the contract ...; [and]

(b) consequential losses for which the interference is a legal cause....

Comment (a) under the above section provides that since the tort is an intentional one, punitive damages are recoverable in these actions under appropriate circumstances. Although section 908 of the Restatement (Second) of Torts provides general [860] guidelines, the particular circumstances under which a plaintiff is entitled to punitive damages are not clearly defined under New York law; there seem to be different tests, depending on the tort. A frequently cited New York Court of Appeals opinion, Walker v. Sheldon, 10 N.Y.2d 401, 223 N.Y.S.2d 488, 179 N.E.2d 497 (1961), sets forth the theory for favoring the awarding of punitive damages and lists many examples of actions in which New York courts have allowed punitive damages. We will discuss those standards under our punitive damages section.

Pennzoil relied on two witnesses to prove the amount of its damages: Dr. Thomas Barrow and Dr. Ronald Lewis. Dr. Barrow holds a Ph.D. in petroleum engineering from Stanford University, and a bachelor's and master's degree from the University of Texas in geology and petroleum engineering. He has been president of Humble Oil & Refining Company, a senior vice-president of Exxon Corporation, chairman and chief executive officer of Kennecott Corporation, and president of Standard Oil of Ohio. He sits on the board of directors of many major corporations and charitable institutions.

Dr. Lewis is employed by Pennzoil as a vice-president in charge of offshore operations. He holds a bachelor of science degree and a master of science degree in petroleum engineering from Colorado School of Mines, and a Ph.D. with emphasis on petroleum engineering from the University of Texas. He has held responsible positions with the government, Mobil Oil Company, and Pennzoil, and taught petroleum engineering for seven years.

Texaco presented no witnesses to refute the testimony of Dr. Barrow or Dr. Lewis.

Dr. Barrow prepared three damages models, as follows:

(1) a replacement cost model,

(2) a discounted cash flow model, and

(3) a cost acquisition model.

Because the jury based its award of damages on the replacement cost model, the other two models will not be discussed. By Dr. Barrow's testimony, Pennzoil showed that because of Texaco's interference with its Getty contract, it was deprived of its right to acquire 3/7th's of Getty's proven reserves, amounting to 1.008 billion barrels of oil equivalent (B.O.E.), at a cost of $3.40 a barrel. Pennzoil's evidence further showed that its cost to find equivalent reserves (based on its last five years of exploration costs) was $10.87 per barrel. Therefore, Pennzoil contended that it suffered damages equal to 1.008 billion B.O.E. times $7.47 (the difference between $10.87, the cost of finding equivalent reserves, and $3.40, the cost of acquiring Getty's reserves) or $7.53 billion. The jury agreed.

Texaco first alleges that the trial judge should have instructed the jury that the measure of Pennzoil's damages was the difference between the market value of Getty Oil stock and its contract price at the time of the breach. We reject this contention. The Getty/Pennzoil agreement contemplated something more than a simple buy-sell stock transaction. Pennzoil's cause of action against Texaco was in tort, not in contract, and Pennzoil's measure of damages was the pecuniary loss of the benefits it would have been entitled to under the contract. Guard-Life Corporation, 50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445. There was ample evidence that the reason Pennzoil (and later, Texaco) wanted to buy Getty was to acquire control of Getty Oil's reserves, and not for any anticipated profit from the later sale of Getty stock. There was evidence that such fluctuations in market price are primarily of interest to holders of small, minority share positions.

The court in Special Issue No. 3 correctly instructed the jury that the measure of damages was the amount necessary to put Pennzoil in as good a position as it would have been in if its agreement, if any, with the Getty entities had been performed. If the measure of damages suggested by Texaco was correct, then there would have been no necessity to submit an issue at all, [861] because no issue of fact would have existed, there being no dispute about the market value of the stock or the contract price of the stock at the time of the breach.

Texaco next contends that the replacement cost theory is based on the speculative and remote contention that Pennzoil would have gained direct access to Getty's assets. Texaco strongly urges that Pennzoil had a "good faith" obligation under its alleged contract to attempt to reorganize and restructure Getty Oil rather than to divide its assets. We agree. Under New York law, a duty of fair dealing and good faith is implied in every contract. Teachers Insurance & Annuity Association of America v. Butler, 626 F.Supp. 1229, 1231-32 (S.D.N.Y.1986) (citing Rowe v. Great Atlantic & Pacific Tea Co., 46 N.Y.2d 62, 412 N.Y.S.2d 827, 385 N.E.2d 566 (1978)). But a duty of good faith and fair dealing does not require that Pennzoil completely subordinate its financial well-being to the proposition of reorganization or restructuring.

The directors of Pennzoil would have had a duty to the company's shareholders to obtain the greatest benefit from the merger assets, by either restructuring, reorganizing, or taking the assets in kind. If taking the assets in kind would be the most advantageous to Pennzoil, its directors would, in the absence of a great detriment to Getty, have a duty to take in kind. So the acquisition of a pro rata share of Getty Oil's reserves would be more than a mere possibility, unless the restructuring or reorganization of Getty would be just as profitable to Pennzoil as taking the assets in kind.

Next, Texaco urges that the jury's use of the replacement cost model resulted in a gross overstatement of Pennzoil's loss because:

(a) Pennzoil sought to replace Getty's low value reserves with reserves of a much higher value;

(b) Pennzoil based its replacement cost on its costs to find oil only during the period from 1980 to 1984, rather than over a longer period;

(c) Pennzoil improperly included future development costs in its exploration costs;

(d) Pennzoil used pre-tax rather than post-tax figures; and

(e) Pennzoil failed to make a present value adjustment of its claim for future expenses.

Our problem in reviewing the validity of these Texaco claims is that Pennzoil necessarily used expert testimony to prove its losses by using three damages models. In the highly specialized field of oil and gas, expert testimony that is free of conjecture and speculation is proper and necessary to determine and estimate damages. Amoco Production Co. v. Alexander, 594 S.W.2d 467, 477 (Tex.Civ.App.— Houston [1st Dist.] 1979), modified on other grounds, 622 S.W.2d 563 (Tex.1981). Texaco presented no expert testimony to refute the claims but relied on its cross-examination of Pennzoil's experts to attempt to show that the damages model used by the jury was flawed. Dr. Barrow testified that each of his three models would constitute an accepted method of proving Pennzoil's damages. It is inevitable that there will be some degree of inexactness when an expert is attempting to make an educated estimate of the damages in a case such as this one. Prices and costs vary, depending on the locale, and the type of crude found. The law recognizes that a plaintiff may not be able to prove its damages to a certainty. But this uncertainty is tolerated when the difficulty in calculating damages is attributable to the defendant's conduct. Whitney v. Citibank, N.A., 782 F.2d 1106 (2d Cir.1986).

In his replacement cost model, Dr. Barrow estimated the cost to replace 1.008 billion barrels of oil equivalent that Pennzoil had lost. Dr. Barrow admitted that some of Getty's reserves consisted of heavy crude, which was less valuable than lighter crude, and that he had made no [862] attempt to determine whether there was an equivalency between the lost Getty barrels and the barrels used to calculate Pennzoil's exploration costs. Dr. Barrow also testified that there was no way to determine what grade of reserves Pennzoil would find in its future exploration; they could be better or worse than the Getty reserves. Finally Dr. Barrow testified that in spite of his not determining the value equivalency, the replacement cost model was an accepted method of figuring Pennzoil's loss. Dr. Lewis testified that with improved refining technology, the difference in value between light and heavy crude was becoming less significant.

Texaco next urges that Pennzoil should have calculated replacement cost by using a longer time period and industry wide figures rather than using only its own exploration costs, over a five year period. Dr. Lewis admitted that it might have been more accurate to use a longer period of time to estimate exploration costs, but he and Dr. Barrow both testified that exploration costs had been consistently rising each year and that the development cost estimates were conservative. Dr. Barrow testified that in his opinion, Pennzoil would, in the future, have to spend a great deal more than $10.87 a barrel to find crude. Dr. Lewis testified that industry wide exploration costs were higher than Pennzoil's, and those figures would result in a higher cost estimate than the $10.87 per barrel used by Pennzoil.

Next, Texaco claims that Pennzoil inflated its exploration costs by $1.86 per barrel by including "future development cost" in its historical exploration costs. Both Dr. Lewis' and Dr. Barrow's testimony refuted that contention. Texaco neither offered evidence to refute their testimony, nor did its cross-examination reveal that this was an unwarranted cost.

Texaco also claims that Pennzoil should have used post-tax rather than pre-tax figures in figuring its loss calculations. First, it contends that there are large tax incentives for exploration and development that are not applicable to acquisition of reserves. Second, it contends that there was a $2 billion tax penalty attached to the Pennzoil/Getty agreement, and Pennzoil's $900 million share of that penalty would have increased its $3.40 pre-tax acquisition cost by nearly a dollar.

Dr. Barrow testified that the fact that Pennzoil included $997 million as recapture tax in its costs of acquiring the Getty reserves, made the pre-tax comparison between the $3.40 per barrel to acquire Getty reserves and the $10.87 per barrel for Pennzoil to find new oil, "apples and apples"; in other words, the $997 million tax adjustment compensated for the tax benefits reaped when discovering, as compared with purchasing, reserves. Further, there was no conclusive proof that the Internal Revenue Service would have assessed a $2 billion penalty to Getty's purchase of the Museum's shares under the Pennzoil/Getty agreement, as alleged by Texaco. Several witnesses, familiar with tax law, testified that it was unlikely that such a tax would be imposed; therefore it was for the jury to decide when assessing damages, whether Pennzoil's pro rata share of the speculative tax penalty should reduce the amount of its damages.

Texaco's contention that Pennzoil's cost replacement model should be discounted to present value ignores the fact that Pennzoil's suit is not for future damages but for those already sustained. Pennzoil would have had an interest in the Getty reserves immediately if the agreement had been consummated, and it did not seek damages for reserves to be recovered in the future. The cases cited by Texaco are inapposite here because all involve damages that the plaintiff would incur in the future, such as lost wages or future yearly payments. Also, Texaco requested no jury instruction on a discount or a discount rate; therefore, any complaint of the court's failure to submit the issue or instruction is waived. See Tex.R.Civ.P. 279. Nor was Texaco entitled to an omitted finding by the court under rule 279, because [863] the omitted discount and discount rate were not issues "necessarily referable" to the damages issue. Id.

Texaco's Points of Error 57 through 60 are overruled.

In its 69th point of error, Texaco claims that the court erroneously applied New York Law when it allowed prejudgment interest, because most of the damages are to compensate for expenses to be incurred over the next 25 years. We have previously considered and rejected Texaco's contention that Pennzoil's recovery, or any part thereof, was for future damages.

Under New York law, a plaintiff in an action for inducing a breach of contract is entitled as a matter of right to interest on the amount of recovery, measured from the date of the accrual of the cause of action. De Long Corp. v. Morrison-Knudsen Co., 14 N.Y.2d 346, 251 N.Y.S.2d 657, 200 N.E.2d 557 (1964).

Point of Error 69 is overruled.

PUNITIVE DAMAGES

Texaco alleges five legal reasons why punitive damages were not available to Pennzoil in this case.

First, Texaco incorrectly claims that punitive damages are not available to a plaintiff in an inducement of breach of contract cause, where the alleged tortfeasor acted for its own economic benefit rather than gratuitously to injure the defendant, citing Guard-Life Corp., 67 A.D.2d 658, 412 N.Y.S.2d 623 (App.Div. 1979), modified on other grounds, 50 N.Y.2d 183, 428 N.Y.S.2d 628, 406 N.E.2d 445. The Guard-Life Corp. court disallowed punitive damages because there was no evidence of malice, ill will, or a wrongful act done willfully or maliciously. The court there noted that the defendant's motive was to secure an economic advantage and merely contrasted that fact with the absence of evidence of malice or ill will. On appeal, New York's highest court stated that the defendant's status as a competitor would not protect it from the consequences of interfering with an existing contract, though it might excuse him from interfering with a prospective contract or a contract terminable at will.

Second, Texaco says that New York law prohibits punitive damages where the defendant was acting pursuant to the advice of counsel and believed its actions were proper. Texaco incorrectly, for the purposes of this argument, states that the court wrongfully excluded evidence proffered by Texaco concerning the legal advice it was given and its consequent belief that its conduct was proper. The court specifically informed Texaco that it could offer this testimony for the limited purpose of disproving that Pennzoil was entitled to punitive damages, but Texaco refused to make the limited offer. Further, there is much testimony in the record that Texaco's attorneys advised it that there was no binding contract between the Getty entities and Pennzoil, and that Texaco's management acted pursuant to that advice. The jury could have considered that testimony together with the other evidence when determining whether to assess punitive damages.

We agree that a good faith reliance on the advice of counsel is an important factor in determining whether a defendant's conduct is willful, wanton, or reckless, but we are of the opinion that such reliance would not necessarily preclude an award of punitive damages under New York law. Texaco cites Russian Church of Our Lady of Kazan v. Dunkel, 67 Misc.2d 1032, 326 N.Y.S.2d 727 (Sup.Ct.1971), modified on other grounds, 41 A.D.2d 746, 341 N.Y. S.2d 148 (App.Div.1973), aff'd, 33 N.Y.2d 456, 354 N.Y.S.2d 631, 310 N.E.2d 307 (1974), in support of its contention, but in that case, the court held that plaintiff's proof of punitive damages was deficient because the evidence failed to show that the defendants' conduct was wanton, willful, or reckless. The court then commented that the defendants had been acting pursuant to the advice of counsel, and [864] that such conduct was not tantamount to criminality justifying punitive damages. We do not consider this language to announce a general rule that acting pursuant to the advice of counsel precludes punitive damages, any more than we consider that a showing of criminal conduct is necessary to such an award.

Third, Texaco claims that New York law precludes an award of punitive damages absent a showing that Texaco's conduct constituted morally culpable conduct aimed at the public. Where the conduct of a party is of such a nature that similar behavior should be discouraged, the court can award punitive damages. 14 N.Y.Jur., Damages, § 176 et seq. We are of the opinion that Borkowski v. Borkowski, 39 N.Y.2d 982, 387 N.Y.S.2d 233, 355 N.E.2d 287 (1976), and Whitney v. Citibank, N.A., 782 F.2d at 1118, both refute Texaco's contention that a showing of conduct aimed at the public generally is necessary to support a punitive damage award. Even if there were such a requirement, Texaco's conduct, as found by the jury, could be considered conduct aimed at the public that punitive damages are designed to deter.

Fourth, Texaco claims that the culpable conduct that the jury had in mind in awarding punitive damages was not even attributable to Texaco, but instead was the conduct of the Getty entities. Texaco contends that the argument of counsel and the court's instruction in Special Issue No. 2 allowed the jury to punish Texaco for the acts of the Getty's entities. There is no testimony to support this allegation. We have no way, other than speculation, of knowing what specific acts the jury considered when assessing punitive damages.

Texaco's fifth contention is that the amount of punitive damages awarded is unreasonable. This contention will be discussed with the following points of error wherein Texaco requests a remittitur.

REMITTITUR

In its 65th through 68th points of error, Texaco claims that the jury's award of both compensatory and punitive damages are grossly excessive and prays that we remand on that basis or grant a remittitur. Though the size of the award was indeed large, so were the stakes.

Although the verdict is large and the trial court, in the exercise of its sound discretion, could have set it aside, an appellate court will not disturb the verdict in the absence of circumstances tending to show that it was the result of passion, prejudice, or other improper motive; or that the amount fixed was not the result of a deliberate and conscientious conviction in the minds of the jury and the court; or that the amount was so excessive as to shock a sense of justice of the appellate court.

Under former rule 440, Texas Rules of Civil Procedure, the appellate court could suggest a remittitur if it was of the opinion that the verdict was excessive. If the remittitur was not filed, the court could reverse the judgment. Effective September 1, 1986, Tex.R.Civ.P. 440 was repealed and replaced by rule 85, Texas Rules of Appellate Procedure. The successor rule reads in pertinent part:

[I]f such court [Court of Appeals] is of the opinion that the trial court abused its discretion in refusing to suggest a remittitur and that said cause should be reversed for that reason only, then said appellate court shall indicate to such party, or his attorney, within what time he may file a remittitur of such excess.

Because appellate review occurs after September 1, 1986, we are of the opinion that we are required to apply the "abuse of discretion" test set forth in rule 85, Tex.R. App.P. But we are also of the opinion that the result on the question of remittitur in this case would be the same under either rule.

Under the new rule, we may order a remittitur only if we find that the trial judge abused his discretion in refusing to suggest a remittitur. In reviewing remittitur points to determine whether the amount of damages awarded is excessive, [865] we consider only the evidence that is favorable to the award. Wharf Cat, Inc. v. Cole, 567 S.W.2d 228 (Tex.Civ.App.—Corpus Christi 1978, writ ref'd n.r.e.).

Though the compensatory damages are large, they are supported by the evidence, and were not the result of mere passion, prejudice, or improper motive. We have received many amicus curae briefs suggesting that the verdict should be greatly reduced or overturned because of the adverse economic impact it would have, if allowed to stand, on certain states and industries, and on Texaco's many shareholders. Though we are mindful of the economic effect the judgment might have on some individuals and institutions, and we are sympathetic with those who might be affected by the verdict through no fault of their own, we are not authorized by law to substitute our judgment for that of the jury, and to make redress as we deem appropriate. Because we are of the opinion that the evidence supports the jury's award of compensatory damages, we do not consider a remittitur of those damages appropriate.

In New York, punitive damages have been allowed in cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish the defendant but to deter him as well as others from indulging in similar conduct in the future. Walker v. Sheldon, 10 N.Y.2d 401, 223 N.Y.S.2d 488, 179 N.E.2d 497. It is not the form of the action that gives the right to punitive damages, but the moral culpability of the defendant. Id. Punitive damages are recoverable in tort actions where there exist ingredients of malice, fraud, oppression, insult, wanton or reckless disregard of plaintiff's rights, or other circumstances of aggravation. Such damages are also recoverable for intentional torts committed wantonly or maliciously. Rupert v. Sellers, 65 A.D.2d 473, 411 N.Y.S.2d 75 (App.Div.1978) (J. Cardamone concurring), aff'd, 50 N.Y.2d 881, 430 N.Y.S.2d 263, 408 N.E.2d 671, cert. denied, 449 U.S. 901, 101 S.Ct. 272, 66 L.Ed.2d 132 (1980); Oehlhof v. Solomon, 73 A.D. 329, 76 N.Y.S. 716 (App.Div.1902). In Rupert, the court upheld an award of punitive damages in an action for tortious interference with a contractual relationship, and impliedly held that the interference by an insurance broker with a group insurance contract between a medical society and a competing broker constituted a tort aimed at the public. In Russian Church of Our Lady of Kazan, 67 Misc. 1032, 326 N.Y.S.2d 727, the court stated that "[w]here the conduct of a party is of such a nature that similar behavior should be discouraged, the court can award punitive or exemplary damages. However, the court or the jury must be satisfied that such conduct was wanton, willful or malicious." Id., 326 N.Y.S.2d at 757.

The jury in our case found that Texaco's actions were intentional, willful, and in wanton disregard of the rights of Pennzoil. We consider this a sufficient finding under New York law to support an award of punitive damages in a tortious inducement of a breach of contract cause of action.

The amount of exemplary or punitive damages to be awarded depends on the facts of the case and rests largely within the sound discretion of the jury. Carr v. Galvan, 650 S.W.2d 864 (Tex.App.—San Antonio 1983, writ ref'd n.r.e.); Toomey v. Farley, 2 N.Y.2d 71, 156 N.Y.S.2d 840, 138 N.E.2d 221 (1956). Under Texas law, exemplary damages must be reasonably proportioned to actual damages. Alamo National Bank v. Kraus, 616 S.W.2d 908 (Tex.1981). Factors to be considered in determining whether an award of exemplary damages is reasonable include: (1) the nature of the wrong, (2) the character of the conduct involved, (3) the degree of culpability of the wrongdoer, (4) the situation and sensibilities of the parties concerned, and (5) the extent to which such conduct offends a public sense of justice and propriety. Id. at 910.

The proportion of punitive damages to actual damages presents no problem. [866] The punitive damages awarded only amount to approximately 40% of actual damages, which in itself is not excessive. Under New York law, punitive damages need bear no ratio to compensatory damages. Hartford Accident & Indemnity Co. v. Village of Hempstead, 48 N.Y.2d 218, 422 N.Y.S.2d 47, 397 N.E.2d 737 (1979).

But when considering the other factors listed above, our task is more difficult. From the evidence, the jury could have concluded that Texaco deliberately seized upon an opportunity to wrest an immensely valuable contract from a less affluent competitor, by using its vast wealth to induce the Museum, Gordon Getty, and Getty Oil to breach an existing contract. The evidence shows that the wrongful conduct came not from servants or mid-level employees but from top level management. Apparently the jury believed that the conduct of Texaco's top level management was less than the public was entitled to expect from persons of such stature. There is no evidence that Texaco interfered with the contract to injure Pennzoil, but the jury could reasonably conclude from the evidence at trial that Texaco cared little if such injury resulted from its interference. Points of Error 61 through 66 and Point 68 are overruled.

Considering the type of action, the conduct involved, and the need for deterrence, we are of the opinion that the punitive damages are excessive and that the trial court abused its discretion in not suggesting a remittitur. Though our Texas guidelines are similar to those of New York, New York courts have adopted a more conservative stance on punitive damages. There is a point where punitive damages may overstate their purpose and serve to confiscate rather than to deter or punish. In this case, punitive damages of one billion dollars are sufficient to satisfy any reason for their being awarded, whether it be punishment, deterrence, or encouragement of the victim to bring legal action. We conclude that the award of punitive damages is excessive by two billion dollars. Point of Error 67 is sustained.

If within 30 days from the date of this opinion, Pennzoil files in this Court a remittitur of two billion dollars, the judgment of the trial court will be reformed, and the award of one billion dollars punitive damages will be affirmed; otherwise, the cause will be reversed and remanded.

Finally, we respectfully refuse to certify to the Texas Supreme Court the question of the judgment's propriety under New York law. We are of the opinion that this question is not an appropriate one for certification.

Texaco's Points of Error 1 through 66, and 68 through 90 are overruled. Point of Error 67 is sustained.

If within thirty days from the date of this judgment, Pennzoil files in this Court a remittitur of two billion dollars, as suggested above, the judgment will be reformed and affirmed as to the award of $7.53 billion in compensatory damages and $1 billion in exemplary damages; otherwise the judgment will be reversed and remanded.

[1] Rule 701 provides: "If the witness is not testifying as an expert, his testimony in the form of opinions or inferences is limited to those opinions or inferences which are (a) rationally based on the perception of the witness and (b) helpful to a clear understanding of his testimony or the determination of a fact in issue."

[2] SEC Rule 10b-13 provides that once a party has publicly announced a tender offer, the tender offeror is prohibited from directly or indirectly purchasing or arranging to purchase securities of the target company, other than through the tender offer, so long as the tender offer remains open. 17 C.F.R. § 240.10b-13 (1985).

[424] Thomas P. Luning, Schiff Hardin & Waite, Chicago, Ill., for plaintiff-appellant.

John L. Hines, Jr., Tuite, Mejia & Giacchetti, Chicago, Ill., for defendants-appellees.

Before EASTERBROOK, RIPPLE, and MANION, Circuit Judges.

EASTERBROOK, Circuit Judge.

We have a pattern common in commercial life. Two firms reach concord on the general terms of their transaction. They sign a document, captioned "agreement in principle" or "letter of intent", memorializing these terms but anticipating further negotiations and decisions — an appraisal of the assets, the clearing of a title, the list is endless. One of these terms proves divisive, and the deal collapses. The party that perceives itself the loser then claims that the preliminary document has legal force independent of the definitive contract. Ours is such a dispute.

Ball-Co Manufacturing, a maker of specialty valve components, floated its assets on the market. Empro Manufacturing showed interest. After some preliminary negotiations, Empro sent Ball-Co a three-page "letter of intent" to purchase the assets of Ball-Co and S.B. Leasing, a partnership holding title to the land under Ball-Co's plant. Empro proposed a price of $2.4 million, with $650,000 to be paid on closing and a 10-year promissory note for the remainder, the note to be secured by the "inventory and equipment of Ballco." The letter stated "[t]he general terms and conditions of such proposal (which will be subject to and incorporated in a formal, definitive Asset Purchase Agreement signed by both parties)". Just in case Ball-Co might suppose that Empro had committed itself to buy the assets, paragraph four of the letter stated that "Empro's purchase shall be subject to the satisfaction of certain conditions precedent to closing including, but not limited to" the definitive Asset Purchase Agreement and, among five other conditions, "[t]he approval of the shareholders and board of directors of Empro".

Although Empro left itself escape hatches, as things turned out Ball-Co was the one who balked. The parties signed the letter of intent in November 1987 and negotiated through March 1988 about many terms. Security for the note proved to be the sticking point. Ball-Co wanted a security interest in the land under the plant; Empro refused to yield.

When Empro learned that Ball-Co was negotiating with someone else, it filed this diversity suit. Contending that the letter of intent obliges Ball-Co to sell only to it, Empro asked for a temporary restraining order. The district judge set the case for a prompt hearing and, after getting a look at the letter of intent, dismissed the complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim on which relief may be granted. Relying on Interway, Inc. v. Alagna, 85 Ill.App.3d 1094, 41 Ill.Dec. 117, 407 N.E.2d 615 (1st Dist.1980), the district judge concluded that the statement, appearing twice in the letter, that the agreement is "subject to" the execution of a definitive contract meant that the letter has no independent force.

Empro insists on appeal that the binding effect of a document depends on the parties' intent, which means that the [425] case may not be dismissed — for Empro says that the parties intended to be bound, a factual issue. Empro treats "intent to be bound" as a matter of the parties' states of mind, but if intent were wholly subjective there would be no parol evidence rule, no contract case could be decided without a jury trial, and no one could know the effect of a commercial transaction until years after the documents were inked. That would be a devastating blow to business. Contract law gives effect to the parties' wishes, but they must express these openly. Put differently, "intent" in contract law is objective rather than subjective — a point Interway makes by holding that as a matter of law parties who make their pact "subject to" a later definitive agreement have manifested an (objective) intent not to be bound, which under the parol evidence rule becomes the definitive intent even if one party later says that the true intent was different. As the Supreme Court of Illinois said in Schek v. Chicago Transit Authority, 42 Ill.2d 362, 364, 247 N.E.2d 886, 888 (1969), "intent must be determined solely from the language used when no ambiguity in its terms exists". See also Feldman v. Allegheny International, Inc., 850 F.2d 1217 (7th Cir.1988) (Illinois law); Skycom Corp. v. Telstar Corp., 813 F.2d 810, 814-17 (7th Cir.1987) (New York and Wisconsin law). Parties may decide for themselves whether the results of preliminary negotiations bind them, Chicago Investment Corp. v. Dolins, 107 Ill.2d 120, 89 Ill.Dec. 869, 871, 481 N.E.2d 712, 715 (1985), but they do this through their words.

Because letters of intent are written without the care that will be lavished on the definitive agreement, it may be a bit much to put dispositive weight on "subject to" in every case, and we do not read Interway as giving these the status of magic words. They might have been used carelessly, and if the full agreement showed that the formal contract was to be nothing but a memorial of an agreement already reached, the letter of intent would be enforceable. Borg-Warner Corp. v. Anchor Coupling Co., 16 Ill.2d 234, 156 N.E.2d 513 (1958). Conversely, Empro cannot claim comfort from the fact that the letter of intent does not contain a flat disclaimer, such as the one in Feldman pronouncing that the letter creates no obligations at all. The text and structure of the letter — the objective manifestations of intent — might show that the parties agreed to bind themselves to some extent immediately. Borg-Warner is such a case. One party issued an option, which called itself "firm and binding"; the other party accepted; the court found this a binding contract even though some terms remained open. After all, an option to purchase is nothing if not binding in advance of the definitive contract. The parties to Borg-Warner conceded that the option and acceptance usually would bind; the only argument in the case concerned whether the open terms were so important that a contract could not arise even if the parties wished to be bound, a subject that divided the court. See 156 N.E.2d at 930-36 (Schaefer, J., dissenting).

A canvass of the terms of the letter Empro sent does not assist it, however. "Subject to" a definitive agreement appears twice. The letter also recites, twice, that it contains the "general terms and conditions", implying that each side retained the right to make (and stand on) additional demands. Empro insulated itself from binding effect by listing, among the conditions to which the deal was "subject", the "approval of the shareholders and board of directors of Empro". The board could veto a deal negotiated by the firm's agents for a reason such as the belief that Ball-Co had been offered too much (otherwise the officers, not the board, would be the firm's final decision-makers, yet state law vests major decisions in the board). The shareholders could decline to give their assent for any reason (such as distrust of new business ventures) and could not even be required to look at the documents, let alone consider the merits of the deal. See Earl Sneed, The Shareholder May Vote As He Pleases: Theory and Fact, 22 U.Pittsburgh L.Rev. 23, 31-36, 40-42 (1960) (collecting cases). Empro even took care to require the return of its [426] $5,000 in earnest money "without set off, in the event this transaction is not closed", although the seller usually gets to keep the earnest money if the buyer changes its mind. So Empro made clear that it was free to walk.

Neither the text nor the structure of the letter suggests that it was to be a one-sided commitment, an option in Empro's favor binding only Ball-Co. From the beginning Ball-Co assumed that it could negotiate terms in addition to, or different from, those in the letter of intent. The cover letter from Ball-Co's lawyer returning the signed letter of intent to Empro stated that the "terms and conditions are generally acceptable" but that "some clarifications are needed in Paragraph 3(c) (last sentence)", the provision concerning Ball-Co's security interest. "Some clarifications are needed" is an ominous noise in a negotiation, foreboding many a stalemate. Although we do not know what "clarifications" counsel had in mind, the specifics are not important. It is enough that even on signing the letter of intent Ball-Co proposed to change the bargain, conduct consistent with the purport of the letter's text and structure.

The shoals that wrecked this deal are common hazards in business negotiations. Letters of intent and agreements in principle often, and here, do no more than set the stage for negotiations on details. Sometimes the details can be ironed out; sometimes they can't. Illinois, as Chicago Investment, Interway, and Feldman show, allows parties to approach agreement in stages, without fear that by reaching a preliminary understanding they have bargained away their privilege to disagree on the specifics. Approaching agreement by stages is a valuable method of doing business. So long as Illinois preserves the availability of this device, a federal court in a diversity case must send the disappointed party home empty-handed. Empro claims that it is entitled at least to recover its "reliance expenditures", but the only expenditures it has identified are those normally associated with pre-contractual efforts: its complaint mentions the expenses "in negotiating with defendants, in investigating and reviewing defendants' business, and in preparing to acquire defendants' business." Outlays of this sort cannot bind the other side any more than paying an expert to tell you whether the painting at the auction is a genuine Rembrandt compels the auctioneer to accept your bid.

AFFIRMED.

Edward Flower for appellant-respondent.

David S. J. Rubin for respondent-appellant.

Chief Judge COOKE and Judges GABRIELLI, JONES and WACHTLER concur with Judge FUCHSBERG; Judge MEYER concurs in a memorandum; Judge JASEN dissents in part and on defendant's appeal votes to affirm in a memorandum.

[108] FUCHSBERG, J.

This case raises an issue fundamental to the law of contracts. It calls upon us to review a decision of the Appellate Division, which held that a realty lease's provision that the rent for a renewal period was "to be agreed upon" may be enforceable.

The pertinent factual and procedural contexts in which the case reaches this court are uncomplicated. In 1973, the appellant, as landlord, leased a retail store to the respondent for a five-year term at a rent graduated upwards from $500 per month for the first year to $650 for the fifth. The renewal clause stated that "[t]he Tenant may renew this lease for an additional period of five years at annual rentals to be agreed upon; Tenant shall give Landlord thirty (30) days written notice, to be mailed certified mail, return receipt requested, of the intention to exercise such right". It is not disputed that the tenant gave timely notice of its desire to renew or that, once the landlord made it clear that he would do so only at a rental starting at $900 a month, the tenant engaged an appraiser who opined that a fair market rental value would be $545.41.

The tenant thereupon commenced an action for specific performance in Supreme Court, Suffolk County, to compel the landlord to extend the lease for the additional term at the appraiser's figure or such other sum as the court would decide was reasonable. For his part, the landlord in due course brought a holdover proceeding in the local District Court to evict the tenant. On the landlord's motion for summary judgment, the Supreme Court, holding that a bald agreement to agree on a future rental was unenforceable for uncertainty as a matter of law, dismissed the tenant's complaint. Concordantly, it denied as moot the tenant's motion to remove the District Court case to the Supreme Court and to consolidate the two suits.

It was on appeal by the tenant from these orders that the Appellate Division, expressly overruling an established line of cases in the process, reinstated the tenant's complaint and granted consolidation. In so doing, it reasoned that "a renewal clause in a lease providing for future agreement on the rent to be paid during the renewal term is enforceable if it is established that the parties' intent was not to [109] terminate in the event of a failure to agree". It went on to provide that, if the tenant met that burden, the trial court could proceed to set a "reasonable rent". One of the Justices, concurring, would have eliminated the first step and required the trial court to proceed directly to the fixation of the rent. Each party now appeals by leave of the Appellate Division pursuant to CPLR 5602 (subd [b], par 1). The tenant seeks only a modification adopting the concurrer's position. The question formally certified to us by the Appellate Division is simply whether its order was properly made. Since we conclude that the disposition at the Supreme Court was the correct one, our answer must be in the negative.

We begin our analysis with the basic observation that, unless otherwise mandated by law (e.g., residential emergency rent control statutes), a contract is a private "ordering" in which a party binds himself to do, or not to do, a particular thing (Fletcher v Peck, 6 Cranch [10 US] 87, 136; Hart and Sachs, Legal Process, 147-148 [1958]). This liberty is no right at all if it is not accompanied by freedom not to contract. The corollary is that, before one may secure redress in our courts because another has failed to honor a promise, it must appear that the promisee assented to the obligation in question.

It also follows that, before the power of law can be invoked to enforce a promise, it must be sufficiently certain and specific so that what was promised can be ascertained. Otherwise, a court, in intervening, would be imposing its own conception of what the parties should or might have undertaken, rather than confining itself to the implementation of a bargain to which they have mutually committed themselves. Thus, definiteness as to material matters is of the very essence in contract law. Impenetrable vagueness and uncertainty will not do (1 Corbin, Contracts, § 95, p 394; 6 Encyclopedia of New York Law, Contracts, § 301; Restatement, Contracts 2d, § 32, Comment a).

Dictated by these principles, it is rightfully well settled in the common law of contracts in this State that a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable (Willmott v Giarraputo, 5 N.Y.2d 250, 253; [110] Sourwine v Truscott, 17 Hun 432, 434).^[1] This is especially true of the amount to be paid for the sale or lease of real property (see Forma v Moran, 273 App Div 818; Huber v Ruby, 187 Misc 967, 969, app dsmd 271 App Div 927; see, generally, 58 ALR 3d 500, Validity and Enforceability of Provision for Renewal of Lease at Rental to be Fixed by Subsequent Agreement of the Parties). The rule applies all the more, and not the less, when, as here, the extraordinary remedy of specific performance is sought (11 Williston, Contracts [Jaeger 3d ed], § 1424; Pomeroy, Equity Jurisprudence, § 1405).

This is not to say that the requirement for definiteness in the case before us now could only have been met by explicit expression of the rent to be paid. The concern is with substance, not form. It certainly would have sufficed, for instance, if a methodology for determining the rent was to be found within the four corners of the lease, for a rent so arrived at would have been the end product of agreement between the parties themselves. Nor would the agreement have failed for indefiniteness because it invited recourse to an objective extrinsic event, condition or standard on which the amount was made to depend. All of these, inter alia, would have come within the embrace of the maxim that what can be made certain is certain (9 Coke 47a). (Cf. Backer Mgt. Corp. v Acme Quilting Co., 46 N.Y.2d 211, 219 [escalation of rent keyed to building employees' future wage increases]; City of Hope v Fisk Bldg. Assoc., 63 AD2d 946 [rental increase to be adjusted for upward movement in US Consumer Price Index]; see, generally, 87 ALR3d 986; Lease Provisions Providing for Rent Adjustment Based on Event or Formula Outside Control of Parties.)

But the renewal clause here in fact contains no such ingredients. [111] Its unrevealing, unamplified language speaks to no more than "annual rentals to be agreed upon". Its simple words leave no room for legal construction or resolution of ambiguity. Neither tenant nor landlord is bound to any formula. There is not so much as a hint at a commitment to be bound by the "fair market rental value" which the tenant's expert reported or the "reasonable rent" the Appellate Division would impose, much less any definition of either. Nowhere is there an inkling that either of the parties directly or indirectly assented, upon accepting the clause, to subordinate the figure on which it ultimately would insist, to one fixed judicially, as the Appellate Division decreed be done, or, for that matter, by an arbitrator or other third party.

Finally, in this context, we note that the tenant's reliance on May Metropolitan Corp. v May Oil Burner Corp. (290 N.Y. 260) is misplaced. There the parties had executed a franchise agreement for the sale of oil burners. The contract provided for annual renewal, at which time each year's sales quota was "to be mutually agreed upon". In holding that the defendant's motion for summary judgment should have been denied, the court indicated that the plaintiff should be given an opportunity to establish that a series of annual renewals had ripened into a course of dealing from which it might be possible to give meaning to an otherwise uncertain term. This decision, in the more fluid sales setting in which it occurred, may be seen as a precursor to the subsequently enacted Uniform Commercial Code's treatment of open terms in contracts for the sale of goods (see Uniform Commercial Code, § 1-205, subd [1]; § 2-204, subd [3]; see, also, Restatement, Contracts 2d, § 249). As the tenant candidly concedes, the code, by its very terms, is limited to the sale of goods. The May case is therefore not applicable to real estate contracts. Stability is a hallmark of the law controlling such transactions (see Heyert v Orange & Rockland Utilities, 17 N.Y.2d 352, 362).

For all these reasons, the order of the Appellate Division should be reversed, with costs, and the orders of the Supreme Court, Suffolk County, reinstated. The certified question, therefore, should be answered in the negative. As to the [112] plaintiff's appeal, since that party was not aggrieved by the order of the Appellate Division, the appeal should be dismissed (CPLR 5511), without costs.

MEYER, J. (concurring).

While I concur in the result because the facts of this case do not fit the rule of May Metropolitan Corp. v May Oil Burner Corp. (290 N.Y. 260), I cannot concur in the majority's rejection of that case as necessarily inapplicable to litigation concerning leases. That the setting of that case was commercial and that its principle is now incorporated in a statute (the Uniform Commercial Code) which by its terms is not applicable to real estate is irrelevant to the question whether the principle can be applied in real estate cases.

As we recognized in Farrell Lines v City of New York (30 N.Y.2d 76, 82, quoting from A.Z.A. Realty Corp. v Harrigan's Cafe, 113 Misc 141, 147): "An agreement of lease possesses no peculiar sanctity requiring the application of rules of construction different from those applicable to an ordinary contract." To the extent that the majority opinion can be read as holding that no course of dealing between the parties to a lease could make a clause providing for renewal at a rental "to be agreed upon" enforceable I do not concur.

JASEN, J. (dissenting in part).

While I recognize that the traditional rule is that a provision for renewal of a lease must be "certain" in order to render it binding and enforceable, in my view the better rule would be that if the tenant can establish its entitlement to renewal under the lease, the mere presence of a provision calling for renewal at "rentals to be agreed upon" should not prevent judicial intervention to fix rent at a reasonable rate in order to avoid a forfeiture. Therefore, I would affirm the order of the Appellate Division for the reasons stated in the opinion of Justice LEON D. LAZER at the Appellate Division.

On defendant's appeal: Order reversed, with costs, the orders of Supreme Court, Suffolk County, reinstated and the question certified answered in the negative.

On plaintiff's appeal: Appeal dismissed, without costs.

[1] Other States which are in accord include: Arkansas (Lutterloh v Patterson, 211 Ark 814); Maine (Metcalf Auto Co. v Norton, 119 Me 103); Missouri (State ex rel. Johnson v Blair, 351 Mo 1072; North Carolina (Young v Sweet, 266 NC 623); Oregon (Karamanos v Hamm, 267 Ore 1); and Rhode Island (Vartabedian v Peerless Wrench Co., 46 RI 472). But see: Alaska (Hammond v Ringstad, 10 Alaska 543); Arizona (Hall v Weatherford, 32 Ariz 370); California (Chaney v Schneider, 92 Cal App 2d 88); Ohio (Moss v Olson, 148 Ohio St 625); and Tennessee (Playmate Clubs v Country Clubs, 62 Tenn App 383).

Present: WILKINS, C.J., ABRAMS, LYNCH, GREANEY, FRIED, MARSHALL, & IRELAND, JJ.

[510] Stephen H. Oleskey (Lisa J. Pirozzolo with him) for the plaintiff.

Saul A. Schapiro (Nina F. Lempert with him) for Boston Redevelopment Authority.

Rory FitzPatrick (Irene C. Freidel & Merita Hopkins with him) for the city of Boston.

FRIED, J.

A jury found the defendants, the city of Boston (city) and the Boston Redevelopment Authority (BRA), liable for monetary damages for having breached a contract with the plaintiff, Lafayette Place Associates (LPA), for the sale of certain land (Hayward Parcel), and the BRA liable for the tort of intentional interference with LPA's contractual relation with another entity, Campeau Massachusetts, Inc. (Campeau). The trial judge entered judgment against the city, and granted judgment notwithstanding the verdict in favor of the BRA, on the ground that it was not amenable to suit for an intentional tort. We conclude that there was a valid contract between the city and LPA but that the city did not breach it. We also affirm the judgment entered in favor of the BRA, and the dismissal of LPA's claims under G. L. c. 93A.

I

This dispute arises out of efforts going back to the administration of Boston Mayor Kevin White in the late 1970's to rehabilitate the "Combat Zone," a dilapidated area adjacent to a shopping area on Washington Street. A grand scheme was devised by LPA's entrepreneurs for the construction of a department store, a retail mall, and a hotel in the area. In 1978, an agreement (Tripartite Agreement) was signed between LPA, the city, and the BRA for the development of the area in two phases. Phase I was to encompass a shopping mall and a hotel and was eventually built.^[2] It is not a subject of these suits. Phase II was to include one or more office buildings, further retail space, and a department store. It was to be built on four parcels of land to be assembled into a single parcel, called the Hayward Parcel, at the time partially occupied by a city parking structure, the Hayward Place parking garage. Whether Phase II would ever be undertaken was made contingent in the Tripartite Agreement on [511] the city's decision to remove the parking structure. If it did, the city would still be allowed to build an underground parking garage on the site with LPA being granted air rights to build over it.

The agreement as to the development of the Hayward Parcel was principally set out in Section 6.02 of the Tripartite Agreement. Section 6.02 is expressed in terms of the grant of an option to LPA to purchase the Hayward Parcel. The option is contingent on notice by the city that it plans to discontinue the Hayward Place garage. By agreement, LPA could thereupon notify the city within the option period if it "desires to purchase the rights hereby made available to it [and] the City shall sell the same...." The Tripartite Agreement and accompanying maps identify the boundaries of the Hayward Parcel, but indicate several alternatives concerning the rights to be conveyed. In the Tripartite Agreement, the city is stated to have in hand appraisals of the fair market value of two of the four component parcels of the Hayward Parcel, and agrees "forthwith" to obtain appraisals of the two remaining parcels.^[3] The price to be paid was to be one-half of the appraised fair market value as of 1978, plus one-half of the increase in value attributable to "the construction of the Public Improvements and the Project."^[4] In other words, the formula accounted for the possibility that between 1978 and the future sale of the Hayward Parcel, the value of the parcel could change as a result of the construction of Phase I on adjacent land. The Tripartite Agreement further provided that "[t]he existence and amount of increase in fair market values attributable to the construction of the Public Improvements and the Project shall be determined by independent appraisal." Section 13.01 of the Tripartite Agreement also provides, after giving a standard definition of fair market value, that such value shall be determined by a procedure, akin to arbitration, by which by giving written notice either party may designate a first appraiser, the other party may designate a second appraiser, and a third appraiser may be appointed by the first and second, by the Chief Judge of the United States District Court [512] for the District of Massachusetts, or by the president of the Boston Bar Association.^[5]

The Tripartite Agreement also provides,

"[t]he Developer may exercise the right and option set forth in this Section 6.02 by giving notice of its desire to purchase such rights to the City at any time within the Option Period. After the receipt of and following such notice from the Developer, the parties shall in good faith negotiate and enter into an agreement calling for the purchase and sale of the rights in question. Such agreement shall be in the customary form of agreements for the purchase and sale of real estate in the greater Boston area except that the agreement shall reflect such reservation and shall contain other appropriate provisions with respect to the integration of construction and other matters relevant to coordinated use of the rights conveyed and the rights retained by the City."

On February 26, 1982, the parties agreed, in what is known as the Second Supplemental Agreement, to certain changes to the Tripartite Agreement concerning the construction and operation of a parking garage by the city under the Hayward Parcel. In addition, the parties amended Section 6.02 by adding the following:

"[I]f the Developer shall exercise the right and option set forth in this Section 6.02, there shall automatically be created an agreement by the Developer to buy and by the City to sell the ... Parcels .... [A]ppropriate details of the purchase and sale shall be worked out by the parties so as to conform to their intent under this Section 6.02., but if they shall be unable to do so then the matter shall be resolved by arbitration in accordance with the arbitration procedure set forth in ARTICLE EIGHT of the Deed and Agreement, dated as of September 11, 1979, between the City and the Developer."

Article 8 of the deed sets out a binding arbitration procedure for [513] the resolution of disputes.^[6] On December 16, 1983, the city gave notice to LPA that it intended to discontinue the Hayward Place garage and build a parking garage beneath the Hayward Parcel, thereby commencing LPA's option period. In that notice, the city listed five contingencies to closing the sale of the Hayward Parcel, including that "the parties are able to agree, via appraisals, on the increased value of parcels D-1, D-2 and D-3, as the result of the construction of the Lafayette Place Project."

On July 2, 1986, as all parties agree, LPA exercised its option to purchase the Hayward Parcel. On October 27, 1987, the parties extended the date on which closing might take place by providing, in what is known as the Third Supplemental Agreement, that:

"Section 6.02 of the Tripartite Agreement is amended by deleting the proviso in the fourth full paragraph thereof... and substituting in its place the following: `provided that, unless the City and the Developer shall agree to a further extension, the Developer shall lose its rights hereunder to proceed with an acquisition if a closing has not occurred by January 1, 1989, unless the City and/or the Authority shall fail to work in good faith with the Developer through the design review process to conclude a closing.'"

By virtue of the Third Supplemental Agreement, LPA had until January 1, 1989, a date which all parties refer to as the "drop dead date," to "proceed with an acquisition."

LPA never demanded and the city never tendered a deed within the required time period or at any other time. The basis of its contract action against the city is that the city in bad faith failed to carry out those of its obligations under the Tripartite Agreement necessary to allow LPA to proceed to demand a closing, and indeed that it engaged in bad faith actions designed to impede LPA in effecting a timely closing. The reason for these obstructionist tactics by the city, as LPA sought to show by testimony and documents, was that the new administration [514] of Mayor Raymond Flynn believed that the price established by the Section 6.02 formula, which was based on 1978 values, was grossly unfair to the city in the light of a strong surge in real estate prices in the intervening years. LPA offered evidence of several instances of what it claimed were the city's obstructionist tactics. These included failing to complete the appraisals necessary to establish the price for the Hayward Parcel, initiating zoning changes that would have greatly reduced the allowable height of the office towers planned for the site, lack of cooperation about determining whether Avenue de Lafayette and New Essex Street would be closed, and threatening to put a new street through the middle of the parcel, which would have made its development economically unviable.

In November, 1987, after the conclusion of the Third Supplemental Agreement but before the final breakdown of dealings in 1989, LPA negotiated the sale of its development rights in the Hayward Parcel to Campeau. LPA was to receive $24.5 million in return for its rights under Phase I of the project. The sale was subject to approval by the BRA, and on December 4, 1987, LPA filed an application for approval. On February 1, 1988, LPA withdrew its application; the BRA had not acted on it in the interim. In March, 1988, LPA entered into a lease agreement with Campeau whereby Campeau assumed LPA's debts under Phase I and was to pay LPA approximately $21.5 million in cash and notes in return for LPA's rights to the project. Under the lease agreement, Campeau agreed to pay LPA additional consideration if the BRA approved the sale of the Hayward Parcel.

Thereafter, LPA was not directly involved in negotiations regarding the sale of the Hayward Parcel. Campeau began elaborate plans for a development called "Boston Crossing," which included construction of a department store and office tower on the Hayward Parcel, the rebuilding of the Phase I mall on its nearby parcel, and the construction of an office tower above a rebuilt Jordan Marsh. During 1988, representatives from Campeau and the BRA met repeatedly to negotiate about Campeau's plans. When it became clear that Campeau could not secure BRA approval for the Boston Crossing project by the expiration of LPA's option period, Campeau requested a further extension of the drop dead date. The BRA refused to extend the January 1, 1989, deadline. On December 19, 1988, Campeau's president sent a letter to Mayor Flynn describing the current [515] state of the project, renewing Campeau's request for an extension of the option period, and informing Mayor Flynn that "we have no recourse but to officially notify the city that we wish to complete the transaction and make payment immediately." On December 30, 1988, Stephen Coyle, director of the BRA, responded. He stated that, "once the development review process is complete, the City's parcel can be sold for its fair reuse value," and noted that "[b]y their own terms, prior agreements on Hayward Place will expire on January 1, 1989. This event does not in our judgment alter our willingness to work with you ... [i]t simply puts the question of the disposition of Hayward Place in a current context."

LPA's option period expired on January 1, 1989. In June, 1989, the BRA approved Campeau's "Boston Crossing" design, but by June, 1990, Campeau had defaulted on its payments to LPA under the lease agreement and LPA terminated its lease with Campeau. Manufacturers Hanover Trust Company, as lender, foreclosed on LPA's and Campeau's interests in the Lafayette Place Mall in February, 1991, and the project collapsed. On March 16, 1992, LPA filed suit against the city and the BRA.^[7] LPA alleged that the city had breached the Tripartite Agreement by failing to work out the necessary details to effect the transfer of the Hayward Parcel after LPA exercised its option to buy, and LPA sought specific performance, or, alternatively, damages for breach of the Tripartite Agreement. LPA also sought damages for breach of the implied covenant of good faith and fair dealing, interference with contractual relations, and violation of G. L. c. 93A.

On October 21, 1994, a jury returned a verdict against the city and the BRA. The jury found that there was a contract for the purchase of the Hayward Parcel, that both the city and the BRA breached the contract, but that the BRA was not acting as an agent of the city in connection with the contract. The jury awarded LPA $9.6 million against the city. The jury also found that the BRA intentionally interfered with contractual relations between LPA and Campeau, and awarded LPA $6.4 million in damages. The trial judge then ruled that the $6.4 million verdict [516] against the BRA was "encompassed" within the $9.6 million award against the city. On August 17, 1995, the judge granted the BRA's motion for judgment notwithstanding the verdict,^[8] ruling that the BRA is a public employer under the Massachusetts Tort Claims Act and is therefore immune from suit for intentional torts. We granted LPA's application for direct appellate review.

II

The city makes two principal arguments in this appeal: that the Tripartite Agreement was too indefinite to constitute a binding contract, and that in any event the city was not in breach. Although the city treats these as quite distinct arguments we believe that they must be considered together to come to a fair and sensible view of the arrangement between the parties and their dealings with each other pursuant to it. There were certainly contingencies left open at the time that the parties concluded the Tripartite Agreement, principally the price to be paid, the treatment of Avenue de Lafayette and New Essex Street, and whether or not the city would choose to build an underground garage on the Hayward Parcel. But these open matters did not preclude the formation of a binding agreement. The parties specified formulae and procedures that would determine a price under the several contingencies. It would be most unfortunate if parties could not make binding, reliable agreements about such complex projects, allowing them to make commitments and seek financing for their conclusion. If the degree of specificity the city claims is necessary were insisted on, no such agreements could be concluded. But it is the other side of this same coin that the procedures necessary to lend specificity to what at the outset is not entirely specific are an integral part of the agreement the parties concluded, and, if a party does not follow those procedures, it should not be able to claim that the other side is in breach of what is necessarily still an open-ended arrangement. We conclude that there was sufficient [517] evidence to find a binding agreement, as the jury indeed did find, but it is also clear, as a matter of law, that LPA failed to follow the steps required of it under the Tripartite Agreement as supplemented to put the city in breach.

A

The first question is whether there was a valid and enforceable contract between LPA and the city or whether, as the city claims, the terms of the Tripartite Agreement as amended were too indefinite to constitute a contract. The Tripartite Agreement states that "the parties shall in good faith negotiate and enter into an agreement," which the city argues indicates that no binding agreement had been concluded. The city points out that Section 6.02 leaves undetermined the contract price and exactly what is to be included in the Hayward Parcel. In some cases, the failure to reduce uncertainties to definite terms is fatal, particularly where parties have not yet formalized their negotiations or have left essential terms completely open. See Mendel Kern, Inc. v. Workshop, Inc., 400 Mass. 277, 280-281 (1987) ("an intention to do something is not necessarily a promise to do it"); Lucey v. Hero Int'l Corp., 361 Mass. 569, 574 (1972) (no option contract for purchase of land where parties merely specified boundaries to be "mutually agreed upon by both parties"); Saxon Theatre Corp. v. Sage, 347 Mass. 662, 666 (1964) (no contract for lease of property where parties merely signed letter of intent that provided no description of the land nor means of determining rent). But see Shayeb v. Holland, 321 Mass. 429, 431 (1947) (enforcing contract despite absence of price term). We adhere to the principle that "[a]n agreement to reach an agreement is a contradiction in terms and imposes no obligation on the parties thereto," Rosenfield v. United States Trust Co., 290 Mass. 210, 217 (1935), in the circumstances that justify and gave rise to it: where parties have merely reached the stage of "imperfect negotiation" prior to formalizing a contract, and have not yet reduced their agreement to terms. Id. When parties have progressed beyond that stage, however, a competing principle applies: a contract should be interpreted "so as to make it a valid and enforceable undertaking rather than one of no force and effect." Shayeb v. Holland, supra at 432. See McMahon v. Monarch Life Ins. Co., 345 Mass. 261, [518] 264 (1962).^[9] Rules of contract must not preclude parties from binding themselves in the face of uncertainty. If parties specify formulae and procedures that, although contingent on future events, provide mechanisms to narrow present uncertainties to rights and obligations, their agreement is binding. See generally Hastings Assocs. v. Local 369 Bldg. Fund, Inc., 42 Mass. App. Ct. 162, 169 (1997) (accepting contract calling for appointment of neutral third party to determine lease price under formula); Cataldo v. Zuckerman, 20 Mass. App. Ct. 731, 737 (1985) (accepting formula for determination of compensation as sufficiently specific to create contract).

The Tripartite Agreement provided a pricing formula to determine the price to be paid for the Hayward Parcel. When the parties signed the Tripartite Agreement, most of the information needed to complete that formula was available. Because the formula incorporated the fair market value of the parcel at the time of the future transaction, which, by definition, was unknown at the time of contracting, Section 13.01 detailed an appraisal procedure to be used for securing that information. By using that procedure, which called for the creation of a threemember appraisal board, the parties could have determined the price to be paid. In addition, the Second Supplemental Agreement states that "if the Developer shall exercise the right and option set forth in Section 6.02, there shall automatically be created an agreement by the Developer to buy and the City to sell" the Hayward Parcel. Moreover, it specified that "appropriate details of the purchase and sale ... shall be resolved by arbitration" in accordance with a specified procedure. Although this provision was not added until 1982, it created a means for resolving disputes that might arise in the course of effecting the ultimate sale of the Hayward Parcel. In particular, questions about the exact size of the parcel and the allocation of air rights over the relevant public streets were the kind of "details" that [519] could be worked out using this process.^[10] To borrow Justice Holmes's metaphor, the machinery was built and had merely to be set in motion. See Drummond v. Crane, 159 Mass. 577, 579 (1893) (a future writing was merely "additional wheel in the machinery" of a contract). See also Sands v. Arruda, 359 Mass. 591, 594 (1971); Coan v. Holbrook, 327 Mass. 221, 224 (1951). We therefore conclude that the Tripartite Agreement, as amended, was an enforceable contract, under which both parties had certain rights and obligations.

B

Because the Tripartite Agreement, as amended, was an enforceable contract, upon LPA's exercise of its option in 1986, there arose a bilateral contract for the purchase and sale of the Hayward Parcel. See American Oil Co. v. Cherubini, 351 Mass. 581, 585 (1967) (exercise of option creates bilateral contract for purchase and sale); C. & W. Dyeing & Cleaning Co. v. DeQuattro, 344 Mass. 739, 741 (1962) (same). See also Blum v. Kenyon, 29 Mass. App. Ct. 417, 420 (1990) (same). The question then becomes whether LPA can, as a matter of law, maintain a claim against the city for breach of that contract. "The general rule is that when performance under a contract is concurrent one party cannot put the other in default unless he is ready, able, and willing to perform and has manifested this by some offer of performance." Leigh v. Rule, 331 Mass. 664, 668 (1954). See 6 Corbin, Contracts § 1258 (1962). Any material failure by a plaintiff to put a defendant in breach bars recovery, see Kanavos v. Hancock Bank & Trust Co., 395 Mass. 199, 202-203 (1985); Pas-Teur, Inc. v. Energy Sciences, Inc., 11 Mass. App. Ct. 967, 968-969 (1981) (citing cases), unless the plaintiff is excused from tender because the other party has shown that he cannot or will not perform. Leigh v. Rule, supra. Even if a potential buyer notifies the seller of the buyer's intention to tender on a certain date and appears at the registry of deeds on that date with the required consideration, there may [520] not be the "readiness to perform" that is a necessary condition of placing the defendant in breach. See Mayer v. Boston Metro. Airport, Inc., 355 Mass. 344, 350-352, 354-355 (1969).

Applying these principles to the facts most favorable to LPA in this case, the question becomes whether LPA, as a matter of law, was ready, able, and willing to close the sale of the Hayward Parcel prior to January 1, 1989, and whether LPA indicated as much to the city.^[11] There is no evidence in the record, and LPA does not now argue, that LPA attempted to tender payment for the Hayward Parcel between July, 1986, when it exercised its option under the Tripartite Agreement, and March, 1988, when it transferred its rights to Campeau. LPA must therefore rely on the possibility that Campeau fulfilled LPA's contractual obligations by tendering payment or demanding the deed. On December 19, 1988, less than two weeks prior to the drop dead date, Campeau informed Mayor Flynn by letter that "we have no recourse but to officially notify the city that we wish to complete the transaction and make payment immediately." This is the best evidence in the record of an attempt to tender payment to force the city to close the sale of the Hayward Parcel.^[12] It is not sufficient. To place a seller in default, a buyer must manifest that he is ready, able, and willing to perform by setting a time and place for passing papers or making some other concrete offer of performance. See Leigh v. Rule, supra at 668; LeBlanc v. Molloy, 335 Mass. 636, 637-638 (1957); Mayer v. Boston Metro. Airport, Inc., supra at 354. Even attributing to [521] LPA Campeau's action in sending the letter to Mayor Flynn (an attribution the city urges us not to make), Campeau's letter does not specify when, where, or how Campeau intends to tender payment, nor does it indicate what Campeau believes the city's obligations were at that point in time.^[13] Compare Fox of Boylston St. Ltd. Partnership v. Mayor of Boston, 418 Mass. 816, 819-820 (1994) (notice letter specified closing date and location); Bucciero v. Drinkwater, 13 Mass. App. Ct. 551, 552-553 (1982) (buyer was ready, willing, and able to perform when he arrived at closing with payment). Campeau provided no suggested purchase price, nor even a suggestion as to when Campeau and the city should meet to resolve the remaining differences. Finally, this single sentence is embedded in a long letter to the mayor sent only weeks prior to the termination of the option period. It was an empty gesture that could not possibly have been acted on in the time remaining until LPA and Campeau forfeited their rights under the Tripartite Agreement.

LPA might claim that neither it nor Campeau could have tendered and thus put the city in breach, because absent a final delineation of what the parcel contained and an appraisal of what the parcel was worth there was no basis for a definitive tender. But the agreement between the parties specified mechanisms for resolving just these open questions. Indeed it is only because such mechanisms were specified that we have been willing to hold that the arrangement between the parties is definite enough to constitute a binding agreement.

Under the Section 6.02 price formula, the parties could not have completed the transaction without using the procedure set forth in Section 13.01 to determine whether any increase in the fair market value of the parcel since 1978 was attributable to the construction of Phase I. The Tripartite Agreement does not specify which party has the obligation to trigger Section 13.01's appraisal process; both parties share this responsibility. Neither party could be ready, able, and willing to close the sale until this procedure was at least initiated. Given that this information had not been obtained, and that neither LPA nor Campeau ever sought to obtain it, LPA cannot, as a matter of law, have put the city in default. See Kanavos v. Hancock Bank & Trust, supra at [522] 203 ("[i]f neither could perform, even if the [defendant] repudiated the contract, neither could recover").

Similarly, under the arbitration clause of the Second Supplemental Amendment, LPA, the city, and the BRA shared responsibility for using arbitration to resolve the remaining differences that LPA claims prevented it from closing the transaction.^[14] Neither LPA nor the city activated those procedures. LPA's complaint that the city and the BRA breached the contract by failing to determine the exact size and composition of the Hayward Parcel is undermined by LPA's failure to initiate arbitration about the undecided details or even to propose to the city that the procedures specified in the Tripartite Agreement should be used to resolve these differences. Similarly, questions about the treatment of Avenue de Lafayette and the allocation and value of air rights over it and other streets could have been answered in arbitration, but neither LPA nor Campeau ever sought such answers.

LPA's claims must thus rest on the possibility that even if its tender — particularly the December 19, 1988, letter from Campeau to Mayor Flynn — was insufficient, LPA (and Campeau) should be excused from its obligation to tender because the city's tactics and delays demonstrated that it would not perform under the contract. See Leigh v. Rule, supra at 668 ("the law does not require a party to tender performance if the other party has shown that he cannot or will not perform"). LPA claims, and the trial judge in denying the city's motion for directed verdict or judgment notwithstanding the verdict cites the fact, that the city failed to secure needed appraisals with which to determine the price for the Hayward Parcel,^[15] that the BRA had proposed zoning regulations that placed unacceptable height restrictions on the parcel, that the city's transportation department was threatening to route a street through the parcel, and that LPA, Campeau, the city, and the BRA had failed to reach agreement as to how to treat the Avenue de Lafayette. These facts, taken alone or together, do not excuse the obligation to [523] tender. There was testimony from Marco Ottieri, LPA's project manager, that throughout the mid-1980's, LPA was committed to purchasing the Hayward Parcel regardless of its ultimate configuration and of restrictions placed upon the parcel by the city, because it would "build whatever we could build there profitably." He stated that LPA would have bought the parcel regardless of height restrictions and whether or not the city kept open Avenue de Lafayette. This seriously weakens LPA's argument that the city's proposed regulation of the Hayward Parcel materially affected the transaction or amounted to a repudiation.

Unlike a situation in which a defendant clearly expresses an unwillingness to perform, thereby repudiating the contract,^[16] here LPA seeks to attribute repudiation to the city based on the mere fact that uncertainties remained that LPA shared responsibility for resolving. Compare Hastings Assocs. v. Local 369 Bldg. Fund, Inc., 42 Mass. App. Ct. 162, 177 (1997) (where defendant indicated that it would not fulfil its obligations, defendant was in default and plaintiff was not obliged to use specified procedures to determine value of business). In this circumstance, where a complex contract leaves certain key terms to be decided by formulae and procedures, and where both parties share responsibility for activating those procedures, the plaintiff cannot be ready, able, and willing to tender, nor can the plaintiff put the defendant in default, unless the plaintiff attempts to use the contractually specified mechanisms to overcome the very uncertainties they were designed for. If two parties form an agreement that incorporates procedural devices to overcome unknowns, a plaintiff must at least attempt to make use of those devices before he can claim that the unknowns prevented meeting his obligations at law. This is particularly true in a complex and heavily regulated transaction such as this one, where public entities and public and elected officials with changing policies and constituencies are involved, and the transaction spans many years. This is not to say that governments are absolved from performing contractual obligations, but where a government contract specifies procedures and methods [524] a private party must be particularly assiduous to comply with them. "Men must turn square corners when they deal with the Government." Rock Island, Ark. & La. R.R. v. United States, 254 U.S. 141, 143 (1920) (Holmes, J.). LPA knew at the time it entered into the contract with the city that political bodies have various obligations and constraints, and that closing the sale after exercising its option would require agreeing on the transaction's specifics. We therefore conclude as a matter of law that LPA was not excused from its obligation to put the city in default, and that LPA did not fulfil this obligation.

C

LPA alleges not only that the city breached the Tripartite Agreement but that it did so in bad faith. This allegation of bad faith does not change our analysis in the preceding subsection.

The last clause of the Third Supplemental Agreement states that the January 1, 1989, drop dead date shall not apply if "the City and/or the [BRA] shall fail to work in good faith with the Developer through the design review process to conclude a closing." The Third Supplemental Agreement, however, was not signed until October 29, 1987, immediately prior to LPA's transfer of its rights to Campeau.^[17] There is overwhelming evidence that the review process progressed appropriately as soon as Campeau initiated the process in the spring of 1988,^[18] [525] only months prior to the drop dead date.^[19] Campeau's letters to the BRA during 1988 consistently demonstrate that the design review process was proceeding smoothly and in a collaborative fashion.^[20] Thus, LPA cannot argue that the BRA or the city acted in bad faith with regard to the design review process during this period.^[21]

Had bad faith infected the design review process itself, the drop dead date would have been extended automatically according to the terms of the Third Supplemental Agreement. As the review process was not so infected, LPA's bad faith claim rests on the fact that the BRA refused to extend the drop dead date despite Campeau's repeated requests for such an extension. A duty of good faith and fair dealing is implicit in the performance of a party's contractual obligations, see Fortune v. National Cash Register Co., 373 Mass. 96, 102-103 (1977), and generally if parties modify an existing contract, their modification must be made in good faith: one party cannot extract the modification from the other wrongfully. See U.C.C. § 2-209, comment 2 (1989). But LPA cites no authority for the proposition that the refusal by one party to accede to a modification that would inure to the benefit of the other party is, in itself, bad faith, where the only ill motive alleged is a desire to avoid the benefit in question. Absent bad faith in the design review [526] process, the city and the BRA were under no contractual obligation to grant an extension to LPA. Even if the defendants' refusal to extend the deadline was motivated by the possibility of evading the pricing formula in the Tripartite Agreement, as LPA suggests,^[22] that refusal could not constitute bad faith, because the BRA had no contractual duty to grant the extension that LPA sought. Compare Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 472 (1991) (finding of bad faith justified where contract required defendant to approve a development plan and defendant refused to do so in order to extract monetary concessions from plaintiff). See Restatement of Contracts § 205 comment a (1979).

Finally, the mere fact that the city did not convey the Hayward Parcel to Campeau prior to January 1, 1989, does not support a claim of bad faith. Particularly given the uncertainties that LPA added to the transaction — including the substitution of Campeau for LPA and Campeau's including in its design proposals submitted for review designs for a much larger project, the Boston Crossing project, than LPA's original project that referred only to the Hayward Parcel — LPA cannot maintain that the city acted in bad faith by not completing the transaction, unless LPA and Campeau had also done all they could to force the city to close the sale. Had LPA, or Campeau, been serious about putting the city in default, it could either have indicated more clearly that it was ready, able, and willing to close the sale by indicating its understanding of the exact composition of and price to be paid for the Hayward Parcel and setting a time and place for a transfer of the deed, thereby forcing the city to make use of the appraisal and arbitration procedures, or itself pressed the appraisal and arbitration procedures specified in the Tripartite Agreement to resolve all remaining disagreements. That it did none of these things bars [527] its claim against the city.^[23] Neither party tendered performance, and neither was in breach or default. See Flynn v. Wallace, 359 Mass. 711, 716 (1971); Hapgood v. Shaw, 105 Mass. 276, 279 (1870). See also Corbin, Contracts § 663 (1960); § 1258 (1962).

III

We turn now to LPA's claims against the BRA. The Superior Court jury found that the BRA tortiously and intentionally interfered with LPA's contractual relations with Campeau. The judge granted the BRA's motion for judgment notwithstanding the jury's verdict. The judge ruled that the Massachusetts Tort Claims Act (Act), G. L. c. 258, § 10 (c), renders the BRA, as a "public employer," immune from suit for "any claim arising out of an intentional tort, including ... interference with contractual relations." LPA argues that the BRA was not entitled to this ruling because it had raised the bar of the statute in an untimely fashion; because the BRA was an "independent body politic and corporate" and as such explicitly excluded by G. L. c. 258, § 1, from the immunity accorded by § 10 (c); and because, even if § 10 (c) did apply to the BRA, this would only remit the BRA to its situation before the enactment of c. 258, at which time the BRA was amenable to suit for intentional torts.

A

Although the BRA did not raise the bar of the statute in a motion to dismiss or at summary judgment, it did do so in its motion for a directed verdict at the close of all the evidence. The BRA renewed this argument in a motion for judgment notwithstanding the verdict. The judge ruled that this was sufficient, and that there had been a "flurry of arguments from both sides" on the issue. The only relevant authorities LPA cites for the proposition that the BRA raised this issue too late have to do with refusals to grant leave to amend pleadings because of prejudice to the nonmoving party. See Mathis v. Massachusetts Elec. Co., 409 Mass. 256, 264 (1991); Hamed v. Fadili, 408 Mass. 100, 105 (1990). These authorities recognize that this sort of matter is committed to the discretion of the judge. Assuming [528] that this should be treated as a motion to amend the pleadings, we conclude that the judge did not abuse his discretion. This is particularly so because the status of the BRA for purposes of § 10 (c) is a purely legal question not requiring recourse to the jury.

B

In Whitney v. Worcester, 373 Mass. 208, 212 (1977), and Morash & Sons v. Commonwealth, 363 Mass. 612 (1973), we warned that, if the Legislature did not act to abrogate the immunity from liability in tort accorded at common law to governmental entities, this court would do so. The Massachusetts Tort Claims Act followed in 1978, providing a scheme of tort liability for "public employers" in certain circumstances and subject to several conditions. See generally Glannon, Governmental Tort Liability under the Massachusetts Tort Claims Act of 1978, 66 Mass. L. Rev. 7, 10 (1981). Section 10 (c) excludes liability for intentional torts from the scope of c. 258 and specifically mentions the tort of interference with contractual relations. See G. L. c. 258, § 10 (c). Section 1 defines a public employer as

"the commonwealth and any county, city, town, educational collaborative, or district, including any public health district or joint district or regional health district or regional health board established pursuant to the provisions of section twenty-seven A or twenty-seven B of chapter one hundred and eleven, and any department, office, commission, committee, council, board, division, bureau, institution, agency or authority thereof ... which exercises direction and control over the public employee, but not a private contractor with any such public employer, the Massachusetts Bay Transportation Authority, the Massachusetts Port Authority, the Massachusetts Turnpike Authority, or any other independent body politic and corporate. With respect to public employees of a school committee of a city or town, the public employer for the purposes of this chapter shall be deemed to be said respective city or town."

The Superior Court judge ruled that the BRA was not an "independent body politic and corporate." Neither the statute [529] itself nor our prior decisions allow a ready answer to the controversy the parties raise about this classification. Certainly the term is not self-defining. The leading case on this matter, the learned opinion of the Appeals Court in Kargman v. Boston Water & Sewer Comm'n, 18 Mass. App. Ct. 51 (1984), see Commesso v. Hingham Hous. Auth., 399 Mass. 805, 808 (1987), traces the history of the term "body corporate and politic" from its original appearance in the Preamble to our Constitution to its present usage to designate "a legal entity [created by the Legislature] to perform specified tasks deemed to be essential public functions." Kargman, supra at 55. It is only the subset of independent bodies corporate and politic that do not enjoy immunity from intentional torts under § 10 (c). What entities, in addition to the three specifically mentioned in § 1, are to be identified as independent bodies corporate and politic we have been left to discern from a rather inadequate set of hints. The term itself is not very helpful, so that the Appeals Court in Kargman sought to extrapolate from the list of authorities specifically designated as independent in § 1 to instances not specifically named. It identified two general features of the designated entities: financial independence and political independence. The court went on to identify certain indicia of financial and political independence, id. at 56-58, and concluded that the Boston water and sewer commission was such an independent body. By defining the term independence in terms of financial and political independence, the Kargman analysis at least has the virtue of disaggregating the term into two possibly more manageable units, but the norm is still defined by reference to itself, and that is a problem.

The Superior Court judge, in a thorough and closely reasoned memorandum, applied the Kargman analysis to the situation of the BRA. He reached his conclusion that the BRA is not an independent body politic by emphasizing the factors that detract from the BRA's political independence: when initiating urban renewal projects it is subject to stringent public notice requirements and requires approval for many of its actions at the State and local level. He also found lacking indicia of financial independence, in that the BRA must account for its expenditures at the State and the local level and may receive State financial assistance for its urban renewal projects and advances to cover certain of its expenses. He concluded that "the BRA is subject to many checks on its power to initiate and carry out redevelopment [530] projects in Boston, which do not comport with political and financial independence. It is significantly less autonomous than either the MBTA, Turnpike, or Massport." LPA points out the many ways in which the BRA has financial and political independence similar to that of the three authorities named in § 1: removal of authority members only for cause; its ability to sue and be sued in its own name; its ability to hold title to property in its own name; its enjoyment of the power of eminent domain; its ability to incur indebtedness and issue bonds without pledging the credit of the State or city; and its ability to charge market rents for its properties. LPA also compares the BRA to the Boston water and sewer commission, which was held to be independent in Kargman. Moreover, LPA points out that some of the features urged by the BRA as indicia of a lack of independence, such as the oversight by the State auditor of its expenditures which the judge mentions, apply to the three named authorities as well. This battle of factors seems much closer to a standoff than either the BRA's or the judge's analysis would acknowledge.

Any analysis that relies heavily on the Kargman factors must cope with the embarrassment that just the factors that are discerned in Kargman as the indicia of independence of the three named entities are present with at least as much force in the case of Boston, other cities and towns, and the Commonwealth itself — all of which are designated at the beginning of § 1 as public employers. The BRA suggests that perhaps recourse to a possible underlying rationale for the designation of the three named entities might assist analysis: they all provide services for a fee not to the general public but to that specific segment of the public that chooses to use those services, and so it is fair that the users bear the cost in higher fees of the injuries intentionally inflicted by the authorities. This is only mildly convincing. We do not see why the costs of injuries inflicted by non-independent bodies should be borne by the injured parties alone and not by the public in general.^[24]

Though we do not decline the illumination that these proposals and analyses might offer, we probably cannot do much better in this case than to rely on analogy, that logically imperfect but inveterate tool of the law in tight corners. See generally Brewer, Exemplary Reasoning: Semantics, Pragmatics, and the [531] Rational Force of Legal Argument by Analogy, 109 Harv. L. Rev. 925 (1996); Levi, An Introduction to Legal Reasoning (1949). And here the closest analogy to the BRA are the local housing authorities, to which in Commesso we declined to assign independent status for the purposes of §§ 1 and 10 (c). See Commesso, supra at 809. As the Superior Court judge noted, it is significant that redevelopment authorities were created by the Legislature to assume the powers, such as land assembly and the carrying out of redevelopment projects, formerly held by housing authorities. See St. 1952, c. 617, § 4, amending G. L. c. 121, § 26QQ. In communities that choose not to establish redevelopment authorities, the powers assigned to redevelopment authorities remain with the housing authorities. See G. L. c. 121B, § 9. If a community chooses to establish a redevelopment authority, the governance of that authority is the same as that which applies to a housing authority, G. L. c. 121B, §§ 5-7. And, as the Superior Court judge pointed out,

"As operating agencies, housing and redevelopment authorities enjoy the same powers, including but not limited to the power to: sue and be sued; work with the federal government on urban renewal projects; receive public or private loans and grants; take property by eminent domain; clear and improve property; enter into contracts necessary to carry out housing and urban renewal projects; make relocation payments to displaced businesses or persons; borrow money upon the security of their bonds or notes; invest in securities; contract with organizations undertaking c. 121A projects; make and amend rules and regulations; and join with other operating agencies in exercising their respective powers. G. L. c. 121B, § 11."

Indeed, the two-page chart provided by LPA as an appendix to its brief here comparing the political and financial situation of various types of entities in the Commonwealth shows only one nontrivial difference^[25] between the BRA and a housing authority: the existence of statutory limits on the rent that housing authorities may charge tenants, see G. L. c. 121B, § 32, and the absence of such constraints on sales and leases of property [532] by a redevelopment authority under G. L. c. 121B, § 49. But of course this difference is merely the result of the assignment of functions to a redevelopment authority in communities that choose to establish one. If redevelopment functions remain in the housing authority, which then plays a dual role pursuant to G. L. c. 121B, § 9 (b) or (c), then the housing authority too, in respect to those functions, may charge market rents.^[26] And it would be captious to suggest that a housing authority does or does not enjoy the immunities of the Act depending on whether redevelopment functions have been left with it.

The BRA is unique among redevelopment authorities and enjoys a special statutory basis. See generally Aronson, The Boston Redevelopment Authority: A Quasi Public Authority, 43 B.U. L. Rev. 466 (1963). The most significant difference between the BRA and other redevelopment authorities is that the BRA functions as the city's planning board and enjoys the powers of the State housing board in respect to c. 121A urban renewal projects.^[27] See St. 1960, c. 652. See also Opinion of the Justices, 341 Mass. 760, 787-788 (1960). But both a city planning board and the State housing board would certainly be within the § 1 definition of public employers for the purposes of G. L. c. 258, § 10, and the addition of their powers should not make the designation of the BRA as a public employer less apt.

Finally, we resolve whatever indeterminacy this analysis may leave in favor of subjecting the BRA to the general regime of c. 258. The BRA is certainly a public body, a governmental entity of some sort performing public functions. Any doubts about the BRA's status under the difficult and uncertain designation of "independent body politic and corporate" should be resolved against such a designation, because of the desirability of making the c. 258 regime as comprehensive as possible, thus avoiding reintroducing the "crazy quilt" of immunities, Rogers v. Metropolitan Dist. Comm'n, 18 Mass. App. Ct. 337, 338-339 (1984), which the Act was meant to replace. This is particularly [533] so because any decision taking a governmental entity out of the category of "public employers" has the effect not only, as here, of making that entity liable for intentional torts, but also of removing the immunities provided by the other provisions of § 10. This may have large consequences to which none of our cases so far has attended. Of particular concern is removing a governmental body from the protection of the immunity of § 10 (b), which refers to

"any claim based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a public employer or public employee, acting within the scope of his office or employment, whether or not the discretion involved is abused."

We conclude that the BRA is a public employer not excluded from the scope of the Act.

C

We have less difficulty disposing of LPA's ingenious argument that, even if the BRA is not an independent body politic and corporate, § 10 (c) does not confer upon it immunity from liability for intentional torts. Section 10 of c. 258 provides that "[t]he provisions of sections one to eight, inclusive, shall not apply to" any of the claims listed in that section. G. L. c. 258, § 10. The list includes, among other things, claims based "on the exercise or performance or the failure to exercise or perform a discretionary function," § 10 (b); and claims arising out of intentional torts, § 10 (c). Other excluded claims relate to assessment or collection of taxes, § 10 (d); issuance, denial or revocation of permits or licenses, § 10 (e); inadequate or negligent inspections, § 10 (f); failure to provide fire protection or police services, § 10 (g)-(h); and negligent provision of medical services, § 10 (j) (2). Section 2 provides for liability of public employers for negligence, G. L. c. 258, § 2, and §§ 4-7 impose certain prerequisites for claims against public employers, including the prior presentation of such claims for administrative action, and provide for procedures for their resolution. G. L. c. 258, §§ 4-7. LPA argues that because § 10 provides that none of these provisions shall apply to intentional torts, the result is that such claims are simply remitted to the preexisting law governing liability. And because the BRA's [534] enabling statute, G. L. c. 121B, § 13, which preexisted c. 258, provided that the BRA shall be "liable ... in tort in the same manner as a private corporation," the BRA continues to be liable for the intentional tort charged here. LPA finds confirmation for this conclusion in our decision in Spring v. Geriatric Auth. of Holyoke, 394 Mass. 274 (1985), in which we stated that "[b]y excluding intentional torts from the scope of G. L. c. 258, the Legislature left open the matter of governmental liability for intentional torts. Consistent with the common law principles of governmental immunity which preceded the Massachusetts Tort Claims Act, we conclude that public employers retain their immunity from suits arising from intentional torts." Id. at 284-285. Because the preexisting law, to which we are remitted according to LPA's argument, allowed for BRA's liability for intentional torts, the BRA does not enjoy immunity for intentional torts now.

LPA's reading of the statute is not in accord with its over-all purpose of enacting a comprehensive and uniform regime of tort liability for public employers in the wake of our decisions in Whitney v. Worcester, 373 Mass. 208, 212 (1977), and Morash & Sons v. Commonwealth, 363 Mass. 612 (1973). Although we have not undertaken a review of such legislation, it is likely that the enabling statutes of many public bodies contain a variety of provisions relating to the tort liability of those bodies. It would be the upshot of LPA's argument that, whenever any of the provisions of § 10 (including, for instance, those excluding liability for discretionary functions or for failure to grant or renew a license or permit) applied, we would be remitted to the preexisting law. It is sufficient to mention that the pre-existing law to which LPA refers, G. L. c. 121B, § 13, applies to the Boston Housing Authority (BHA) as well, so that the BHA on this argument would be liable for the whole range of claims excluded by § 10.^[28] Compare Commesso v. Hingham Hous. Auth., supra at 809. Such a reading would be so manifestly against the intention of the Legislature to introduce a uniform regime of tort liability for public bodies, see Rogers v. [535] Metropolitan Dist. Comm'n, supra, that a mere drafting infelicity will not lead us to adopt it. Similarly the statement quoted from our decision in Spring will not move us in that direction. In context it was quite irrelevant to the Spring case whether § 10 (c) was described as prescribing immunity for intentional torts or as remitting the matter to the preexisting common law, which in that instance would have foreclosed tort liability altogether. See Spring, supra at 295 (Abrams, J., concurring) (Federal Tort Claims Act, 28 U.S.C. § 2680[h] [1982], on which c. 258 is patterned, provides an interpretive guide and has been construed "as immunizing public employers from suits arising out of intentional torts"). We therefore hold that the BRA is immune under G. L. c. 258, § 10 (c), from suit for intentional torts.

IV

LPA also claims that the motion judge erred in entering summary judgment against LPA on its G. L. c. 93A claims against the city and the BRA. Chapter 93A proscribes "unfair or deceptive practices in the conduct of any trade or commerce." G. L. c. 93A, § 2 (a). A party engages in trade or commerce when it acts in a "business context." "This court ... has repeatedly held that c. 93A does not apply to parties motivated by `legislative mandate, not business or personal reasons.'" Peabody N.E., Inc. v. Marshfield, 426 Mass. 436, 439-440 (1998), quoting Poznik v. Medical Professional Ins. Ass'n, 417 Mass. 48, 52 (1994). The gravamen of LPA's claim against the city and the BRA is that it was cheated out of the benefit that would have accrued to it if the agreement regarding the Hayward Parcel had been performed. This is indeed the kind of claim that is often made under c. 93A, see e.g., Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 475 (1991), but that does not mean that the city was engaged in trade or commerce when it entered into the arrangement nor when it took the actions of which LPA now complains. It is perfectly possible for a governmental entity to engage in dishonest or unscrupulous behavior as it pursues its legislatively mandated ends. The allowance of the motion of summary judgment was correct because the defendants' involvement in these transactions was wholly in pursuit of the legislatively prescribed mandate of G. L. c. 121A, § 2, that "the redevelopment of land not only in sub-standard areas but also in blighted open and decadent areas in accordance with a [536] comprehensive plan to promote the sound growth of the community is necessary." There simply cannot be any doubt that the parties' dealings took place in the context of the pursuit of the urban renewal and redevelopment goals of c. 121A and c. 121B. That is the premise of every other part of this litigation. Although we have not yet addressed the question whether a public entity is ever a proper defendant in a c. 93A action, it is quite clear that in this case at least these public entities are not.^[29]

V

Because we conclude as a matter of law that the city did not breach its contract with LPA, we reverse the judgment of the Superior Court and order entry of judgment for the city. Whatever contractual claims LPA may have against the BRA must fail for the same reason. The judgment in favor of the BRA is affirmed because we agree that it is immune from suit for an intentional tort. The judgment in favor of the city and the BRA dismissing LPA's c. 93A claims is also affirmed.

So ordered.

[1] City of Boston.

[2] The shopping mall, Lafayette Place Mall, was not a success. The bank that held the mortgage foreclosed on it on February 5, 1991. The hotel, originally known as the Lafayette Hotel, has been operating successfully as the Swissotel and separated itself from the development.

[3] The city completed an appraisal of the third parcel in 1979.

[4] This was the formula to be used if the city ultimately determined, as it in fact did, that it would retain subsurface rights to build a parking garage under the Hayward Parcel. Had the city decided not to retain subsurface rights, an alternate formula provided that the purchase price would be the full fair market value as of 1978 plus one-half of any increase in value attributable to the construction of "the Public Improvements and the Project."

[5] This appraisal process was to be used to determine the fair market value of the "project rights," which included the "Developer's present and future rights in and to the Project Area." The "project area" included parcels D-1, D-2, D-3, and D-4, which made up the Hayward Parcel.

[6] The September 11, 1979 deed, which was for the purchase of the "Lafayette Parcel" in connection with Phase I, provides that "[i]f a dispute shall arise ... and if ... such dispute is to be settled by arbitration, then either Owner may serve upon the other Owner a notice demanding that the dispute be arbitrated...." Each party is permitted to select an arbitrator, and the two chosen arbitrators then select a third.

[7] On July 18, 1990, LPA had filed suit against Campeau, alleging that Campeau had failed to use "commercially reasonable efforts" to go forward with Phase II, and therefore had violated the lease agreement between LPA and Campeau. In addition, LPA alleged that Campeau had failed to pay amounts due under the lease. The record does not reflect the disposition of this action.

[8] The judge had earlier ruled that the judgment against the BRA for breach of contract could not stand because it was inconsistent with the jury's specific finding that the BRA was not an agent of the city, and that the award of damages in tort against the BRA could not stand because they were subsumed in the contract damages awarded against the city. A claim against the defendants under G. L. c. 93A had been dismissed on motion for summary judgment prior to the commencement of the trial.

[9] As Judge Leval has said, "Notwithstanding the importance of protecting negotiating parties from involuntary judicially imposed contract, it is equally important that courts enforce and preserve agreements that were intended as binding, despite a need for further documentation or further negotiation. It is, of course, the aim of contract law to gratify, not to defeat, expectations that arise out of intended contractual agreement, despite informality or the need for further proceedings between the parties." (Footnotes omitted.) Teachers Ins. Annuity Ass'n v. Tribune Co., 670 F. Supp. 491, 497-498 (S.D.N.Y. 1987).

[10] There is little doubt that all parties understood the general boundaries of the Hayward Parcel, given that the parcel is bounded by streets and buildings in a small city block. Although the exact details of the boundaries of the parcel might have varied depending upon what building plan was ultimately approved by the city and the BRA, this was not a situation in which the parties agreed upon the purchase of a totally unspecified or undemarcated property. Compare Lucey v. Hero Int'l Corp., 361 Mass. 569, 573 (1972).

[11] The city's motion for directed verdict argued that there was no evidence to support a finding that "the plaintiff called for a closing to acquire title" to the Hayward Parcel, and that if there was a demand for closing it was insufficient. The city incorporated these defenses in its motion for judgment notwithstanding the verdict. It also argued that there was no evidence "of either the plaintiff or the city taking any steps to negotiate or enter into a purchase and sale agreement" during the option period. Moreover, the issue of LPA's failure to demand recourse to the specified arbitration procedure was raised repeatedly over the course of the litigation, including in the city's motion for special verdict, motion for directed verdict, by incorporation into its motion for judgment notwithstanding the verdict, and in the city's brief to this court. The city argued in its motion for judgment notwithstanding the verdict that LPA failed to activate the Section 13.01 appraisal procedure, and thus that the city could not be in breach.

[12] Prior to December, 1988, Campeau sent several letters to the BRA asking for an extension of the option period. In none of these letters, however, did Campeau demand tender of the deed to the Hayward Parcel or offer to tender payment.

[13] It was also unhelpful of Campeau to send this "tender" to Mayor Flynn, given that officials from both Campeau and LPA testified that they knew that the BRA, and not Mayor Flynn's office, had primary responsibility for the transaction.

[14] LPA only brought suit in 1992, long after such recourse to arbitration to fix obligations would have been pointless, and so the city is entitled simply to claim that it had never been put in breach.

[15] In the Tripartite Agreement, the city was obligated to obtain appraisals of the 1978 value of parcels D-3 and D-4. Although it secured an appraisal for parcel D-3, it did not for D-4. The city argues, however, that the appraisals for D-1, D-2, and D-3 sufficed to determine the value of D-4, which was a very small part of the over-all parcel.

[16] Compare Kanavos v. Hancock Bank & Trust Co., 395 Mass. 199, 201-202 (1985) (bank repudiated option contract to sell shares of stock by selling shares to a third party); Limpus v. Armstrong, 3 Mass. App. Ct. 19, 22 (1975) (defendants repudiated purchase and sale contract by selling property to third party).

[17] Campeau's actions in this regard must be attributed to LPA, for if they are not then the city's alternate argument that LPA abandoned the contract when it transferred its rights to Campeau would take on considerable force. LPA cannot have it both ways.

[18] Although LPA complains that the BRA's handling of the design review process prior to October, 1987, when the Third Supplemental Agreement was signed, violated the implied covenant of good faith, we reject this claim on two grounds. First, when the parties amended their agreement in 1987 and included a good faith clause, the slate was wiped clean for these purposes. Second, LPA failed to show that any delay in the design review process prior to 1988 was attributable to bad faith on the part of the city or the BRA rather than a lack of preparedness or persistence on LPA's part. LPA was engaged in discussions and negotiations with the BRA during 1984, 1985, and 1986, and may have completed the first phase of the BRA's four-stage authorization process by submitting an initial sketch of its plans for the Hayward Parcel, but LPA concedes that it did not progress beyond that very preliminary point. LPA did not press forward with its design, and it therefore cannot complain that its design was never approved.

[19] On April 25, 1988, Campeau's senior vice-president, Lenard McQuarrie, sent the BRA's director a letter indicating that Campeau had "begun to marshal" resources for the project and was about to "initiate" the review process. On May 16, 1988, McQuarrie stated that Campeau was "beginning to commit significant funds to preliminary design ... for the Hayward Place site."

[20] A June 17, 1988, letter from McQuarrie to the BRA stated that "[b]ased on the cooperation we are receiving from both yourself and your staff, we are optimistic that the project will proceed quickly through the ... Development Review process." Similarly, an October 21, 1988, letter stated that "[w]e are making excellent progress on the ... master planning of Boston Crossing and have begun the ... review process." And on December 19, 1988, Campeau's letter to Mayor Flynn stated that all parties were "making good progress towards the final approval of this project."

[21] Moreover, even if the city did act in bad faith in the design review process and thus the option period was extended beyond January 1, 1989, neither Campeau nor LPA ever attempted to enforce the agreement by seeking arbitration, tendering payment, or seeking a closing after that date. As noted above, Campeau received design authorization in June, 1989, but went bankrupt in 1990. LPA did not then renew its negotiations with the city, but instead filed suit against Campeau in July, 1990, and against the city and the BRA in March, 1992.

[22] LPA presented evidence that during the period in which LPA sought authorization of the sale to Campeau, the city's real property board publicly expressed concern that the pricing formula in the Tripartite Agreement was unfavorable to the city. On December 30, 1987, Commissioner J. Edward Roche of the city's real property department wrote Mayor Flynn expressing concern that a transfer of rights from LPA to Campeau might bring about a "windfall" to Campeau because of the pricing formula in Section 6.02. LPA also showed that the minutes of a meeting of the real property board on January 22, 1988, stated that "the Board expressed its desire ... to receive the fair market value for the Hayward Parcel (abandoning the Tripartite formula)."

[23] The jury returned a special verdict that affirmed that "L.P.A. perform[ed] its obligations under the contract." This verdict was incorrect as a matter of law, given the fact that LPA fulfilled none of the obligations set out above.

[24] In Kargman v. Boston Water & Sewer Comm'n, 18 Mass. App. Ct. 51, 56 n.5 (1984), the Appeals Court cast doubt on this criterion.

[25] LPA also notes that the BRA does not need planning board approval for projects, whereas a housing authority does. This is because the BRA has had transferred to it the functions of the city's planning board in respect to its projects.

[26] General Laws c. 121B, § 9, states that housing authorities with redevelopment authority have the powers granted regular redevelopment authorities under G. L. 121B, § 49.

[27] General Laws c. 121A, § 4, permits the housing board to make rules and regulations regarding the approval of redevelopment projects. The housing board must approve most redevelopment projects, G. L. c. 121A, § 5, and must inspect the construction of redevelopment projects to ensure that construction complies with the approved proposal. G. L. c. 121A, § 8.

[28] LPA seeks support for its argument in a 1983 amendment of G. L. c. 121B, § 13, that altered the treatment of the liability of employees of redevelopment and housing authorities. This is unpersuasive. The Legislature did not address itself directly to the operative first sentence of § 13, and we will not assume that an amendment of an independent portion of the section endorsed or reaffirmed that first sentence in the face of the strong Legislative mandate of c. 258.

[29] Cases such as Boston v. Aetna Life Ins. Co., 399 Mass. 569, 575 (1987), in which the public entity may act as a plaintiff in a c. 93A action, are not apposite. One who deals with a public entity, as for instance in providing it with goods or services, may very well be engaged in trade or commerce without the entity being so engaged as well.

Brock R. Snyder, of Lillard, Eidson, Lewis & Porter, of Topeka, argued the cause and was on the brief for the appellant.

Terry L. Bullock, of Cosgrove, Webb & Oman, of Topeka, argued the cause and was on the brief for the appellee.

The opinion of the court was delivered by

FONTRON, J.:

This is an action to recover damages for breach of contract. Trial was had to the court which entered judgment in favor of the plaintiff. The defendant has appealed.

Southwest Engineering Company, Inc., the plaintiff, is a Missouri corporation engaged in general contracting work, while the defendant, Martin Tractor Company, Inc., is a Kansas corporation. The two parties will be referred to hereafter either as plaintiff, or Southwest, on the one hand and defendant, or Martin, on the other.

We glean from the record that in April, 1966, the plaintiff was interested in submitting a bid to the United States Corps of Engineers for the construction of certain runway lighting facilities at McConnell Air Force Base at Wichita. However, before submitting a bid, and on April 11, 1966, the plaintiff's construction superintendent, Mr. R.E. Cloepfil, called the manager of Martin's engine department, Mr. Ken Hurt, who at the time was at Colby, asking for a price on a standby generator and accessory equipment. Mr. Hurt replied that he would phone him back from Topeka, which he did the next day, quoting a price of $18,500. This quotation was re-confirmed by Hurt over the phone on April 13.

Southwest submitted its bid on April 14, 1966, using Hurt's figure of $18,500 for the generating equipment, and its bid was accepted. On April 20, Southwest notified Martin that its bid had been accepted. Hurt and Cloepfil thereafter agreed over the phone to meet in Springfield on April 28. On that date Hurt flew to Springfield, where the two men conferred at the airfield restaurant for about an hour. Hurt took to the meeting a copy of the job specifications which the government had supplied Martin prior to the letting.

At the Springfield meeting it developed that Martin had upped its price for the generator and accessory equipment from $18,500 to $21,500. Despite this change of position by Martin, concerning [686] which Cloepfil was understandably amazed, the two men continued their conversation and, according to Cloepfil, they arrived at an agreement for the sale of a D353 generator and accessories for the sum of $21,500. In addition it was agreed that if the Corps of Engineers would accept a less expensive generator, a D343, the aggregate price to Southwest would be $15,000. The possibility of providing alternate equipment, the D343, was suggested by Mr. Hurt, apparently in an attempt to mollify Mr. Cloepfil when the latter learned that Martin had reneged on its price quotation of April 12. It later developed that the Corps of Engineers would not approve the cheaper generator and that Southwest eventually had to supply the more expensive D353 generator.

At the conference, Mr. Hurt separately listed the component parts of each of the two generators on the top half of a sheet of paper and set out the price after each item. The prices were then totaled. On the bottom half of the sheet Hurt set down the accessories common to both generators and their cost. This handwritten memorandum, as it was referred to during the trial, noted a 10 per cent discount on the aggregate cost of each generator, while the accessories were listed at Martin's cost. The price of the D353 was rounded off at $21,500 and the D343 at $15,000. The memorandum was handed to Cloepfil while the two men were still at the airport. We will refer to this memorandum further during the course of this opinion.

On May 2, 1966, Cloepfil addressed a letter to the Martin Tractor Company, directing Martin to proceed with shop drawings and submittal documents for the McConnell lighting job and calling attention to the fact that applicable government regulations were required to be followed. Further reference to this communication will be made when necessary.

Some three weeks thereafter, on May 24, 1966, Hurt wrote Cloepfil the following letter:

"MARTIN TRACTOR COMPANY, INC.

Topeka Chanute Concordia Colby

CATERPILLAR[*]

"P.O. Box 1698 Topeka, Kansas May 24, 1966 Mr. R.E. Cloepfil Southwest Engineering Co., Inc. P.O. Box 3314, Glenstone Station Springfield, Missouri 65804

[687] Dear Sir:

Due to restrictions placed on Caterpillar products, accessory suppliers, and other stipulations by the district governing agency, we cannot accept your letter to proceed dated May 2, 1966, and hereby withdraw all verbal quotations.

Regretfully, /s/ Ken Hurt Ken Hurt, Manager Engine Division"

On receipt of this unwelcome missive, Cloepfil telephoned Mr. Hurt who stated they had some work underway for the Corps of Engineers in both the Kansas City and Tulsa districts and did not want to take on any other work for the Corps at that time. Hurt assured Cloepfil he could buy the equipment from anybody at the price Martin could sell it for. Later investigation showed, however, that such was not the case.

In August of 1966, Mr. Cloepfil and Mr. Anderson, the president of Southwest, traveled to Topeka in an effort to persuade Martin to fulfill its contract. Hurt met them at the company office where harsh words were bandied about. Tempers eventually cooled off and at the conclusion of the verbal melee, hands were shaken all around and Hurt went so far as to say that if Southwest still wanted to buy the equipment from them to submit another order and he would get it handled. On this promising note the protagonists parted.

After returning to Springfield, Mr. Cloepfil, on September 6, wrote Mr. Hurt placing an order for a D353 generator (the expensive one) and asking that the order be given prompt attention, as their completion date was in early December. This communication was returned unopened.

A final effort to communicate with Martin was attempted by Mr. Anderson when the unopened letter was returned. A phone call was placed for Mr. Martin, himself, and Mr. Anderson was informed by the girl on the switchboard that Martin was in Colorado Springs on a vacation. Anderson then placed a call to the motel where he was told Mr. Martin could be reached. Martin refused to talk on the call, on learning the caller's name, and Anderson was told he would have to contact his office.

Mr. Anderson then replaced his call to Topeka and reached either the company comptroller or the company treasurer who responded by cussing him and saying "Who in the hell do you think you are? We don't have to sell you a damn thing."

[688] Southwest eventually secured the generator equipment from Foley Tractor Co. of Wichita, a company which Mr. Hurt had one time suggested, at a price of $27,541. The present action was then filed, seeking damages of $6,041 for breach of the contract and $9,000 for loss resulting from the delay caused by the breach. The trial court awarded damages of $6,041 for the breach but rejected damages allegedly due to delay. The defendant, only, has appealed; there is no cross-appeal by plaintiff.

The basic disagreement centers on whether the meeting between Hurt and Cloepfil at Springfield resulted in an agreement which was enforceable under the provisions of the Uniform Commercial Code (sometimes referred to as the Code), which was enacted by the Kansas Legislature at its 1965 session. K.S.A. 84-2-201 (1), being part of the Code, provides:

"Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing."

Southwest takes the position that the memorandum prepared by Hurt at Springfield supplies the essential elements of a contract required by the foregoing statute, i.e., that it is (1) a writing signed by the party sought to be charged, (2) that it is for the sale of goods and (3) that quantity is shown. In addition, the reader will have noted that the memorandum sets forth the prices of the several items listed.

It cannot be gainsaid that the Uniform Commercial Code has effected a somewhat radical change in the law relating to the formation of enforceable contracts as such has been expounded by this and other courts. In the Kansas Comment to 84-2-201, which closely parallels the Official UCC Comment, the following explanation is given:

"Subsection (1) relaxes the interpretations of many courts in providing that the required writing need not contain all the material terms and that they need not be stated precisely. All that is required is that the writing afford a basis for believing that the offered oral evidence rests on a real transaction. Only three definite and invariable requirements as to the writing are made by this subsection. First, it must evidence a contract for the sale of goods; second, it must be `signed,' a word which includes any authentication which identifies the party [689] to be charged; and third, it must specify quantity. Terms relating to price, time, and place of payment or delivery, the general quality of goods, or any particular warranties may all be omitted."

From legal treatises, as well, we learn that the three invariable requirements of an enforceable written memorandum under 84-2-201 are that it evidence a sale of goods, that it be signed or authenticated and that it specify quantity. In Vernon's Kansas Statutes Annotated, Uniform Commercial Code, Howe and Navin, the writers make this clear:

"Under the Code the writing does not need to incorporate all the terms of the transaction, nor do the terms need to be stated precisely. The Code does require that the writing be broad enough to indicate a contract of sale between the parties; that the party against whom enforcement is sought, or his agent, must have signed the writing; and that the quantity dealt with must be stated. Any error concerning the quantity stated in the memorandum prevents enforcement of the agreement beyond the precise quantity stated." (p. 116.)

The defendant does not seriously question the interpretation accorded the statute by eminent scriveners and scholars, but maintains, nonetheless, that the writing in question does not measure up to the stature of a signed memorandum within the purview of the Code; that the instrument simply sets forth verbal quotations for future consideration in continuing negotiations.

But on this point the trial court found there was an agreement reached between Hurt and Cloepfil at Springfield; that the formal requirements of K.S.A. 84-2-201 were satisfied; and that the memorandum prepared by Hurt contains the three essentials of the statute in that it evidences a sale of goods, was authenticated by Hurt and specifies quantity. Beyond that, the court specifically found that Hurt had apparent authority to make the agreement; that both Southwest and Martin were "merchants" as defined in K.S.A. 84-2-104; that the agreement reached at Springfield included additional terms not noted in the writing: (1) Southwest was to install the equipment; (2) Martin was to deliver the equipment to Wichita and (3) Martin was to assemble and supply submittal documents within three weeks; and that Martin's letter of May 24, 1966, constituted an anticipatory breach of the contract.

We believe the record supports all the above findings. With particular reference to the preparation and sufficiency of the written memorandum, the following evidence is pertinent:

Mr. Cloepfil testified that he and Hurt sat down at a restaurant table and spread out the plans which Hurt had brought with him; [690] that they went through the specifications item by item and Hurt wrote each item down, together with the price thereof; that while the specifications called for a D353 generator, Hurt thought the D343 model might be an acceptable substitute, so he gave prices on both of them and Southwest could take either one of the two which the Corps of Engineers would approve; that Hurt gave him (Cloepfil) the memorandum "as a record of what we had done, the agreement we had arrived at at our meeting in the restaurant at the airport."

We digress at this point to note Martin's contention that the memorandum is not signed within the meaning of 84-2-201. The sole authentication appears in handprinted form at the top left-hand corner in these words: "Ken Hurt, Martin Tractor, Topeka, Caterpillar." The court found this sufficient, and we believe correctly so.

K.S.A. 84-1-201 (39) provides as follows:

"`Signed' includes any symbol executed or adopted by a party with present intention to authenticate a writing."

The official U.C.C. Comment states in part:

"The inclusion of authentication in the definition of `signed' is to make clear that as the term is used in this Act a complete signature is not necessary. Authentication may be printed, stamped or written; .. . It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead.... The question always is whether the symbol was executed or adopted by the party with present intention to authenticate the writing."

Hurt admittedly prepared the memorandum and has not denied affixing his name thereto. We believe the authentication sufficiently complies with the statute.

The evidence already cited would be ample to sustain the trial court's finding that an agreement was reached between Hurt and Cloepfil in Springfield. However, Cloepfil's testimony is not the only evidence in support of that finding. In a pretrial deposition, Mr. Hurt, himself, deposed that "we agreed on the section that I would be quoting on, and we come to some over-all general agreement on the major items." At the trial Hurt testified he did not wish to change that statement in any way.

Hurt further testified that in his opinion the thing which stood in the way of a firm deal was Martin's terms of payment — that had Southwest agreed with those terms of payment, so far as he was concerned, he would have considered a firm deal was made. Mr. [691] Hurt acknowledged while on the stand that he penned the memorandum and that as disclosed therein a 10 per cent discount was given Southwest on the price of either of the generators listed (depending on which was approved by the Corps of Engineers), and that the accessories common to both generators were to be net — that is, sold without profit.

It is quite true, as the trial court found, that terms of payment were not agreed upon at the Springfield meeting. Hurt testified that as the memorandum was being made out, he said they wanted 10 per cent with the order, 50 per cent on delivery and the balance on acceptance, but he did not recall Cloepfil's response. Cloepfil's version was somewhat different. He stated that after the two had shaken hands in the lobby preparing to leave, Hurt said their terms usually were 20 per cent down and the balance on delivery; while he (Cloepfil) said the way they generally paid was 90 per cent on the tenth of the month following delivery and the balance on final acceptance. It is obvious the parties reached no agreement on this point.

However, a failure on the part of Messrs. Hurt and Cloepfil to agree on terms of payment would not, of itself, defeat an otherwise valid agreement reached by them. K.S.A. 84-2-204(3) reads:

"Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy."

The official U.C.C. Comment is enlightening:

"Subsection (3) states the principle as to `open terms' underlying later sections of the Article. If the parties intend to enter into a binding agreement, this subsection recognizes that agreement as valid in law, despite missing terms, if there is any reasonably certain basis for granting a remedy. The test is not certainty as to what the parties were to do nor as to the exact amount of damages due the plaintiff. Nor is the fact that one or more terms are left to be agreed upon enough of itself to defeat an otherwise adequate agreement. Rather, commercial standards on the point of `indefiniteness' are intended to be applied, this Act making provision elsewhere for missing terms needed for performance, open price, remedies and the like.

"The more terms the parties leave open, the less likely it is that they have intended to conclude a binding agreement, but their actions may be frequently conclusive on the matter despite the omissions."

The above Code provision and accompanying Comment were quoted in Pennsylvania Co. v. Wilmington Trust Co., 39 Del. Ch. 453, 166 A.2d 726, where the court made this observation:

"There appears to be no pertinent court authority interpreting this rather [692] recent but controlling statute. In an article entitled "The Law of Sales In the Proposed Uniform Commercial Code,' 63 Harv. Law Rev. 561, 576, Mr. Williston wanted to limit omissions to `minor' terms. He wanted `business honor' to be the only compulsion where `important terms' are left open. Nevertheless, his recommendation was rejected (see note on p. 561). This shows that those drafting the statute intended that the omission of even an important term does not prevent the finding under the statute that the parties intended to make a contract." (pp. 731, 732.)

So far as the present case is concerned, K.S.A. 84-2-310 supplies the omitted term. This statute provides in pertinent part:

"Unless otherwise agreed

"(a) payment is due at the time and place at which the buyer is to receive the goods even though the place of shipment is the place of delivery;"

In our view, the language of the two Code provisions is clear and positive. Considered together, we take the two sections to mean that where parties have reached an enforceable agreement for the sale of goods, but omit therefrom the terms of payment, the law will imply, as part of the agreement, that payment is to be made at time of delivery. In this respect the law does not greatly differ from the rule this court laid down years ago.

In Thompson v. Seek, 84 Kan. 674, 115 Pac. 397, the parties entered into a written agreement for the sale of corn at a stated price to be delivered at Thompson's elevator. Terms of payment were not mentioned. Thompson was unable to pay cash on delivery but proposed to pay by check instead. Seek refused this tender and rescinded the contract, whereupon Thompson sued for breach of contract. The decision of the court is reflected in Syllabus 1:

"A written contract for the purchase of corn to be delivered at the buyer's elevator implies payment in cash, and upon offer to deliver, and refusal to pay except by check, at a time when banks are not honoring checks by paying cash, the buyer is not entitled to damages for failure to deliver."

We do not mean to infer that terms of payment are not of importance under many circumstances, or that parties may not condition an agreement on their being included. However, the facts before us hardly indicate that Hurt and Cloepfil considered the terms of payment to be significant, or of more than passing interest. Hurt testified that while he stated his terms he did not recall Cloepfil's response, while Cloepfil stated that as the two were on the point of leaving, each stated their usual terms and that was as far as it went. The trial court found that only a brief and casual conversation ensued as to payment, and we think that is a valid summation of what took place.

[693] Moreover, it is worthy of note that Martin first mentioned the omission of the terms of payment, as justifying its breach, in a letter written by counsel on September 15, 1966, more than four months after the memorandum was prepared by Hurt. On prior occasions Martin attributed its cancellation of the Springfield understanding to other causes. In its May 24 letter, Martin ascribed its withdrawal of "all verbal quotations" to "restrictions placed on Caterpillar products, accessory suppliers, and other stipulations by the district governing agency." In explaining the meaning of the letter to Cloepfil, Hurt said that Martin was doing work for the Corps of Engineers in the Kansas City and Tulsa districts and did not want to take on additional work with them at this time.

The entire circumstances may well give rise to a suspicion that Martin's present insistence that future negotiations were contemplated concerning terms of payment, is primarily an afterthought, for use as an escape hatch. Doubtless the trial court so considered the excuse in arriving at its findings.

We are aware of Martin's argument that Southwest's letter of May 2, 1966, referring to the sale is evidence that no firm contract had been concluded. Granted that some of the language employed might be subject to that interpretation, the trial court found, on what we deem to be substantial, competent evidence, that an agreement of sale was concluded at Springfield. Under our invariable rule those findings are binding upon this court on appeal even though there may have been evidence to the contrary. (See cases in 1 Hatcher's Kansas Digest [Rev. Ed.] Appeal & Error, §§ 507, 508.)

The defendant points particularly to the following portion of the May 2 letter, as interjecting a new and unacceptable term in the agreement made at Springfield.

"... We are not prepared to make a partial payment at the time of placing of this order. However, we will be able to include 100% of the engine generator price in our first payment estimate after it is delivered, and only 10% will have to be withheld pending acceptance. Ordinarily this means that suppliers can expect payment of 90% within about thirty days after delivery."

It must be conceded that the terms of payment proposed in Southwest's letter had not been agreed to by Martin. However, we view the proposal as irrelevant. Although terms of payment had not been mutually agreed upon, K.S.A. 84-2-310 supplied the missing terms, i.e., payment on delivery, which thus became part of the agreement already concluded. In legal effect the proposal was no more than [694] one to change the terms of payment implied by law. Since Martin did not accept the change, the proposal had no effect, either as altering or terminating the agreement reached at Springfield. As the Michigan Court of Appeals said in American Parts v. Arbitration Assn., 8 Mich. App. 156, 154 N.W.2d 5:

"... Surely a party who has entered into an agreement cannot change that agreement by the simple expedient of sending a written `confirmation' containing additional or different terms ..." (p. 174.)

Neither, may we add, will an extraneous proposal which materially alters the original agreement, be included unless agreed to by the other party. (Application of Doughboy Industries, Inc., 233 N.Y.S.2d 488, 17 A.D.2d 216.)

Substantial parts of the briefs filed by both parties are devoted to discussions of the meaning and effect of K.S.A. 84-2-207. This murky bit of prose, which the United States Court of Appeals, First Circuit, characterized in Roto-Lith, Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1962) as "not too happily drafted" has given rise to a good deal of litigation and has prompted a spate of learned articles from legal savants. Section (1) and (2) of this statute read:

"(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

"(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:

"(a) the offer expressly limits acceptance to the terms of the offer;

"(b) they materially alter it; or

"(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received."

The discussions centering on this section of the Code are occasioned by findings of the trial court that Southwest's letter of May 2 is both an "acceptance" and a "confirmation" within the purview thereof; that as either an "acceptance" or "confirmation" the letter stated additional terms which were different from those agreed upon and which constituted a material alteration of the agreement. In view of the court's previous findings that a viable contract had already been concluded at Springfield, we deem these findings superfluous and extraneous.

We do not propose to engage in an extended dissertation upon the purpose or meaning of 84-2-207. In our view the statute is not [695] germane to the facts of this case; we think it designed for situations where an open offer is accepted by "an expression of acceptance" (we presume in writing) or where an oral agreement is later confirmed in writing. Neither situation is presented in the case now before us.

The trial court found that an enforceable agreement, memorialized in writing, had been reached in Springfield. This finding implies both offer and acceptance, the two being merged into the resulting contract. When the letter of May 2, 1966, was written there was no outstanding offer to accept — conditionally or otherwise. Neither was there an oral agreement to confirm — the agreement having previously been memorialized in the written memorandum of April 28.

As we read the authorities pointed out by counsel on both sides, as they have attempted to divine for us the sense of 84-2-207, none of them appear to fit the pattern of the present action. The cited cases involve either an outstanding offer, accepted by written instrument containing different or added terms, or an oral agreement later confirmed by a writing which states new or additional terms. In this connection, while we recognize that the term "confirmation" may be employed in a variety of meanings, we think it is used in 84-2-207 in the sense of "a written order or agreement that verifies or substantiates an agreement previously concluded orally." (Webster's Third New International Dictionary, Unabridged.)

Neither confirmation nor acceptance by Southwest was needed on May 2 to breathe life into the agreement previously concluded at Springfield, for it was memorialized in writing at the time of making. In an article entitled "The Law of Sales Under the Uniform Commercial Code, 17 Rutgers Law Review 14, Professor Calvin W. Corman writes:

"The Code Provision merely requires that the writing be sufficient to indicate that a contract for sale has been made between the parties." (p. 20.)

In our opinion the instant memorandum amply satisfies that requirement, affording a substantial basis for the belief that it rests on a real transaction. (See Harry Rubin & Sons, Inc. v. Con. P. Co. of Am., 396 Pa. 506, 512, 153 A.2d 472.)

We find no error in this case and the judgment of the trial court is affirmed.

Ellis D. WHEELER, Petitioner,


v.


S. E. WHITE, Respondent.

[94] SMITH, Justice.

A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.

The vital principle is that he who by his language or conduct leads another to do what he would not otherwise have done, shall not subject such person to loss or injury by disappointing the expectations upon which he acted. Such a change of position is sternly forbidden * * *. This remedy is always so applied as to promote the ends of justice.

We are dealing with a promise by appellants that a franchise would be granted and radios supplied, on the faith of which appellees with the knowledge and encouragement of appellants incurred expenses in making preparations to do business. Under these circumstances we think that appellants cannot now advance any defense inconsistent with their assurance that the franchise would be granted. Justice and fair dealing require that one who acts to his detriment on the faith of conduct of the kind revealed here should be protected by estopping the party who has brought about the situation from alleging anything in opposition to the natural consequences of his own course of conduct. * * 


GREENHILL, Justice (concurring).

[693] For the defendants there was a brief by Benton, Bosser, Fulton, Menn & Nehs of Appleton, and oral argument by David L. Fulton.

For the plaintiffs there was a brief by Van Hoof, Van Hoof & Wylie of Little Chute, and oral argument by Gerard H. Van Hoof.

CURRIE, C. J.

The instant appeal and cross appeal present these questions:

(1) Whether this court should recognize causes of action grounded on promissory estoppel as exemplified by sec. 90 of Restatement, 1 Contracts?

(2) Do the facts in this case make out a cause of action for promissory estoppel?

(3) Are the jury's findings with respect to damages sustained by the evidence?

[694]

Recognition of a Cause of Action Grounded on Promissory Estoppel.

Sec. 90 of Restatement, 1 Contracts, provides (at p. 110):

"A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise."

The Wisconsin Annotations to Restatement, Contracts, prepared under the direction of the late Professor William H. Page and issued in 1933, stated (at p. 53, sec. 90):

"The Wisconsin cases do not seem to be in accord with this section of the Restatement. It is certain that no such proposition has ever been announced by the Wisconsin court and it is at least doubtful if it would be approved by the court."

Since 1933, the closest approach this court has made to adopting the rule of the Restatement occurred in the recent case of Lazarus v. American Motors Corp. (1963), 21 Wis. (2d) 76, 85, 123 N. W. (2d) 548, wherein the court stated:

"We recognize that upon different facts it would be possible for a seller of steel to have altered his position so as to effectuate the equitable considerations inherent in sec. 90 of the Restatement."

While it was not necessary to the disposition of the Lazarus Case to adopt the promissory-estoppel rule of the Restatement, we are squarely faced in the instant case with that issue. Not only did the trial court frame the special verdict on the theory of sec. 90 of Restatement, 1 Contracts, but no other possible theory has been presented to or discovered by this court which would permit plaintiffs to recover. Of [695] other remedies considered that of an action for fraud and deceit seemed to be the most comparable. An action at law for fraud, however, cannot be predicated on unfulfilled promises unless the promisor possessed the present intent not to perform. Suskey v. Davidoff (1958), 2 Wis. (2d) 503, 507, 87 N. W. (2d) 306, and cases cited. Here, there is no evidence that would support a finding that Lukowitz made any of the promises, upon which plaintiffs' complaint is predicated, in bad faith with any present intent that they would not be fulfilled by Red Owl.

Many courts of other jurisdictions have seen fit over the years to adopt the principle of promissory estoppel, and the tendency in that direction continues.^[1] As Mr. Justice MCFADDIN, speaking in behalf of the Arkansas court, well stated, that the development of the law of promissory estoppel "is an attempt by the courts to keep remedies abreast of increased moral consciousness of honesty and fair representations in all business dealings." Peoples National Bank of Little Rock v. Linebarger Construction Co. (1951), 219 Ark. 11, 17, 240 S. W. (2d) 12. For a further discussion of the doctrine of promissory estoppel, see 1A Corbin, Contracts, pp. 187 et seq., secs. 193-209; 3 Pomeroy's Equity Jurisprudence (5th ed.), pp. 211 et seq., sec. 808b; 1 Williston, Contracts (Jaeger's 3d ed.), pp. 607 et seq., [696] sec. 140; Boyer, Promissory Estoppel: Requirements and Limitations of the Doctrine, 98 University of Pennsylvania Law Review (1950), 459; Seavey, Reliance Upon Gratuitous Promises or Other Conduct, 64 Harvard Law Review (1951), 913; Annos. 115 A. L. R. 152, and 48 A. L. R. (2d) 1069.

The Restatement avoids use of the term "promissory estoppel," and there has been criticism of it as an inaccurate term. See 1A Corbin, Contracts, p. 232 et seq., sec. 204. On the other hand, Williston advocated the use of this term or something equivalent. 1 Williston, Contracts (1st ed.), p. 308, sec. 139. Use of the word "estoppel" to describe a doctrine upon which a party to a lawsuit may obtain affirmative relief offends the traditional concept that estoppel merely serves as a shield and cannot serve as a sword to create a cause of action. See Utschig v. McClone (1962), 16 Wis. (2d) 506, 509, 114 N. W. (2d) 854. "Attractive nuisance" is also a much-criticized term. See concurring opinion, Flamingo v. Waukesha (1952), 262 Wis. 219, 227, 55 N. W. (2d) 24. However, the latter term is still in almost universal use by the courts because of the lack of a better substitute. The same is also true of the wide use of the term "promissory estoppel." We have employed its use in this opinion not only because of its extensive use by other courts but also since a more-accurate equivalent has not been devised.

Because we deem the doctrine of promissory estoppel, as stated in sec. 90 of Restatement, 1 Contracts, is one which supplies a needed tool which courts may employ in a proper case to prevent injustice, we endorse and adopt it.

Applicability of Doctrine to Facts of this Case.

The record here discloses a number of promises and assurances given to Hoffman by Lukowitz in behalf of Red [697] Owl upon which plaintiffs relied and acted upon to their detriment.

Foremost were the promises that for the sum of $18,000 Red Owl would establish Hoffman in a store. After Hoffman had sold his grocery store and paid the $1,000 on the Chilton lot, the $18,000 figure was changed to $24,100. Then in November, 1961, Hoffman was assured that if the $24,100 figure were increased by $2,000 the deal would go through. Hoffman was induced to sell his grocery store fixtures and inventory in June, 1961, on the promise that he would be in his new store by fall. In November, plaintiffs sold their bakery building on the urging of defendants and on the assurance that this was the last step necessary to have the deal with Red Owl go through.

We determine that there was ample evidence to sustain the answers of the jury to the questions of the verdict with respect to the promissory representations made by Red Owl, Hoffman's reliance thereon in the exercise of ordinary care, and his fulfilment of the conditions required of him by the terms of the negotiations had with Red Owl.

There remains for consideration the question of law raised by defendants that agreement was never reached on essential factors necessary to establish a contract between Hoffman and Red Owl. Among these were the size, cost, design, and layout of the store building; and the terms of the lease with respect to rent, maintenance, renewal, and purchase options. This poses the question of whether the promise necessary to sustain a cause of action for promissory estoppel must embrace all essential details of a proposed transaction between promisor and promisee so as to be the equivalent of an offer that would result in a binding contract between the parties if the promisee were to accept the same.

Originally the doctrine of promissory estoppel was invoked as a substitute for consideration rendering a gratuitous [698] promise enforceable as a contract. See Williston, Contracts (1st ed.), p. 307, sec. 139. In other words, the acts of reliance by the promisee to his detriment provided a substitute for consideration. If promissory estoppel were to be limited to only those situations where the promise giving rise to the cause of action must be so definite with respect to all details that a contract would result were the promise supported by consideration, then the defendants' instant promises to Hoffman would not meet this test. However, sec. 90 of Restatement, 1 Contracts, does not impose the requirement that the promise giving rise to the cause of action must be so comprehensive in scope as to meet the requirements of an offer that would ripen into a contract if accepted by the promisee. Rather the conditions imposed are:

(1) Was the promise one which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee?

(2) Did the promise induce such action or forbearance?

(3) Can injustice be avoided only by enforcement of the promise?^[2]

We deem it would be a mistake to regard an action grounded on promissory estoppel as the equivalent of a breach-of-contract action. As Dean Boyer points out, it is desirable that fluidity in the application of the concept be maintained. 98 University of Pennsylvania Law Review (1950), 459, at page 497. While the first two of the above-listed three requirements of promissory estoppel present issues of fact which ordinarily will be resolved by a jury, the third requirement, that the remedy can only be invoked where necessary to avoid injustice, is one that involves a policy decision by the court. Such a policy decision necessarily embraces an element of discretion.

[699] We conclude that injustice would result here if plaintiffs were not granted some relief because of the failure of defendants to keep their promises which induced plaintiffs to act to their detriment.

Damages.

Defendants attack all the items of damages awarded by the jury.

The bakery building at Wautoma was sold at defendants' instigation in order that Hoffman might have the net proceeds available as part of the cash capital he was to invest in the Chilton store venture. The evidence clearly establishes that it was sold at a loss of $2,000. Defendants contend that half of this loss was sustained by Mrs. Hoffman because title stood in joint tenancy. They point out that no dealings took place between her and defendants as all negotiations were had with her husband. Ordinarily only the promisee and not third persons are entitled to enforce the remedy of promissory estoppel against the promisor. However, if the promisor actually foresees, or has reason to foresee, action by a third person in reliance on the promise, it may be quite unjust to refuse to perform the promise. 1A Corbin, Contracts, p. 220, sec. 200. Here not only did defendants foresee that it would be necessary for Mrs. Hoffman to sell her joint interest in the bakery building, but defendants actually requested that this be done. We approve the jury's award of $2,000 damages for the loss incurred by both plaintiffs in this sale.

Defendants attack on two grounds the $1,000 awarded because of Hoffman's payment of that amount on the purchase price of the Chilton lot. The first is that this $1,000 had already been lost at the time the final negotiations with Red Owl fell through in January, 1962, because the remaining $5,000 of purchase price had been due on October 15, 1961. The record does not disclose that the lot owner had [700] foreclosed Hoffman's interest in the lot for failure to pay this $5,000. The $1,000 was not paid for the option, but had been paid as part of the purchase price at the time Hoffman elected to exercise the option. This gave him an equity in the lot which could not be legally foreclosed without affording Hoffman an opportunity to pay the balance. The second ground of attack is that the lot may have had a fair market value of $6,000, and Hoffman should have paid the remaining $5,000 of purchase price. We determine that it would be unreasonable to require Hoffman to have invested an additional $5,000 in order to protect the $1,000 he had paid. Therefore, we find no merit to defendants' attack upon this item of damages.

We also determine it was reasonable for Hoffman to have paid $125 for one month's rent of a home in Chilton after defendants assured him everything would be set when plaintiff sold the bakery building. This was a proper item of damage.

Plaintiffs never moved to Chilton because defendants suggested that Hoffman get some experience by working in a Red Owl store in the Fox River Valley. Plaintiffs, therefore, moved to Neenah instead of Chilton. After moving, Hoffman worked at night in an Appleton bakery but held himself available for work in a Red Owl store. The $140 moving expense would not have been incurred if plaintiffs had not sold their bakery building in Wautoma in reliance upon defendants' promises. We consider the $140 moving expense to be a proper item of damage.

We turn now to the damage item with respect to which the trial court granted a new trial, i.e., that arising from the sale of the Wautoma grocery-store fixtures and inventory for which the jury awarded $16,735. The trial court ruled that Hoffman could not recover for any loss of future profits for the summer months following the sale on June 6, 1961, but that damages would be limited to the difference between [701] the sales price received and the fair market value of the assets sold, giving consideration to any goodwill attaching thereto by reason of the transfer of a going business. There was no direct evidence presented as to what this fair market value was on June 6, 1961. The evidence did disclose that Hoffman paid $9,000 for the inventory, added $1,500 to it and sold it for $10,000 or a loss of $500. His 1961 federal income-tax return showed that the grocery equipment had been purchased for $7,000 and sold for $7,955.96. Plaintiffs introduced evidence of the buyer that during the first eleven weeks of operation of the grocery store his gross sales were $44,000 and his profit was $6,000 or roughly 15 percent. On cross-examination he admitted that this was gross and not net profit. Plaintiffs contend that in a breach-of-contract action damages may include loss of profits. However, this is not a breach-of-contract action.

The only relevancy of evidence relating to profits would be with respect to proving the element of goodwill in establishing the fair market value of the grocery inventory and fixtures sold. Therefore, evidence of profits would be admissible to afford a foundation for expert opinion as to fair market value.

Where damages are awarded in promissory estoppel instead of specifically enforcing the promisor's promise, they should be only such as in the opinion of the court are necessary to prevent injustice. Mechanical or rule-of-thumb approaches to the damage problem should be avoided. In discussing remedies to be applied by courts in promissory estoppel we quote the following views of writers on the subject:

"Enforcement of a promise does not necessarily mean Specific Performance. It does not necessarily mean Damages for breach. Moreover the amount allowed as Damages may be determined by the plaintiff's expenditures or change of position in reliance as well as by the value to him of the [702] promised performance. Restitution is also an `enforcing' remedy, although it is often said to be based upon some kind of a rescission. In determining what justice requires, the court must remember all of its powers, derived from equity, law merchant, and other sources, as well as the common law. Its decree should be molded accordingly." 1A Corbin, Contracts, p. 221, sec. 200.

"The wrong is not primarily in depriving the plaintiff of the promised reward but in causing the plaintiff to change position to his detriment. It would follow that the damages should not exceed the loss caused by the change of position, which would never be more in amount, but might be less, than the promised reward." Seavey, Reliance on Gratuitous Promises or Other Conduct, 64 Harvard Law Review (1951), 913, 926.

"There likewise seems to be no positive legal requirement, and certainly no legal policy, which dictates the allowance of contract damages in every case where the defendant's duty is consensual." Shattuck, Gratuitous Promises—A New Writ?, 35 Michigan Law Review (1936), 908, 912.^[3]

At the time Hoffman bought the equipment and inventory of the small grocery store at Wautoma he did so in order to gain experience in the grocery-store business. At that time discussion had already been had with Red Owl representatives that Wautoma might be too small for a Red Owl operation and that a larger city might be more desirable. Thus Hoffman made this purchase more or less as a temporary experiment. Justice does not require that the damages awarded him, because of selling these assets at the behest of defendants, should exceed any actual loss sustained measured by the difference between the sales price and the fair market value.

[703] Since the evidence does not sustain the large award of damages arising from the sale of the Wautoma grocery business, the trial court properly ordered a new trial on this issue.

By the Court.—Order affirmed. Because of the cross appeal, plaintiffs shall be limited to taxing but two thirds of their costs.

[*] Motion for rehearing denied, with costs, on April 27, 1965.

[1] Among the many cases which have granted relief grounded upon promissory estoppel are: Goodman v. Dicker (D. C., D. C. 1948), 169 Fed. (2d) 684; Drennan v. Star Paving Co. (1958), 51 Cal. (2d) 409, 333 Pac. (2d) 757; Van Hook v. Southern California Waiters Alliance (1958), 158 Cal. App. (2d) 556, 323 Pac. (2d) 212; Chrysler Corp. v. Quimby (1958), 51 Del. 264, 144 Atl. (2d) 123, 144 Atl. (2d) 885; Lusk-Harbison-Jones, Inc., v. Universal Credit Co. (1933), 164 Miss. 693, 145 So. 623; Feinberg v. Pfeiffer Co. (Mo. App. 1959), 322 S. W. (2d) 163; Schafer v. Fraser (1955), 206 Or. 446, 290 Pac. (2d) 190, 294 Pac. (2d) 609; Northwestern Engineering Co. v. Ellerman (1943), 69 S. D. 397, 10 N. W. (2d) 879.

[2] See Boyer, 98 University of Pennsylvania Law Review (1950), 459, 460. "Enforcement" of the promise embraces an award of damages for breach as well as decreeing specific performance.

[3] For expression of the opposite view, that courts in promissory-estoppel cases should treat them as ordinary breach of contract cases and allow the full amount of damages recoverable in the latter, see note, 13 Vanderbilt Law Review (1960), 705.

1. MASTER AND SERVANT — CONTRACT OF HIRING — EVIDENCE — INSTRUCTIONS.

Where, in an action on a parol contract of hiring alleged to have been entered into after the termination of a written contract of employment, the witnesses coincided as to the terms of the re-employment proposed in a conversation between the parties and defendant only proved that he refused to enter into a contract with the employé regarding another year's employment, a charge that, in order to find for plaintiff, the jury must find not only that the conversation occurred, but that by such conversation both parties intended to contract with each other, was erroneous.

2. CONTRACTS — INTENTION OF PARTIES.

To constitute a contract there must, in general, be a meeting of the minds of the parties, and both must agree to the same thing, in the same sense; but, in so far as their intention is an element, it is only such intention as the words or the acts of the parties predicate, and not one secretly cherished, which is inconsistent therewith.

3. SAME — QUESTION FOR COURT.

The general rule is that it is for the court to construe the effect of writings relied on to make a contract, and the effect of unambiguous oral words, but, where the words are in dispute, the question whether they were used or not is for the jury.

4. MASTER AND SERVANT — CONTRACT OF EMPLOYMENT — QUESTION FOR COURT.

A contract of employment terminated December 15th. Eight days thereafter the employé demanded a contract for another year, and stated that unless he obtained one he would cease work at once. The employer responded: "Go ahead, you are all right." Held, that the conversation, as a matter of law, created a contract for a year, and the court erred in making the formation of the contract depend on a finding that both parties intended to make one.

Appeal from St. Louis Circuit Court; O'Neill Ryan, Judge.

Action by Charles R. Embry against the Hargadine, McKittrick Dry Goods Company. From a judgment for defendant, plaintiff appeals. Reversed and remanded.

Sloan Pitzer, for appellant. Johnson, Allen & Richards, for respondent.

GOODE, J.

We dealt with this case on a former appeal (115 Mo. App. 130, 91 S. W. 170). It has been retried, and is again before us for the determination of questions not then reviewed. The appellant was an employé of the respondent company under a written contract to expire December 15, 1903, at a salary of $2,000 per annum. His duties were to attend to the sample department of respondent, of which he was given complete charge. It was his business to select samples for the traveling salesmen of the company, which is a wholesale dry goods concern, to use in selling goods to retail merchants. Appellant contends that on December 23, 1903, he was re-engaged by respondent, through its president, Thos. H. McKittrick, for another year at the same compensation and for the same duties stipulated in his previous written contract. On March 1, 1904, he was discharged, having been notified in February that, on account of the necessity of retrenching expenses, his services and that of some other employés would no longer be required. The respondent company contends that its president never re-employed appellant after the termination of his written contract, and hence that it had a right to discharge him when it chose. The point with which we are concerned requires an epitome of the testimony of appellant and the counter testimony of McKittrick, the president of the company, in reference to the alleged re-employment. Appellant testified: That several times prior to the termination of his written contract on December 15, 1903, he had endeavored to get an understanding with McKittrick for another year, but had been put off from time to time. That on December 23d, eight days after the expiration of said contract, he called on McKittrick, in the latter's office, and said to him that as appellant's written employment had lapsed eight days before, and as there were only a few days between then and the 1st of January in which to seek employment with other firms, if respondent wished to retain his services longer he must have a contract for another year, or he would quit respondent's service then and there. That he had been put off twice before and wanted an understanding or contract at once so that he could go ahead without worry. That McKittrick asked him how he was getting along in his department, and appellant said he was very busy, as they were in the height of the season getting men out — had about 110 salesmen on the line and others in preparation. That McKittrick then said: "Go ahead, you're all right. Get your men out, and don't let that worry you." That appellant took McKittrick at his word and worked until February 15th without any question in his mind. It was on February 15th that he was notified his services would be discontinued on March 1st. McKittrick denied this conversation as related by appellant, and said that, when accosted by the latter on December 23d, he (McKittrick) was working on his books in order to get out a report for a stockholders' meeting, and, when appellant said if he did not get a contract he would leave, that he (McKittrick) said: "Mr. Embry, I am just getting ready for the stockholders' meeting to-morrow. I have no time to take it up now. I have told you before I would not take it up until I had [778] these matters out of the way. You will have to see me at a later time. I said: `Go back upstairs and get your men out on the road.' I may have asked him one or two other questions relative to the department, I don't remember. The whole conversation did not take more than a minute."

Embry also swore that, when he was notified he would be discharged, he complained to McKittrick about it, as being a violation of their contract, and McKittrick said it was due to the action of the board of directors, and not to any personal action of his, and that others would suffer by what the board had done as well as Embry. Appellant requested an instruction to the jury setting out, in substance, the conversation between him and McKittrick according to his version, and declaring that those facts, if found to be true, constituted a contract between the parties that defendant would pay plaintiff the sum of $2,000 for another year, provided the jury believed from the evidence that plaintiff commenced said work believing he was to have $2,000 for the year's work. This instruction was refused, but the court gave another embodying in substance appellant's version of the conversation, and declaring it made a contract "if you (the jury) find both parties thereby intended and did contract with each other for plaintiff's employment for one year from and including December 23, 1903, at a salary of $2,000 per annum." Embry swore that, on several occasions when he spoke to McKittrick about employment for the ensuing year, he asked for a renewal of his former contract, and that on December 23d, the date of the alleged renewal, he went into Mr. McKittrick's office and told him his contract had expired, and he wanted to renew it for a year, having always worked under year contracts. Neither the refused instruction nor the one given by the court embodied facts quite as strong as appellant's testimony, because neither referred to appellant's alleged statement to McKittrick that unless he was re-employed he would stop work for respondent then and there.

It is assigned for error that the court required the jury, in order to return a verdict for appellant, not only to find the conversation occurred as appellant swore, but that both parties intended by such conversation to contract with each other for plaintiff's employment for the year from December, 1903, at a salary of $2,000. If it appeared from the record that there was a dispute between the parties as to the terms on which appellant wanted re-employment, there might have been sound reason for inserting this clause in the instruction; but no issue was made that they split on terms; the testimony of McKittrick tending to prove only that he refused to enter into a contract with appellant regarding another year's employment until the annual meeting of stockholders was out of the way. Indeed, as to the proposed terms McKittrick agrees with Embry, for the former swore as follows: "Mr. Embry said he wanted to know about the renewal of his contract. Said if he did not have the contract made he would leave." As the two witnesses coincided as to the terms of the proposed re-employment, there was no reason for inserting the above-mentioned clause in the instruction in order that it might be settled by the jury whether or not plaintiff, if employed for one year from December 23, 1903, was to be paid $2,000 a year. Therefore it remains to determine whether or not this part of the instruction was a correct statement of the law in regard to what was necessary to constitute a contract between the parties; that is to say, whether the formation of a contract by what, according to Embry, was said, depended on the intention of both Embry and McKittrick. Or, to put the question more precisely: Did what was said constitute a contract of re-employment on the previous terms irrespective of the intention or purpose of McKittrick?

Judicial opinion and elementary treatises abound in statements of the rule that to constitute a contract there must be a meeting of the minds of the parties, and both must agree to the same thing in the same sense. Generally speaking, this may be true; but it is not literally or universally true. That is to say, the inner intention of parties to a conversation subsequently alleged to create a contract cannot either make a contract of what transpired, or prevent one from arising, if the words used were sufficient to constitute a contract. In so far as their intention is an influential element, it is only such intention as the words or acts of the parties indicate; not one secretly cherished which is inconsistent with those words or acts. The rule is thus stated by a text-writer, and many decisions are cited in support of his text: "The primary object of construction in contract law is to discover the intention of the parties. This intention in express contracts is, in the first instance, embodied in the words which the parties have used and is to be deduced therefrom. This rule applies to oral contracts, as well as to contracts in writing, and is the rule recognized by courts of equity." 2 Paige, Contracts, § 1104. So it is said in another work: "Now this measure of the contents of the promise will be found to coincide in the usual dealings of men of good faith and ordinary competence, both with the actual intention of the promisor and with the actual expectation of the promisee. But this is not a constant or a necessary coincidence. In exceptional cases a promisor may be bound to perform something which he did not intend to promise, or a promisee may not be entitled to require that performance which he understood to be promised to him." Walds-Pollock, Contracts (3d Ed.) 309. In Brewington v. Mesker, 51 Mo. App. 348, 356, it is said that the meeting of minds, which is essential to the formation of a contract, is not determined [779] by the secret intention of the parties, but by their expressed intention, which may be wholly at variance with the former. In Machine Co. v. Criswell, 58 Mo. App. 471, an instruction was given on the issue of whether the sale of a machine occurred, which told the jury that an intention on the part of the seller to pass the title, and of the purchaser to receive and accept the machine for the purpose of making it his own, was essential to a sale, and if the jury believed such intention did not exist in the minds of both parties at the time, and was not made known to each other, then there was no sale, notwithstanding the delivery. In commenting on this instruction, the court said: "The latter clause of the instruction is erroneous and misleading. It is true that in every case of purchase the question of sale or no sale is a matter of intention; but such intention must always be determined by the conduct, acts, and express declarations of the parties, and not by the secret intention existing in the mind or minds of the contracting parties. If the validity of such a contract depended upon secret intentions of the parties, then no oral contract of sale could be relied on with safety." Machine Co. v. Criswell, 58 Mo., loc. cit. 473. In Smith v. Hughes, L. R. 6 Q. B. 597, 607, it was said: "If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms." And that doctrine was adopted in Phillip v. Gallant, 62 N. Y. 256. In 9 Cyc. 245, we find the following text: "The law imputes to a person an intention corresponding to the reasonable meaning of his words and acts. It judges his intention by his outward expressions and excludes all questions in regard to his unexpressed intention. If his words or acts, judged by a reasonable standard, manifest an intention to agree in regard to the matter in question, that agreement is established, and it is immaterial what may be the real, but unexpressed, state of his mind on the subject." Even more pointed was the language of Baron Bramwell in Brown v. Hare, 3 Hurlst. & N. *484, *495: "Intention is immaterial till it manifests itself in an act. If a man intends to buy, and says so to the intended seller, and he intends to sell, and says so to the intended buyer, there is a contract of sale; and so there would be if neither had the intention." In view of those authorities, we hold that, though McKittrick may not have intended to employ Embry by what transpired between them according to the latter's testimony, yet if what McKittrick said would have been taken by a reasonable man to be an employment, and Embry so understood it, it constituted a valid contract of employment for the ensuing year.

The next question is whether or not the language used was of that character, namely, was such that Embry, as a reasonable man, might consider he was re-employed for the ensuing year on the previous terms, and act accordingly. We do not say that in every instance it would be for the court to pronounce on this question, because, peradventure, instances might arise in which there would be such an ambiguity in the language relied on to show an assent by the obligor to the proposal of the obligee that it would be for the jury to say whether a reasonable mind would take it to signify acceptance of the proposal. Belt v. Goode, 31 Mo. 128; Davies v. Baldwin, 66 Mo. App. 577. In Lancaster v. Elliott, 28 Mo. App. 86, 92, the opinion, as to the immediate point, reads: "The interpretation of a contract in writing is always a matter of law for determination by the court, and equally so, upon like principles, is the question what acts and words, in nearly every case, will suffice to constitute an acceptance by one party, of a proposal submitted by the other, so that a contract or agreement thereby becomes matured." The general rule is that it is for the court to construe the effect of writings relied on to make a contract, and also the effect of unambiguous oral words. Belt v. Goode, supra; Brannock v. Elmore, 114 Mo. 55, 21 S. W. 451; Norton v. Higbee, 38 Mo. App. 467, 471. However, if the words are in dispute, the question of whether they were used or not is for the jury. Belt v. Goode, supra. With these rules of law in mind, let us recur to the conversation of December 23d between Embry and McKittrick as related by the former. Embry was demanding a renewal of his contract, saying he had been put off from time to time, and that he had only a few days before the end of the year in which to seek employment from other houses, and that he would quit then and there unless he was reemployed. McKittrick inquired how he was getting along with the department, and Embry said they, i. e., the employés of the department, were very busy getting out salesmen. Whereupon McKittrick said: "Go ahead, you are all right. Get your men out, and do not let that worry you." We think no reasonable man would construe that answer to Embry's demand that he be employed for another year, otherwise than as an assent to the demand, and that Embry had the right to rely on it as an assent. The natural inference is, though we do not find it testified to, that Embry was at work getting samples ready for the salesmen to use during the ensuing season. Now, when he was complaining of the worry and mental distress he was under because of his uncertainty about the future, and his urgent need, either of an immediate contract with respondent, or a refusal by it to make one, leaving him free to seek employment elsewhere, McKittrick must have answered as he did for the purpose of assuring appellant that any apprehension was [780] needless, as appellant's services would be retained by the respondent. The answer was unambiguous, and we rule that if the conversation was according to appellant's version, and he understood he was employed, it constituted in law a valid contract of re-employment, and the court erred in making the formation of a contract depend on a finding that both parties intended to make one. It was only necessary that Embry, as a reasonable man, had a right to and did so understand.

Some other rulings are assigned for error by the appellant, but we will not discuss them because we think they are devoid of merit.

The judgment is reversed, and the cause remanded. All concur.

2 Hurl. & C. 906, 159 Eng. Rep. 375 (Ex. 1864)

Raffles
v.
Wichelhaus.

To a declaration for not accepting Surat cotton which the defendant bought of the plaintiff " to arrive ex Peerless from Bombay," the defendant pleaded that he meant a ship called the "Peerless" which sailed from Bombay, in October, and the plaintiff was not ready to deliver any cotton which arrived by that ship, but only cotton which arrived by another ship called the " Peerless," which sailed from Bombay in December. -Held, on demurrer, that the plea was a good answer.

DECLARATION. -For that it was agreed between the plaintiff and the defendants, to wit, at Liverpool, that the plaintiff should sell to the defendants, and the defendants buy of the plaintiff, certain goods, to wit, 125 bales of Surat cotton, guaranteed middling fair merchant's Dhollorah, to arrive ex "Peerless" from Bombay; and that the cotton should be taken from the quay, and that the defendants would pay the plaintiff for the same at a certain rate, to wit, at the rate of 17¼ d. per pound, within a certain time then agreed upon after the arrival of the said goods in England. -Averments: that the said goods did arrive by the said ship from Bombay in England, to wit, at Liverpool, and the plaintiff was then and there ready, and willing and offered to deliver the said goods to the defendants, &c. Breach: that the defendants refused to accept the said goods or pay the plaintiff for them.

Plea. -That the said ship mentioned in the said agreement was meant and intended by the defendants to be the ship called the "Peerless," which sailed from Bombay, to wit, in October; and that the plaintiff was not ready and willing and did not offer to deliver to the defendants any bales of cotton which arrived by the last mentioned ship, but instead thereof was only ready and willing and offered to deliver to the defendants 125 bales of Surat cotton which arrived by another and different ship, which was also called the "Peerless," and which sailed from Bombay, to wit, in December.

Demurrer, and joinder therein.

Milward, in support of the demurrer. -The contract was for the sale of a number of bales of cotton of a particular description, which the plaintiff was ready to deliver. It is immaterial by what ship the cotton was to arrive, so that it was a ship called the "Peerless." The words " to arrive ex 'Peerless,'" only mean that if the vessel is lost on the voyage, the contract is to be at an end. [Pollock, C. B. -It would be a question for the jury whether both parties meant the same ship called the "Peerless."] That would be so if the contract was for the sale of a ship called the "Peerless;" but it is for the sale of cotton on board a ship of that name. [Pollock, C. B. -The defendant only bought that cotton which was to arrive by a particular ship. It may as well be said, that if there is a contract for the purchase of certain goods in warehouse A, that is satisfied by the delivery of goods of the same description in warehouse B.] In that case there would be goods in both warehouses; here it does not appear that the plaintiff had any goods on board the other "Peerless." [Martin, B. -It is imposing on the defendant a contract different from that which he entered into. Pollock, C. B. -It is like a contract for the purchase of wine coming from a particular estate in France or Spain, where there are two estates of that name.] The defendant has no right to contradict by parol evidence a written contract good upon the face of it. He does not impute misrepresentation or fraud, but only says that he fancied the ship was a different one. Intention is of no avail, unless stated at the time of the contract. [Pollock, C. B. -One vessel sailed in October and the other in December.] The time of sailing is no part of the contract.

Mellish (Cohen with him), in support of the plea. -There is nothing on the face of the contract to shew that any particular ship called the "Peerless" was meant; but the moment it appears that two ships called the "Peerless" were about to sail from Bombay there is a latent ambiguity, and parol evidence may be given for the purpose shewing that the defendant meant one "Peerless" and the plaintiff another. That being so, there was no consensus ad idem, and therefore no binding contract. -He was then stopped by the Court.

Per CURIAM. There must be judgment for the defendants.

Judgment for the defendants. Pollock, C. B., Martin, B., and Pigott, B. Jan. 27.

Sheldon M. Markel, Buffalo, N. Y., for appellant.

Paul R. Braunsdorf, Rochester, N. Y. (Harris, Beach, Wilcox, Rubin & Levey, Rochester, N. Y., of counsel), for appellee.

Before OAKES, GURFEIN and MESKILL, Circuit Judges.

GURFEIN, Circuit Judge:

This is an action for breach of contract, entertained in the District Court for the Western District of New York (Hon. Harold P. Burke, Judge) by virtue of the diversity of citizenship of the parties.^[1] [163] 28 U.S.C. § 1332. Plaintiff-appellant, Flower City Painting Contractors, Inc. ("Flower") is a newly formed painting contracting firm in Rochester, New York, owned and managed by black minority personnel. Defendant-appellee, Gumina Construction Company ("Gumina") is an Ohio company with its principal place of business in Lorain, Ohio.

Gumina entered into a prime contract with the FIGHT Village Housing Development Fund Company, Inc., for the construction of a garden type apartment project called "FIGHT Village," on March 12, 1973. The project was federally funded and developed under the auspices of the Federal Housing Authority of the Department of Housing and Urban Development ("HUD"). Pursuant to Executive Order No. 11246, which prohibits employment discrimination by Government contractors, HUD regulations and the terms of the prime contract required the prime contractor to undertake an affirmative action program that included efforts to recruit and hire minority subcontractors. HUD Contract Compliance Handbook 8000.6 at 27 (1972). Compliance was a condition of the contract.

Part of Gumina's affirmative action obligation was satisfied by its award of a subcontract for painting in the FIGHT Village to Flower on April 16, 1973. As indicated by the cost breakdown summary sheet attached to the prime contract, the total anticipated cost of painting and decorating the entire FIGHT project was to be $101,000. This estimation of cost was significant, since an excess of cost in one aspect could have caused a cost overrun that would cut into the prime contractor's profits. The subcontract executed with Flower provided that Flower was to be paid $98,499.84 for its work, a sum that was roughly only $2500 less than the maximum allotted for painting and decorating the entire project.

The terms of the Gumina-Flower subcontract included the language of Flower's original bid on the subcontract which was incorporated in haec verba as Schedule A of the subcontract. That Schedule reads as follows:

"SCHEDULE A"

   The painting of the above mentioned project in accordance   with the painting specifications and plans for this project.1. One bedroom units     $*335.00 per unit   $*17,420.002. Two bedroom units     $*371.00 per unit   $*28,196.003. Three bedroom units   $*428.00 per unit   $*29,960.004. Four bedroom units    $*477.58 per unit   $*22,923.84                           A Total of:       $*98,499.84  Please note: price given reflects no bonding requirement and               a non-union job operation.

The subcontract also incorporated by reference the prime contract, drawings, addenda, and specifications, as well as modifications subsequently issued. Indeed, Schedule A made specific reference to the contract specifications and plans in defining the scope of the subcontractor's work. The subcontract further provided that the subcontractor would "faithfully observe all requirements and conditions set forth by plans and specifications on file at the F.H.A. Office in Buffalo, N.Y. . . .," and that these documents were to be "available for inspection by the Subcontractor upon his request."

On March 18, 1974, nearly one year after Flower entered into the subcontract, it asserted in a letter to Gumina that the contract required Flower to paint interior walls of the individual apartment units only and that Flower was not obligated to paint exteriors or common buildings.^[2] On March 25, 1974, Flower received from Gumina a copy of Article II of the subcontract with additional explanatory language typed in as a reminder of obligations which Gumina insisted that Flower had under its subcontract. This notation stated: "It is further [164] understood that this contract includes all exterior work, (encompasses all work, within specs and drawings) except exterior siding. The community building is also a part of this contract." On March 29, 1974, the president of Flower submitted to Gumina an itemization of additional costs for this "exterior work," claiming that it was not required to do the painting of apartment laundry rooms, storage rooms, and hallways, as well as of exterior doors, trim and certain common buildings.^[3] On April 4, 1974 (the letter was erroneously dated March 4), Gumina responded to Flower's demand for extra payments by reiterating that the exterior work specified by Flower as requiring additional payment, was work which had already been agreed upon. Gumina, in the same letter, though the work had not yet begun, cancelled the contract. Appellant sued Gumina for damages.

At trial, Gumina defended its removal of Flower on the ground that the latter had misinterpreted the contract, and that by insisting upon extra payment for the painting of exteriors Flower had refused to comply with the terms of — and had thereby repudiated — the existing subcontract. Flower maintained the converse position: that Gumina had unilaterally attempted to enlarge the scope of Flower's obligation under the contract by requiring work outside the individual "unit" interiors. The trial court accepted the contract interpretation offered by Gumina. It found, despite Flower's contentions that it had been hired to paint only the walls in the "units," that, on the contrary, neither the subcontract nor the specifications incorporated by reference excluded common hallways, storage areas, laundry rooms, or exterior surfaces of FIGHT Village. The court determined that the specifications required the painting of "`all surfaces except those specifically excluded.'"

The court held that Flower committed a breach of contract "by asking for extra pay for work it was obligated to do under its contract." It found that "Flower City unequivocally declared its refusal to perform according to the contract" and that "cancellation was the proper response by Gumina Construction." It was on that basis that the complaint was dismissed after trial.

On this appeal, the defendant contends that an alternative ground upon which to uphold dismissal of Flower's suit is that no subcontract was actually formed between Flower and Gumina because there was no "meeting of the minds." This issue was not expressly considered by the District Court, although the assumption that a contract existed as interpreted by Gumina is implicit in its ruling.

If we hold Flower strictly to its obligation to recognize that the specifications were part of the subcontract, then its claim for additional payment as a condition of performance was unjustified, as Judge Burke found. This, in turn, would raise the question whether a refusal to perform part of an alleged contract, except in accordance with one's own interpretation, is a repudiation. If so, we would then have to decide whether such a repudiation by Flower was sufficiently material to be treated as a justification for unilateral rescission by Gumina. Thus, if we adopted the approach of the court below that there was a contract, even aside from the issue of what were its obligations, we would have considerable difficulty in weighing the correctness of the conclusion of law that there had been a repudiation sufficient to justify an immediate unilateral rescission.

We think, however, that this thorny problem need not be reached. Rather, we have concluded — using the objective criterion of judgment — that there was no meeting of the minds in the first instance and that, hence, there never was a contract enforcible by either party.

Viewing the subcontract itself as written, both Flower's and Gumina's interpretations of the document are plausible. The description of the subject matter of the contract in [165] Schedule A in terms of "units" and the fact that the total bid listed is the aggregate of the bids on the individual units suggest that nothing more was required to be painted than the actual units themselves. On the other hand, the incorporation of the specifications with their delineation of exterior painting chores and the use of the word "project" in Schedule A indicate that the scope of the work encompassed all painting in FIGHT City.

Resolution of this ambiguity might be effected by construing the contract on the assumption that it incorporated the habitual or customary practice of the construction industry in Rochester, New York, that painting subcontracts be awarded on an entire project basis.

Such usage, if operative, may be proved by parol, as was done here. See, e. g., Division of Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc.2d 720, 730-31, 304 N.Y.S.2d 191 (Sup.Ct.1969). But proof of the usage is not enough by itself to establish the meaning of the contract, for "[a] party cannot be bound by usage unless he either knows or has reason to know of its existence and nature." Restatement (First) of Contracts § 247, comment b. See Walls v. Bailey, 49 N.Y. 464 (1872).

In an ordinary situation involving the painting subcontract on a construction job in Rochester, the court could find as a fact that a painting contractor "knows or has reason to know of [this usage's] existence and nature." It seems clear enough that Flower actually did not know the usage, as its President testified, and the court made no finding to the contrary. The question whether Flower had "reason to know" is the issue.

Flower was brought into the picture by the imposition on the contractor of an affirmative action program. While competence to do the job must have been the assumption of the Regulation, experience in the trade was not. Flower was a neophyte minority painting contractor. This was its first substantial subcontract on a construction job. It would be unrealistic to hold it strictly to a "reason to know" standard of trade usage.

The consequence of ruling that Flower cannot be held to trade usage is recognition, however, that the contract document could represent two different understandings of what the subject matter embraced. This means that Gumina, as well, was not bound since it takes two to make a contract. Unfortunately, there was no contract to enforce in favor of Flower, as there would have been no contract to enforce against Flower if Gumina had been the plaintiff in an action for breach. And we cannot say that either party acted so unreasonably as to justify construing the ambiguity in the contract against it. Each party, in fact, held a different and reasonable view of the undertaking, Flower on the basis of its literal reading of the word "units" and Gumina because of its suppositions concerning trade practice and its awareness that Flower was to be paid virtually the entire sum allocated to painting the FIGHT City project.^[4]

Though the setting is new, the problem is old. In two nineteenth century cases, Raffles v. Wichelhaus, 159 Eng.Rep. 375 (Ex.1864) (the famous "Peerless" case) and Kyle v. Kavanagh, 103 Mass. 356 (1869), courts, when faced with an arguably material contract term that could mean or represent two different things, found that no contract existed. See O. Holmes, The Common Law 309-10 (1881).^[5] As Judge Pollack [166] noted in Oswald v. Allen, 285 F.Supp. 488, 492 (S.D.N.Y.1968), aff'd, 417 F.2d 43 (2d Cir. 1969), the essence of the Raffles opinion was that "neither party had reason to know of the latent ambiguity. . . ." The rule of Raffles and Kyle was adopted and more fully formulated in the Restatement (First) of Contracts § 71(a).

If the manifestations of intention of either party are uncertain or ambiguous, and he has no reason to know that they may bear a different meaning to the other party from that which he himself attaches to them, his manifestations are operative in the formation of a contract only in the event that the other party attaches to them the same meaning. [Emphasis added.]

Accord, Oswald v. Allen, supra; Julius Kayser & Co. v. Textron, Inc., 228 F.2d 783, 789-90 (4th Cir. 1956); Hayford v. Century Insurance Co., 106 N.H. 242, 209 A.2d 716, 718 (1965); Wright v. Dutch, 140 Cal.App.2d 891, 296 P.2d 34 (Cal.App.1956); Restatement (Second) of Contracts § 21A (tent. draft); 3 Corbin on Contracts § 599, at 593-97; 1 Williston on Contracts § 95, at 344-48 (3d ed. Jaeger); Young, Equivocation in Agreements, 64 Colum.L.Rev. 619, 621 (1964); see Dadourian Export Corp. v. United States, 291 F.2d 178, 187 & n. 4 (2d Cir. 1961) (Friendly, J., dissenting).

We affirm the judgment of dismissal on the ground that no enforcible contract ever came into existence.

The dissenting opinion, finding a contract as interpreted by Flower, relies upon some testimony by Ellison, president of Flower, that he was told by the superintendent for Gumina in March 1974 — almost a year after the putative "contract" was signed — that there had been some "changes" since the signing and that the Gumina superintendent, therefore, had to add a "piece of contract document." The dissenting opinion finds that this bit of testimony indicated that Gumina was "redefining the scope of the work by a `further understanding'" and concludes that "[c]learly, Gumina made an initial mistake and then tried to get Flower to change the contract." Dissent op. at 168. But we are not the trial court, and this conclusion rests upon an opinion as to the credibility of a witness whom Judge Burke heard, and whom we have never seen. If Judge Burke had believed this parol evidence, it would have amounted to an admission regarding the construction of the contract by Gumina. Although this testimony was admitted, Judge Burke found, nevertheless, that the "piece" of document Flower received from Gumina later in March was "a copy of Article II of the subcontract, with additional explanatory language as a reminder of obligations Flower City had under its subcontract." Finding No. 14 [emphasis added]. One may assume, therefore, that, in reaching Finding No. 14, Judge Burke rejected Ellison's testimony to the contrary.

The judgment is affirmed.

OAKES, Circuit Judge (dissenting):

I respectfully dissent and would reverse the judgment.

It seems to me that we must construe the original contract against the general contractor who prepared it. To be sure, the parties based that contract on a proposal, which Flower submitted and Gumina accepted, stated precisely in the terms of the schedule attached to the contract. But Gumina [167] had indicated to Flower that the proposal was in the form necessary to win the bid; and it was important to Gumina for purposes of the affirmative action program required under HUD regulations, majority op. at 163, that Flower obtain the painting subcontract. As the majority notes, Schedule A does refer to the "painting of the above mentioned project in accordance with the painting specifications and plans for this project"; but it also specifically itemizes the work and the price in terms of the one, two, three, and four bedroom units, stating a price per unit, then the total price for each size apartment, and finally a grand total for all units of all sizes which equals the contract price of $98,499.84. To my mind this schedule means exactly that the painting envisioned under the contract included only the "units" themselves and that the exterior, the community building, and the interior halls were not included. Indeed there was evidence that when Flower submitted its proposal the interior halls were going to be brick and not painted at all.^[6]

The contract itself, consisting of a standard American Institute of Architects (AIA) Subcontract of seven printed pages which the parties had completed in full by typewriting and duly executed along with a typewritten two-page rider and the "Schedule A," refers to the scope of the work as follows in Article 2, entitled "The Work":

The Subcontractor shall furnish all labor, materials and equipment and shall perform all the Work . . . described in Schedule A attached hereto and made a part hereof as if fully set forth in this space.

The subcontractor further agrees that it will faithfully observe all requirements and conditions set forth by plans and specifications on file at the F.H.A. Office in Buffalo, N.Y. and identified as F.H.A. Project No. 014-44028-NP-R-SUP.

Thus, it is Schedule A itself, duly quoted in the majority opinion at 163 and not repeated here, that sets forth the scope of the work. To be sure, in the second paragraph of Article 2, the subcontractor specifically agreed to observe "all requirements and conditions set forth by plans and specifications on file." But it does not seem to me that those words can be construed to cover work other than that specified in Schedule A, the incorporated description of the work under the contract. The subcontractor, Flower, promised to observe the "requirements and conditions" set forth in the plans and specifications, including the general conditions and standards and the modifications and supplements thereto as well as the requirements and conditions in the painting specifications as to quality and type of paint, method of application, and the like. I do not see, however, that any of these requirements and conditions adds to the scope of the painting work to be done.

The majority relies on the introductory clause in Schedule A reading, "The painting of the above mentioned project in accordance with the painting specifications and plans for this project." But the particular governs the general, and immediately below the quoted caption the schedule lists the per unit figures for the different size apartments and sets out a total price for size representing the price for the total number of units of each size. Moreover, the introductory clause in Schedule A does not say "all painting in the above mentioned project"; it says "the painting of the above mentioned project."

The majority suggests that had Flower examined Defendant's Exhibit 5, the prime contract with the cost breakdown for each type of labor and materials, which indicates a total painting cost of $101,000, Flower would have known that Gumina would require the painting of the exterior work, interior hallways, and the community building in addition to the units themselves for [168] less than $101,000 and that given Flower's contract for $98,499.84, the contractor would go over his projection for painting costs unless Flower did all the painting. I do not think, however, that we can hold the subcontractor to this kind of knowledge simply because the prime contract was on file. A contractor can over- or underestimate a particular portion of the work, and here Flower followed Gumina's own suggestions as to price, proposal format, and scope of work.

If there were any doubt as to the meaning of the subcontract — and it seems to me there cannot be because of the undisputed evidence that the general contractor, Gumina, drew the contract and that Flower submitted the proposal precisely in the terms of Schedule A at Gumina's specific request — the subsequent conduct of the parties is quite compelling.^[7] Gumina's field superintendent, Brian Smith, asked Flower's president and general superintendent, Michael Ellison, to bring a copy of the contract "over to the job site." He then "informed [Ellison] that since we had signed the contract, there had been some changes and he needed to get [Ellison's] copy of [the] contract so that he could add a piece of contract document to [the contract]."^[8] That "piece of contract document" was a new AIA subcontract page covering Articles 1-4 inclusive and redefining the scope of the work by a "further understanding," namely that all exterior work and the community building were included (at the original price).^[9] Smith told Ellison "that he didn't think the exteriors or the common interior hallways were included" and that he thought that Ellison "ought to amend the contract."^[10] Clearly, Gumina made an initial mistake and then tried to get Flower to change the contract. There had been a meeting of the minds on the terms of the contract as stated in Schedule A; but one party, the one in the more favorable bargaining position and the one which had drawn the contract, had made a unilateral mistake. It does not need citation of authority to suggest that this kind of mistake does not permit repudiation, rescission, or modification of the contract.

In short, I believe that Gumina entered into and breached a valid, enforceable contract with Flower and that the case should be remanded for the ascertainment of damages.^[11]

[1]The jurisdictional basis for consideration of this suit was not discussed below. The complaint asserted federal question jurisdiction only under 28 U.S.C. § 1343 with regard to claims under 42 U.S.C. §§ 1981 and 1983 and Title VI of the Civil Rights Act of 1964, but the District Judge's findings make it evident that there is actual diversity of citizenship as well as the requisite jurisdictional amount.

The trial court did not make any specific rulings with respect to plaintiff's civil rights claims, which do not appear to have entered into the trial. On this appeal, plaintiff argues that the trial judge denied it the opportunity to present evidence on the discrimination issue. The record reveals no effort to present such a case. The contention that the trial judge was unfair is without merit. We do not consider the appropriateness of the statutory provisions the plaintiff invokes as a basis for its discrimination cause of action.

[2] There is some indication that this opening salvo was preceded by discussion. See infra.

[3] The extra work was estimated to cost an additional $14,545.17, about 15 percent of the subcontract price.

[4] We do note, however, that Flower's people expected to make a profit of about $60,000 on this $98,000 contract, which may be some indication that their view of the scope of the work was unrealistic.

[5] There is an even earlier case in which the problem was considered at some length by Justice Story sitting as Circuit Justice. In Hazard v. New England Marine Ins. Co., 11 Fed.Cases 934 (C.C.D.Mass.1832) (No. 6,282), the question arose as to whether the term "coppered ship" in a marine insurance contract was to be understood according to the usage in the shipowner's home port of New York or according to usage in the underwriters' city of Boston: the underwriters, defending a suit on the contract, maintained that the plaintiff had not provided a coppered ship as promised, while the plaintiff argued that the ship was coppered as he understood it. At one point in Justice Story's instructions to the jury, he charged that if the plaintiff and the underwriters had differing understandings of the term "coppered" and if neither had cause to know of the other's understanding, then no contract should be deemed formed because there was mutual mistake. Id.at 936-37.

On appeal, the judgment for the underwriters was reversed. Hazard's Admin. v. Marine Insurance Co., 33 U.S. (8 Pet.) 557 (1834). The Supreme Court reasoned that underwriters should be presumed to be aware of the usages of their clients as a matter of their business. The "meeting of the minds" question was not extensively considered in the reported oral argument; the participants viewed the real choice to be between accepting the shipowner's or the underwriters' interpretations and enforcing the contract one way or another.

[6]Michael Ellison, president and general superintendent of Flower, testified on cross-examination as follows:

The General Contractor informed us what had to be painted on the Fight Village project, because the preliminary specs were not complete. So he told me the public hallways there were going to be brick, so it was to my understanding from the General Contractor that was not going to be painted.

[7] The majority opinion says simply that nearly one year after Flower entered into the subcontract it asserted in a letter of March 18, 1974, that the contract required interior painting only. This recitation of the events omits the testimony referred to in text in this opinion immediately infra;it also omits the following testimony:

A. After we received the copy of the contract back from the General Contractor, it must have been about a month or so later we received a letter from the General Contractor asking us to post a performance and payment bond. And our contract bid proposal was stated, "No bond or union required."

. . . . .

Q. Did you submit a performance bond?

A. No, I didn't.

Q. Did you submit any other instruments?

A. Yes. What we did, we turned it over to our attorney, and he wrote the General Contractor a letter.

Q. Then what happened?

A. We heard nothing else from the General Contractor.

(Testimony of Michael Ellison.)

[8] This was the undisputed testimony of Mr. Ellison. Gumina never called its field superintendent, Mr. Smith, to testify.

[9] I note that even the addition to the contract does not mention the interior hallways.

[10]As Flower was subsequently to write Gumina, on April 11, 1974 (Ex. 8):

In respond [sic] to your letter dated March 4, 1974, wherein you stated that we proposed additional cost for items already agreed upon in our formal contract, there must be a lack in communication between your field office and your home office. Mr. Bryant [sic] Smith advised our company to submit a price for the items that were not a part of our original contract. We have met three or four times to discuss these matters. Mr Bryant Smith gave us a set of plans, in order that we might apply cost to these additions.

[11]I agree with the majority on the argument pertaining to custom in the trade. If the contract were really ambiguous such evidence might be admissible generally, but it would not be admissible against Flower in this case.

The trial judge made a number of findings pertaining to damages; but these do not in my view support his conclusion, among others, that Flower "failed to establish a rational basis for its assertion of lost profit and failed to prove prospective lost profits with reasonable particularity and certainty." Flower City Painting Contractors, Inc. v. Gumina Constr. Co., Civ.No.74-552, at 9 (W.D.N.Y. Feb. 16, 1978). The evidence was somewhat vague and conclusory but, with all respect, not so uncertain in my view as to require dismissal of the case.

[507] Before WRIGHT, P.J., WATKINS, JACOBS, HOFFMAN, SPAULDING, CERCONE, and PACKEL, JJ.

George F. Taylor, and Tucker, Arensberg & Ferguson, for appellant.

John K. Tabor, Donald E. Seymour, and Kirkpatrick, Lockhart, Johnson & Hutchison, for appellee.

OPINION BY HOFFMAN, J., March 27, 1973:

The appellant contends that the trial court erred in granting a compulsory nonsuit as to his contractual counterclaim. The existence of a contract in this case depends on (1) whether the oral offer here necessarily terminated at the end of a telephone conversation, or, (2) if it did, whether there was a counteroffer made and accepted.

The facts as set forth in the appellant's case are as follows: The appellee, a fabricator of steel and wire products, orally offered the appellant, a steel broker, a specified quantity of two different sizes of steel rods at specified prices. The appellant responded that he thought he wanted the rods but he wanted to check [508] with his customers. Some five weeks later the appellant called the appellee and agreed to buy one size of rods and then two days later agreed to purchase the other size at the prices originally discussed. The appellee replied "Fine, Thank you" to both phone calls.

The trial judge based his decision on the rule set forth in Boyd v. Merchants and Farmers Peanut Co., 25 Pa. Superior Ct. 199 (1904) that an oral offer ordinarily terminates with the end of the conversation. The dictum in Boyd, however, does not preclude the possibility that in some cases an oral offer does continue past the conversation. The general rule is that:

"(1) The power to create a contract by acceptance of an offer terminates at the time specified in the offer, or, if no time is specified, at the end of a reasonable time.

"(2) What is a reasonable time is a question of fact, depending on the nature of the contract proposed, the usages of business and other circumstances of the case which the offeree at the time of his acceptance either knows or has reason to know." Restatement of Contracts, § 40. (Emphasis added). Pennsylvania has adopted the similar general terminology of the Uniform Commercial Code, Act of October 2, 1959, P.L. 1023, § 2, 12A P.S. § 2-206(1) (a). See infra.

There may be times when a judge could find as a matter of law that an oral offer made in the course of a conversation terminates with the end of the conversation. If there is any doubt as to what is a reasonable interpretation, the decision should be left to the jury. In this case, the appellant had informed the appellee that he wanted time to contact some customers before accepting the offer, which was only natural for a steel broker. Under the circumstances, it is possible that a jury could have found that the oral offer continued beyond the end of the conversation.

[509] We need not, however, decide this appeal on that issue. Even if the original offer by appellee had lapsed, a jury could find that the required elements of offer and acceptance were present in appellant's two subsequent telephone conversations with appellee and that a contract therefore existed. If appellee's original offer lapsed, appellant's telephone calls agreeing to purchase the specific size and quantity of rods they had previously discussed, at a price also previously agreed upon, constituted new offers. Appellee's response, including the statement, "Fine, Thank you", indicated an acceptance of these offers. As the U.C.C. indicates: "Unless otherwise unambiguously indicated by the language or circumstances (a) an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances; . . . ." Act of October 2, 1959, P.L. 1023, § 2, 12A P.S. § 2-206 (1) (a). Here, appellee accepted in the same manner and medium and during the same conversation in which appellant's offers were made.

Viewing appellant's case in the light most favorable to him, there was sufficient evidence supporting his contractural counterclaim to go to the jury.

The order of the court below is reversed and the case remanded for a new trial.

Walter H. Linforth, Wm. M. Cannon and John L. McVey for Appellants.

Marshall Rutherford, Fitzgerald, Abbott & Beardsley, Calkins, Hagar, Hall & Linforth, Goudge, Robinson & Hughes, Chapman, Trefethen, Richards & Chapman and Cormac & Bolles for Respondents. [372]

THE COURT.

Plaintiffs appeal from a judgment refusing to grant specific performance of an alleged contract to make a will. The facts are not in dispute and are as follows:

The plaintiff Caro M. Davis was the niece of Blanche Whitehead who was married to Rupert Whitehead. Prior to her marriage in 1913 to her coplaintiff Frank M. Davis, Caro lived for a considerable time at the home of the Whiteheads, in Piedmont, California. The Whiteheads were childless and extremely fond of Caro. The record is replete with uncontradicted testimony of the close and loving relationship that existed between Caro and her aunt and uncle. During the period that Caro lived with the Whiteheads she was treated as and often referred to by the Whiteheads as their daughter. In 1913, when Caro was married to Frank Davis the marriage was arranged at the Whitehead home and a reception held there. After the marriage Mr. and Mrs. Davis went to Mr. Davis' home in Canada, where they have resided ever since. During the period 1913 to 1931 Caro made many visits to the Whiteheads, several of them being of long duration. The Whiteheads visited Mr. and Mrs. Davis in Canada on several occasions. After the marriage and continuing down to 1931 the closest and most friendly relationship at all times existed between these two families. They corresponded frequently, the record being replete with letters showing the loving relationship.

By the year 1930 Mrs. Whitehead had become seriously ill. She had suffered several strokes and her mind was failing. Early in 1931 Mr. Whitehead had her removed to a private hospital. The doctors in attendance had informed him that she might die at any time or she might linger for many months. Mr. Whitehead had suffered severe financial reverses. He had had several sieges of sickness and was in poor health. The record shows that during the early part of 1931 he was desperately in need of assistance with his wife, and in his business affairs, and that he did not trust his friends in Piedmont. On March 18, 1931, he wrote to Mrs. Davis telling her of Mrs. Whitehead's condition and added that Mrs. Whitehead was very wistful. "Today I endeavored to find out what she wanted. I finally asked her if she wanted to see you. She burst out crying and we had great difficulty in getting her to stop. [373] Evidently, that is what is on her mind. It is a very difficult matter to decide. If you come it will mean that you will have to leave again, and then things may be serious. I am going to see the doctor, and get his candid opinion and will then write you again. ... Since writing the above, I have seen the doctor, and he thinks it will help considerably if you come." Shortly thereafter, Mr. Whitehead wrote to Caro Davis further explaining the physical condition of Mrs. Whitehead and himself. On March 24, 1931, Mr. Davis, at the request of his wife, telegraphed to Mr. Whitehead as follows: "Your letter received. Sorry to hear Blanche not so well. Hope you are feeling better yourself. If you wish Caro to go to you can arrange for her to leave in about two weeks. Please wire me if you think it advisable for her to go." On March 30, 1931, Mr. Whitehead wrote a long letter to Mr. Davis, in which he explained in detail the condition of Mrs. Whitehead's health and also referred to his own health. He pointed out that he had lost a considerable portion of his cash assets but still owned considerable realty, that he needed someone to help him with his wife and some friend he could trust to help him with his business affairs and suggested that perhaps Mr. Davis might come to California. He then pointed out that all his property was community property; that under his will all the property was to go to Mrs. Whitehead; that he believed that under Mrs. Whitehead's will practically everything was to go to Caro. Mr. Whitehead again wrote to Mr. Davis under date of April 9, 1931, pointing out how badly he needed someone he could trust to assist him, and giving it as his belief that if properly handled he could still save about $150,000. He then stated: "Having you [Mr. Davis] here to depend on and to help me regain my mind and courage would be a big thing." Three days later, on April 12, 1931, Mr. Whitehead again wrote, addressing his letter to "Dear Frank and Caro", and in this letter made the definite offer, which offer it is claimed was accepted and is the basis of this action. In this letter he first pointed out that Blanche, his wife, was in a private hospital and that "she cannot last much longer ... my affairs are not as bad as I supposed at first. Cutting everything down I figure 150,000 can be saved from the wreck." He then enumerated the values placed upon his various properties and then [374] continued

My trouble was caused by my friends taking advantage of my illness and my position to skin me.

Now if Frank could come out here and be with me, and look after my affairs, we could easily save the balance I mentioned, provided I dont get into another panic and do some more foolish things.

The next attack will be my end, I am 65 and my health has been bad for years, so, the Drs. dont give me much longer to live. So if you can come, Caro will inherit everything and you will make our lives happier and see Blanche is provided for to the end.

My eyesight has gone back on me, I cant read only for a few lines at a time. I am at the house alone with Stanley [the chauffeur] who does everything for me and is a fine fellow. Now, what I want is some one who will take charge of my affairs and see I dont lose any more. Frank can do it, if he will and cut out the booze.

Will you let me hear from you as soon as possible, I know it will be a sacrifice but times are still bad and likely to be, so by settling down you can help me and Blanche and gain in the end. If I had you here my mind would get better and my courage return, and we could work things out.

This letter was received by Mr. Davis at his office in Windsor, Canada, about 9:30 A. M. April 14, 1931. After reading the letter to Mrs. Davis over the telephone, and after getting her belief that they must go to California, Mr. Davis immediately wrote Mr. Whitehead a letter, which, after reading it to his wife, he sent by air mail. This letter was lost, but there is no doubt that it was sent by Davis and received by Whitehead, in fact the trial court expressly so found. Mr. Davis testified in substance as to the contents of this letter. After acknowledging receipt of the letter of April 12, 1931, Mr. Davis unequivocally stated that he and Mrs. Davis accepted the proposition of Mr. Whitehead and both would leave Windsor to go to him on April 25th. This letter of acceptance also contained the information that the reason they could not leave prior to April 25th was that Mr. Davis had to appear in court on April 22d as one of the executors of his mother's estate. The testimony is uncontradicted and ample to support the trial court's finding that this letter was sent [375] by Davis and received by Whitehead. In fact under date of April 15, 1931, Mr. Whitehead again wrote to Mr. Davis and stated

Your letter by air mail received this a. m. Now, I am wondering if I have put you to unnecessary trouble and expense, if you are making any money dont leave it, as things are bad here. ... You know your business and I dont and I am half crazy in the bargain, but I dont want to hurt you or Caro.

Then on the other hand if I could get some one to trust and keep me straight I can save a good deal, about what I told you in my former letter.

This letter was received by Mr. Davis on April 17, 1931, and the same day Mr. Davis telegraphed to Mr. Whitehead "Cheer up—we will soon be there, we will wire you from the train."

Between April 14, 1931, the date the letter of acceptance was sent by Mr. Davis, and April 22d, Mr. Davis was engaged in closing out his business affairs, and Mrs. Davis in closing up their home and in making other arrangements to leave. On April 22, 1931, Mr. Whitehead committed suicide. Mr. and Mrs. Davis were immediately notified and they at once came to California. From almost the moment of her arrival Mrs. Davis devoted herself to the care and comfort of her aunt, and gave her aunt constant attention and care until Mrs. Whitehead's death on May 30, 1931. On this point the trial court found:

From the time of their arrival in Piedmont, Caro M. Davis administered in every way to the comforts of Blanche Whitehead and saw that she was cared for and provided for down to the time of the death of Blanche Whitehead on May 30, 1931; during said time Caro M. Davis nursed Blanche Whitehead, cared for her and administered to her wants as a natural daughter would have done toward and for her mother.

This finding is supported by uncontradicted evidence and in fact is conceded by respondents to be correct. In fact the record shows that after their arrival in California Mr. and Mrs. Davis fully performed their side of the agreement.

After the death of Mrs. Whitehead, for the first time it was discovered that the information contained in Mr. Whitehead's letter of March 30, 1931, in reference to the contents of his and Mrs. Whitehead's wills was incorrect. By a duly witnessed will dated February 28, 1931, Mr. Whitehead, [376] after making several specific bequests, had bequeathed all of the balance of his estate to his wife for life, and upon her death to respondents Geoff Doubble and Rupert Ross Whitehead, his nephews. Neither appellant was mentioned in his will. It was also discovered that Mrs. Whitehead by a will dated December 17, 1927, had devised all of her estate to her husband. The evidence is clear and uncontradicted that the relationship existing between Whitehead and his two nephews, respondents herein, was not nearly as close and confidential as that existing between Whitehead and appellants.

After the discovery of the manner in which the property had been devised was made, this action was commenced upon the theory that Rupert Whitehead had assumed a contractual obligation to make a will whereby "Caro Davis would inherit everything"; that he had failed to do so; that plaintiffs had fully performed their part of the contract; that damages being insufficient, quasi specific performance should be granted in order to remedy the alleged wrong, upon the equitable principle that equity regards that done which ought to have been done. The requested relief is that the beneficiaries under the will of Rupert Whitehead, respondents herein, be declared to be involuntary trustees for plaintiffs of Whitehead's estate.

It should also be added that the evidence shows that as a result of Frank Davis leaving his business in Canada he forfeited not only all insurance business he might have written if he had remained, but also forfeited all renewal commissions earned on past business. According to his testimony this loss was over $8,000.

The trial court found that the relationship between Mr. and Mrs. Davis and the Whiteheads was substantially as above recounted and that the other facts above stated were true; that prior to April 12, 1931, Rupert Whitehead had suffered business reverses and was depressed in mind and ill in body; that his wife was very ill; that because of his mental condition he "was unable to properly care for or look after his property or affairs"; that on April 12, 1931, Rupert Whitehead in writing made an offer to plaintiffs that, if within a reasonable time thereafter plaintiffs would leave and abandon their said home in Windsor, and if Frank M. Davis would abandon or dispose of his said [377] business, and if both the plaintiffs would come to Piedmont in the said county of Alameda where Rupert Whitehead then resided and thereafter reside at said place and be with or near him, and, if Frank M. Davis would thereupon and thereafter look after the business and affairs of said Rupert Whitehead until his condition improved to such an extent as to permit him so to do, and if the plaintiffs would look after and administer to the comforts of Blanche Whitehead and see that she was properly cared for until the time of her death, that, in consideration thereof, Caro M. Davis would inherit everything that Rupert Whitehead possessed at the time of his death and that by last will and testament Rupert Whitehead would devise and bequeath to Caro M. Davis all property and estate owned by him at the time of his death, other than the property constituting the community interest of Blanche Whitehead; that shortly prior to April 12, 1931, Rupert Whitehead informed plaintiffs of the supposed terms of his will and the will of Mrs. Whitehead. The court then finds that the offer of April 12th was not accepted. As already stated, the court found that plaintiffs sent a letter to Rupert Whitehead on April 14th purporting to accept the offer of April 12th, and also found that this letter was received by the Whiteheads, but finds that in fact such letter was not a legal acceptance. The court also found that the offer of April 12th was "fair and just and reasonable, and the consideration therefor, namely, the performance by plaintiffs of the terms and conditions thereof, if the same had been performed, would have been an adequate consideration for said offer and for the agreement that would have resulted from such performance; said offer was not, and said agreement would not have been, either harsh or oppressive or unjust to the heirs at law, or devisees, or legatees, of Rupert Whitehead, or to each or any of them, or otherwise".

The court also found that plaintiffs did not know that the statements made by Whitehead in reference to the wills were not correct until after Mrs. Whitehead's death, that after plaintiffs arrived in Piedmont they cared for Mrs. Whitehead until her death and "Blanche Whitehead was greatly comforted by the presence, companionship and association of Caro M. Davis, and by her administering to her wants". [378]

The theory of the trial court and of respondents on this appeal is that the letter of April 12th was an offer to contract, but that such offer could only be accepted by performance and could not be accepted by a promise to perform, and that said offer was revoked by the death of Mr. Whitehead before performance. In other words, it is contended that the offer was an offer to enter into a unilateral contract, and that the purported acceptance of April 14th was of no legal effect.

[1] The distinction between unilateral and bilateral contracts is well settled in the law. It is well stated in section 12 of the American Institute's Restatement of the Law of Contracts as follows: "A unilateral contract is one in which no promisor receives a promise as consideration for his promise. A bilateral contract is one in which there are mutual promises between two parties to the contract; each party being both a promisor and a promisee." This definition is in accord with the law of California. (Christman v. Southern Cal. Edison Co., 83 Cal.App. 249 [256 P. 618].)

In the case of unilateral contracts no notice of acceptance by performance is required. Section 1584 of the Civil Code provides, "Performance of the conditions of a proposal, ... is an acceptance of the proposal." (See Cuthill v. Peabody, 19 Cal.App. 304 [125 P. 926]; Los Angeles Traction Co. v. Wilshire, 135 Cal. 654 [67 P. 1086].)

[2] Although the legal distinction between unilateral and bilateral contracts is thus well settled, the difficulty in any particular case is to determine whether the particular offer is one to enter into a bilateral or unilateral contract. Some cases are quite clear cut. Thus an offer to sell which is accepted is clearly a bilateral contract, while an offer of a reward is a clear-cut offer of a unilateral contract which cannot be accepted by a promise to perform, but only by performance. (Berthiaume v. Doe, 22 Cal.App. 78 [133 P. 515].) Between these two extremes is a vague field where the particular contract may be unilateral or bilateral depending upon the intent of the offerer and the facts and circumstances of each case. The offer to contract involved in this case falls within this [379] category. By the provisions of the Restatement of the Law of Contracts it is expressly provided that there is a presumption that the offer is to enter into a bilateral contract. Section 31 provides:

In case of doubt it is presumed that an offer invites the formation of a bilateral contract by an acceptance amounting in effect to a promise by the offeree to perform what the offer requests, rather than the formation of one or more unilateral contracts by actual performance on the part of the offeree.

Professor Williston in his Treatise on Contracts, volume 1, section 60, also takes the position that a presumption in favor of bilateral contracts exists.

In the comment following section 31 of the Restatement the reason for such presumption is stated as follows: "It is not always easy to determine whether an offerer requests an act or a promise to do the act. As a bilateral contract immediately and fully protects both parties, the interpretation is favored that a bilateral contract is proposed."

While the California cases have never expressly held that a presumption in favor of bilateral contracts exists, the cases clearly indicate a tendency to treat offers as offers of bilateral rather than of unilateral contracts. (Roth v. Moeller, 185 Cal. 415 [197 P. 62]; Boehm v. Spreckels, 183 Cal. 239 [191 P. 5]; see, also, Wood v. Lucy, Lady Duff- Gordon, 222 N.Y. 88 [118 N.E. 214].)

[3] Keeping these principles in mind we are of the opinion that the offer of April 12th was an offer to enter into a bilateral as distinguished from a unilateral contract. Respondents argue that Mr. Whitehead had the right as offerer to designate his offer as either unilateral or bilateral. That is undoubtedly the law. It is then argued that from all the facts and circumstances it must be implied that what Whitehead wanted was performance and not a mere promise to perform. We think this is a non sequitur, in fact the surrounding circumstances lead to just the opposite conclusion. These parties were not dealing at arm's length. Not only were they related, but a very close and intimate friendship existed between them. The record indisputably demonstrates that Mr. Whitehead had confidence in Mr. and Mrs. Davis, in fact that he had lost all confidence in [380] everyone else. The record amply shows that by an accumulation of occurrences Mr. Whitehead had become desperate, and that what he wanted was the promise of appellants that he could look to them for assistance. He knew from his past relationship with appellants that if they gave their promise to perform he could rely upon them. The correspondence between them indicates how desperately he desired this assurance. Under these circumstances he wrote his offer of April 12th, above quoted, in which he stated, after disclosing his desperate mental and physical condition, and after setting forth the terms of his offer: "Will you let me hear from you as soon as possible—I know it will be a sacrifice but times are still bad and likely to be, so by settling down you can help me and Blanche and gain in the end." By thus specifically requesting an immediate reply Whitehead expressly indicated the nature of the acceptance desired by him—namely, appellants' promise that they would come to California and do the things requested by him. This promise was immediately sent by appellants upon receipt of the offer, and was received by Whitehead. It is elementary that when an offer has indicated the mode and means of acceptance, an acceptance in accordance with that mode or means is binding on the offerer.

Another factor which indicates that Whitehead must have contemplated a bilateral rather than a unilateral contract, is that the contract required Mr. and Mrs. Davis to perform services until the death of both Mr. and Mrs. Whitehead. It is obvious that if Mr. Whitehead died first some of these services were to be performed after his death, so that he would have to rely on the promise of appellants to perform these services. It is also of some evidentiary force that Whitehead received the letter of acceptance and acquiesced in that means of acceptance.

Shaw v. King, 63 Cal.App. 18 [218 P. 50], relied on by respondents is clearly not in point. In that case there was no written acceptance, nor was there an acceptance by partial or total performance.

[4] For the foregoing reasons we are of the opinion that the offer of April 12, 1931, was an offer to enter into a bilateral contract which was accepted by the letter of April 14, 1931. Subsequently appellants fully performed [381] their part of the contract. Under such circumstances it is well settled that damages are insufficient and specific performance will be granted. (Wolf v. Donahue, 206 Cal. 213 [273 P. 547].) Since the consideration has been fully rendered by appellants the question as to mutuality of remedy becomes of no importance. (6 Cal.Jur., sec. 140.)

[5] Respondents also contend the complaint definitely binds appellants to the theory of a unilateral contract. This contention is without merit. The complaint expressly alleges the parties entered into a contract. It is true that the complaint also alleged that the contract became effective by performance. However, this is an action in equity. Respondents were not misled. No objection was made to the testimony offered to show the acceptance of April 14th. A fair reading of the record clearly indicates the case was tried by the parties on the theory that the sole question was whether there was a contract—unilateral or bilateral.

For the foregoing reasons the judgment appealed from is reversed.

Vendor and Purchaser—Contract—Specific Performance—Offer to sell—Withdrawal before Acceptance—Sale to another Person—Notice.

An offer to sell property may be withdrawn before acceptance without any formal notice to the person to whom the offer is made. It is sufficient if that person has actual knowledge that the person who made the offer has done some act inconsistent with the continuance of the offer, such as selling the property to a third person.

Semble, that the sale of the property to a third person would of itself amount to a withdrawal of the offer, even although the person to whom the offer was first made had no knowledge of the sale.

Semble, that the acceptance of an offer to sell constitutes a contract for sale only as from the time of the acceptance. The contract does not relate back to the time when the offer was made.

The owner of property signed a document which purported to be an agreement to sell it at a price fixed. But a post script was added, which he also signed—"This offer to be left over until Friday 9 A.M.":—

Held, that the document amounted only to an offer, which might be withdrawn at any time before acceptance, and that a sale to a third person which came to the knowledge of the person to whom the offer was made was an effectual withdrawal of the offer.

Decision of Bacon, V.C., reversed.

On Wednesday, the 10th of June, 1874, the Defendant John Dodds signed and delivered to the Plaintiff, George Dickinson, a memorandum, of which the material part was as follows:—

[464] I hereby agree to sell to Mr. George Dickinson the whole of the dwelling-houses, garden ground, stabling, and outbuildings thereto belonging, situate at Croft, belonging to me, for the sum of £800. As witness my hand this tenth day of June, 1874.

£800. (Signed) John Dodds.

P .S.—This offer to be left over until Friday, 9 o'clock, A.M. J. D. (the twelfth), 12th June, 1874.

(Signed) J. Dodds.

The bill alleged that Dodds understood and intended that the Plaintiff should have until Friday 9 A.M within which to determine whether he would or would not purchase, and that he should absolutely have until that time the refusal of the property at the price of £800, and that the Plaintiff in fact determined to accept the offer on the morning of Thursday, the 11th of June, but did not at once signify his acceptance to Dodds, believing that he had the power to accept it until 9 A.M. on the Friday.

In the afternoon of the Thursday the Plaintiff was informed by a Mr. Berry that Dodds had been offering or agreeing to sell the property to Thomas Allan, the other Defendant. Thereupon the Plaintiff, at about half-past seven in the evening, went to the house of Mrs. Burgess, the mother-in-law of Dodds, where he was then staying, and left with her a formal acceptance in writing of the offer to sell the property. According to the evidence of Mrs. Burgess this document never in fact reached Dodds, she having forgotten to give it to him.

On the following (Friday) morning, at about seven o'clock, Berry, who was acting as agent for Dickinson, found Dodds at the Darlington railway station, and handed to him a duplicate of the acceptance by Dickinson, and explained to Dodds its purport. He replied that it was too late, as he had sold the property. A few minutes later Dickinson himself found Dodds entering a railway carriage, and handed him another duplicate of the notice of acceptance, but Dodds declined to receive it, saying, "You are too late. I have sold the property."

It appeared that on the day before, Thursday, the 11th of June, Dodds had signed a formal contract for the sale of the property to the Defendant Allan for £800, and had received from him a deposit of £40.

[465] The bill in this suit prayed that 'the Defendant Dodds might be decreed specifically to perform the contract of the 10th of June, 1874; that he might be restrained from conveying the property to Allan; that Allan might be restrained from taking any such conveyance; that, if any such conveyance had been or should be made, Allan might be declared a trustee of the property for, and might be directed to convey the property to, the Plaintiff; and for damages.

The cause came on for hearing before Vice-Chancellor Bacon on the 25th of January, 1876.

Kay, Q.C., and Caldecott, for the Plaintiff:—

The memorandum of the 10th of June, 1874, being in writing, satisfies the Statute of Frauds. Though signed by the vendor only, it is effectual as an agreement to sell the property.

Supposing it to have been an offer only, an offer, if accepted before it is withdrawn, becomes, upon acceptance, a binding agreement. Even if signed by the person only who is sought to be charged, a proposal, if accepted by the other party, is within the statute: Reuss v. Picksley^[1], following Warner v. Willington^[2].

In Kennedy V. Lee^[3] Lord Eldon states the law to be, that "if a person communicates his acceptance of an offer within a reasonable time after the offer being made, and if, within a reasonable time of the acceptance being communicated, no variation has been made by either party in the terms of the offer so made and accepted, the acceptance must be taken as simultaneous with the offer, and both together as constituting such an agreement as the Court will execute." So that, not only is a parol acceptance sufficient, but such an acceptance relates back to the date of the offer. This is further shewn by Adams v. Lindsell^[4], where an offer of sale was made by letter to the Plaintiffs" on receiving their answer in course of post." The letter was misdirected, and did not reach the Plaintiffs until two days after it ought to have reached them. The Plaintiffs, immediately on receiving the letter, wrote an answer accepting; and it was held that they were entitled to the benefit of the contract.

[466] The ruling in Adams v. Lindsell^[5] was approved by the House of Lords in Dunlop v. Higgins^[6], as appears from the judgment of Sir G. Mellish, L.J., in Harris' Case^[7]; and it is now settled that a contract which can be accepted by letter is complete when a letter containing such acceptance has been posted. The leaving by the Plaintiff of the notice at Dodds' residence was equivalent to the delivery of a letter by a postman.

That Allan is a necessary party appears from Potter v. Sanders^[8]; and if Allan has had a conveyance of the legal estate, the Court will decree specific performance against him.

Swanston, Q.C., and Crossley, for the Defendant Dodds:—

The bill puts the case no higher than that of an offer. Taking the memorandum of the 10th of June, 1874, as an offer only, it is well established that, until acceptance, either party may retract; Cooke v. Oxley^[9]; Benjamin on Sales^[10]. After Dodds had retracted by selling to Allan, the offer ,vas no longer open. Having an option to retract, he exercised that option: Humphries v. Carvalho^[11]; Pollock on Contracts^[12]; Routledge v. Grant^[13].

In delivering judgment in Martin v. Mitchell^[14], Sir T. Plumer, M.R., put the case of a contract signed by one party only. He asked^[15], "What mutuality is there, if the one is at liberty to renounce the contract, and the other not?" and in Meynell v. Surtees^[16], the distinctions between an offer and an agreement in respect of binding land were pointed out: Fry on Specific Performance^[17].

The postscript being merely voluntary, without consideration, is nudum pactum; and the memorandum may be read as if it contained no postscript.

Jackson, Q.C., and Gazdar, for the Defendant Allan:—

Allan is an unnecessary party. If Dodds has not made a valid [467] contract with the Plaintiff, he is a trustee for Allan; if Dodds has made a binding contract, rights arise between Allan and Dodds which are not now in controversy.

We agree with the co-Defendant that, in order that the Plaintiff may have a locus standi, there must have been a contract. If the postscript is a modification of the offer, it is nudum pactum, and may be rejected.

It may be conceded that if there had been an acceptance, it would have related back in point of date to the offer. But there was no acceptance. Notice of acceptance served on Mrs. Burgess was not enough.

Even if it would have been otherwise sufficient, here it was too late. Dodds had no property left to contract for. The property had ceased to be his. He had retracted his offer; and the property had become vested in some one else: Hebb's Case^[18]. The Plaintiff would not have delivered the notice if he had not heard of the negotiation between Dodds and Allan. What retraciation could be more effectual than a sale of the property to some one else?

The Defendant Allan was a bona fide purchaser without notice.

Kay, in reply:—

The true meaning of the document was a sale. The expression is not “open," but "over." The only liberty to be allowed by that was a liberty for the Plaintiff to retract.

But, taking it as an offer, the meaning was, that at any day or hour within the interval named, the Plaintiff had a right to indicate to the Defendant his acceptance, and from that moment the Defendant would have had no right of retractation. Then, was there a retractation before acceptance? To be a retractation, there must be a notification to the other party. A pure resolve within the recesses of the vendor's own mind is not sufficient. There was no communication to the Plaintiff. He accepted on two several occasions. There could have been no parting with the property without communication with him. He was told that the offer was to be left over.

The grounds of the decision in Cooke v. Oxley^[19] have been [468] abundantly explained by Mr. Benjamin in his work on Sales. It was decided simply on a point of pleading.

BACON, V.C., after remarking that the case involved no question of unfairness or inequality, and after stating the terms of the document of the 10th of June, 1874, and the statement of the Defendant's case as given in his answer, continued:—

I consider that to be one agreement, and I think the terms of the agreement put an end to any question of nudum pactum. I think the inducement for the Plaintiff to enter into the contract was the Defendant's compliance with the Plaintiff's request that there should be some time allowed to him to determine whether he would accept it or not. But whether the letter is read with or without the postscript, it is, in my judgment, as plain and clear a contract for sale as can be expressed in words, one of the terms of that contract being that the Plaintiff shall not be called upon, to accept, or to testify his acceptance, until 9 o'clock on the morning of the 12th of June. I see, therefore, no reason why the Court should not enforce the specific performance of the contract, if it finds that all the conditions have been complied with.

Then what are the facts? It is clear that a plain, explicit acceptance of the contract was, on Thursday, the 11th of June, delivered by the Plaintiff at the place of abode of the Defendant, and ought to have come to his hands. Whether it came to his hands or not, the fact remains that, within the time limited, the Plaintiff did accept and testify his acceptance. From that moment the Plaintiff was bound, and the Defendant could at any time, notwithstanding Allan, have filed a bill against the Plaintiff for the specific performance of the contract which he had entered into, and which the Defendant had accepted.

I am at a loss to guess upon what ground it can be said that it is not a contract which the Court will enforce. It cannot be on the ground that the Defendant had entered into a contract with Allan, because, giving to the Defendant all the latitude which can be desired, admitting that he had the same time to change his mind as he, by the agreement, gave to the Plaintiff-the law, I take it, is clear on the authorities, that if a contract, unilateral in its [469] shape, is completed by the acceptance of the party on the other side, it becomes a perfectly valid and binding contract. It may be withdrawn from by one of the parties in the meantime, but, in order to be withdrawn from, information of that fact must be conveyed to the mind of the person who is to be affected by it. It will not do for the Defendant to say, "I made up my mind that I would withdraw, but I did not tell the Plaintiff; I did not say anything to the Plaintiff until after he had told me by a written notice and with a loud voice that he accepted the option which had been left to him by the agreement." In my opinion, after that hour on Friday, earlier than nine o'clock, when the Plaintiff and Defendant met, if not before, the contract was completed, and neither party could retire from it.

It is said that the authorities justify the Defendant's contention that he is not bound to perform this agreement, and the case of Cooke v. Oxley^[20] was referred to. But I find that the judgment in Cooke v. Oxley went solely upon the pleadings. It was a rule to shew cause why judgment should not be arrested, therefore it must have been upon the pleadings. Now, the pleadings were that the vendor in that case proposed to sell to the Defendant. There was no suggestion of any agreement which could be enforced. The Defendant proposed to the Plaintiff to sell and deliver, if the Plaintiff would agree to purchase upon the terms offered, and give notice at an earlier hour than four of the afternoon of that day; and the Plaintiff says he agreed to purchase, but does not say the Defendant agreed to sell. He agreed to purchase, and gave notice before four o'clock in the afternoon. Although the case is not so clearly and satisfactorily reported as might· be desired, it is only necessary to read the judgment to see that it proceeds solely upon this allegation in the pleadings. Mr. Justice Buller says, "As to the subsequent time, the promise can only be supported upon the ground of a new contract made at four o'clock; but there was no pretence for that." Nor was there the slightest allegation in the pleadings for that; and judgment was given against the Plaintiff.

Routledge v. Grant^[21] is plainly distinguishable from this case upon the grounds which have been mentioned. There the contract [470] was to sell on certain terms; possession to be given upon a particular day. Those terms were varied, and therefore no agreement was come to; and when the intended purchaser was willing to relinquish the condition which he imposed, the other said, "No, I withdraw; I have made up my mind not to sell to you;" and, the judgment of the Court was that he was perfectly right.

Then Warner v. Willington^[22] seems to point out the law in the clearest and most distinct manner possible. An offer was made-call it an agreement or offer, it is quite indifferent. It was so far an offer, that it was not to be binding unless there was an acceptance; and before acceptance was made, the offer was retracted, the agreement was rescinded, and the person who had then the character of vendor declined to go further with the arrangement, which had been begun by what had passed between them. In the present case I read the agreement as a positive engagement on the part of the Defendant Dodds that he will sell for £800, and, not a promise, but, an agreement, part of the same instrument, that the Plaintiff shall not be called upon to express his acquiescence in that agreement until Friday at nine o'clock. Before Friday at nine o'clock the Defendant receives notice of acceptance. Upon what ground can the Defendant now be let off his contract? It is said that Allan can sustain his agreement with the Defendant, because at the time when they entered into the contract the Defendant was possessed of the property, and the Plaintiff had nothing to do with it. But it would be opening the door to fraud of the most flagrant description if it was permitted to a Defendant, the owner of property, to enter into a binding contract to sell, and then sell it to somebody else and say that by the fact of such second sale he has deprived himself of the property which he has agreed to sell by the first contract. That is what Allan says in substance, for he says that the sale to him was a retractation which deprived Dodds of the equitable interest he had in the property, although the legal estate remained in him. But by the fact of the agreement, and by the relation back of the acceptance (for such I must hold to be the law) to the date of the agreement, the property in equity was the property of the Plaintiff, and Dodds had nothing to sell to Allan. The property [471] remained intact, unaffected by any contract with Allan, and there is no ground, in my opinion, for the contention that the contract with Allan can be supported. It would be doing violence to principles perfectly well known and often acted upon in this Court; I think the Plaintiff has made out very satisfactorily his title to a decree for specific performance, both as having the equitable interest, which he asserts is vested in him, and as being a purchaser of the property for valuable consideration without notice against both Dodds, the vendor, and Allan, who has entered into the contract with him.

There will be a decree for specific performance, with a declaration that Allan has no interest in the property; and the Plaintiff will be at liberty to deduct his costs of the suit out of his purchase-money. From this decision both the Defendants appealed, and the appeals were heard on the 31st of March and the 1st of April, 1876.

Swanston, Q.C. (Crossley with him) for the Defendant Dodds.

Sir H. Jackson, Q.C. (Gazdar with him), for the Defendant Allan.

Kay, Q.C., and Caldecott, for the Plaintiff.

The arguments amounted to a repetition of those before the Vice-Chancellor. In addition to the authorities then cited the following cases were referred to: Thornbury v. Bevill^[23]; Taylor v. Wakefield^[24]; Head v. Diggon^[25]; Palmer v. Soott^[26].

JAMES, L. J. after referring to the document of the 10th of June, 1874, continued:—

The document, though beginning "I hereby agree to sell," was nothing but an offer, and was only intended to be an offer, for the Plaintiff himself tells us that he required time to consider whether he would enter into an agreement or not. Unless both parties had then agreed there was no concluded agreement then made; it was [472] in effect and substance only an offer to sell. The Plaintiff, being minded not to complete the bargain at that time, added this memorandum—"This offer to be left over until Friday, 9 o'clock A.M., 12th June, 1874." That shews it was only an offer. There was no consideration given for the undertaking or promise, to whatever extent it may be considered binding, to keep the property unsold until 9 o'clock on Friday morning; but apparently Dickinson was of opinion, and probably Dodds was of the same opinion, that he (Dodds) was bound by that promise, and could not in any way withdraw from it, or retract it, until 9 o'clock on Friday morning, and this probably explains a good deal of what afterwards took place. But it is clear settled law, on one of the clearest principles of law, that this promise, being a mere nudum pactum, was not binding, and that at any moment before a comp1ete acceptance by Dickinson of the offer, Dodds was as free as Dickinson himself. Well, that being the state of things, it is said that the only mode in which Dodds could assert that freedom was by actually and distinctly saying to Dickinson, "Now I withdraw my offer." It appears to me that there is neither principle nor authority for the proposition that there must be an express and actual withdrawal of the offer, or what is called a retractation. It must, to constitute a contract, appear that the two minds were at one, at the same moment of time, that is, that there was an offer continuing up to the time of the acceptance. If there was not such a continuing offer, then the acceptance comes to nothing. Of course it may well be that the one man is bound in some way or other to let the other man know that his mind with regard to the offer has been changed; but in this case, beyond all question, the Plaintiff knew that Dodds was no longer minded to sell the property to him as plainly and clearly as if Dodds had told him in so many words, "I withdraw the offer." This is evident from the Plaintiff's own statements in the bill.

The Plaintiff says in effect that, having heard and knowing that Dodds was no longer minded to sell to him, and that he was selling or had sold to some one else, thinking that he could not in point of law withdraw his offer, meaning to fix him to it, and endeavouring to bind him, "I went to the house where he was lodging, and saw his mother-in-law, and left with her an acceptance of the [473] offer, knowing all the while that he had entirely changed his mind. I got an agent to watch for him at 7 o'clock the next morning, and I went to the train just before 9 o'clock, in order that I might catch him and give him my notice of acceptance just before 9 o'clock, and when that occurred he told my agent, and he told me, you are too late, and he then threw back the paper." It is to my mind quite Clear that before there was any attempt at acceptance by the Plaintiff, he was perfectly well aware that Dodds had changed his mind, and that he had in fact agreed to sell the property to Allan. It is impossible, therefore, to say there was ever that existence of the same mind between the two parties which is essential in point of law to the making of an agreement. I am of opinion, therefore, that the Plaintiff has failed to prove that there was any binding contract between Dodds and himself.

MELLISH, L.J.:—

I am of the same: opinion. The first question is, whether this document of the 10th of June, 1874, which was signed by Dodds, was an agreement to sell, or only an offer to sell, the property therein mentioned to Dickinson; and I am clearly of opinion that it was only an offer, although it is in the first part of it, independently of the postscript, worded as an agreement. I apprehend that, until acceptance, so that both parties are bound, even though an instrument is so worded as to express that both parties agree, it is in point of law only an offer, and, until both parties are bound, neither party is bound. It is not necessary that both parties should be bound within the Statute of Frauds, for, if one party makes an offer in writing, and the other accepts it verbally, that will be sufficient to bind the person who has signed the written document. But, if there be no agreement, either verbally or in writing, then, until acceptance, it is in point of law an offer only, although worded as if it were an agreement. But it is hardly necessary to resort to that doctrine in the present case, because the postscript calls it an offer, and says, "This offer to be left over until Friday, 9 o'clock A.M." Well, then, this being only an offer, the law says—and it is a perfectly clear rule of law-that, although it is said that the offer is to be left open until Friday morning at [474] 9 o'clock, that did not bind Dodds. He was not in point of law bound to hold the offer overuntil 9 o'clock on Friday morning. He was not so bound either in law or ill equity. Well, that being so, when on the next day he made an agreement with Allan to sell the property to him, I am not aware of any ground on which it can be said that that contract with Allan was not as good and binding a contract as ever was made. Assuming Allan to have known (there is some dispute about it, and Allan does not admit that he knew of it, but I will assume that he did) that Dodds had made the offer to Dickinson, and had given him till Friday morning at 9 o'clock to accept it, still in point of law that could not prevent Allan from making a more favourable offer than Dickinson, and entering at once into a binding agreement with Dodds.

Then Dickinson is informed by Berry that the property has been sold by Dodds to Allan. Berry does not tell us from whom he heard it, but he says that he did hear it, that he knew it, and that he informed Dickinson of it. Now, stopping there, the question which arises is this—If an offer has been made for the sale of property, and before that offer is accepted, the person who has made the offer enters into a binding agreement to sell the property to somebody else, and the person to whom the offer was first made receives notice in some way that the property has been sold to another person, can he after that make a binding contract by the acceptance of the offer? I am of opinion that he cannot. The law may be right or wrong in saying that a person who has given to another a certain time within which to accept an offer is not bound by his promise to give that time; but, if he is not bound by that promise, and may still sell the property to some one else, and if it be the law that, in order to make a contract, the two minds must be in agreement at some one time, that is, at the time of the acceptance, how is it possible that when the person to whom the offer has been made knows that the person who has made the offer has sold the property to someone else, and that, in fact, he has not remained in the same mind to sell it to him, he can be at liberty to accept the offer and thereby make a binding contract? It seems to me that would be simply absurd. If a man makes an offer to sell a particular horse in his stable, and says, "I will give you until the day after to-morrow to [475] accept the offer," and the next day goes and sells the horse to somebody else, and receives the purchase-money from him, can the person to whom the offer was originally made then come and say, "I accept," so as to make a binding contract, and so as to be entitled to recover damages for the non-delivery of the horse? If the rule of law is that a mere offer to sell property, which can be withdrawn at any time, and which is made dependent on the acceptance of the person to whom it is made, is a mere nandum pactum, how is it possible that the person to whom the offer has been made can by acceptance make a binding contract after he knows that the person who bas made the offer has sold the property to some one else? It is admitted law that, if a man who makes an offer dies, the offer cannot be accepted after he is dead, and parting with the property has very much the same effect as the death of the owner, for it makes the performance of the offer impossible. I am clearly of opinion that, just as when a man who has made an offer dies before it is accepted it is impossible that it can then be accepted, so when once the person to whom the offer was made knows that the property has been sold to some one else, it is too late for him to accept the offer, and on that ground I am clearly of opinion that there was no binding contract for the sale of this property by Dodds to Dickinson, and evenif there had been, it seems to me that the sale of the property to Allan was first in point of time. However, it is not necessary to consider, if there had been two binding contracts, which of them would be entitled to priority in equity, because there is no binding contract between Dodds and Dickinson.

Baggallay, J.A.:—

I entirely concur in the judgments which have been pronounced.

James, L.J.:—

The bill will be dismissed with costs.

Swanston, Q.C.:—

We shall have the costs of the appeal.

Kay, Q.C.:—

There should only be the costs of one appeal.

Sir H. Jackson, Q.C.:-The Defendant Allan was obliged to protect himself.

[476]Mellish, L.J.:—

He had a separate case. There might, if two contracts had been proved, have been a question of priority.

James, L.J.:—

I think the Plaintiff must pay the costs of both appeals.

Solicitor for Appellants; O. B. Wooler.

Solicitor for Plaintiff: R. T. Jarvis, agent for Hutchinson & Lucas, Darlington.

[1] Law Rep. 1 Ex. 342.

[2] 3 Drew. 523.

[3] 3 Mer. 441, 454.

[4] 1 B. & A. 68l.

[5] 1 B. & A. 681.

[6] 1 H. L. C. 381.

[7] Law Rep. 7 Ch. 587, 595.

[8] 6 Hare, 1.

[9] 3 T. R. 653.

[10] 2nd Ed. p. 52.

[11] 16 East, 45.

[12] Page 8.

[13] 4 Bing. 653.

[14] 2 Jac. & W. 413.

[15] Page 428.

[16] 1 Jur. (N.S.) 737.

[17] Page 80.

[18] Law Rep. 4, Eq. 9, 12.

[19] 3 T. R. 653.

[20] 3 T. R. 653.

[21] 4 Bing. 653.

[22] 3 Drew. 523.

[23] 1 Y. & C. Ch. 554.

[24] 6 E. & B. 765.

[25] 3 Man. & Ry. 97.

[26] 1 Russ. & My. 391.

248 N.Y. 86

JENNIE PETTERSON, as Executrix of JOHN PETTERSON, Deceased, Respondent,
v.
GEORGE PATTBERG, Appellant.

Petterson v. Pattberg, 222 App. Div. 693, reversed.

(Decided February 20, 1928; decided May 1, 1928.)

APPEAL from a judgment of the Appellate Division of the Supreme Court in the second judicial department, entered November 18,1927, affirming a judgment in favor of plaintiff entered upon a verdict directed by the court.

Harry G. Anderson and Louis J. Merrell for appellant. Inasmuch as the mortgage had been sold and plaintiff's testator had been apprised thereof before the tender of performance, the offer must be deemed to have been withdrawn; therefore, no contract resulted from such tender. (Butchers Advocate Co., Inc., v. Berkof, 94 Misc. Rep. 299; Lacelles v. Clark, 204 Mass. 362; Stensgaard v. Smith, 43 Minn. 11; Biggers v. Owen, 79 Ga. 658; Smith v. [87] Caughen, 98 Misc. Rep. 746; Levin v. Dietz, 194 N.Y. 376; Detlinfass v. Horsley, 177 App. Div. 143; 224 N.Y. 560; Dickinson v. Dodds, 2 Ch. Div. 463.)

Saul Levine for respondent. The plaintiff established a good cause of action against the defendant. (Lord v. Cronin, 154 N. Y. 172; Mason v. Decker, 72 N.Y. 595; Justice v. Lang, 42 N.Y. 493; Fox v. Hawkins, 135 N.Y. Supp. 245; Jones v. Barnes, 105 App. Div. 287; Willetts v. Sun Mutual Ins. Co., 45 N.Y. 45; White v. Baxter, 71 N.Y. 254; Marie v. Garrison, 83 N.Y. 14; Strong v. Sheffield, 144 N.Y. 395; Beck v. Bonwit, 153 N.Y. Supp. 888; Corn v. Bergmann, 123 N.Y. Supp. 160.)

KELLOGG, J. The evidence given upon the trial sanctions the following statement of facts: John Petterson, of whose last will and testament the plaintiff is the executrix, was the owner of a parcel of real estate in Brooklyn, known as 5301 Sixth avenue. The defendant was the owner of a bond executed by Petterson, which was secured by a third mortgage upon the parcel. On April 4th, 1924, there remained unpaid upon the principal the sum of $5,450. This amount was payable in installments of $250 on April 25th, 1924, and upon a like monthly date every three months thereafter Thus the bond and mortgage had more than five years to run before the entire sum became due. Under date of the 4th of April, 1924, the defendant wrote Petterson as follows:

"I hereby agree to accept cash for the mortgage which I hold against premises 5301 6th Ave., Brooklyn, N.Y. It is understood and agreed as a consideration I will allow you $780 providing said mortgage is paid on or before May 31, 1924, and the regular quarterly payment due April 25, 1924, is paid when due."

On April 25, 1924, Petterson paid the defendant the installment of principal due on that date. Subsequently, on a day in the latter part of May, 1924, Petterson presented himself at the defendant's home, and knocked at the door. The defendant [88] demanded the name of his caller. Petterson replied: "It is Mr. Petterson. I have come to pay off the mortgage." The defendant answered that he had sold the mortgage. Petterson stated that he would like to talk with the defendant, so the defendant partly opened the door. Thereupon Petterson exhibited the cash and said he was ready to pay off the mortgage according to the agreement. The defendant refused to take the money. Prior to this conversation Petterson had made a contract to sell the land to a third person free and clear of the mortgage to the defendant. Meanwhile, also, the defendant had sold the bond and mortgage to a third party. It, therefore, became necessary for Petterson to pay to such person the full amount of the bond and mortgage. It is claimed that he thereby sustained a loss of $780, the sum which the defendant agreed to allow upon the bond and mortgage if payment in full of principal, less that sum, was made on or before May 31st, 1924. The plaintiff has had a recovery for the sum thus claimed, with interest.

Clearly the defendant's letter proposed to Petterson the making of a unilateral contract, the gift of a promise in exchange for the performance of an act. The thing conditionally promised by the defendant was the reduction of the mortgage debt. The act requested to be done, in consideration of the offered promise, was payment in full of the reduced principal of the debt prior to the due date thereof. "If an act is requested, that very act and no other must be given." (Williston on Contracts, sec. 73.) "In case of offers for a consideration, the performance of the consideration is always deemed a condition." (Langdell's Summary of the Law of Contracts, sec. 4.) It is elementary that any offer to enter into a unilateral contract may be withdrawn before the act requested to be done has been performed. (Williston on Contracts, sec. 60: Langdell's Summary, sec. 4; Offord v. Davies, 12 C. B. [N. S.] 748.) A bidder at a sheriff's sale may revoke his bid at any time before the property [86] is struck down to him. (Fisher v. Seltzer, 23 Penn. St. 308.) The offer of a reward in consideration of an act to be performed is revocable before the very act requested has been done. (Shuey v. United States, 92 U.S. 73; Biggers v. Owen, 79 Ga. 658; Fitch v. Snedaker, 38 N.Y. 248.) So, also, an offer to pay a broker commissions, upon a sale of land for the offeror, is revocable at any time before the land is sold, although prior to revocation the broker performs services in an effort to effectuate a sale. (Stensgaard v. Smith, 43 Minn. 11; Smith v. Cauthen, 98 Miss. 746.)

An interesting question arises when, as here, the offeree approaches the offeror with the intention of proffering performance and, before actual tender is made, the offer is withdrawn. Of such a case Williston says: "The offeror may see the approach of the offeree and know that an acceptance is contemplated. If the offeror can say 'I revoke' before the offeree accepts, however brief the interval of time between the two acts, there is no escape from the conclusion that the offer is terminated." Williston on Contracts, sec. 60-b. In this instance Petterson, standing at the door of the defendant's house, stated to the defendant that he had come to pay off the mortgage. Before a tender of the necessary moneys had been made the defendant informed Petterson that he had sold the mortgage. That was a definite notice to Petterson that the defendant could not perform his offered promise and that a tender to the defendant, who was no longer the creditor, would be ineffective to satisfy the debt.

"An offer to sell property may be withdrawn before acceptance without any formal notice to the person to whom the offer is made. It is sufficient if that person has actual knowledge that the person who made the offer has done some act inconsistent with the continuance of the offer, such as selling the property to a third person."

(Dickinson v. Dodds, 2 Ch. Div. 463, headnote.) To the same effect is Coleman v. Applegarth (68 Md. 21). Thus, it clearly appears that the defendant's offer was [86] withdrawn before its acceptance had been tendered. It is unnecessary to determine, therefore, what the legal situation might have been had tender been made before withdrawal. It is the individual view of the writer that the same result would follow. This would be so, for the act requested to be performed was the completed act of payment, a thing incapable of performance unless assented to by the person to be paid. (Williston on Contracts, sec. 60-b.) Clearly an offering party has the right to name the precise act performance of which would convert his offer into a binding promise. Whatever the act may be until it is performed the offer must be revocable. However, the supposed case is not before us for decision. We think that in this particular instance the offer of the defendant was withdrawn before it became a binding promise, and, therefore, that no contract was ever made for the breach of which the plaintiff may claim damages. The judgment of the Appellate Division and that of the Trial Term should be reversed and the complaint dismissed, with costs in all courts.

LEHMAN, J. (dissenting). The defendant's letter to Petterson constituted a promise on his part to accept payment at a discount of the mortgage he held, provided the mortgage is paid on or before May 31st, 1924. Doubtless by the terms of the promise itself, the defendant made payment of the mortgage by the plaintiff, before the stipulated time, a condition precedent to performance by the defendant of his promise to accept payment at a discount. If the condition precedent has not been performed, it is because the defendant made performance impossible by refusing to accept payment, when the plaintiff came with an offer of immediate performance. "It is a principle of fundamental justice that if a promisor is himself the cause of the failure of performance either of an obligation due him or of a condition upon which his own liability depends, he cannot take advantage of the failure." (Williston on Contracts, [86] section 677.) The question in this case is not whether payment of the mortgage is a condition precedent to the performance of a promise made by the defendant, but, rather, whether at the time the defendant refused the offer of payment, he had assumed any binding obligation, even though subject to condition.

The promise made by the defendant lacked consideration at the time it was made. Nevertheless the promise was not made as a gift or mere gratuity to the plaintiff. It was made for the purpose of obtaining from the defendant something which the plaintiff desired. It constituted an offer which was to become binding whenever the plaintiff should give, in return for the defendant's promise, exactly the consideration which the defendant requested. Here the defendant requested no counter promise from the plaintiff. The consideration requested by the defendant for his promise to accept payment was, I agree, some act to be performed by the plaintiff. Until the act requested was performed, the defendant might undoubtedly revoke his offer. Our problem is to determine from the words of the letter read in the light of surrounding circumstances what act the defendant requested as consideration for his promise.

The defendant undoubtedly made his offer as an inducement to the plaintiff to "pay" the mortgage before it was due. Therefore, it is said, that "the act requested to be performed was the completed act of payment, a thing incapable of performance unless assented to by the person to be paid." In unmistakable terms the defendant agreed to accept payment, yet we are told that the defendant intended, and the plaintiff should have understood, that the act requested by the defendant, as consideration for his promise to accept payment, included performance by the defendant himself of the very promise for which the act was to be consideration. The defendant's promise was to become binding only when fully performed; and part of the consideration to be furnished [92] by the plaintiff for the defendant's promise was to be the performance of that promise by the defendant. So construed, the defendant's promise or offer, though intended to induce action by the plaintiff, is but a snare and delusion. The plaintiff could not reasonably suppose that the defendant was asking him to procure the performance by the defendant of the very act which the defendant promised to do, yet we are told that even after the plaintiff had done all else which the defendant requested, the defendant's promise was still not binding because the defendant chose not to perform.

I cannot believe that a result so extraordinary could have been intended when the defendant wrote the letter. "The thought behind the phrase proclaims itself misread when the outcome of the reading is injustice or absurdity." (See opinion of CARDOZO, Ch. J., in Surace v. Danna, 248 N.Y. 18.) If the defendant intended to induce payment by the plaintiff arid yet reserve the right to refuse payment when offered he should have used a phrase better calculated to express his meaning than the words: "I agree to accept." A promise to accept payment, by its very terms, must necessarily become binding, if at all, not later than when a present offer to pay is made.

I recognize that in this case only an offer of payment, and not a formal tender of payment, was made before the defendant withdrew his offer to accept payment. Even the plaintiff's part in the act of payment was then not technically complete. Even so, under a fair construction of the words of the letter I think the plaintiff had done the act which the defendant requested as consideration for his promise. The plaintiff offered to pay with present intention and ability to make that payment. A formal tender is seldom made in business transactions, except to lay the foundation for subsequent assertion in a court of justice of rights which spring from refusal of the tender. If the defendant acted in good faith in making his offer to accept payment, he could not well [93] have intended to draw a distinction in the act requested of the plaintiff in return, between an offer which unless refused would ripen into completed payment, and a formal tender. Certainly the defendant could not have expected or intended that the plaintiff would make a formal tender of payment without first stating that he had come to make payment. We should not read into the language of the defendant's offer a meaning which would prevent enforcement of the defendant's promise after it had been accepted by the plaintiff in the very way which the defendant must have intended it should be accepted, if he acted in good faith.

The judgment should be affirmed.

CARDOZO, Ch. J., POUND, CRANE and O'BRIEN, JJ., concur with KELLOGG, JJ., LEHMAN, J., dissents in opinion, in which ANDREWS, J., concurs.

Judgments reversed, etc.

Royal Courts of Justice.

7th December 1892

Before:

LORD JUSTICE BOWEN
LORD JUSTICE LINDLEY
LORD JUSTICE A.L. SMITH

Carlill
Plaintiff
v.
Carbolic Smoke Ball Company
Defendants

J. Banks Pittman for the Plaintiff
Field & Roscoe for the Defendants.

LORD JUSTICE LINDLEY: I will begin by referring to two points which were raised in the Court below. I refer to them simply for the purpose of dismissing them. First, it is said no action will lie upon this contract because it is a policy. You have only to look at the advertisement to dismiss that suggestion. Then it was said that it is a bet. Hawkins, J., came to the conclusion that nobody ever dreamt of abet, and that the transaction had nothing whatever in common with a bet. I so entirely agree with him that I pass over this contention also as not worth serious attention.

Then, what is left? The first observation I will make is that we are not dealing with any inference of fact. We are dealing with an express promise to pay £100 in certain events. Read the advertisement how you will, and twist it about as you will, here is a distinct promise expressed in language which is perfectly unmistakable —

"£100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the iufluenza after having used the ball three times daily for two weeks according to the printed directions supplied with each ball."

We must first consider whether this was intended to be a promise at all, or whether it was a mere puff which meant nothing.Was it a mere puff? My answer to that question is No, and I base my answer upon this passage: "£1000 is deposited with the Alliance Bank, shewing our sincerity in the matter. Now, for what was that money deposited or that statement made except to negative the suggestion that this was a mere puff and meant nothing at all? The deposit is called in aid by the advertiser as proof of his sincerity in the matter — that is, the sincerity of his promise to pay this £100 in the event which he has specified. I say this for the purpose of giving point to the observation that we are not inferring a promise; there is the promise, as plain as words can make it.

Then it is contended that it is not binding. In the first place, it is said that it is not made with anybody in particular. Now that point is common to the words of this advertisement and to the words of all other advertisements offering rewards. They are offers to anybody who performs the conditions named in the advertisement, and anybody who does perform the condition accepts the offer. In point of law this advertisement is an offer to pay £100 to anybody who will perform these conditions, and the performance of the conditions is the acceptance of the offer. That rests upon a string of authorities, the earliest of which is Williams v. Carwardine 4 B. Ad. 621, which has been followed by many other decisions upon advertisements offering rewards.

But then it is said, "Supposing that the performance of the conditions is an acceptance of the offer, that acceptance ought to have been notified." Unquestionably, as a general proposition, when an offer is made, it is necessary in order to make a binding contract, not only that it should be accepted, but that the acceptance should be notified. But is that so in cases of this kind? I apprehend that they are an exception to that rule, or, if not an exception, they are open to the observation that the notification of the acceptance need not precede the performance. This offer is a continuing offer. It was never revoked, and if notice of acceptance is required — which I doubt very much, for I rather think the true view is that which was expressed and explained by Lord Blackburn in the case of Brogden v. Metropolitan Ry. Co. 2 App. Cas. 666, 691 — if notice of acceptance is required, the person who makes the offer gets the notice of acceptance contemporaneously with his notice of the performance of the condition. If he gets notice of the acceptance before his offer is revoked, that in principle is all you want. I, however, think that the true view, in a case of this kind, is that the person who makes the over shews by his language and from the nature of the transaction that he does not expect and does not require notice of the acceptance apart from notice of the performance.

We, therefore, find here all the elements which are necessary to form a binding contract enforceable in point of law, subject to two observations. First of all it is said that this advertisement is so vague that you cannot really construe it as a promise — that the vagueness of the language shews that a legal promise was never intended or contemplated. The language is vague and uncertain in some respects, and particularly in this, that the £100 is to be paid to any person who contracts the increasing epidemic after having used the balls three times daily for two weeks. It is said, When are they to be used? According to the language of the advertisement no time is fixed, and, construing the offer most strongly against the person who has made it, one might infer that any time was meant. I do not think that was meant, and to hold the contrary would be pushing too far the doctrine of taking language most strongly against the person using it. I do not think that business people or reasonable people would understand the words as meaning that if you took a smoke ball and used it three times daily for two weeks you were to be guaranteed against influenza for the rest of your life, and I think it would be pushing the language of the advertisement too far to construe it as meaning that. But if it does not mean that,what does it mean? It is for the defendants to shew what it does mean; and it strikes me that there are two, and possibly three, reasonable constructions to be put on this advertisement, any one of which will answer the purpose of the plaintiff.

Possibly it may be limited to persons catching the "increasing epidemic" (that is, the then prevailing epidemic), or any colds or diseases caused by taking cold, during the prevalence of the increasing epidemic. That is one suggestion; but it does not commend itself to me. Another suggested meaning is that you are warranted free from catching this epidemic, or colds or other diseases caused by taking cold, whilst you are using this remedy after using it for two weeks. If that is the meaning, the plaintiff is right, for she used the remedy for two weeks and went on using it till she got the epidemic. Another meaning, and the one which I rather prefer, is that the reward is offered to any person who contracts the epidemic or other disease within a reasonable time after having used the smoke ball. Then it is asked, What is a reasonable time? It has been suggested that there is no standard of reasonableness; that it depends upon the reasonable time for a germ to develop! I do not feel pressed by that. It strikes me that a reasonable time may be ascertained in a business sense and in a sense satisfactory to a lawyer, in this way; find out from a chemist what the ingredients are; find out from a skilled physician how long the effect of such ingredients on the system could be reasonably expected to endure so as to protect a person from an epidemic or cold, and in that way you will get a standard to be laid before a jury, or a judge without a jury, by which they might exercise their judgment as to what a reasonable time would be. It strikes me, I confess, that the true construction of this advertisement is that £100 will be paid to anybody who uses this smoke ball three times daily for two weeks according to the printed directions, and who gets the influenza or cold or other diseases caused by taking cold within a reasonable time after so using it; and if that is the true construction, it is enough for the plaintiff.

I come now to the last point which I think requires attention — that is, the consideration. It has been argued that this is nudum pactum — that there is no consideration. We must apply to that argument the usual legal tests. Let us see whether there is no advantage to the defendants. It is said that the use of the ball is no advantage to them, and that what benefits them is the sale; and the case is put that a lot of these balls might be stolen, and that it would be no advantage to the defendants if the thief or other people used them. The answer to that, I think, is as follows. It is quite obvious that in the view of the advertisers a use by the public of their remedy, if they can only get the public to have confidence enough to use it, will react and produce a sale which is directly beneficial to them. Therefore, the advertisers get out of the use an advantage which is enough to constitute a consideration.

But there is another view. Does not the person who acts upon this advertisement and accepts the offer put himself to some inconvenience at the request of the defendants? Is it nothing to use this ball three times daily for two weeks according to the directions at the request of the advertiser? Is that to go for nothing? It appears to me that there is a distinct inconvenience,not to say a detriment, to any person who so uses the smoke ball. I am of opinion, therefore, that there is ample consideration for the promise.

We were pressed upon this point with the case of Gerhard v. Bates 2 E. B. 476, which was the case of a promoter of companies who had promised the bearers of share warrants that they should have dividends for so many years, and the promise as alleged was held not to shew any consideration. Lord Campbell's judgment when you come to examine it is open to the explanation, that the real point in that case was that the promise, if any, was to the original bearer and not to the plaintiff, and that as the plaintiff was not suing in the name of the original bearer there was no contract with him. Then Lord Campbell goes on to enforce that view by shewing that there was no consideration shewn for the promise to him. I cannot help thinking that Lord Campbell's observations would have been very different if the plaintiff in that action had been an original bearer, or if the declaration had gone on to shew what a société anonyme was, and had alleged the promise to have been, not only to the first bearer, but to anybody who should become the bearer. There was no such allegation, and the Court said, in the absence of such allegation, they did not know (judicially, of course) what a société anonyme was, and, therefore, there was no consideration. But in the present case, for the reasons I have given, I cannot see the slightest difficulty in coming to the conclusion that there is consideration.

It appears to me, therefore, that the defendants must perform their promise, and, if they have been so unwary as to expose themselves to a great many actions, so much the worse for them.

LORD JUSTICE BOWEN: I am of the same opinion. We were asked to say that this document was a contract too vague to be enforced.

The first observation which arises is that the document itself is not a contract at all, it is only an offer made to the public.

The defendants contend next, that it is an offer the terms of which are too vague to be treated as a definite offer, inasmuch as there is no limit of time fixed for the catching of the influenza, and it cannot be supposed that the advertisers seriously meant to promise to pay money to every person who catches the influenza at any time after the inhaling of the smoke ball. It was urged also, that if you look at this document you will find much vagueness as to the persons with whom the contract was intended to be made — that, in the first place, its terms are wide enough to include persons who may have used the smoke ball before the advertisement was issued; at all events, that it is an offer to the world in general, and, also, that it is unreasonable to suppose it to be a definite offer, because nobody in their senses would contract themselves out of the opportunity of checking the experiment which was going to be made at their own expense. It is also contended that the advertisement is rather in the nature of a puff or a proclamation than a promise or offer intended to mature into a contract when accepted. But the main point seems to be that the vagueness of the document shews that no contract whatever was intended. It seems to me that in order to arrive at a right conclusion we must read this advertisement in its plain meaning, as the public would understand it. It was intended to be issued to the public and to be read by the public.How would an ordinary person reading this document construe it?

It was intended unquestionably to have some effect, and I think the effect which it was intended to have, was to make people use the smoke ball, because the suggestions and allegations which it contains are directed immediately to the use of the smoke ball as distinct from the purchase of it. It did not follow that the smoke ball was to be purchased from the defendants directly, or even from agents of theirs directly. The intention was that the circulation of the smoke ball should be promoted, and that the use of it should be increased. The advertisement begins by saying that a reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic after using the ball. It has been said that the words do not apply only to persons who contract the epidemic after the publication of the advertisement, but include persons who had previously contracted the influenza. I cannot so read the advertisement. It is written in colloquial and popular language, and I think that it is equivalent to this:

"£100 will be paid to any person who shall contract the increasing epidemic after having used the carbolic smoke ball three times daily for two weeks."

And it seems to me that the way in which the public would read it would be this, that if anybody, after the advertisement was published, used three times daily for two weeks the carbolic smoke ball, and then caught cold, he would be entitled to the reward. Then again it was said:

"How long is this protection to endure? Is it to go on for ever, or for what limit of time?"

I think that there are two constructions of this document, each of which is good sense, and each of which seems to me to satisfy the exigencies of the present action. It may mean that the protection is warranted to last during the epidemic, and it was during the epidemic that the plaintiff contracted the disease. I think, more probably, it means that the smoke ball will be a protection while it is in use. That seems tome the way in which an ordinary person would understand an advertisement about medicine, and about a specific against influenza. It could not be supposed that after you have left off using it you are still to be protected for ever, as if there was to be a stamp set upon your forehead that you were never to catch influenza because you had once used the carbolic smoke ball. I think the immunity is to last during the use of the ball. That is the way in which I should naturally read it, and it seems to me that the subsequent language of the advertisement supports that construction. It says:

"During the last epidemic of influenza many thousand carbolic smoke balls were sold, and in no ascertained case was the disease contracted by those using" (not "who had used") "the carbolic smoke ball,"

and it concludes with saying that one smoke ball will last a family several months (which imports that it is to be efficacious while it is being used), and that the ball can be refilled at a cost of 5s. I, therefore, have myself no hesitation in saying that I think, on the construction of this advertisement, the protection was to enure during the time that the carbolic smoke ball was being used. My brother, the Lord Justice who preceded me,thinks that the contract would be sufficiently definite if you were to read it in the sense that the protection was to be warranted during a reasonable period after use. I have some difficulty myself on that point; but it is not necessary for me to consider it further, because the disease here was contracted during the use of the carbolic smoke ball.

Was it intended that the £100 should, if the conditions were fulfilled, be paid? The advertisement says that £1000 is lodged at the bank for the purpose. Therefore, it cannot be said that the statement that £100 would be paid was intended to be a mere puff. I think it was intended to be understood by the public as an offer which was to be acted upon.

But it was said there was no check on the part of the persons who issued the advertisement, and that it would be an insensate thing to promise £100 to a person who used the smoke ball unless you could check or superintend his manner of using it. The answer to that argument seems to me to be that if a person chooses to make extravagant promises of this kind he probably does so because it pays him to make them, and, if he has made them, the extravagance of the promises is no reason in law why he should not be bound by them.

It was also said that the contract is made with all the world — that is, with everybody; and that you cannot contract with everybody. It is not a contract made with all the world. There is the fallacy of the argument. It is an offer made to all the world;and why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition? It is an offer to become liable to any one who,before it is retracted, performs the condition, and, although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement. It is not like cases in which you offer to negotiate, or you issue advertisements that you have got a stock of books to sell, or houses to let, in which case there is no offer to be bound by any contract. Such advertisements are offers to negotiate — offers to receive offers — offers to chaffer, as, I think, some learned judge in one of the cases has said. If this is an offer to be bound, then it is a contract the moment the person fulfils the condition.

That seems to me to be sense, and it is also the ground on which all these advertisement cases have been decided during the century; and it cannot be put better than in Willes, J.'s, judgment in Spencer v. Harding Law Rep. 5 C. P. 561, 563.

"In the advertisement cases,"

he says,

"there never was any doubt that the advertisement amounted to a promise to pay the money to the person who first gave information. The difficulty suggested was that it was a contract with all the world. But that,of course, was soon overruled. It was an offer to become liable to any person who before the offer should be retracted should happen to be the person to fulfil the contract, of which the advertisement was an offer or tender. That is not the sort of difficulty which presents itself here. If the circular had gone on, 'and we undertake to sell to the highest bidder,' the reward cases would have applied, and there would have been a good contract in respect of the persons."

As soon as the highest bidder presented himself, says Willes, J., the person who was to hold the vinculum juris on the other side of the contract was ascertained, and it became settled.

Then it was said that there was no notification of the acceptance of the contract. One cannot doubt that, as an ordinary rule of law, an acceptance of an offer made ought to be notified to the person who makes the offer, in order that the two minds may come together. Unless this is done the two minds may be apart,and there is not that consensus which is necessary according to the English law — I say nothing about the laws of other countries — to make a contract. But there is this clear gloss to be made upon that doctrine, that as notification of acceptance is required for the benefit of the person who makes the offer, the person who makes the offer may dispense with notice to himself if he thinks it desirable to do so, and I suppose there can be no doubt that where a person in an offer made by him to another person, expressly or impliedly intimates a particular mode of acceptance as sufficient to make the bargain binding, it is only necessary for the other person to whom such offer is made to follow the indicated method of acceptance; and if the person making the offer, expressly or impliedly intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification.

That seems to me to be the principle which lies at the bottom of the acceptance cases, of which two instances are the well-known judgment of Mellish, L.J., in Harris's Case Law Rep. 7 Ch. 587, and the very instructive judgment of Lord Blackburn in Brogden v. Metropolitan Ry. Co. 2 App. Cas. 666, 691, in which he appears to me to take exactly the line I have indicated.

Now, if that is the law, how are we to find out whether the person who makes the offer does intimate that notification of acceptance will not be necessary in order to constitute a binding bargain? In many cases you look to the offer itself. In many cases you extract from the character of the transaction that notification is not required, and in the advertisement cases it seems to me to follow as an inference to be drawn from the transaction itself that a person is not to notify his acceptance of the offer before he performs the condition, but that if he performs the condition notification is dispensed with. It seems to me that from the point of view of common sense no other idea could be entertained. If I advertise to the world that my dog is lost, and that anybody who brings the dog to a particular place will be paid some money, are all the police or other persons whose business it is to find lost dogs to be expected to sit down and write me a note saying that they have accepted my proposal? Why, of course, they at once look after the dog, and as soon as they find the dog they have performed the condition. The essence of the transaction is that the dog should be found, and it is not necessary under such circumstances, as it seems to me, that in order to make the contract binding there should be any notification of acceptance. It follows from the nature of the thing that the performance of the condition is sufficient acceptance without the notification of it, and a person who makes an offer in an advertisement of that kind makes an offer which must be read by the light of that common sense reflection. He does, therefore, in his offer impliedly indicate that he does not require notification of the acceptance of the offer.

A further argument for the defendants was that this was a nudum pactum — that there was no consideration for the promise — that taking the influenza was only a condition, and that the using the smoke ball was only a condition, and that there was no consideration at all; in fact, that there was no request, express or implied, to use the smoke ball. Now, I will not enter into an elaborate discussion upon the law as to requests in this kind of contracts. I will simply refer to Victors v. Davies 12 M. W. 758 and Serjeant Manning's note to Fisher v. Pyne 1 M. G. 265,which everybody ought to read who wishes to embark in this controversy. The short answer, to abstain from academical discussion, is, it seems to me, that there is here a request to use involved in the offer. Then as to the alleged want of consideration. The definition of "consideration" given in Selwyn's Nisi Prius, 8^th ed. p. 47, which is cited and adopted by Tindal, C.J., in the case of Laythoarp v. Bryant 3 Scott, 238, 250, is this:

"Any act of the plaintiff from which the defendant derives a benefit or advantage, or any labour, detriment, or inconvenience sustained by the plaintiff, provided such act is performed or such inconvenience suffered by the plaintiff, with the consent, either express or implied, of the defendant."

Can it be said here that if the person who reads this advertisement applies thrice daily, for such time as may seem to him tolerable, the carbolic smoke ball to his nostrils for a whole fortnight, he is doing nothing at all — that it is a mere act which is not to count towards consideration to support a promise (for the law does not require us to measure the adequacy of the consideration). Inconvenience sustained by one party at the request of the other is enough to create a consideration. I think, therefore, that it is consideration enough that the plaintiff took the trouble of using the smoke ball. But I think also that the defendants received a benefit from this user, for the use of the smoke ball was contemplated by the defendants as being indirectly a benefit to them, because the use of the smoke balls would promote their sale.

Then we were pressed with Gerhard v. Bates 2 E. B. 476. In Gerhard v. Bates 2 E. B. 476, which arose upon demurrer, the point upon which the action failed was that the plaintiff did not allege that the promise was made to the class of which alone the plaintiff was a member, and that therefore there was no privity between the plaintiffs and the defendant. Then Lord Campbell went on to give a second reason. If his first reason was not enough,and the plaintiff and the defendant there had come together as contracting parties and the only question was consideration, it seems to me Lord Campbell's reasoning would not have been sound. It is only to be supported by reading it as an additional reason for thinking that they had not come into the relation of contracting parties; but, if so, the language was superfluous. The truth is, that if in that case you had found a contract between the parties there would have been no difficulty about consideration; but you could not find such a contract. Here, in the same way, if you once make up your mind that there was a promise made to this lady who is the plaintiff, as one of the public — a promise made to her that if she used the smoke ball three times daily for a fortnight and got the influenza, she should have £100, it seems to me that her using the smoke ball was sufficient consideration. I cannot picture to myself the view of the law on which the contrary could be held when you have once found who are the contracting parties. If I say to a person, "If you use such and such a medicine for a week I will give you £5," and he uses it, there is ample consideration for the promise.

LORD JUSTICE A. L. SMITH: The first point in this case is, whether the defendants' advertisement which appeared in the Pall Mall Gazette was an offer which, when accepted and its conditions performed, constituted a promise to pay, assuming there was good consideration to uphold that promise, or whether it was only a puff from which no promise could be implied, or, as put by Mr.Finlay, a mere statement by the defendants of the confidence they entertained in the efficacy of their remedy. Or as I might put it in the words of Lord Campbell in Denton v. Great Northern Ry. Co. 5 E. B. 860, whether this advertisement was mere waste paper. That is the first matter to be determined. It seems to me that this advertisement reads as follows:

"£100 reward will be paid by the Carbolic Smoke Ball Company to any person who after having used the ball three times daily for two weeks according to the printed directions supplied with such ball contracts the increasing epidemic influenza, colds, or any diseases caused by taking cold. The ball will last a family several months, and can be refilled at a cost of 5s."

If I may paraphrase it, it means this: "If you" — that is one of the public as yet not ascertained, but who, as Lindley and Bowen, L. JJ., have pointed out, will be ascertained by the performing the condition —

"will hereafter use my smoke ball three times daily for two weeks according to my printed directions, I will pay you £100 if you contract the influenza within the period mentioned in the advertisement."

Now, is there not a request there? It comes to this:

"In consideration of your buying my smoke ball, and then using it as I prescribe, I promise that if you catch the influenza within a certain time I will pay you £100."

It must not be forgotten that this advertisement states that as security for what is being offered, and as proof of the sincerity of the offer, £1000 is actually lodged at the bank wherewith to satisfy any possible demands which might be made in the event of the conditions contained therein being fulfilled and a person catching the epidemic so as to entitle him to the £100. How can it be said that such a statement as that embodied only a mere expression of confidence in the wares which the defendants had to sell? I cannot read the advertisement in any such way. In my judgment, the advertisement was an offer intended to be acted upon, and when accepted and the conditions performed constituted a binding promise on which an action would lie, assuming there was consideration for that promise. The defendants have contended that it was a promise in honour or an agreement or a contract in honour - whatever that may mean. I understand that if there is no consideration for a promise, it may be a promise in honour, or, as we should call it, a promise without consideration and nudum pactum; but if anything else is meant, I do not understand it. Ido not understand what a bargain or a promise or an agreement in honour is unless it is one on which an action cannot be brought because it is nudum pactum, and about nudum pactum I will say a word in a moment.

In my judgment, therefore, this first point fails, and this was an offer intended to be acted upon, and, when acted upon and the conditions performed, constituted a promise to pay.

In the next place, it was said that the promise was too wide,because there is no limit of time within which the person has to catch the epidemic. There are three possible limits of time to this contract. The first is, catching the epidemic during its continuance; the second is, catching the influenza during the time you are using the ball; the third is, catching the influenza within a reasonable time after the expiration of the two weeks during which you have used the ball three times daily. It is not necessary to say which is the correct construction of this contract, for no question arises thereon. Whichever is the true construction, there is sufficient limit of time so as not to make the contract too vague on that account.

Then it was argued, that if the advertisement constituted an offer which might culminate in a contract if it was accepted, and its conditions performed, yet it was not accepted by the plaintiff in the manner contemplated, and that the offer contemplated was such that notice of the acceptance had to be given by the party using the carbolic ball to the defendants before user, so that the defendants might be at liberty to superintend the experiment. All I can say is, that there is no such clause in the advertisement, and that, in my judgment, no such clause can be read into it; and I entirely agree with what has fallen from my Brothers, that this is one of those cases in which a performance of the condition by using these smoke balls for two weeks three times a day is an acceptance of the offer.

It was then said there was no person named in the advertisement with whom any contract was made. That, I suppose, has taken place in every case in which actions on advertisement shave been maintained, from the time of Williams v. Carwardine 4 B. Ad. 621, and before that, down to the present day. I have nothing to add to what has been said on that subject, except that a person becomes a persona designat a and able to sue, when he performs the conditions mentioned in the advertisement.

Lastly, it was said that there was no consideration, and that it was nudum pactum. There are two considerations here. One is the consideration of the inconvenience of having to use this carbolic smoke ball for two weeks three times a day; and the other more important consideration is the money gain likely to accrue to the defendants by the enhanced sale of the smoke balls, by reason of the plaintiff's user of them. There is ample consideration to support this promise. I have only to add that as regards the policy and the wagering points, in my judgment, there is nothing in either of them.

Appeal dismissed.

[107]

Appeal from Supreme Judicial Court, Androscoggin County, in Equity.

Suit by Joseph A. Brackenbury and another against Sarah D. P. Hodgkin and Walter C. Hodgkin. From a decree for plaintiffs, defendants appeal. Appeal dismissed, and decree affirmed as to Walter C. Hodgkin.

Argued before CORNISH, C. J., and SPEAR, KING, BIRD, HANSON, and MADIGAN, JJ.

Benjamin L. Berman, of Lewiston, and Jacob H. Berman, of Portland, for appellants.

McGillicuddy & Morey, of Lewiston, for appellees.

CORNISH, C. J.

The defendant Mrs. Sarah D. P. Hodgkin on the 8th day of February, 1915, was the owner of certain real estate—her home farm, situated in the outskirts of Lewiston. She was a widow and was living alone. She was the mother of six adult children, five sons, one of whom, Walter, is the codefendant, and one daughter, who is the coplaintiff. The plaintiffs were then residing in Independence, Mo. Many letters had passed between mother and daughter concerning the daughter and her husband returning to the old home and taking care of the mother, and finally on February 8, 1915, the mother sent a letter to the daughter and her husband which is the foundation of this bill in equity. In this letter she made a definite proposal, the substance of which was that if the Brackenburys would move to Lewiston, and maintain and care for Mrs. Hodgkin on the home place during her life, and pay the moving expenses, they were to have the use and income of the premises, together with the use of the household goods, with certain exceptions, Mrs. Hodgkin to have what rooms she might need. The letter closed, by way of postscript, with the words, "you to have the place when I have passed away."

Relying upon this offer, which was neither withdrawn nor modified, and in acceptance (hereof, the plaintiffs moved from Missouri to Maine late in April, 1915, went upon the premises described and entered upon the performance of the contract. Trouble developed after a few weeks, and the relations between the parties grew most disagreeable. The mother brought two suits against her son-in-law on trifling matters, and finally ordered the plaintiffs from the place, but they refused to leave. Then on November 7, 1916, she executed and delivered to her son, Walter C. Hodgkin, a deed of the premises, reserving a life estate in herself. Walter, however, was not a bona fide purchaser for value without notice, but took the deed with full knowledge of the agreement between the parties and for the sole purpose of evicting the plaintiffs. On the very day the deed was executed he served a notice to quit upon Mr. Brackenbury, as preliminary to an action of forcible entry and detainer which was brought on November 13, 1916. This bill in equity was brought by the plaintiffs to secure a reconveyance of the farm from Walter to his mother, to restrain and enjoin Walter from further prosecuting his action of forcible entry and detainer, and to obtain an adjudication that the mother holds the legal title impressed with a trust in favor of the plaintiffs in accordance with their contract.

The sitting justice made an elaborate and carefully considered finding of facts and signed a decree, sustaining the bill with costs against Walter C. Hodgkin, and granting the relief prayed for. The case is before the law court on the defendants' appeal from this decree.

Four main issues are raised.

1. As to the completion and existence of a valid contract.

A legal and binding contract is clearly proven. The offer on the part of the mother was in writing, and its terms cannot successfully be disputed. There was no need that it be accepted in words, nor that a counter promise on the part of the plaintiffs be made. The offer was the basis, not of a bilateral contract, requiring a reciprocal promise, a promise for a promise, but of a unilateral contract requiring an act for a promise. "In the latter case the only acceptance of the offer that is necessary is the performance of the act. In other words, the promise becomes binding when the act is performed." 6 R. C. L. 607. This is elementary law.

The plaintiffs here accepted the offer by moving from Missouri to the mother's farm in Lewiston and entering upon the performance of the specified acts, and they have continued performance since that time so far as they have been permitted by the mother to do so. The existence of a completed and valid contract is clear.

[108] 2. The creation of an equitable interest.

This contract between the parties, the performance of which was entered upon by the plaintiffs, created an equitable interest in the land described in the bill in favor of the plaintiffs. The letter of February 8, 1915, signed by the mother, answered the statutory requirement that "there can be no trust concerning lands, except trusts arising or resulting by implication of law, unless created or declared by some writing signed by the party or his attorney." R. S. 1903, c. 75, § 14. No particular formality need be observed; a letter or other memorandum is sufficient to establish a trust provided its terms and the relations of the parties to it appear with reasonable certainty. Bates v. Hurd, 65 Me. 181; McCleUan v. MeClellan, 65 Me. 500. The equitable interest of the plaintiffs in these premises is obvious, and they are entitled to have that interest protected.

3. Alleged breach of duty on the part of the plaintiffs.

The defendants contend that, granting an equitable estate has been established, the plaintiffs have failed of performance because of their improper and unkind treatment of Mrs. Hodgkin, and therefore have forfeited the right to equitable relief which they might otherwise be entitled to. The sitting justice decided this question of fact in favor of the plaintiffs, and his finding is fully warranted by the evidence. Mrs Hodgkin's temperament and disposition, not only as described in the testimony of others, but as revealed in her own attitude, conduct, and testimony as a witness, as they stand out on the printed record, mark her as the provoking cause in the various family difficulties. She was "the one primarily at fault."

4. Adequate relief at law.

The defendants finally invoke the familiar rule that the plaintiffs have a plain and adequate remedy at law, and therefore cannot ask relief in equity.

The answer to this proposition is that this rule does not apply when the court has been given full equity jurisdiction, or has been given special statutory jurisdiction covering the case. Brown v. Kimball Co., 84 Me. 492, 24 Atl. 847; Farnsworth v. Whiting, 104 Me. 488, 72 Atl. 314; Trask v. Chase, 107 Me. 137, 77 Atl. 698. The court in equity in this state is given special statutory jurisdiction to grant relief in cases of trusts (R. S. 1903, c. 79, § 6, par. 4), and therefore the exception and not the rule must govern here.

The plaintiffs are entitled to the remedy here sought, and the entry must be:

Appeal dismissed.

Decree of sitting justice affirmed, with costs against Walter C. Hodgkin.

64 F. 2d 344
JAMES BAIRD CO.
v.
GIMBEL BROS., INC.
Circuit Court of Appeals, Second Circuit.
No. 330.
April 10, 1933

Campbell, Harding, Goodwin & Danforth, of New York City (Garrard Glenn and William L. Glenn, both of New York City, of counsel), for appellant.

Chadbourne, Stanchfield & Levy, of New York City (Leonard P. Moore and David S. Hecht, both of New York City, of counsel), for appellee.

Before MANTON L. HAND, and SWAN, Circuit Judges.

L. HAND, Circuit Judge. The plaintiff sued the defendant for breach of a contract to deliver linoleum under a contract of sale; the defendant denied the making of the contract; the parties tried the case to the judge under a written stipulation and he directed judgment for the defendant. The facts as found, bearing on the making of the contract, the only issue necessary to discuss, were as follows: The defendant, a New York merchant, knew that the Department of Highways in Pennsylvania had asked for bids for the construction of a public building. It sent an employee to the office of a contractor in Philadelphia, who had possession of the specifications, and the employee there computed the amount of the linoleum which would be required on the job, underestimating the total yardage by about one-half the proper amount. In ignorance of this mistake, on December twenty-fourth the defendant sent to some twenty or thirty contractors, likely to bid on the job, an offer to supply all the linoleum required by the specifications at two different lump sums, depending upon the quality used. These offers concluded as follows: "If successful in being awarded this contract, it will be absolutely guaranteed, . . . and  . . . we are offering these prices for reasonable" (sic), "prompt acceptance after the general contract has been awarded." The plaintiff, a contractor in Washington, got one of these on the twenty-eighth, and on the same day the defendant learned its mistake and telegraphed all the contractors to whom it had sent the offer, that it withdrew it and would substitute a new one at about double the amount of the old. This withdrawal reached the plaintiff at Washington on the afternoon of the same day, but not until after it had put in a bid at Harrisburg at a lump sum, based as to linoleum upon the prices quoted by the defendant. The public authorities accepted the plaintiff's bid on December thirtieth, the defendant having meanwhile written a letter of confirmation of its withdrawal, received on the thirty-first. The plaintiff formally accepted the offer on January second, and, as the defendant persisted in declining to recognize the existence of a contract, sued it for damages on a breach.

Unless there are circumstances to take it out of the ordinary doctrine, since the offer was withdrawn before it was accepted, the acceptance was too late. Restatement of Contracts, §35. To meet this the plaintiff argues as follows: It was a reasonable implication from the defendant's offer that it should be irrevocable in case the plaintiff acted upon it, that is to say, used the prices quoted in making its bid, thus putting itself in a position from which it could not withdraw without great loss. While it might have withdrawn its bid after receiving the revocation, the time had passed to submit another, and as the item of linoleum was a very trifling part of the cost of the whole building, it would have been an unreasonable hardship to expect it to lose the contract on that account, and probably forfeit its deposit. While it is true that the plaintiff might in advance have secured a contract conditional upon the success of its bid, this was not what the defendant suggested. It understood that the contractors would use its offer in their bids, and would thus in fact commit themselves to supplying the linoleum at the proposed prices. The inevitable implication from all this was that when the contractors acted upon it, they accepted the offer and promised to pay for the linoleum, in case their bid were accepted. 

It was of course possible for the parties to make such a contract, and the question is merely as to what they meant; that is, what is to be imputed to the words they used. Whatever plausibility there is in the argument, is in the fact that the defendant must have known the predicament in which the contractors would be put if it withdrew its offer after the bids went in. However, it seems entirely clear that the contractors did not suppose that they accepted the offer merely by putting in their bids. If, for example, the successful one had repudiated the contract with the public authorities after it had been awarded to him, certainly the defendant could not have sued him for a breach. If he had become bankrupt, the defendant could not prove against his estate. It seems plain therefore that there was no contract between them. And if there be any doubt as to this, the language of the offer sets it at rest. The phrase, "if successful in being awarded this contract," is scarcely met by the mere use of the prices in the bids. Surely such a use was not an "award" of the contract to the defendant. Again, the phrase, "we are offering these prices for . . . prompt acceptance after the general contract has been awarded," looks to the usual communication of an acceptance, and precludes the idea that the use of the offer in the bidding shall be the equivalent. It may indeed be argued that this last language contemplated no more than an early notice that the offer had been accepted, the actual acceptance being the bid, but that would wrench its natural meaning too far, especially in the light of the preceding phrase. The contractors had a ready escape from their difficulty by insisting upon a contract before they used the figures; and in commercial transactions it does not in the end promote justice to seek strained interpretations in aid of those who do not protect themselves.

But the plaintiff says that even though no bilateral contract was made, the defendant should be held under the doctrine of "promissory estoppel." This is to be chiefly found in those cases where persons subscribe to a venture, usually charitable, and are held to their promises after it has been completed. It has been applied much more broadly, however, and has now been generalized in section 90, of the Restatement of Contracts. We may arguendo accept it as it there reads, for it does not apply to the case at bar. Offers are ordinarily made in exchange for a consideration, either a counter-promise or some other act which the promisor wishes to secure. In such cases they propose bargains; they presuppose that each promise or performance is an inducement to the other. Wisconsin, etc., Ry. v. Powers, 191 U. S. 379, 386, 387, 24 S. Ct. 107, 48 L. Ed. 229; Banning Co. v. California, 240 U. S. 142, 152, 153, 36 S. Ct. 338, 60 L. Ed. 569. But a man may make a promise without expecting an equivalent; a donative promise, conditional or absolute. The common law provided for such by sealed instruments, and it is unfortunate that these are no longer generally available. The doctrine of "promissory estoppel" is to avoid the harsh results of allowing the promisor in such a case to repudiate, when the promisee has acted in reliance upon the promise. Siegel v. Spear & Co., 234 N.Y. 479, 138 N.E. 414, 26 A. L.R. 1205. Cf. Allegheny College v. National Bank, 246 N.Y. 369, 159 N.E. 173, 57 L.R.A. 980. But an offer for an exchange is not meant to become a promise until a consideration has been received, either a counter-promise or whatever else is stipulated. To extend it would be to hold the offeror regardless of the stipulated condition of his offer. In the case at bar the defendant offered to deliver the linoleum in exchange for the plaintiff's acceptance, not for its bid, which was a matter of indifference to it. That offer could become a promise to deliver only when the equivalent was received; that is, when the plaintiff promised to take and pay for it. There is no room in such a situation for the doctrine of "promissory estoppel."

Nor can the offer be regarded as of an option, giving the plaintiff the right seasonably to accept the linoleum at the quoted prices if its bid was accepted, but not binding it to take and pay, if it could get a better bargain elsewhere. There is not the least reason to suppose that the defendant meant to subject itself to such a one-sided obligation. True, if so construed, the doctrine of "promissory estoppel" might apply, the plaintiff having acted in reliance upon it, though, so far as we have found, the decisions are otherwise. Ganss v. Guffey Petroleum Co., 125 App. Div. 760, 110 N.Y.S. 176; Comstock v. North, 88 Miss. 754, 41 So. 374. As to that, however, we need not declare ourselves.

Judgment affirmed.

51 Cal. 2d 409 (1958)

WILLIAM A. DRENNAN, Respondent,
v.
STAR PAVING COMPANY (a Corporation), Appellant.

L. A. No. 25024.
Supreme Court of California. In Bank.
Dec. 31, 1958.

Atus P. Reuther, Norman Soibelman, Obegi & High and Earl J. McDowell for Appellant.

S. B. Gill for Respondent.

TRAYNOR, J.

Defendant appeals from a judgment for plaintiff in an action to recover damages caused by defendant's refusal to perform certain paving work according to a bid it submitted to plaintiff.

On July 28, 1955, plaintiff, a licensed general contractor, was preparing a bid on the "Monte Vista School Job" in the Lancaster school district. Bids had to be submitted before 8 p.m. Plaintiff testified that it was customary in that area for general contractors to receive the bids of subcontractors by telephone on the day set for bidding and to rely on them in computing their own bids. Thus on that day plaintiff's secretary, Mrs. Johnson, received by telephone between 50 and 75 subcontractors' bids for various parts of the school job. As each bid came in, she wrote it on a special form, which she brought into plaintiff's office. He then posted it on a master cost sheet setting forth the names and bids of all subcontractors. His own bid had to include the names of subcontractors who were to perform one-half of one per cent or more of the construction work, and he had also to provide a bidder's bond of 10 per cent of his total bid of $317,385 as a guarantee that he would enter the contract if awarded the work.

Late in the afternoon, Mrs. Johnson had a telephone conversation with Kenneth R. Hoon, an estimator for defendant. He gave his name and telephone number and stated that he was bidding for defendant for the paving work at the Monte Vista School according to plans and specifications and that his bid was $7,131.60. At Mrs. Johnson's request he repeated his bid. Plaintiff listened to the bid over an extension telephone in his office and posted it on the master sheet after receiving the bid form from Mrs. Johnson. Defendant's was the lowest bid for the paving. Plaintiff computed his own bid accordingly and submitted it with the name of defendant as the subcontractor for the paving. When the bids were opened on July 28th, plaintiff's proved to be the lowest, and he was awarded the contract.

On his way to Los Angeles the next morning plaintiff stopped at defendant's office. The first person he met was defendant's construction engineer, Mr. Oppenheimer. Plaintiff testified: 

I introduced myself and he immediately told me that they had made a mistake in their bid to me the night before, they couldn't do it for the price they had bid, and I told him I would expect him to carry through with their original bid because I had used it in compiling my bid and the job was being awarded them. And I would have to go and do the job according to my bid and I would expect them to do the same.

Defendant refused to do the paving work for less than $15,000. Plaintiff testified that he "got figures from other people" and after trying for several months to get as low a bid as possible engaged L & H Paving Company, a firm in Lancaster, to do the work for $10,948.60.

The trial court found on substantial evidence that defendant made a definite offer to do the paving on the Monte Vista job according to the plans and specifications for $7,131.60, and that plaintiff relied on defendant's bid in computing his own bid for the school job and naming defendant therein as the subcontractor for the paving work. Accordingly, it entered judgment for plaintiff in the amount of $3,817 (the difference between defendant's bid and the cost of the paving to plaintiff) plus costs.

Defendant contends that there was no enforceable contract between the parties on the ground that it made a revocable offer and revoked it before plaintiff communicated his acceptance to defendant.

There is no evidence that defendant offered to make its bid irrevocable in exchange for plaintiff's use of its figures in computing his bid. Nor is there evidence that would warrant interpreting plaintiff's use of defendant's bid as the acceptance thereof, binding plaintiff, on condition he received the main contract, to award the subcontract to defendant. In sum, there was neither an option supported by consideration nor a bilateral contract binding on both parties.

Plaintiff contends, however, that he relied to his detriment on defendant's offer and that defendant must therefore answer in damages for its refusal to perform. Thus the question is squarely presented: Did plaintiff's reliance make defendant's offer irrevocable?

Section 90 of the Restatement of Contracts states: "A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." This rule applies in this state. (Edmonds v. County of Los Angeles, 40 Cal.2d 642 [255 P.2d 772]; Frebank Co. v. White, 152 Cal.App.2d 522 [313 P.2d 633]; Wade v. Markwell & Co., 118 Cal.App.2d 410 [258 P.2d 497, 37 A.L.R.2d 1363]; West v. Hunt Foods, Inc., 101 Cal.App.2d 597 [225 P.2d 978]; Hunter v. Sparling, 87 Cal.App.2d 711 [197 P.2d 807]; see 18 Cal.Jur.2d 407-408; 5 Stan. L. Rev. 783.)

Defendant's offer constituted a promise to perform on such conditions as were stated expressly or by implication therein or annexed thereto by operation of law. (See 1 Williston, Contracts [3d ed.], §24A, p. 56, §61, p. 196.) Defendant had reason to expect that if its bid proved the lowest it would be used by plaintiff. It induced "action . . . of a definite and substantial character on the part of the promisee."

Had defendant's bid expressly stated or clearly implied that it was revocable at any time before acceptance we would treat it accordingly. It was silent on revocation, however, and we must therefore determine whether there are conditions to the right of revocation imposed by law or reasonably inferable in fact. In the analogous problem of an offer for a unilateral contract, the theory is now obsolete that the offer is revocable at any time before complete performance. Thus section 45 of the Restatement of Contracts provides:

If an offer for a unilateral contract is made, and part of the consideration requested in the offer is given or tendered by the offeree in response thereto, the offeror is bound by a contract, the duty of immediate performance of which is conditional on the full consideration being given or tendered within the time stated in the offer, or, if no time is stated therein, within a reasonable time.

In explanation, comment b states that the

main offer includes as a subsidiary promise, necessarily implied, that if part of the requested performance is given, the offeror will not revoke his offer, and that if tender is made it will be accepted. Part performance or tender may thus furnish consideration for the subsidiary promise. Moreover, merely acting in justifiable reliance on an offer may in some cases serve as sufficient reason for making a promise binding (see §90).

Whether implied in fact or law, the subsidiary promise serves to preclude the injustice that would result if the offer could be revoked after the offeree had acted in detrimental reliance thereon. Reasonable reliance resulting in a foreseeable prejudicial change in position affords a compelling basis also for implying a subsidiary promise not to revoke an offer for a bilateral contract.

The absence of consideration is not fatal to the enforcement of such a promise. It is true that in the case of unilateral contracts the Restatement finds consideration for the implied subsidiary promise in the part performance of the bargained-for exchange, but its reference to section 90 makes clear that consideration for such a promise is not always necessary. The very purpose of section 90 is to make a promise binding even though there was no consideration "in the sense of something that is bargained for and given in exchange." (See 1 Corbin, Contracts 634 et seq.) Reasonable reliance serves to hold the offeror in lieu of the consideration ordinarily required to make the offer binding. In a case involving similar facts the Supreme Court of South Dakota stated that 

we believe that reason and justice demand that the doctrine [of section 90] be applied to the present facts. We cannot believe that by accepting this doctrine as controlling in the state of facts before us we will abolish the requirement of a consideration in contract cases, in any different sense than an ordinary estoppel abolishes some legal requirement in its application. We are of the opinion, therefore, that the defendants in executing the agreement [which was not supported by consideration] made a promise which they should have reasonably expected would induce the plaintiff to submit a bid based thereon to the Government, that such promise did induce this action, and that injustice can be avoided only by enforcement of the promise.

(Northwestern Engineering Co. v. Ellerman, 69 S.D. 397, 408 [10 N.W.2d 879]; see also Robert Gordon, Inc. v. Ingersoll-Rand Co., 117 F.2d 654, 661; cf. James Baird Co. v. Gimbel Bros., 64 F.2d 344.)

When plaintiff used defendant's offer in computing his own bid, he bound himself to perform in reliance on defendant's terms. Though defendant did not bargain for this use of its bid neither did defendant make it idly, indifferent to whether it would be used or not. On the contrary it is reasonable to suppose that defendant submitted its bid to obtain the subcontract. It was bound to realize the substantial possibility that its bid would be the lowest, and that it would be included by plaintiff in his bid. It was to its own interest that the contractor be awarded the general contract; the lower the subcontract bid, the lower the general contractor's bid was likely to be and the greater its chance of acceptance and hence the greater defendant's chance of getting the paving subcontract. Defendant had reason not only to expect plaintiff to rely on its bid but to want him to. Clearly defendant had a stake in plaintiff's reliance on its bid. Given this interest and the fact that plaintiff is bound by his own bid, it is only fair that plaintiff should have at least an opportunity to accept defendant's bid after the general contract has been awarded to him.

It bears noting that a general contractor is not free to delay acceptance after he has been awarded the general contract in the hope of getting a better price. Nor can he reopen bargaining with the subcontractor and at the same time claim a continuing right to accept the original offer. (See R. J. Daum Const. Co. v. Child, 122 Utah 194 [247 P.2d 817, 823].) In the present case plaintiff promptly informed defendant that plaintiff was being awarded the job and that the subcontract was being awarded to defendant.

Defendant contends, however, that its bid was the result of mistake and that it was therefore entitled to revoke it. It relies on the rescission cases of M. F. Kemper Const. Co. v. City of Los Angeles, 37 Cal.2d 696 [235 P.2d 7], and Brunzell Const. Co. v. G. J. Weisbrod, Inc., 134 Cal.App.2d 278 [285 P.2d 989]. (See also Lemoge Electric v. San Mateo County, 46 Cal.2d 659, 662 [297 P.2d 638].) In those cases, however, the bidder's mistake was known or should have been to the offeree, and the offeree could be placed in status quo. [7] Of course, if plaintiff had reason to believe that defendant's bid was in error, he could not justifiably rely on it, and section 90 would afford no basis for enforcing it. (Robert Gordon, Inc. v. Ingersoll-Rand Co., 117 F.2d 654, 660.) Plaintiff, however, had no reason to know that defendant had made a mistake in submitting its bid, since there was usually a variance of 160 per cent between the highest and lowest bids for paving in the desert around Lancaster. He committed himself to performing the main contract in reliance on defendant's figures. Under these circumstances defendant's mistake, far from relieving it of its obligation, constitutes an additional reason for enforcing it, for it misled plaintiff as to the cost of doing the paving. Even had it been clearly understood that defendant's offer was revocable until accepted, it would not necessarily follow that defendant had no duty to exercise reasonable care in preparing its bid. It presented its bid with knowledge of the substantial possibility that it would be used by plaintiff; it could foresee the harm that would ensue from an erroneous underestimate of the cost. Moreover, it was motivated by its own business interest. Whether or not these considerations alone would justify recovery for negligence had the case been tried on that theory (see Biakanja v. Irving, 49 Cal.2d 647, 650 [320 P.2d 16]), they are persuasive that defendant's mistake should not defeat recovery under the rule of section 90 of the Restatement of Contracts.

As between the subcontractor who made the bid and the general contractor who reasonably relied on it, the loss resulting from the mistake should fall on the party who caused it.

Leo F. Piazza Paving Co. v. Bebek & Brkich, 141 Cal.App.2d 226 [296 P.2d 368], and Bard v. Kent, 19 Cal.2d 449 [122 P.2d 8, 139], are not to the contrary. In the Piazza case the court sustained a finding that defendants intended, not to make a firm bid, but only to give the plaintiff "some kind of an idea to use" in making its bid; there was evidence that the defendants had told plaintiff they were unsure of the significance of the specifications. There was thus no offer, promise, or representation on which the defendants should reasonably have expected the plaintiff to rely. The Bard case held that an option not supported by consideration was revoked by the death of the optioner. The issue of recovery under the rule of section 90 was not pleaded at the trial, and it does not appear that the offeree's reliance was "of a definite and substantial character" so that injustice could be avoided "only by the enforcement of the promise."

There is no merit in defendant's contention that plaintiff failed to state a cause of action, on the ground that the complaint failed to allege that plaintiff attempted to mitigate the damages or that they could not have been mitigated. Plaintiff alleged that after defendant's default, "plaintiff had to procure the services of the L & H Co. to perform said asphaltic paving for the sum of $10,948.60." Plaintiff's uncontradicted evidence showed that he spent several months trying to get bids from other subcontractors and that he took the lowest bid. Clearly he acted reasonably to mitigate damages. [10] In any event any uncertainty in plaintiff's allegation as to damages could have been raised by special demurrer. (Code Civ. Proc., §430, subd. 9.) It was not so raised and was therefore waived. (Code Civ. Proc., §434.)

The judgment is affirmed.

Gibson, C.J., Shenk, J., Schauer, J., Spence, J., and McComb, J., concurred.

[71] Before Judges GOLDMANN, FOLEY and COLLESTER.

Mr. Sam J. Abraham argued the cause for appellant (Messrs. Magner, Abraham & Kahn, attorneys).

Mr. Peter A. Adams argued the cause for respondent.

The opinion of the court was delivered by COLLESTER, J.A.D.

Summary judgment on cross-motions therefor was entered in favor of plaintiff E.A. Coronis Associates (Coronis) on defendant M. Gordon Construction Company's (Gordon) counterclaim in the Superior Court, Law Division.

This litigation began when plaintiff brought suit on three contracts not here pertinent. Defendant admitted liability thereon, but counterclaimed for breach of a contract to supply and erect structural steel on one of its projects. Gordon is a general contractor. In anticipation of making a bid to construct two buildings at the Port of New York Authority's Elizabeth Piers it sought bids from subcontractors. Coronis designs, fabricates, supplies and erects structural steel. On April 22, 1963 it sent the following letter to Gordon:

[72] "April 22, 1963 Mr. David BenZvi Gordon Construction Co. Elizabeth Avenue Linden, N.J. Subject: Bldgs. 131 & 132 Elizabeth Port Authority Piers Structural Steel

Dear Mr. BenZvi:

We regret very much that this estimate was so delayed. Be assured that the time consumed was due to routing of the plans through our regular sources of fabrication.

We are pleased to offer:

All structural steel including steel girts and purlins Both Buildings delivered and erected ................... $155,413.50 All structural steel equipped with clips for wood girts & purlins Both Buildings delivered and erected ................... 98,937.50

NOTE: This price is predicated on an erected price of .1175 per Lb. of steel and we would expect to adjust the price on this basis to conform to actual tonnage of steel used in the project.

Thank you very much for this opportunity to quote.

Very truly yours, E.A. CORONIS ASSOCIATES /s/ Arthur C. Pease Arthur C. Pease"

Gordon contends that at some date prior to April 22 the parties reached an oral agreement and that the above letter was sent in confirmation.

Bids were opened by the Port Authority on April 19, 1963, and Gordon's bid was the lowest. He alleges that Coronis was informed the same day. The Port Authority contract was officially awarded to Gordon on May 27, 1963 and executed about two weeks later. During this period Gordon never accepted the alleged offer of Coronis. Meanwhile, on June 1, 1963, Coronis sent a telegram, in pertinent part reading:

"Due to conditions beyond our control, we must withdraw our proposal of April 22nd 1963 for structural steel Dor Buildings 131 and 132 at the Elizabeth-Port Piers at the earliest possible we will resubmit our proposal."

[73] Two days later, on June 3, 1963, Gordon replied by telegram as follows:

"Ref your tel. 6-3 and for the record be advised that we are holding you to your bid of April 22, 1963 for the structural steel of carge bldgs 131 and 132."

Coronis never performed. Gordon employed the Elizabeth Iron Works to perform the work and claims as damages the difference between Coronis' proposal of $155,413.50 and Elizabeth Iron Works' charge of $208,000.

Gordon contends that the April 22 letter was an offer and that Coronis had no right to withdraw it. Two grounds are advanced in support. First, Gordon contends that the Uniform Commercial Code firm offer section, N.J.S. 12A:2-205, precludes withdrawal and, second, it contends that withdrawal is prevented by the doctrine of promissory estoppel.

I.

Prior to the enactment of the Uniform Commercial Code an offer not supported by consideration could be revoked at any time prior to acceptance. American Handkerchief Corp. v. Frannat Realty Co., 17 N.J. 12 (1954). The drafters of the Code recognized that the common law rule was contrary to modern business practice and possessed the capability to produce unjust results. See Corbin, "The Uniform Commercial Code — Sales, Should it be Enacted," 59 Yale L.J. 821, 827 (1950). The response was section 2-205 (N.J.S. 12A:2-205) which reverses the common law rule and states:

"An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time it stated for a reasonable time. * * *" (Emphasis added)

Coronis' letter contains no terms giving assurance it will be held open. We recognize that just as an offeree runs a risk in acting on an offer before accepting it, the offeror runs a risk [74] if his offer in considered irrevocable. Cf., James Baird Co. v. Gimbel Bros. Inc., 64 F.2d 344 (2 Cir. 1933). In their comments to section 2-205 of the Code the drafters anticipated these risks and stated:

"However, despite settled courses of dealing or usages of the trade whereby firm offers are made by oral communication and relied upon without more evidence, such offers remain revocable under this Article since authentication by a writing is the essence of this section." Uniform Commercial Code (N.J.S. 12A:2-205), comment, par. 2.

We think it clear that plaintiff's writing does not come within the provision of section 2-205 of a "signed writing which by its terms gives assurance that it will be held open." See Wilmington Trust Company v. Coulter, 200 A.2d 441 (Del. Sup. Ct. 1964).

Having so concluded, we need not consider the question of whether the Coronis letter was an offer or whether the letter dealt with "goods." We note in this connection that Coronis quoted the price for structural steel delivered and erected.

II.

Defendant also argues that even if plaintiff's writing of April 22 is not a firm offer within the meaning of section 2-205, justice requires that we apply the doctrine of promissory estoppel to preclude its revocation. Restatement, Contracts, § 90 provides:

"A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise."^[1]

[75] Defendant argues that it relied on plaintiff's bid in making its own bid and that injustice would result if plaintiff could now revoke. Thus, defendant contends that plaintiff's bid is made irrevocable by application of the doctrine of promissory estoppel.

No New Jersey case has applied the rule in our State. But our highest court has twice implied that in appropriate circumstances it would. Friedman v. Tappan Development Corp., 22 N.J. 523 (1956); American Handkerchief Corp. v. Frannat Realty Co., supra. The general rule is that estoppel only applies to representations of facts past or present. Berman v. One Forty-Five Belmont Ave. Corp., 109 N.J. Eq. 256, 261 (Ch. 1931). The significant function of promissory estoppel is to apply an estoppel to representations or promises as to future events. 31 C.J.S. Estoppel § 80, pp. 466, 467 (1964). Writing for the court in Friedman, Justice Heher recognized that the doctrine was not truly an estoppel in the historical sense. He described the doctrine by stating:

"The term `promissory estoppel' is of comparatively recent origin in our jurisprudence, not altogether clear in its quality and import. It is not a true estoppel, but a departure from the classic doctrine of consideration that the promise and the consideration must purport to be the motive each for the other, in whole or at least in part, and it is not enough that the promise induces the detriment or that the detriment induces the promise if the other half is wanting, Wisconsin & Michigan R. Co. v. Powers, 191 U.S. 379, 386, 24 S.Ct. 107, 48 L.Ed. 229 (1903), Holmes, C.J.; Coast National Bank v. Bloom, supra [113 N.J.L. 597, 602 (E. & A. 1934)], a professed adaptation of the principle of estoppel to the formation of contracts where, relying on a gratuitous promise, the promisee has suffered detriment. Martin v. Meles, 179 Mass. 114, 60 N.E. 397 (Sup. Jud. Ct. 1901), Holmes, C.J. There is in such circumstances no representation of an existing fact, but merely that the promisor at the time of making the promise intends to fulfill it. The reliance is on a promise, and not on a misstatement of fact, and so the estoppel is termed `promissory' to mark the distinction. Williston on Contracts (rev. ed.), section 139." (22 N.J., at pp. 535, 536)

The evolving nature of the doctrine under examination is illustrated by the variation in the expressions of the authorities in its characterization. Thus it has been called a "species [76] of consideration," Porter v. Commissioner of Internal Revenue, 60 F.2d 673, 675 (2 Cir. 1932), affirmed 288 U.S. 436, 53 S.Ct. 451, 77 L.Ed. 880 (1933); and the "equivalent of" or a "substitute for" consideration. Allegheny College v. National Chautauqua County Bank of Jamestown, 246 N.Y. 369, 159 N.E. 173, 175, 57 A.L.R. 980 (Ct. App. 1927). The doctrine has found basic acceptance throughout the country. However, the courts have not agreed on where the doctrine is to be applied. They frequently state that in this country promissory estoppel "has been generally confined to charitable subscriptions, where difficulty has been encountered in sustaining the promise under the conventional theories of consideration, and to certain promises between individuals for the payment of money, enforced as informal contracts." Friedman v. Tappan Development Corp., supra, at p. 536; 1 Williston, Contracts (3d ed. 1957), § 140, pp. 611, 612. While the doctrine is now recognized "almost universally" in the charitable subscription cases, 1A Corbin, op. cit., § 198, p. 204; 1 Williston, op. cit., p. 609, § 140, it also enjoys a much wider application. Annotation 48 A.L.R.2d 1069, 1079-1087 (1950); Annotation 115 A.L.R. 152, 156 (1938); 1A Corbin, op. cit., §§ 193-209. For example, promissory estoppel has been applied to preclude reliance on the statute of limitations, Waugh v. Lennard, 69 Ariz. 214, 211 P.2d 806 (Sup. Ct. 1949); to avoid the statute of frauds, Alaska Airlines v. Stephenson, 217 F.2d 295, 15 Alaska 272 (9 Cir. 1954); to prevent foreclosure of a mortgage, Bank of Fairbanks v. Kaye, 227 F.2d 566, 16 Alaska 23 (9 Cir. 1955); to enforce a pension plan, West v. Hunt Foods, 101 Cal. App.2d 597, 225 P.2d 978 (D. Ct. App. 1951); to require the granting of a franchise, Chrysler Corporation v. Quimby, 1 Storey 264, 51 Del. 264, 144 A.2d 123, 885 (Sup. Ct. 1958); to protect creditors by requiring directors of a corporation to convey land to it, Berman v. Griggs, 145 Me. 258, 75 A.2d 365 (Sup. Jud. Ct. 1950); to enforce a release given without consideration, Fried v. Fisher, 328 Pa. 497, 196 A. 39, 115 A.L.R. 147 (Sup. Ct. 1938); and to enforce an easement [77] granted without consideration or a writing, Miller v. Lawlor, 245 Iowa 1144, 66 N.W.2d 267, 48 A.L.R.2d 1058 (Sup. Ct. 1954).

We see no reason why, given an appropriate factual situation, the doctrine would not apply in this State. Our view is reinforced by the ever expanding scope of liability designed to compensate those injured by wrongful conduct. See, e.g., Ekalo v. Constructive Service Corporation of America, 46 N.J. 82 (1965); Falzone v. Busch, 45 N.J. 559 (1965); Schipper v. Levitt & Sons, Inc., 44 N.J. 70 (1965). As Justice Jacobs said in Schipper:

"The law should be based on current concepts of what is right and just and the judiciary should be alert to the never-ending need for keeping its common law principles abreast of the times. Ancient distinctions which make no sense in today's society and tend to discredit the law should be readily rejected. * * *" (at p. 90)

We see no difference between substantial reliance on a representation or promise as to current or past facts and as to future facts. It is only right and just that a promise a promisor knows will induce action of a substantial character be enforced if it is in fact relied on.

The authorities are not uniform in applying the doctrine of promissory estoppel to situations comparable to that before us. We believe the better line of authority applies the doctrine. N. Litterio & Co. v. Glassman Constr. Co., 115 U.S. App. D.C. 335, 319 F.2d 736 (D.C. Cir. 1963); Air Conditioning Co. of Hawaii v. Richards Constr. Co., 200 F. Supp. 167 (D. Hawaii 1963), affirmed on other grounds 318 F.2d 410 (9 Cir. 1963); Reynolds v. Texarkana Construction Company, 237 Ark. 583, 374 S.W.2d 818 (Sup. Ct. 1964); Drennan v. Star Paving Co., 51 Cal.2d 409, 333 P.2d 757 (Sup. Ct. 1958); Norcross v. Winters, 209 Cal. App.2d 207, 25 Cal. Rptr. 821 (D. Ct. App. 1962); Northwestern Engineering Co. v. Ellerman, 69 S.D. 397, 10 N.W.2d 879 (Sup. Ct. 1943); Union Tank Car Company v. Wheat Brothers, 15 Utah 2d 101, 387 P.2d 1000 (Sup. Ct. 1964). Cf., R.P. [78] Farnsworth & Co. v. Albert, 79 F. Supp. 27 (E.D. La. 1948), reversed 176 F.2d 198 (5 Cir. 1949); Harris v. Lillis, 24 So.2d 689 (La. Ct. App. 1946). Contra, James Baird Co. v. Gimbel Bros., Inc., 64 F.2d 344 (2 Cir. 1933); Southeastern Sales & Service Co. v. T.T. Watson, Inc., 172 So.2d 239 (Fla. D. Ct. App. 1965).

The Drennan case involved an oral bid by a subcontractor for paving work at a school project on which plaintiff general contractor was about to bid. Defendant's paving bid was the lowest, and the general contractor computed his own bid accordingly. Plaintiff was the successful bidder but the following day was informed by defendant it would not do the work at its bid price. The California Supreme Court, per Justice Traynor, applied the doctrine of promissory estoppel to prevent defendant's revocation of its bid, stating:

"When plaintiff used defendant's offer in computing his own bid, he bound himself to perform in reliance on defendant's terms. Though defendant did not bargain for this use of its bid neither did defendant make it idly, indifferent to whether it would be used or not. On the contrary it is reasonable to suppose that defendant submitted its bid to obtain the subcontract. It was bound to realize the substantial possibility that its bid would be the lowest, and that it would be included by plaintiff in his bid. It was to its own interest that the contractor be awarded the general contract; the lower the subcontract bid, the lower the general contractor's bid was likely to be and the greater its chance of acceptance and hence the greater defendant's chance of getting the paving subcontract. Defendant had reason not only to expect plaintiff to rely on his bid but to want him to. Clearly defendant had a stake in plaintiff's reliance on its bid. Given this interest and the fact that plaintiff is bound by his own bid, it is only fair that plaintiff should have at least an opportunity to accept defendant's bid after the general contract has been awarded to him." (333 P.2d, at p. 760)

The South Dakota Supreme Court was confronted with a virtually identical set of facts in the Northwestern Engineering case. In applying promissory estoppel it stated,

"Obviously it would seem unjust and unfair, after appellant was declared the successful bidder and imposed with all the obligations of such, to allow respondents to then retract their promise and permit the effect of such retraction to fall upon the appellant." (10 N.W.2d, at p. 883)

[79] Similarly, in the Reynolds case a subcontractor submitted a bid for the electrical work for a school project on which the general contractor was about to bid. The general contractor relied on the subcontractor's bid. In applying promissory estoppel to prevent revocation the court held that,

"Justice demands that the loss resulting from the subcontractor's carelessness should fall upon him who was guilty of the error rather than upon the principal contractor who relied in good faith upon the offer that he received." (374 S.W.2d, at p. 820)

We agree.

III.

To successfully establish a cause of action based on promissory estoppel Gordon must prove that (1) it received a clear and definite offer from Coronis; (2) Coronis could expect reliance of a substantial nature; (3) actual reasonable reliance on Gordon's part, and (4) detriment. Restatement, Contracts, § 90; N. Litterio & Co. v. Glassman Constr. Co., supra, 319 F.2d, at p. 739.

The Law Division did not think promissory estoppel would apply in the situation sub judice. Therefore we reverse. We also remand since it is necessary to determine if the elements of a promissory estoppel case are present. They are essentially factual and inappropriate to a summary judgment. R.R. 4:58-3; Robbins v. Jersey City, 23 N.J. 229 (1957). Gordon must show the existence of an offer. The April 22 letter is subsequent in time to Gordon's bid to the Port Authority. It cannot furnish the basis for this suit since it would have been impossible for Gordon to have relied on it when making its bid. However, it is alleged that the letter merely confirmed prior oral agreements. The true facts must await a full hearing.

Similarly, Gordon must show that Coronis could reasonably expect Gordon to rely on the bid. This will depend on Coronis' actual knowledge or the custom and usage in the trade. N. Litterio & Co. v. Glassman Constr. Co., supra; [80] Hedden v. Lupinsky, 405 Pa. 609, 176 A.2d 406 (Sup. Ct. 1962). Gordon must also show actual reliance.^[2]Norcross v. Winters, supra. And we note that if Coronis' bid was so low as to put Gordon on notice that it was erroneous it cannot claim reliance. Drennan v. Star Paving Co., supra; MacIsaac & Menke Co. v. Freeman, 194 Cal. App.2d 327, 15 Cal. Rptr. 48 (D. Ct. App. 1961); cf., Feldman v. Urban Commercial, Inc., 70 N.J. Super. 463 (Ch. Div. 1961). Finally, of course, detriment must be shown.

Reversed and remanded.

[1] The Restatement does not use the term "promissory estoppel." It has been criticized as too broad. Professor Corbin approves of the Restatement's stating of the rule "in terms of action or forbearance in reliance on a promise." 1A Corbin, Contracts, § 204 (1963), cited with approval in Friedman v. Tappan Development Corp., 22 N.J. 523, 538 (1956). We use the term "promissory estoppel" for convenience.

[2] We do not consider whether the existence of section 2-205 of the Uniform Commercial Code precludes reliance on an offer not conforming to its provisions.

Livingstone

v.

Evans et al

Alberta Supreme Court, Trial

Walsh, J.

October 30, 1925

Contract I D—Offer and acceptance—Intervening negotiations—Effect.

Where one man offers to sell land toanother and the latter does not accept but makes a counter-offer, which the former refuses, and the latter then accepts the original offer it is a question of fact whether the intervening counter-offer and refusal have put an end to the original offer, so that the acceptance does conclude a contract. So where the refusal of a counter-offer consisted of a “Cannot reduce price,” this constituted a reaffirmation of the original offer and a subsequent acceptance of the original offer was good.

[Re Cowan & Boyd (1921), 61 D.L.R. 497, 49 O.L.R. 335, applied].

ACTION for specific performance.

C.H. Grant, K.C., for plaintiff.

F.C. Casselman, for defendants.

Walsh, J.:

The defendant, Thomas J. Evans, through his agent, wrote to the plaintiff offering to sell him the land in question for $1,800 on terms. On the day that he received this offer the plaintiff wired this agent as follows: “Send lowest cash price. Will give $1,600 cash. Wire.” The agent replied to this by telegram as follows: “Cannot reduce price.” Immediately upon the receipt of this telegram the plaintiff wrote accepting the offer. It is admitted by the defendants that this offer and [770] the plaintiff’s acceptance of it constitute a contract for the sale of this land to the plaintiff by which he is bound unless the intervening telegrams above set out put an end to his offer so that the plaintiff could not thereafter bind him to it by his acceptance of it.

It is quite clear that when an offer has been rejected it is thereby ended and it cannot be afterwards accepted without the consent of him who made it. The simple question and the only one argued before me is whether the plaintiff’s counter offer was in law a rejection of the defendant’s offer which freed him from it.

Hyde v. Wrench (1840)  3 Beav. 334, 49 E.R. 132 a judgment of Lord Langdale, M.R. pronounced in 1840 is the authority for the contention that it was. The defendant offered to sell for £1,000. The plaintiff met that with an offer to pay £950 and (to quote from the judgment) “he thereby rejected the offer previously made by the Defendant. I think that it was not afterwards competent for him to revive the proposal of the Defendant, by tendering an acceptance of it.”

Stevenson v. McLean, (1880) 5 Q.B.D. 346, a later case relied upon by Mr. Grant is easily distinguishable from Hyde v. Wrench as it is in fact distinguished by Lush, J. who decided it. He held that the letter there relied upon as constituting a rejection of the offer was not a new proposal but a mere enquiry which should have been answered and not treated as a rejection but the learned Judge said that if it had contained an offer it would have likened the case to Hyde v. Wrench.

Hyde v. Wrench has stood without question for 85 years. It is adopted by the text writers as a correct exposition of the law and is generally accepted and recognized as such. I think it not too much to say that it has firmly established it as a part of the law of contracts that the making of a counter-offer is a rejection of the original offer.

The plaintiff’s telegram was undoubtedly a counter-offer. True, it contained an inquiry as well but that clearly was one which called for an answer only if the counter-offer was rejected. In substance it said, “I will give you $1,600 cash. If you won’t take that wire your lowest cash price.” In my opinion it put an end to the defendant’s liability under his offer unless it was revived by his telegram in reply to it.

The real difficulty in the case, to my mind, arises out of the defendant’s telegram “cannot reduce price.” If this was simply a rejection of the plaintiff’s counter-offer it amounts to nothing. If, however, it was a renewal of the original offer it [771] gave the plaintiff the right to bind the defendant to it by his subsequent acceptance of it.

With some doubt I think that it was a renewal of the original offer or at any rate an intimation to the plaintiff that he was still willing to treat on the basis of it. It was, of course, a reply to the counter-offer and to the enquiry in the plaintiff’s telegram. But it was more than that. The price referred to in it was unquestionably that mentioned in his letter. His statement that he could not reduce that price  strikes me as having but one meaning, namely, that he was still standing by it and, therefore, still open to accept it.

There is support for this view in a judgment of the Ontario Appellate Division which I have found, In re Cowan and Boyd (1921), 61 D.L.R. 497,  49 O.L.R. 335. That was a landlord and tenant matter. The landlord wrote the tenant offering a renewal lease at an increased rent. The tenant replied that he was paying as high a rent as he should and if the landlord would not renew at the present rental he would like an early reply as he purposed buying a house. To this the landlord replied simply saying that he would call on the tenant between two certain named dates. Before he called and without any further communication between them the tenant wrote accepting the landlord’s original offer. The County Court Judge before whom the matter first came held that the tenant’s reply to the landlord’s offer was not a counter-offer but a mere request to modify its terms. The Appellate Division did not decide that question though from the ground on which it put its judgment it must have disagreed with the Judge below. It sustained his judgment, however, on the ground that the landlord’s letter promising to call on the tenant left open the original offer for further discussion so that the tenant had the right thereafter to accept it as he did.

The landlord’s letter in that case was, to my mind, much more unconvincing evidence of his willingness to stand by his original offer in the face of the tenant’s rejection of it than is the telegram of the defendant in this case. That is the judgment of a very strong Court, the reasons for which were written by the late Chief Justice Meredith. If it is sound, and it is not for me to question it, a fortiori must I be right in the conclusion to which I have come.

I am, therefore, of the opinion that there was a binding contract for the sale of this land to the plaintiff of which he is entitled to specific performance. It was admitted by his counsel that if I reached this conclusion his subsequent agreement [772] to sell the land to the defendant Williams would be of no avail as against the plaintiff’s contract.

There will, therefore, be judgment for specific performance with a declaration that the plaintiff’s rights under his contract have priority over those of the defendant Williams under his. The plaintiff will have his costs as agreed by the case. It is silent as to the scale but unless otherwise agreed they should be under C.R., Sch. C, c.3.

Judgement for the plaintiff.

JOHN G. DAY

v.

ASA H. CATON.

Suffolk. Nov. 19, 1875.— Feb. 29, 1876.

COLT & LORD, JJ., absent

In an action to recover the value of one half of a party wall erected by the plaintiff partly on his estate and partly on that of the defendant, the jury may, in the absence of an express agreement as to payment on the defendant’s part, infer promise to pay, if the plaintiff undertook and completed the wall with the ex-

[514]

pectation that the defendant would pay him for it, and the defendant had reason to know that the plaintiff was so acting with that expectation, and allowed him so to act without objection.

CONTRACT to recover the value of one half of a brick party wall built by the plaintiff upon and between the adjoining estates, 27 and 29 Greenwich Park, Boston.

At the trial in the Superior Court, before Allen, J., it appeared that, in 1871, the plaintiff, having an equitable interest in lot 29, built the wall in question, placing one half of it on the vacant lot 27, in which the defendant then had an equitable interest. The plaintiff testified that there was an express agreement on the defendant’s part to pay him one half the value of the wall when the defendant should use it in building upon lot 27. The defendant denied this, and testified that he never had any conversation with the plaintiff about the wall; and there was no other direct testimony on this point.

The defendant requested the judge to rule that, “ 1. The plaintiff can recover in this case only upon an express agreement.”

“ 2 . If the jury find there was no express agreement about the wall, but the defendant knew that the plaintiff was building upon land in which the defendant had an equitable interest, the defendant’s rights would” not be affected by such knowledge, and his silence and subsequent use of the wall would raise no implied promise to pay anything for the wall.”

The judge refused so to rule, but instructed the jury as follows : “ A promise would not be implied from the fact that the plaintiff, with the defendant’s knowledge, built the wall and the defendant used it, but it might be implied from the conduct of the parties. If the jury find that the plaintiff undertook and completed the building of the wall with the expectation that the defendant would pay him for it, and the defendant had reason to know that the plaintiff was so acting with that expectation and allowed him so to act without objection, then the jury might infer a promise on the part of the defendant to pay the plaintiff.”

The jury found for the plaintiff; and the defendant alleged exceptions.

H. D. Hyde & M. F. Dickinson, Jr., for the defendant.

F. W. Kiitredge, for the plaintiff.

[515]

DEVENS, J. The ruling that a promise to pay for the wall would not be implied from the fact that the plaintiff, with the defendant’s knowledge, built the wall, and that the defendant used it, was substantially in accordance with the request of the defendant, and is conceded to have been correct. Chit. Con. (11th Am. ed.) 86. Wells v. Banister, 4 Mass. 514. Knowlton v. Plantation No. 4, 14 Maine, 20. Davis v. School District in Bradford, 24 Maine, 349.

The defendant, however, contends that the presiding judge incorrectly ruled that such promise might be inferred from the fact that the plaintiff undertook and completed the building of the wall with the expectation that the defendant would pay him for it, the defendant having reason to know that the plaintiff was acting with that expectation, and allowed him thus to act without objection.

The fact that the plaintiff expected to be paid for the work would certainly not be sufficient of itself to establish the existence of a contract, when the question between the parties was whether one was made. Taft v. Dickinson, 6 Allen, 553. It must be shown that, in some manner, the party sought to be charged assented to it. If a party, however, voluntarily accepts and avails himself of valuable services rendered for his benefit, when he has the option whether to accept or reject them, even if there is no distinct proof that they were rendered by his authority or request, a promise to pay for them may be inferred. His knowledge that they were valuable, and his exercise of the option to avail himself of them, justify this inference. Abbot v. Hermon, 7 Greenl. 118. Hayden v. Madison, 7 Greenl. 76. And when one stands by in silence and sees valuable services rendered upon his real estate by the erection of a structure, (of which he must necessarily avail himself afterwards in his proper use thereof,) such silence, accompanied with the knowledge on his part that the party rendering the services expects payment therefor, may fairly be treated as evidence of an acceptance of it, and as tending to show an agreement to pay for it.

The maxim, Qui tacet consentire videtur, is to be construed indeed as applying only to those cases where the circumstances are such that a party is fairly called upon either to deny or admit his liability. But if silence may be interpreted as assent where a

[516]

proposition is made to one which he is bound to deny or admit, so also it may be if he is silent in the face of facts which fairly call upon him to speak. Lamb v. Bunce, 4 M. & S. 275. Conner v. Hackley, 2 Met. CIS. Preston v. American Linen Co. 119 Mass. 400.

If a person saw day after day a laborer at work in his field doing services, which must of necessity ensure to his benefit, knowing that the laborer expected pay for his work, when it was perfectly easy to notify him if his services were not wanted, even if a request were not expressly proved, such a request, either previous to or contemporaneous with the performance of the services, might fairly be inferred. But if the fact was merely brought to his attention upon a single occasion and casually, if he had little opportunity to notify the other that he did not desire the work and should not pay for it, or could only do so at the expense of much time and trouble, the same inference might not be made. The circumstances of each case would necessarily determine whether silence with a knowledge that another was doing valuable work for his benefit, and with the expectation of payment, indicated that consent which would give rise to the inference of a contract. The question would be one for the jury, and to them it was properly submitted in the case before us by the presiding judge.

Exceptions overruled.

CHARLES A. HOBBS

VS.

MASSASOIT WHIP COMPANY.

Essex. January 12, 1893. —March 1, 1893.


Present: FIELD, C. J., ALLEN, HOLMES, KNOWLTON, & BARKER, JJ.

Contract — Retention of Merchandise — Acceptance.

A. brought an action against B. for the price of eelskins. A. had sent eelskins in the same way four or five times before, which skins had been accepted and paid for by B. On B.’s testimony, it was to be assumed that if he had admitted the eelskins to be over a certain length, and fit for his business, as A. testified, and the jury found that they were, he would have accepted them; that this was understood by A.; and that there was a standing offer to A. for such skins. Held, that A. was warranted in sending B. skins conforming to the requirements, and even if the offer was not such that the contract was made as soon as skins corresponding to its terms were sent, sending them did not impose on B. a duty to act about them; and silence on his part, coupled with a retention of the skins for a reasonable time, might be found by the jury to warrant A. in assuming that they were accepted, and thus to amount to an acceptance.

CONTRACT, upon an account annexed for one hundred and eight ⁵⁰⁄₁₀₀ dollars, for 2,850 eelskins sold by the plaintiff to the defendant. At the trial in the Superior Court, before Hammond, J., it appeared in evidence that the plaintiff lived in Saugus, and the defendant had its usual place of business in Westfield, and was engaged in the manufacture of whips.

The plaintiff testified that he delivered the skins in question to one Harding of Lynn, on February 18, 1890, who upon the same or the following day forwarded them to the defendant; that the skins were in good condition when received by Harding, 2,050 of them being over twenty-seven inches in length each, and the balance over twenty-two inches in length each; that he had forwarded eelskins to the defendant through said Harding several different times in 1888 and 1889, and received payment therefor from the defendant; that he knew the defendant used such skins in its business in the manufacture of whips; that the skins sent on February 18, 1890, were for such use; that he understood that all skins sent by him were to be in good condition and over twenty-two inches in length, and that the defendant had never ordered of him skins less than twenty-two inches in length; and that Harding took charge of the skins for him and

[195]

that he received orders through Harding, but that Harding was not his agent.

Harding, who was called as a witness, testified that he had some correspondence for the plaintiff with the defendant in reference to skins; that he acted for the plaintiff in forwarding skins to the defendant, and in receiving pay therefor, and acted for the plaintiff in giving him any information, order, or notice which he received from the defendant in reference to skins sent or to be sent.

The defendant contended that Harding acted as the plaintiff’s agent. The plaintiff contended that Harding acted as the agent of the defendant, and not as his agent. On this point the evidence was conflicting, and the question was submitted to the jury, upon instructions not excepted to.

Four letters were offered in evidence, three of which, dated in 1889, showed transactions between the plaintiff and the defendant, and the fourth of which, dated Lynn, February 18, 1890, signed by Harding and addressed to the defendant, was as follows : “ We send you to-day, for Mr. Hobbs, 2,050 eelskins at .05 and 300 at .02.”

One Pirnie, president of the defendant corporation, called by the defendant, testified that before February 18,1890, the plaintiff had sent eelskins four or five times by Harding to the defendant, which were received and paid for by the defendant; that the defendant agreed to pay five cents each for eelskins over twenty-seven inches in length, and two cents each for eelskins over twenty-two inches in length and less than twenty-seven inches, suitable for use in the defendant’s business; that Harding was not acting for the defendant, but for the plaintiff; that the defendant never ordered the skins in question, and did not purchase them in any manner, and that no officer or employee of the corporation except himself had authority to order or purchase skins, and that he never ordered or purchased those in question; that skins came from Hobbs through Harding on February 19 or 20, 1890, and were at once examined by him, and found to be less than twenty-two inches in length, and found to be unfit for use, and that he notified Harding at once, in writing, that the skins were unfit for use, and that they were held subject to the plaintiff’s order; that the skins remained some months at the defendant’s place of

[196]

business in Westfield, and were then destroyed; and that the defendant received no other skins in the month of February from the plaintiff or from any other person.

One Case, the defendant’s shipping clerk, and one Gowdy, the defendant’s treasurer, testified that the skins sent on February 18, 1890, and received February 19 or 20, 1890, were examined by them, and were very short, in very bad shape, not fit for use, and worthless.

The judge instructed the jury that the plaintiff could not recover for eelskins less than twenty-two inches in length, nor for any of the eelskins if they were in the condition described by the witnesses for the defendant.

The plaintiff denied that he received any notice from the defendant that the skins were not suitable for use, or that they were held subject to his order.

The judge, among other instructions, also gave the following : “ Whether there was any prior contract or not, if skins are sent to them (the defendants) and they see fit, whether they have agreed to take them or not, to lie back and say nothing, having reason to suppose that the man who has sent them believes that they are taking them, since they say nothing about it, then, if they fail to notify, you would be warranted in finding for the plaintiff, on that state of things.”

The jury returned a verdict for the plaintiff; and the defendant alleged exceptions.

F. L. Evans, for the defendant.


J. E. Hanly & J. F. Libby, for the plaintiff.


HOLMES, J.

This is an action for the price of eel skins sent by the plaintiff to the defendant, and kept by the defendant some months, until they were destroyed. It must be taken that the plaintiff received no notice that the defendants declined to accept the skins. The case comes before us on exceptions to an instruction to the jury that, whether there was any prior contract or not, if skins are sent to the defendant, and it sees fit, whether it has agreed to take them or not, to lie back, and to say nothing, having reason to suppose that the man who has sent them believes that it is taking them, since it says nothing about it, then, if it fails to notify, the jury would be warranted in finding for the plaintiff.

[197]

Standing alone, and unexplained, this proposition might seem to imply that one stranger may impose a duty upon another, and make him a purchaser, in spite of himself, by sending goods to him, unless he will take the trouble, and be at the expense, of notifying the sender that he will not buy. The case was argued for the defendant on that interpretation. But, in view of the evidence, we do not understand that to have been the meaning of the judge, and we do not think that the jury can have understood that to have been his meaning. The plaintiff was not a stranger to the defendant, even if there was no contract between them. He had sent eelskins in the same way four or five times before, and they had been accepted and paid for. On the defendant’s testimony, it is fair to assume that, if it had admitted the eelskins to be over twenty-two inches in length, and fit for its business, as the plaintiff testified, and the jury found that they were, it would have accepted them; that this was understood by the plaintiff; and, indeed, that there was a standing offer to him for such skins.

In such a condition of things, the plaintiff was warranted in sending the defendant skins conforming to the requirements, and even if the offer was not such that the contract was made as soon as skins corresponding to its terms were sent, sending them did impose on the defendant a duty to act about them; and silence on its part, coupled with a retention of the skins for an unreasonable time, might be found by the jury to warrant the plaintiff in assuming that they were accepted, and thus to amount to an acceptance. See Bushel v. Wheeler, 15 Q. B. 442; Benjamin on Sales, §§ 162-164; Taylor v. Dexter Engine Co. 146 Mass. 613, 615. The proposition stands on the general principle that conduct which imports acceptance or assent is acceptance or assent in the view of the law, whatever may have been the actual state of mind of the party, — a principle sometimes lost sight of in the cases. O’Donnell v. Clinton, 145 Mass. 461, 463. McCarthy v. Boston & Lowell Railroad, 148 Mass. 550, 552.

Exceptions overruled.

CONTRACTS (§ 27)—SUBSCRIPTION FOR NEWSPAPERS—LIABILITY.

Defendant's father-in-law subscribed and paid for a newspaper for a specified time, to be sent to defendant, who received it during that time. The publisher continued to send the paper to the defendant, who received it, and on two occasions paid a bill for subscription price, and directed the paper to be stopped. Notwithstanding the order to stop, the publisher continued to send the paper, and the defendant received it. Held, that he was liable for the subscription price; a contract to pay the same arising by necessary implication.

Appeal from Circuit Court, Bates County; C. A. Denton, Judge.

Action by O. D. Austin against Charles Burge. From a judgment for defendant, plaintiff appeals. Reversed and remanded.

W. O. Jackson and Silvers & Silvers, for appellant. Thos. J. Smith, for respondent.

ELLISON, J.

This action was brought on an account for the subscription price of a newspaper. The judgment in the trial court was for the defendant. It appears that plaintiff was publisher of a newspaper in Butler, Mo., and that defendant's father-in-law subscribed for the paper, to be sent to defendant for two years, and that the father-in-law paid for it for that time. It was then continued to be sent to defendant, through the mail, for several years more. On two occasions defendant paid a bill presented for the subscription price, but each time directed it to be stopped. Plaintiff denies the order to stop, but for the purpose of the case we shall assume that defendant is correct. He testified that, notwithstanding the order to stop it, it was continued to be sent to him, and he continued to receive and read it, until finally he removed to another state.

We have not been cited to a case in this state involving the liability of a person who, though not having subscribed for a newspaper, continues to accept it by receiving it through the mail. There are, however, certain well-understood principles in the law of contracts that ought to solve the question. It is certain that one cannot be forced into contractual relations with another and that therefore he cannot, against his will, be made the debtor of a newspaper publisher. But it is equally certain that he may cause contractual relations to arise by necessary implication from his conduct. The law in respect to contractual indebtedness for a newspaper is not different from that relating to other things which have not been made the subject of an express agreement. Thus one may not have ordered supplies for his table, or other household necessities, yet if he continue to receive and use them, under circumstances where he had no right to suppose they were a gratuity, he will be held to have agreed, by implication, to pay their value. In this case defendant admits that, notwithstanding he ordered the paper discontinued at the time when he paid a bill for it, yet plaintiff continued to send it, and he continued to take it from the post office to his home. This was an acceptance and use of the property, and, there being no pretense that a gratuity was intended, an obligation arose to pay for it.

A case quite applicable to the facts here involved arose in Fogg v. Atheneum, 44 N. H. 115, 82 Am. Dec. 191. There the Independent Democrat newspaper was forwarded weekly by mail to the defendant from May 1, 1847, to May 1, 1849, when a bill was presented, which defendant objected to paying on the ground of not having subscribed. Payment was, however, finally made, and directions given to discontinue. The paper changed ownership, and the order to stop it was not known to the new proprietors for a year; but, after being notified of the order, [137 S.W. 619] they nevertheless continued to send it to defendant until 1860, a period of 11 years, and defendant continued to receive it through the post office. Payment was several times demanded during this time, but refused on the ground that there was no subscription. The court said that:

"During this period of time the defendants were occasionally requested, by the plaintiff's agent, to pay their bill. The answer was, by the defendants, `We are not subscribers to your newspaper.' But the evidence is the defendants used or kept the plaintiff's * * * newspapers, and never offered to return a number, as they reasonably might have done, if they would have avoided the liability to pay for them. Nor did they ever decline to take the newspapers from the post office."

The defendant was held to have accepted the papers, and to have become liable for the subscription price by implication of law.

In Ward v. Powell, 3 Har. (Del.) 379, it was decided that an implied agreement to pay for a newspaper or periodical arose by the continued taking and accepting the paper from the post office, and that "if a party, without subscribing to a paper, declines taking it out of the post office, he cannot become liable to pay for it; and a subscriber may cease to be such at the end of the year, by refusing to take the papers from the post office, and returning them to the editor as notice of such determination." In Goodland v. Le Clair, 78 Wis. 176, 47 N. W. 268, it was held that if a person receives a paper from the post office for a year, without refusing or returning it, he was liable for the year's subscription. And a like obligation was held to arise in the case of Weatherby v. Bonham, 5 C. & P. 228.

The preparation and publication of a newspaper involves much mental and physical labor, as well as an outlay of money. One who accepts the paper, by continuously taking it from the post office, receives a benefit and pleasure arising from such labor and expenditure as fully as if he had appropriated any other product of another's labor, and by such act he must be held liable for the subscription price. On the defendant's own evidence, plaintiff should have recovered.

The judgment will therefore be reversed, and the cause remanded. All concur.

Joel R. Brandes, Robert W. Kahn, P. C., Andrew F. Capoccia, P. C., and Peter K. Levine for appellant.

James H. Doran for respondent.

Chief Judge COOKE and Judges GABRIELLI, WACHTLER and FUCHSBERG concur with Judge MEYER; Judge JONES dissents in part and votes to affirm in a separate opinion in which Judge JASEN concurs.

[484] MEYER, J.

Presented by this appeal are the questions whether a contract as to earnings and assets may be implied in fact from the relationship of an unmarried couple living together and whether an express contract of such a couple on those subjects is enforceable. Finding an implied contract such as was recognized in Marvin v Marvin (18 Cal 3d 660) to be conceptually so amorphous as practically to defy equitable enforcement, and inconsistent with the legislative policy enunciated in 1933 when common-law marriages were abolished in New York, we decline to follow the Marvin lead. Consistent with our decision in Matter of Gorden (8 N.Y.2d 71), however, we conclude that the express contract of such a couple is enforceable. Accordingly, the order of the Appellate Division dismissing the complaint should be modified to dismiss only the first (implied contract) cause of action and as so modified should be affirmed, with costs to plaintiff.

On a motion to dismiss a complaint we accept the facts alleged as true (219 Broadway Corp. v Alexander's Inc., 46 N.Y.2d 506, 509) and determine simply whether the facts alleged fit within any cognizable legal theory (see Rovello v Orofino Realty, 40 N.Y.2d 633).

Plaintiff alleges that she and defendant have lived together and held themselves out to the community as husband and wife since 1952 and that defendant acknowledges that the two children born of the relationship are his. Her first cause of action alleges the existence of this long-continued relationship and that since its inception she has performed domestic duties and business services at the request of defendant with the expectation that she would receive full compensation for them, and that defendant has always accepted her services [485] knowing that she expected compensation for them. Plaintiff suggests that defendant has recognized that their economic fortunes are united, for she alleges that they have filed joint tax returns "over the past several years." She seeks judgment in the amount of $250,000.

The second cause of action begins with the repetition and reallegation of all of the allegations of the first cause of action. Plaintiff then alleges that in 1952 she and the defendant entered into a partnership agreement by which they orally agreed that she would furnish domestic services^[1] and defendant was to have full charge of business transactions, that defendant "would support, maintain and provide for plaintiff in accordance with his earning capacity and that defendant further agreed on his part to take care of the plaintiff and do right by her," and that the net profits from the partnership were to be used for and applied to the equal benefit of plaintiff and defendant. Plaintiff avers that defendant commanded that she not obtain employment or he would leave her, and that since 1952 the defendant has collected large sums of money "from various companies and business dealings." Finally, plaintiff states that since December of 1975 defendant has dishonored the agreement, has failed to provide support or maintenance, and has refused her demands for an accounting. She asks that defendant be directed to account for moneys received by him during the partnership.

Special Term dismissed the complaint, concluding that no matter how liberally it was construed it sought recovery for "housewifely" duties within a marital-type arrangement for which no recovery could be had. The Appellate Division affirmed because the first cause of action did not assert an express agreement and the second cause of action, though asserting an express partnership agreement, was based upon the same arrangement which was alleged in the first cause of action and was therefore "contextually inadequate". The dissenting Justice was of the view that while the first cause of action was legally insufficient as premised upon an implied contract, the second, expressing as it does an explicit agreement, should have been sustained.

Development of legal rules governing unmarried couples has quickened in recent years with the relaxation of social customs [486] (Douthwaite, Unmarried Couples and the Law, ch 4, passim). It has not, however, been a development free of difficult problems: Is the length of time the relationship has continued a factor? Do the principles apply only to accumulated personal property or do they encompass earnings as well? If earnings are to be included how are the services of the homemaker to be valued? Should services which are generally regarded as amenities of cohabitation be included? Is there unfairness in compensating an unmarried renderer of domestic services but failing to accord the same rights to the legally married homemaker? Are the varying types of remedies allowed mutually exclusive or cumulative? (See, generally, Douthwaite, supra; and CLARK, J., concurring and dissenting in Marvin v Marvin, supra.)

New York courts have long accepted the concept that an express agreement between unmarried persons living together^[2] is as enforceable as though they were not living together (Rhodes v Stone, 63 Hun 624, opn in 17 NYS 561; Vincent v Moriarty, 31 App Div 484), provided only that illicit sexual relations were not "part of the consideration of the contract" (Rhodes v Stone, supra, at 17 NYS, p 562, quoted in Matter of Gorden, 8 N.Y.2d 71, 75, supra). The theory of these cases is that while cohabitation without marriage does not give rise to the property and financial rights which normally attend the marital relation, neither does cohabitation disable the parties from making an agreement within the normal rules of contract law (Matter of Gorden, supra, at p 75; see Ann., 94 ALR3d 552, 559).

Even an express contract presents problems of proof, however, as Matter of Gorden illustrates. There Ann Clark and Oliver Gorden moved from Brooklyn to West Fulton, in Schoharie County, where Gorden acquired a tavern in his own name. For seven years Clark and Gorden operated the tavern without other employees, she performing both the work required by her duties in the tavern and by their home life. They lived together and were known in the community as husband and wife until he died. Clark then filed a claim against the estate predicated upon an oral contract pursuant [487] to which Gorden agreed to compensate her for the value of her services, to marry her, to grant her the same rights as she would have as his wife, and to make a will to compensate her. The Surrogate denied the claim because of the "meretricious" relationship. The Appellate Division, finding no proof that there was any relationship between the duties performed in the operation of the inn and the fact that the parties lived together, reversed and awarded claimant $9,000. We reversed, because the evidence was not of the clear and convincing character required to establish a claim against a decedent's estate, but expressly adopted the rationale of Rhodes v Stone that the unmarried state of the couple did not bar an express contract between them. Ironically, part of the basis for holding the evidence less than clear and convincing was that "If she had been working as an employee instead of a de facto wife, she would not have labored from 8 o'clock in the morning until after midnight without demanding pay or without being paid" (8 NY2d, at p 75).

While accepting Gorden's concept that an unmarried couple living together are free to contract with each other in relation to personal services, including domestic or "housewifely" services, we reject the suggestion, implicit in the sentence quoted above, that there is any presumption that services of any type are more likely the result of a personal, rather than a contractual, bond, or that it is reasonable to infer simply because the compensation contracted for may not be payable in periodic installments that there was no such contract.

Changing social custom has increased greatly the number of persons living together without solemnized ceremony and consequently without benefit of the rules of law that govern property and financial matters between married couples. The difficulties attendant upon establishing property and financial rights between unmarried couples under available theories of law other than contract (see Douthwaite, loc. cit.) warrant application of Gorden's recognition of express contract even though the services rendered be limited to those generally characterized as "housewifely" (Matter of Adams, 1 AD2d 259, affd 2 N.Y.2d 796; cf. Dombrowski v Somers, 41 N.Y.2d 858). There is, moreover, no statutory requirement that such a contract as plaintiff here alleges be in writing (cf. General [488] Obligations Law, § 5-701, subd a, pars 1, 3). The second cause of action is, therefore, sustained.^[3]

The first cause of action was, however, properly dismissed. Historically, we have required the explicit and structured understanding of an express contract and have declined to recognize a contract which is implied from the rendition and acceptance of services (Rhodes v Stone, supra; Vincent v Moriarty, 31 App Div 484, supra; see, also, Matter of Adams, supra). The major difficulty with implying a contract from the rendition of services for one another by persons living together is that it is not reasonable to infer an agreement to pay for the services rendered when the relationship of the parties makes it natural that the services were rendered gratuitously (Matter of Adams, supra, at p 262; Robinson v Munn, 238 N.Y. 40, 43). As a matter of human experience personal services will frequently be rendered by two people living together because they value each other's company or because they find it a convenient or rewarding thing to do (see Marvin v Marvin, 18 Cal 3d, 660, 675-676, n 11, supra). For courts to attempt through hindsight to sort out the intentions of the parties and affix jural significance to conduct carried out within an essentially private and generally noncontractual relationship runs too great a risk of error. Absent an express agreement, there is no frame of reference against which to compare the testimony presented and the character of the evidence that can be presented becomes more evanescent. There is, therefore, substantially greater risk of emotion-laden afterthought, not to mention fraud, in attempting to ascertain by implication what services, if any, were rendered gratuitously and what compensation, if any, the parties intended to be paid.

Similar considerations were involved in the Legislature's abolition by chapter 606 of the Laws of 1933 of common-law marriages in our State. Writing in support of that bill, Surrogate [489] FOLEY informed Governor Lehman that it was the unanimous opinion of the members of the Commission to Investigate Defects in the Law of Estates that the concept of common-law marriage should be abolished because attempts to collect funds from decedents' estates were a fruitful source of litigation. Senate Minority Leader Fearon, who had introduced the bill, also informed the Governor that its purpose was to prevent fraudulent claims against estates and recommended its approval. The consensus was that while the doctrine of common-law marriage could work substantial justice in certain cases, there was no built-in method for distinguishing between valid and specious claims and, thus, that the doctrine served the State poorly.

The notion of an implied contract between an unmarried couple living together is, thus, contrary to both New York decisional law and the implication arising from our Legislature's abolition of common-law marriage. The same conclusion has been reached by a significant number of States other than our own which have refused to allow recovery in implied contract (see Ann., 94 ALR3d 552, 559). Until the Legislature determines otherwise, therefore, we decline to recognize an action based upon an implied contract for personal services between unmarried persons living together.

For the foregoing reasons, the order of the Appellate Division should be modified in accordance with this opinion and, as so modified, should be affirmed, with costs to plaintiff.

JONES, J. (dissenting).

I am in agreement with the majority that the first cause of action, seeking recovery of money damages predicated on an implied agreement between cohabiting persons not married to each other, fails to state a ground for relief under the law of this jurisdiction and that dismissal is appropriate. I would go further, however, and make similar disposition of the second cause of action, on the ground that the express agreement alleged is too vague and indefinite to be enforced.

The terms of the contract in the second cause of action are set forth in paragraph 15 of the complaint where it is alleged that "it was orally agreed and understood by and between the parties hereto that plaintiff would perform the work, services and labor of a domestic nature on her part as requested by the defendant, and that the defendant would support, maintain and provide for plaintiff in accordance with his earning capacity [490] and that defendant further agreed on his part to take care of the plaintiff and do right by her". Thus, defendant's obligation is alleged first as one to support, maintain and provide for plaintiff in accordance with his earning capacity and, additionally, to take care of and do right by plaintiff. The latter segment of the purported undertaking is on its face patently indefinite and unenforceable; as we recently held in Dombrowski v Somers (41 N.Y.2d 858, 859) the words "to take care of" are "too vague to spell out a meaningful promise" — nothing of substance is added by the words "to do right by plaintiff". The former segment — imposing an apparent obligation to support, maintain and provide for in accordance with (defendant's) earning capacity — is similarly nebulous and indeterminate. A reference of more substance is required than simply one to the provider's earning capacity to describe what it is to which the parties are agreeing. What is notably lacking is any statement of the standard of support and maintenance to be provided or of what relationship is to furnish the measure of the allegedly agreed-on life-style. Assuming a provider whose earning capacity places ample funds at his disposal, the level of support and maintenance he will provide for his wife and children will of course vary substantially from the level he will provide for a household retainer living within his residence. Is it the former style of maintenance or the latter — or some other, such as might be extended to a favorite, impoverished aunt living outside the family establishment — to which the defendant binds himself by the alleged agreement?^[*] By its terms the promise is indefinite and uncertain and it runs afoul of the basic premise of contract law — viz., "It is a necessary requirement in the nature of things that an agreement in order to be binding must be sufficiently definite to enable a court to give it an exact meaning" (1 Williston, Contracts [3d ed], § 37).

The majority dismisses the problem of vagueness by reliance on the allegation included in the second pleaded cause of [491] action that "the net profits from the agreement and partnership of the plaintiff and defendant were to be used for and applied to the equal benefit of plaintiff and defendant", apparently accepting this as a sufficiently definite statement of the obligation now sought to be enforced. But, rather than clarifying the ambiguity, this allegation only confounds the confusion. What are "net profits from the agreement and partnership" is wholly unelucidated and, when the agreement as described in paragraph 15 of the complaint is examined, the term seems strange indeed, for the compact is only that plaintiff will perform domestic services and defendant will support her to the undefined extent previously discussed. Although there is an allegation in paragraph 16 that defendant "was to have full charge of the business", no reference to any business appears elsewhere in the pleading and nowhere is it alleged that defendant bound himself to operate or carry on any profit-making activity. Surely it cannot be said that the domestic work for which plaintiff engaged would produce profits. How the "profits" — not to mention the "net profits" — from such an agreement are to be determined is a conundrum; as a consequence any provision for their application to the equal benefit of the parties is fatally vague and indefinite. Plaintiff invites our attention to no case in which courts have undertaken to enforce an agreement approaching the indefiniteness of that allegedly made by the parties to this litigation.

Because the second cause of action seeks recovery on the basis of an agreement the terms of which are too uncertain to admit of its enforcement, this action, like the first cause of action, should be dismissed.

Order modified, etc.

[1] Paragraph 9, one of the realleged allegations, avers that "plaintiff performed work, labor and services for the defendant in the nature of domestic duties and business services at the request of the defendant" (emphasis supplied).

[2] Much of the case law speaks of such a relationship as "meretricious". Defined as "Of or pertaining to a prostitute; having a harlot's traits" (Webster's Third New International Dictionary Unabridged, p 1413), that word's pejorative sense makes it no longer, if it ever was, descriptive of the relationship under consideration, and we, therefore, decline to use it.

[3] We have not overlooked the holding of Dombrowski v Somers (41 N.Y.2d 858, 859) that the words "take care of" are too vague to spell out a meaningful promise. In the instant complaint we regard those words as surplusage in light of the further allegation that the profits of the partnership were to be used and applied for the equal benefit of both plaintiff and defendant. Nor can we accept the dissent's concept that there need necessarily be "profits" from the domestic services. Plaintiff alleges an express agreement of partnership under which she was to contribute services in return for which she was to share in the profits from the business conducted by defendant; more is not required to make defendant accountable for profits of the partnership.

[*] If the agreement alleged were to be interpreted as committing defendant to support plaintiff, within his earning capacity, in the style of a wife, and were to be so enforced, the result would be largely to vitiate the statutory ban on common-law marriages at least with respect to the parties to the arrangement themselves (L 1933, ch 606, amdg Domestic Relations Law, § 11). Nevertheless, the infirmity of the alleged agreement lies not in its potential for impairment of the statute but in its inherent vagueness. Respect for the legislative determination manifested in the statute, however, precludes resort to marital standards of support to supply the definiteness which the agreement of the parties otherwise lacks.

Thomas N. Ambrose, Boise, Idaho, for plaintiff-appellant.

R. B. Kading, Jr., Michael E. Johnson, Boise, Idaho, for defendant-appellee.

[925] Before WRIGHT and GOODWIN, Circuit Judges, and BRUCE R. THOMPSON, Senior District Judge.^[1]

EUGENE A. WRIGHT, Circuit Judge:

We affirm the dismissal by summary judgment of Idaho Power Company's damage suit against Westinghouse Electric. The action alleged that Westinghouse was liable on theories of warranty, negligence, and strict liability for damages caused by a defective voltage regulator which it manufactured and sold to Idaho Power.

On appeal, Idaho Power argues that (1) the district court erred in concluding that limitations of liability in the Westinghouse sales form were part of the contract between the parties, and that (2) even if they were part of the contract, Westinghouse could not disclaim strict liability.

FACTS

On January 12, 1973, Idaho Power sent an inquiry to Westinghouse asking its price for a three-phase voltage regulator. Westinghouse responded on January 25 with a price quotation which provided that it was subject to the terms and conditions on the back of the form.

The terms limited Westinghouse's liability, providing that it would not be liable "for special, indirect, incidental, or consequential damages," and that its liability, "whether in contract, in tort, under any warranty, or otherwise, . . . shall not exceed the price of the product or part on which such liability is based."

The form also limited the contract by this language:

The above terms, together with those set forth or referred to on the face of this quotation and such others as may be accepted by Westinghouse in writing, constitute the entire agreement for the sale of the product.

Idaho Power responded with a purchase order describing the regulator and referring to Westinghouse's price quotation. Idaho Power's order form provided, "acceptance of this order shall be deemed to constitute an agreement upon the part of the seller to the conditions named hereon and supersedes all previous agreements." Although it contained additional terms regarding shipping charges, it did not limit Westinghouse's liability.

Idaho Power received and installed the regulator in June, 1974. The equipment allegedly failed on July 31, causing a fire which damaged it and other machinery.

Westinghouse repaired the regulator at its expense, but Idaho Power sought $21,241.52 for other damages on theories of negligence, breach of implied and express warranty, and strict liability in tort. The summary judgment of dismissal was based on the liability limitations in Westinghouse's sales form.

DISCUSSION

Idaho Power concedes that Westinghouse's price quotation and sales form was an offer. It argues, however, that its purchase order was not an effective acceptance.^[2] It contends, alternatively, that if the order constituted acceptance, the liability limitations were not a part of the resulting contract. Finally, it argues that the disclaimer, if a part of the contract, was not an effective defense to its strict liability action.

Acceptance.

This issue is controlled by U.C.C. § 2-207(1), Idaho Code § 28-2-207(1), which provides:

[926] 28-2-207. Additional terms in acceptance or confirmation.—(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

Idaho Power contends first that this provision is inapplicable because its purchase order was not a "seasonable expression of acceptance or a written confirmation." It points to the printed language in its order form, which purported to restrict the agreement to its terms.

Under common law, its purchase order would have failed as an acceptance since it varied from the offer's terms. 1 Williston, The Law of Contracts § 73 (3d ed. 1957). Section 207, however, rejects the "mirror image" rule, and converts a common law counteroffer into an acceptance even though it states additional or different terms. C. Itoh & Co. (American), Inc. v. Jordan International Co., 552 F.2d 1228, 1232-35 (7th Cir. 1977); Hohenberg Bros. Co. v. Killebrew, 505 F.2d 643, 645-46 (5th Cir. 1974); Dorton v. Collins & Aikman Corp., 453 F.2d 1161, 1168 (6th Cir. 1972); Steiner v. Mobil Oil Corp., 20 Cal.3d 90, 99-100, 141 Cal.Rptr. 157, 163-64, 569 P.2d 751, 757 (1977).

The Official Comments to § 207 state:

2. Under this Article [Chapter] a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, any additional matter contained . . . in the writing intended to close the deal . . falls within subsection (2) and must be regarded as a proposal for an added term . . ..

5A Idaho Code 34 (1967).

Here, Idaho Power's order referred to and accepted the price quoted in Westinghouse's offer. It requested shipment within the time limits specified by Westinghouse. No other correspondence ensued and the regulator was shipped and installed accordingly. In commercial transactions such an order, especially when followed by performance, would normally be understood to have closed the deal between the parties. Consequently, it was a "seasonable expression of acceptance," even though it contained the additional terms.^[3]

Idaho Power next attempts to invoke the proviso to § 207(1), arguing that, if its purchase order constituted acceptance, it was "expressly made conditional on assent" to additional terms. We disagree.

The proviso has been construed narrowly. The court in Dorton v. Collins & Aikman Corp., 453 F.2d 1161, 1168 (6th Cir. 1972), held that it was intended to apply "only to an acceptance which clearly reveals that the offeree is unwilling to proceed with the transaction unless he is assured of the offeror's assent to the additional or different terms therein." It concluded that an acceptance "`subject to all of the terms and conditions on the face and reverse side hereof, . . . all of which are accepted by the [offeror],'" was not "expressly made conditional on assent" within the meaning of § 207. Id. at 1167-68. See also C. Itoh & Co., 552 F.2d at 1234-35.

Idaho Power relies upon similar language to demonstrate that acceptance, if any, was conditional on asset. Its purchase order [927] form states: "Acceptance of this order shall be deemed to constitute an agreement to the conditions named hereon and supersedes all previous agreements."

By this language, Idaho Power attempted to alter the terms of the offer. As in Dorton, however, the language used does not clearly reveal that Idaho Power was "unwilling to proceed with the transaction unless . . . assured of [Westinghouse's] assent to the additional or different terms." Consequently, the proviso in § 207(1) does not apply.

The Terms of the Contract.

Idaho Power also contends that even if the purchase order was an effective acceptance under § 207(1), the disclaimer in Westinghouse's form is not part of the contract. It relies on Southern Idaho Pipe & Steel v. Cal-Cut Pipe & Supply, Inc., 98 Idaho 495, 567 P.2d 1246 (1977), dismissed, 434 U.S. 1056, 98 S.Ct. 1225, 55 L.Ed.2d 757 (1978).

In Southern Idaho Pipe, the court held that when a contract is formed under § 207 by documents with conflicting terms, those terms cancel out, leaving the court to supply the contested term. It reasoned that under such circumstances the offeror's terms should not be conclusive simply because its document was sent first. Id., 567 P.2d at 1253-55. The court then omitted from the contract terms which provided different delivery dates.

Here, Idaho Power's form did not contest Westinghouse's disclaimer. It merely purported to "supersede all previous agreements." At best, the term conflicted with Westinghouse's integration clause. We conclude that it did not nullify the disclaimer.

Because the disclaimer in the Westinghouse offer was part of the contract, the district court did not err in granting summary judgment of Idaho Power's actions based on negligence or warranty.^[4] Idaho Power argues, however, that the disclaimer is not a defense to its strict liability action.

Disclaimer of Strict Liability.

The Idaho Supreme Court has adopted § 402A of the Restatement (Second) of Torts, dealing with strict liability. Shields v. Morton Chemical Co., 95 Idaho 674, 518 P.2d 857 (1974). Comment m of that section suggests that strict liability cannot be disclaimed:

The rule stated in this Section is not governed by the provisions of the Uniform Sales Act, or those of the Uniform Commercial Code, as to warranties; and it is not affected by limitations on the scope and content of warranties, or by limitation to "buyer" and "seller" in those statutes. . . . The consumer's cause of action does not depend upon the validity of his contract with the person from whom he acquires the product, and it is not affected by any disclaimer or other agreement, whether it be between the seller and his immediate buyer, or attached to and accompanying the product into the consumer's hands.

Restatement (Second) of Torts, § 402A at 356.

On the other hand, the Uniform Commercial Code, Idaho Code §§ 28-1-101 et seq., is tolerant of disclaimers. It provides:

(a) the agreement may . . . limit or alter the measure of damages recoverable under this chapter, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts;

Idaho Code § 28-2-719(1)(a).

(3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

Idaho Code § 28-2-719(3).

When strict liability is disclaimed in a commercial setting, it is unclear whether [928] the U.C.C. or the Restatement governs the outcome. The Idaho Supreme Court has not considered the issue but other courts have consistently held that under these circumstances disclaimers of strict liability are effective. The courts vary in their approach.

In Kaiser Steel Corp. v. Westinghouse Electric Corp., 55 Cal.App.3d 737, 127 Cal.Rptr. 838 (1976), the court upheld the dismissal of a strict liability action when the parties, dealing from positions of relatively equal economic strength, contracted in a commercial setting to limit the defendant's liability. The court went on to hold that in this situation the strict liability cause of action does not apply at all.

In reaching this conclusion, the court in Kaiser reasoned that strict liability "is designed to encompass situations in which the principles of sales warranties serve their purpose `fitfully at best.'" 127 Cal.Rptr. at 844. It concluded that in such commercial settings the U.C.C principles work well and "to apply the tort doctrines of products liability will displace the statutory law rather than bring out its full flavor." Id. at 845. See also Southwest Forest Industries v. Westinghouse Electric Corp., 422 F.2d 1013, 1020 (9th Cir. 1970).

In a more limited holding the Third Circuit concluded that § 402A can be waived effectively "between business entities of relatively equal bargaining strength." Keystone Aeronautics Corp. v. R. J. Enstrom Corp., 499 F.2d 146, 149 (3d Cir. 1974). The court in Keystone found that the policy reasons underlying strict liability do not apply as strongly in these circumstances. Therefore the U.C.C. governs. See also S. M. Wilson & Company v. Smith International, Inc., 587 F.2d 1363, 1376 (9th Cir. 1978);^[5]Delta Air Lines, Inc. v. McDonnell Douglas Corp., 503 F.2d 239, 245 (5th Cir. 1974).

Here, the parties are two large corporations of relatively equal bargaining strength. The disclaimer provisions were discussed by the parties and clearly limited Westinghouse's tort liability. We need not decide whether Westinghouse was subject to strict liability under 402A, but hold that under these circumstances the disclaimer was an effective defense to Idaho Power's strict liability action.^[6]

AFFIRMED.

[1] Of the District of Nevada.

[2] Idaho Power argues further that a contract was formed by either (1) the parties' performance, or (2) Westinghouse's acceptance of its purchase order, which Idaho Power contends was a counteroffer. It concludes that in either case the contract's terms did not limit Westinghouse's liability. Because of our holding on the threshold acceptance issue, we need not reach these additional questions.

[3] Duval & Company v. Malcom,233 Ga. 784, 214 S.E.2d 356 (1975), relied on by Idaho Power, is not to the contrary. There, the sellers gave to the buyer a written offer of an output contract specifying no amount. The sellers' "understanding was that the buyer would execute the proposed contract out of their presence," and they would pick up their copy later the same day. In addition to signing the document, however, the buyer added an "estimate" of goods to be delivered. Upon returning, the sellers vehemently protested to the addition, declaring their belief that no contract existed.

The court in Duval held that there was no "`definite and seasonable expression of acceptance,'" concluding that § 207 was inapplicable. It reasoned that the section was "designed to avoid frustrating the parties' actual intent to agree merely because the wording of their forms is conflicting," noting that "under the evidence adduced . . . no deal had in fact been closed . . .." Id. 214 S.E.2d at 358.

Here, aside from the conflicting forms, there is no evidence to indicate that the parties did not intend to close the deal. Duval is clearly distinguishable.

[4] Idaho Power does not dispute that the disclaimer, if part of the contract, is an effective defense to its actions in negligence and breach of warranty. See S. M. Wilson & Co. v. Smith International, Inc., 587 F.2d 1363, 1374-76 (9th Cir. 1978).

[5] In S. M. Wilsonwe stated in dictum:

Where the suit is between a non-performing seller and an aggrieved buyer and the injury consists of damage to the goods themselves and the costs of repair of such damage or a loss of profits that the deal had been expected to yield to the buyer, it would be sensible to limit the buyer's rights to those provided by the Uniform Commercial Code. . . . To treat such a breach as an accident is to confuse disappointment with disaster. Whether the complaint is cast in terms of strict liability in tort or negligence should make no difference. 587 F.2d at 1376 (citations omitted).

[6] For the proposition that strict liability cannot be disclaimed, Idaho Power cites Sterner Aero AB v. Page Airmotive, Inc., 499 F.2d 709 (10th Cir. 1974), Vandermark v. Ford Motor Co., 61 Cal.2d 256, 37 Cal.Rptr. 896, 391 P.2d 168 (1964), and Greeno v. Clark Equipment Co., 237 F.Supp. 427 (N.D.Ind.1965). These cases are inapposite because they involved either ordinary consumer situations, or limitations which did not clearly disclaim tort liability.

247 N. Y. 377
CATHERINE C. MITCHILL, Respondent,
v.
CHARLES LATH et al., Appellants.

[378] 

Mitchell v Lath, 220 App. Div. 776, reversed.

(Argued January 10, 1928; decided February 14, 1928.)

APPEAL, by permission, from a judgment of the Appellate Division of the Supreme Court in the second judicial department, entered May 27, 1927, unanimously affirming a judgment in favor of plaintiff entered upon a decision of the court on trial at Special Term in an action to compel specific performance of an alleged contract to remove an ice house.

James G. Meyer, John T. Kelly and Daniel A. Dugan for appellants. The court erred in destroying the contract by receiving evidence of prior negotiations. (Newburger v. Am. Surety Co., 242 N. Y. 134; Filkins v. Whyland, 24 N. Y. 338; Eighmie v. Taylor, 98 N. Y. 288; Emmett v. Penoyer, 151 N. Y. 564; Sturmdorf v. Saunders, 117 App. Div. 762; Marsh v. McNair, 99 N. Y. 174; Lossing v. Cushman, 123 App. Div. 693; 195 N. Y. 386.) The case at bar is not within the exceptions to the general rule that evidence of parol agreements may not be received to contradict or vary the terms of an instrument in writing. (Thomas v. Scutt, 127 N. Y. 133; House v. Walch, 144 N. Y. 418; Mead v. Dunleavy, 174 N. Y. 108; Studwell v. Bush Co., 206 N. Y. 416; Newburger v. American Surety Co., 242 N. Y. 134.)

Arthur H. Haaren for respondent. Specific performance of defendants' oral contract was properly granted below. (Rintelen v. Schaefer, 158 App. Div. 477.) The parol evidence rule has not been violated and no other ground for reversal has been shown. (Newburger v. [379] Am. Surety Co., 242 N. Y. 134; Indelli v. Lesster, 130 App. Div. 548; Finkle v. Lasher, 178 App. Div. 471; Brown v. De Graff, 183 App. Div. 177; Amer. Aniline Products Co. v. Mitsui & Co., 190 App. Div. 485; Taylor v. Hopper, 62 N. Y. 649; Lobel v. Van Hoose, 141 N. Y. Supp. 490; M'Crea v. Purmort, 16 Wend. 460; Hocking Valley Ry. Co. v. Barbour, 192 App. Div. 654; Post v. Thomas, 180 App. Div. 627.) The injunction prayed for was properly granted. (Musgrave v. Sherwood, 23 Hun, 669.)

ANDREWS, J. In the fall of 1923 the Laths owned a farm. This they wished to sell. Across the road, on land belonging to Lieutenant-Governor Lunn, they had an ice house which they might remove. Mrs. Mitchill looked over the land with a view to its purchase. She found the ice house objectionable. Thereupon "the defendants orally promised and agreed, for and in consideration of the purchase of their farm by the plaintiff, to remove the said ice house in the spring of 1924." Relying upon this promise, she made a written contract to buy the property for $8,400, for cash and a mortgage and containing various provisions usual in such papers. Later receiving a deed, she entered into possession and has spent considerable sums in improving the property for use as a summer residence. The defendants have not fulfilled their promise as to the ice house and do not intend to do so. We are not dealing, however, with their moral delinquencies. The question before us is whether their oral agreement may be enforced in a court of equity.

This requires a discussion of the parol evidence rule — a rule of law which defines the limits of the contract to be construed. (Glackin v. Bennett, 226 Mass. 316.) It is more than a rule of evidence and oral testimony even if admitted will not control the written contract (O'Malley v. Grady, 222 Mass. 202), unless admitted without objection. (Brady v. Nolly, 151 N. Y. 258.) It applies, however, to attempts to modify such a contract by parol. It does not [380] affect a parol collateral contract distinct from and independent of the written agreement. It is, at times, troublesome to draw the line. Williston, in his work on Contracts (sec. 637) points out the difficulty. "Two entirely distinct contracts," he says, 

“each for a separate consideration may be made at the same time and will be distinct legally. Where, however, one agreement is entered into wholly or partly in consideration of the simultaneous agreement to enter into another, the transactions are necessarily bound together. . . . Then if one of the agreements is oral and the other is written, the problem arises whether the bond is sufficiently close to prevent proof of the oral agreement."

That is the situation here. It is claimed that the defendants are called upon to do more than is required by their written contract in connection with the sale as to which it deals.

The principle may be clear, but it can be given effect by no mechanical rule. As so often happens, it is a matter of degree, for as Professor Williston also says where a contract contains several promises on each side it is not difficult to put any one of them in the form of a collateral agreement. If this were enough written contracts might always be modified by parol. Not form, but substance is the test.

In applying this test the policy of our courts is to be considered. We have believed that the purpose behind the rule was a wise one not easily to be abandoned. Notwithstanding injustice here and there, on the whole it works for good. Old precedents and principles are not to be lightly cast aside unless it is certain that they are an obstruction under present conditions. New York has been less open to arguments that would modify this particular rule, than some jurisdictions elsewhere. Thus in Eighmie v. Taylor (98 N. Y. 288) it was held that a parol warranty might not be shown although no warranties were contained in the writing.

Under our decisions before such an oral agreement [381] as the present is received to vary the written contract at least three conditions must exist, (1) the agreement must in form be a collateral one; (2) it must not contradict express or implied provisions of the written contract; (3) it must be one that parties would not ordinarily be expected to embody in the writing; or put in another way, an inspection of the written contract, read in the light of surrounding circumstances must not indicate that the writing appears "to contain the engagements of the parties, and to define the object and measure the extent of such engagement." Or again, it must not be so clearly connected with the principal transaction as to be part and parcel of it.

The respondent does not satisfy the third of these requirements. It may be, not the second. We have a written contract for the purchase and sale of land. The buyer is to pay $8,400 in the way described. She is also to pay her portion of any rents, interest on mortgages, insurance premiums and water meter charges. She may have a survey made of the premises. On their part the sellers are to give a full covenant deed of the premises as described, or as they may be described by the surveyor if the survey is had, executed and acknowledged at their own expense; they sell the personal property on the farm and represent they own it; they agree that all amounts paid them on the contract and the expense of examining the title shall be a lien on the property; they assume the risk of loss or damage by fire until the deed is delivered; and they agree to pay the broker his commissions. Are they to do more? Or is such a claim inconsistent with these precise provisions? It could not be shown that the plaintiff was to pay $500 additional. Is it also implied that the defendants are not to do anything unexpressed in the writing?

That we need not decide. At least, however, an inspection of this contract shows a full and complete agreement, setting forth in detail the obligations of each [382] party. On reading it one would conclude that the reciprocal obligations of the parties were fully detailed. Nor would his opinion alter if he knew the surrounding circumstances. The presence of the ice house, even the knowledge that Mrs. Mitchill thought it objectionable would not lead to the belief that a separate agreement existed with regard to it. Were such an agreement made it would seem most natural that the inquirer should find it in the contract. Collateral in form it is found to be, but it is closely related to the subject dealt with in the written agreement — so closely that we hold it may not be proved.

Where the line between the competent and the incompetent is narrow the citation of authorities is of slight use. Each represents the judgment of the court on the precise facts before it. How closely bound to the contract is the supposed collateral agreement is the decisive factor in each case. But reference may be made to Johnson v. Oppenheim (55 N. Y. 280, 292); Thomas v. Scutt (127 N. Y. 133); Eighmie v. Taylor (98 N. Y. 288); Stowell v. Greenwich Ins. Co. (163 N. Y. 298); Newburger v. American Surety Co. (242 N. Y. 134); Love v. Hamel (59 App. Div. 360); Daly v. Piza (105 App. Div. 496) ; Seitz v. Brewers Refrigerating Co. (141 U.S. 510); American Locomotive Co. v. Nat. Grocery Co. (226 Mass. 314); Doyle v. Dixon (12 Allen, 576). Of these citations, Johnson v. Oppenheim and the two in the Appellate Division relate to collateral contracts said to have been the inducing cause of the main contract. They refer to leases. A similar case is Wilson v. Deen (74 N. Y. 531). All hold that an oral stipulation, said to have been the inducing cause for the subsequent execution of the lease itself, concerning some act to be done by the landlord, or some condition as to the leased premises, might not be shown. In principle they are not unlike the case before us. Attention should be called also to Taylor v. Hopper (62 N. Y. 649), where it is assumed that evidence [383] of a parol agreement to remove a barn, which was an inducement to the sale of lots, was improper.

We do not ignore the fact that authorities may be found that would seem to support the contention of the appellant. Such are Erskine v. Adeane (L. R. 8 Ch. App. 756) and Morgan v. Griffith (L. R. 6 Exch. 70), where although there was a written lease a collateral agreement of the landlord to reduce the game was admitted. In this State Wilson v. Deen might lead to the contrary result. Neither are they approved in New Jersey (Naumberg v. Young, 15 Vroom, 331). Nor in view of later cases in this court can Batterman v. Pierce (3 Hill, 171) be considered an authority. A line of cases in Massachusetts, of which Durkin v. Cobleigh (156 Mass. 108) is an example, have to do with collateral contracts made before a deed is given. But the fixed form of a deed makes it inappropriate to insert collateral agreements, however closely connected with the sale. This may be cause for an exception. Here we deal with the contract on the basis of which the deed to Mrs. Mitchill was given subsequently, and we confine ourselves to the question whether its terms may be modified.

Finally there is the case of Chapin v. Dobson (78 N. Y. 74, 76). This is acknowledged to be on the border line and is rarely cited except to be distinguished. Assuming the premises, however, the court was clearly right. There was nothing on the face of the written contract, it said, to show that it intended to express the entire agreement. And there was a finding, sustained by evidence, that there was an entire contract, only part of which was reduced to writing. This being so, the contract as made might be proved.

It is argued that what we have said is not applicable to the case as presented. The collateral agreement was made with the plaintiff. The contract of sale was with her husband and no assignment of it from him appears. Yet the deed was given to her. It is evident that here [384] was a transaction in which she was the principal from beginning to end. We must treat the contract as if in form, as it was in fact, made by her.

Our conclusion is that the judgment of the Appellate Division and that of the Special Term should be reversed and the complaint dismissed, with costs in all courts.

LEHMAN, J. (dissenting). I accept the general rule as formulated by Judge ANDREWS. I differ with him only as to its application to the facts shown in the record. The plaintiff contracted to purchase land from the defendants for an agreed price. A formal written agreement was made between the sellers and the plaintiff's husband. It is on its face a complete contract for the conveyance of the land. It describes the property to be conveyed. It sets forth the purchase price to be paid. All the conditions and terms of the conveyance to be made are clearly stated. I concede at the outset that parol evidence to show additional conditions and terms of the conveyance would be inadmissible. There is a conclusive presumption that the parties intended to integrate in that written contract every agreement relating to the nature or extent of the property to be conveyed, the contents of the deed to be delivered, the consideration to be paid as a condition precedent to the delivery of the deeds, and indeed all the rights of the parties in connection with the land. The conveyance of that land was the subject-matter of the written contract and the contract completely covers that subject.

The parol agreement which the court below found the parties had made was collateral to, yet connected with, the agreement of purchase and sale. It has been found that the defendants induced the plaintiff to agree to purchase the land by a promise to remove an ice house from land not covered by the agreement of purchase and sale. No independent consideration passed to the defendants for the parol promise. To that extent the written [385] contract and the alleged oral contract are bound together. The same bond usually exists wherever attempt is made to prove a parol agreement which is collateral to a written agreement. Hence "the problem arises whether the bond is sufficiently close to prevent proof of the oral agreement." See Judge ANDREWS’ citation from Williston on Contracts, section 637.

Judge ANDREWS has formulated a standard to measure the closeness of the bond. Three conditions, at least, must exist before an oral agreement may be proven to increase the obligation imposed by the written agreement. I think we agree that the first condition that the agreement "must in form be a collateral one" is met by the evidence. I concede that this condition is met in most cases where the courts have nevertheless excluded evidence of the collateral oral agreement. The difficulty here, as in most cases, arises in connection with the two other conditions. The second condition is that the "parol agreement must not contradict express or implied provisions of the written contract." Judge ANDREWS voices doubt whether this condition is satisfied. The written contract has been carried out. The purchase price has been paid; conveyance has been made, title has passed in accordance with the terms of the written contract. The mutual obligations expressed in the written contract are left unchanged by the alleged oral contract. When performance was required of the written contract, the obligations of the parties were measured solely by its terms. By the oral agreement the plaintiff seeks to hold the defendants to other obligations to be performed by them thereafter upon land which was not conveyed to the plaintiff. The assertion of such further obligation is not inconsistent with the written contract unless the written contract contains a provision, express or implied, that the defendants are not to do anything not expressed in the writing. Concededly there is no such express provision in the [386] contract, and such a provision may be implied, if at all, only if the asserted additional obligation is "so clearly connected with the principal transaction as to be part and parcel of it," and is not "one that the parties would not ordinarily be expected to embody in the writing." The hypothesis so formulated for a conclusion that the asserted additional obligation is inconsistent with an implied term of the contract is that the alleged oral agreement does not comply with the third condition as formulated by Judge ANDREWS. In this case, therefore, the problem reduces itself to the one question whether or not the oral agreement meets the third condition.

I have conceded that upon inspection the contract is complete. "It appears to contain the engagements of the parties, and to define the object and measure the extent of such engagement;" it constitutes the contract between them and is presumed to contain the whole of that contract. (Eighmie v. Taylor, 98 X. Y. 288.) That engagement was on the one side to convey land; on the other to pay the price. The plaintiff asserts further agreement based on the same consideration to be performed by the defendants after the conveyance was complete, and directly affecting only other land. It is true, as Judge ANDREWS points out, that "the presence of the ice house, even the knowledge that Mrs. Mitchill thought it objectionable, would not lead to the belief that a separate agreement existed with regard to it;" but the question we must decide is whether or not, assuming an agreement was made for the removal of an unsightly ice house from one parcel of land as an inducement for the purchase of another parcel, the parties would ordinarily or naturally be expected to embody the agreement for the removal of the ice house from one parcel in the written agreement to convey the other parcel. Exclusion of proof of the oral agreement on the ground that it varies the contract embodied in the [387] writing may be based only upon a finding or presumption that the written contract was intended to cover the oral negotiations for the removal of the ice house which lead up to the contract of purchase and sale. To determine what the writing was intended to cover

"the document alone will not suffice. What it was intended to cover cannot be known till we know what there was to cover. The question being whether certain subjects of negotiation were intended to be covered, we must compare the writing and the negotiations before we can determine whether they were in fact covered."

(Wigmore on Evidence [2d ed.], section 2430.)

The subject-matter of the written contract was the conveyance of land. The contract was so complete on its face that the conclusion is inevitable that the parties intended to embody in the writing all the negotiations covering at least the conveyance. The promise by the defendants to remove the ice house from other land was not connected with their obligation to convey, except that one agreement would not have been made unless the other was also made. The plaintiff's assertion of a parol agreement by the defendants to remove the ice house was completely established by the great weight of evidence. It must prevail unless that agreement was part of the agreement to convey and the entire agreement was embodied in the writing.

The fact that in this case the parol agreement is established by the overwhelming weight of evidence is, of course, not a factor which may be considered in determining the competency or legal effect of the evidence. Hardship in the particular case would not justify the court in disregarding or emasculating the general rule. It merely accentuates the outlines of our problem. The assumption that the parol agreement was made is no longer obscured by any doubts. The problem then is clearly whether the parties are presumed to have intended to render that parol agreement legally ineffective [388] and non-existent by failure to embody it in the writing. Though we are driven to say that nothing in the written contract which fixed the terms and conditions of the stipulated conveyance suggests the existence of any further parol agreement, an inspection of the contract, though it is complete on its face in regard to the subject of the conveyance, does not, I think, show that it was intended to embody negotiations or agreements, if any, in regard to a matter so loosely bound to the conveyance as the removal of an ice house from land not conveyed.

The rule of integration undoubtedly frequently prevents the assertion of fraudulent claims. Parties who take the precaution of embodying their oral agreements in a wilting should be protected against the assertion that other terms of the same agreement were not integrated in the writing. The limits of the integration are determined by the writing, read in the light of the surrounding circumstances. A written contract, however complete, yet covers only a limited field. I do not think that in the written contract for the conveyance of land here under consideration we can find an intention to cover a field so broad as to include prior agreements, if any such were made, to do other acts on other property after the stipulated conveyance was made.

In each case where such a problem is presented, varying factors enter into its solution. Citation of authority in this or other jurisdictions is useless, at least without minute analysis of the facts. The analysis I have made of the decisions in this State leads me to the view that the decision of the courts below is in accordance with our own authorities and should be affirmed.

CARDOZO, Ch. J., POUND, KELLOGG and O'BRIEN, JJ., concur with ANDREWS, J.; LEHMAN, J., dissents in opinion in which CRANE, J., concurs.

Judgment accordingly.

[604] Donald A. Gallagher, Jr., Eugene, argued the cause for appellants. On the briefs were Roy E. Adkins, and Jaqua & Wheatley, P.C., Eugene.

Stuart M. Brown of Young, Horn, Cass & Scott, Eugene, argued the cause and filed a brief for respondent.

HOWELL, Justice.

Plaintiff, lessee, filed this action for trespass against defendants, lessors. The property involved is a 52-acre farm in Lane County. The defendants contended they were entitled under the lease agreement to terminate the lease and recover possession.

The following is the entire written agreement of the parties relating to the lease:

"Oct. 16, 1974

"Stafford Farm agrees to rent to Mike Hatley Rt. 1 Box 83, Halsey, Ore. approximately 52 acres till Sept. 1st 1975 for the purpose of growing wheat with the follow [sic] condition: — Stafford Farm shall have the right to buy out Mr. Mike Hatley at a figure of his cost per acre but not to exceed 70.00 per acre. This buy out is for the express purpose of developing a Mobile Home Park.

"Terms shall be $1800.00 paid on or before Jan. 20th 1975 balance due Sept. 20, 1975. The Rent figure shall be $50.00 per acre.

"Stafford Farm "By /s/ Robert R. Stafford Mgr. /s/ Mike Hatley"

Plaintiff Hatley alleged that between June 8 and June 11, 1975, defendants trespassed on the property by taking possession of the farm and cutting the immature wheat crop. The defendants alleged in their answer that they exercised their right to terminate the lease in order to build a mobile home park and that they offered to pay plaintiff his cost per acre but not to exceed $70 per acre. Plaintiff demanded $400 per acre, the fair market value of the wheat crop.

In plaintiff's reply, he alleged that the written agreement was not the entire integrated agreement of the parties, and that the parties orally agreed the buy out provision of the lease would apply only for a period of 30 to 60 days after the execution of the lease.

The trial court allowed plaintiff to introduce evidence concerning the alleged oral agreement limiting the time in which the buy out provision could be exercised. The jury returned a verdict for plaintiff, and defendants appeal. The only error asserted on appeal is that the trial court erred in allowing admission of the parol evidence [605] relating to the time limit on the buy out agreement.

The parol evidence rule^[1] applies only to those aspects of a bargain that the parties intend to memorialize in the writing. Caldwell et ux. v. Wells, 228 Or. 389, 395, 365 P.2d 505 (1961). The fact that a writing exists does not bring the rule into play if the parties do not intend the writing to embody their final agreement. National Cash Register Co. v. IMC, Inc., 260 Or. 504, 491 P.2d 211 (1971); Sternes v. Tucker, 239 Or. 105, 395 P.2d 881 (1964); Bouchet v. Oregon Motor Car Co., 78 Or. 230, 152 P. 888 (1915). Neither does the rule apply when the parties intended the writing to contain only part of their agreement. Stevens v. Good Samaritan Hosp., 264 Or. 200, 504 P.2d 749 (1972); Hirsch v. Salem Mills Co., 40 Or. 601, 67 P. 949, reh. denied 68 P. 733 (1902); Contract Co. v. Bridge Co., 29 Or. 549, 46 P. 138 (1896). See also 3A Corbin on Contracts § 581 (1960).

In the present case, plaintiff sought to show that the written lease was a "partial integration," i.e., that the written contract included some, but not all, of the terms of the actual agreement. Defendants contend that such a showing could be made only if the oral agreement was "not inconsistent" with the writing and was "an agreement as might naturally be made as a separate agreement * * *." Caldwell et ux. v. Wells, supra, 228 Or. at 395, 365 P.2d at 508. Plaintiff argues that these limitations apply only after it has been demonstrated that the writing is a complete integration, that whether a writing was intended to be a complete integration is a question of fact, and that the jury may consider any relevant evidence in deciding this question of fact. Both parties find support for their positions in past opinions by this court. Compare [606] Stevens v. Good Samaritan Hosp., supra, and Land Reclamation v. Riverside Corp., 261 Or. 180, 492 P.2d 263 (1972) (both supporting plaintiff's position) with Caldwell et ux. v. Wells, supra, and DeVore v. Weyerhaeuser Co., 265 Or. 388, 508 P.2d 220 (1973), cert. denied 415 U.S. 913, 94 S.Ct. 1408, 39 L.Ed.2d 467 (1974) (both supporting defendants' position). A brief review of these cases will illustrate the difficulty of the problem.

In Caldwell, defendant agreed to sell plaintiff a house and a lot and also promised that a well would be drilled on the lot. The parties executed a one-page "Earnest Money Receipt" that made no mention of the promise to drill the well. This court held that the parol evidence rule applied only to those aspects of the bargain that the parties intended to memorialize in the writing, and that whether or not the "Earnest Money Receipt" was intended to embody the entire agreement was a question of fact. Having done this, we then adopted the Restatement of Contracts position, which states:

"(1) An oral agreement is not superseded or invalidated by a subsequent or contemporaneous integration, nor a written agreement by a subsequent integration relating to the same subject-matter, if the agreement is not inconsistent with the integrated contract, and

"(a) is made for separate consideration, or

"(b) is such an agreement as might naturally be made as a separate agreement by parties situated as were the parties to the written contract." 1 Restatement of Contracts 335, § 240 (1932).

Because the promise to have the well drilled might naturally be made as an agreement separate from the promise to convey the land, we held that parol evidence was admissible to prove the former promise.

In Stevens v. Good Samaritan Hosp., supra, defendant contended that evidence of an oral agreement should have been excluded under the parol evidence rule. We said:

"The complaint alleged that certain terms of the employment contract were memorialized in a collective bargaining agreement, but other terms were orally agreed upon between the parties to this proceeding. This is an allegation of an unintegrated agreement; therefore, the parol evidence rule does not apply." 264 Or. at 202, 504 P.2d at 750.

No mention was made of the Restatement test.

Land Reclamation v. Riverside Corporation, supra, involved a deed purporting to transfer real property without restriction and a prior land sale contract restricting the property to use as a sanitary landfill. We held that the land sale contract was an agreement that might naturally be made separately from the deed, and that parol evidence was therefore admissible to prove the restriction. In dicta, however, we stated that "§ 240 [of the Restatement] assumes that the adoption of the writing has been proved. * * * [I]f the previous agreement is not of the type which might naturally be made as a separate agreement, it will nevertheless control if it is shown that the parties intended that agreement, rather than the subsequent writing should control." 261 Or. at 183, n. 4, 492 P.2d at 264.

The dicta in Land Reclamation subsequently was contradicted by dicta in DeVore v. Weyerhaeuser Co., supra, although DeVore did not cite Land Reclamation by name. DeVore involved an industry-wide collective bargaining agreement that defendant employer sought to show was inapplicable to plaintiff employees. The employer alleged an oral agreement to exclude the employees from certain provisions of the collective bargaining agreement and the employees claimed that proof of the oral agreement was barred by the parol evidence rule. We stated the general rule that, "Whether the parties intended to integrate their agreement in the writing is a question of fact in each case," but then went on to note:

"If this were the correct rule, without any further limitations, evidence could always be offered of any prior or contemporaneous oral agreement and in all cases [607] the question whether the parties intended to supersede such an oral agreement by the integration of their entire agreement into the terms of the written contract would be a question of fact which must always be submitted to the trier of the facts, whether court or jury. It may be said, however, with some justification, that the adoption of such a rule, without any limitations, would emasculate, if not `repeal,' the parol evidence rule, which is a rule adopted by statute in Oregon, as in many other states." 265 Or. at 400-01, 508 P.2d at 225-226 (footnote omitted).

We then stated that the Restatement criteria imposed "limitations" on the evidence that can be considered in determining the intent of the parties. Nevertheless, we held the parol evidence admissible because representatives of the employees had admitted that the writing was not intended to be a complete integration.

The inconsistency in our prior decisions reflects a long-standing disagreement among courts and commentators generally as to the applicability of the parol evidence rule. Before examining the merits of the conflicting views, it is useful to consider the background and theory of the rule. The rule apparently was an outgrowth of the law governing contracts under seal. Because the King's word was indisputable, the King's seal on a document made the document uncontestable. 9 J. Wigmore, Evidence 83, § 2426 (3d ed. 1940). The status of writings was further enhanced by the enactment of the Statute of Wills and the Statute of Frauds, both of which made certain transactions legally unenforceable unless they were in writing. This theory was gradually applied to contracts generally, until finally the writing came to be regarded as the agreement itself, rather than merely as evidence of the agreement. Id. at 91.

Modernly, the parol evidence rule has often been justified on grounds of commercial certainty. If parol evidence were allowed to be offered in contradiction of writings, it has been feared that the likelihood of perjury would increase. Calamari & Perillo, The Law of Contracts 109 (2d ed. 1977). It is also believed that the rule is needed to ensure that juries will not decide cases on the "equities," the theory being that the economic underdog will most often be the party seeking to vary the terms of the writing by parol evidence. McCormick, The Parol Evidence Rule as a Procedural Device for Control of the Jury, 41 Yale L.J. 365 (1932).

On the other hand, it has been observed that in a modern society where much of business is transacted over the telephone, contracts that are partly oral and partly written have become increasingly common. Note, The Parol Evidence Rule: Is It Necessary?, 44 N.Y.U.L.Rev. 972, 983 (1969). Moreover, in an era of adhesion contracts and unequal bargaining power, the extent to which many writings actually embody the agreement of the parties is debatable. Sweet, Contract Making and Parol Evidence: Diagnosis and Treatment of a Sick Rule, 53 Cornell L.Rev. 1036, 1056 (1968). Finally, it is doubtful that the rule discourages perjury, since the rule can be avoided by fabricating an oral agreement subsequent to the execution of the writing. Cf., Allen v. Allen, 275 Or. 471, 551 P.2d 459 (1976).

The rule does, however, serve an important function. If the parties in fact have assented to the writing as the embodiment of their entire agreement, each should be able to rely on the terms of the writing as conclusive evidence of what they have agreed to. As Professor Corbin observes:

"No contract whether oral or written can be varied, contradicted or discharged by an antecedent agreement. Today may control the effect of what happened yesterday; but what happened yesterday cannot change the effect of what happens today." 3A Corbin on Contracts 371-72, § 574 (1960); see also Farnsworth, "Meaning" in the Law of Contracts, 76 Yale L.J. 939 (1967).

The difficulty arises when one of the parties asserts, as does the plaintiff in the present case, that the writing does not contain all the terms of the actual agreement. [608] Because the parol evidence rule applies only to complete and final integrations, and because the existence of an integration depends on the intent of the parties, it has been argued that any relevant evidence of the parties' intent should be admissible and that the actual intent of the parties should be a factual question for the jury. As we observed in DeVore v. Weyerhaeuser Co., supra, however, a rule allowing the jury to consider any relevant evidence in deciding whether the writing was intended to be a complete integration "without any limitations, would emasculate, if not `repeal,' the parol evidence rule, which is a rule adopted by statute in Oregon * * *." 265 Or. at 401, 508 P.2d at 226. Consequently, we have recognized the criteria of § 240 of the Restatement of Contracts as imposing limitations on the admissibility of evidence in cases involving the partial integration doctrine. We believe these limitations remain appropriate, despite our occasional statements to the contrary.

On the other hand, the Restatement criteria are not to be applied mechanically or formalistically. As noted above, the purpose of the parol evidence rule is to give special effect to writings only in those cases where the parties intended the writing to be a final and complete statement of their agreement. Insofar as possible, the Restatement criteria should be applied in a manner consistent with that purpose.

Before applying these principles to the facts of the present case, mention should be made of the functions of court and jury in cases involving the parol evidence rule. Both plaintiff and defendants appear to have assumed that the jury decides whether or not the parties intended their writing to be a final and complete integration. Such is not the law. As McCormick notes, "The question [of whether the parties intended the writing to be a complete integration] is one for the court, for it relates to the admission or rejection of evidence." McCormick, Handbook of the Law of Evidence 437, § 215 (1954), quoting Naumberg v. Young, 44 N.J.L. 331, 338 (1882). In deciding that the parties did not intend the writing to be an integration, however, the court does not decide that the alleged oral terms actually were agreed upon. That determination is left to the jury. The court's decision is one of admissibility, not probity.^[2]

In the present case, the trial court decided that the written agreement of the parties was not a complete integration of their actual agreement, and permitted plaintiff to introduce evidence that the buy out provision in the written lease was subject to an oral time limitation. No contention is made that the oral agreement was supported by separate consideration, so the trial court's ruling can be upheld only if the agreement: (1) was "not inconsistent" with the written lease and (2) was "such an agreement as might naturally be made as a separate agreement by parties situated as were parties to the written contract." DeVore v. Weyerhaeuser Co., supra; Caldwell et ux. v. Wells, supra (emphasis added).

Defendant argues that the oral time limitation is "clearly inconsistent" with the terms of the written lease, reasoning that a buy out provision with no time limitation on a lease for a fixed term must be read to run for the entire term of the lease. We do not define the term "inconsistent" so broadly. To be "inconsistent" within the meaning of the partial integration doctrine, the oral term must contradict an express provision [609] in the writing. As the court observed in Hunt Foods and Industries, Inc. v. Doliner, 26 App.Div.2d 41, 270 N.Y.S.2d 937 (1966):

"In a sense any oral provision which would prevent the ripening of the obligations of a writing is inconsistent with the writing. But that obviously is not the sense in which the word is used * * *. To be inconsistent the term must contradict or negate a term of the writing. A term or condition which has a lesser effect is provable." 270 N.Y.S.2d at 940 (emphasis added).

See also, Braund, Inc. v. White, 486 P.2d 50 (Alaska 1971), and Whirlpool Corp. v. Regis Leasing Corp., 29 App.Div.2d 395, 288 N.Y.S.2d 337, 340 (1968), both following the Hunt court's definition of "inconsistent."

In the instant case, nothing is contained in the writing with respect to the duration of the buy out provision. Therefore, the oral time limitation is "not inconsistent" with the terms of the writing.

Defendants argue that even if the oral term is not inconsistent with the terms of the writing, the parol evidence should have been excluded because the oral term "naturally" would have been included in the writing. We disagree.

In determining whether or not an oral term is one that "naturally" would have been included in the writing, the trial court is not limited to a consideration of the face of the document. This court has recognized that "* * * the surrounding circumstances, as well as the written contract, may be considered." Blehm v. Ringering, 260 Or. 46, 50, 488 P.2d 798, 800 (1971). When considering the surrounding circumstances, the trial court should be aware of the fact that parties with business experience are more likely to reduce their entire agreement to writing than parties without such experience, TSS Sportswear, Ltd. v. Swank Shop, Inc., 380 F.2d 512 (9th Cir.1967), and that this is especially true when the parties are represented by counsel on both sides. Scott-Douglas Corp. v. Greyhound Corp., 304 A.2d 309 (Del.Super. 1973). The relative bargaining strength of the parties also should be considered, since a transaction not negotiated at arm's length may result in a writing that omits essential terms. Cf., Bussard v. College of Saint Thomas, Inc., 294 Minn. 215, 200 N.W.2d 155 (1972). And, of course, the apparent completeness and detail of the writing itself may lead the court to conclude the parties intended the writing to be a complete integration of their agreement. Unique Watch Crystal Co. v. Kotler, 344 Ill. App. 54, 99 N.E.2d 728 (1951). See also, Sweet, supra at 1064-67.

This is not to say, however, that the trial court should readily admit parol evidence whenever one of the parties claims a writing does not include all the terms of an agreement. The court should presume that the writing was intended to be a complete integration, at least when the writing is complete on its face, and should admit evidence of consistent additional terms only if there is substantial evidence that the parties did not intend the writing to embody the entire agreement. Hale, The Parol Evidence Rule, 4 Or.L.Rev. 91 (1925).

In the present case, there are a number of facts that could have led the trial court to conclude that it was natural for the parties "situated as were parties to the written contract" to have omitted the time limitation on the buy out provision from the written lease. First, this was not a sophisticated business transaction in which the parties could be expected to include all the terms of their agreement in the writing. Cf., Deering v. Alexander, 281 Or. 607, 576 P.2d 8 (1978). The lease agreement was a handwritten document that hardly shows the kind of careful preparation that accompanies a formal integration. See Calamari and Perillo, The Law of Contracts 102 (2d ed. 1977). Moreover, the agreement was concluded by the parties themselves, without counsel to advise them of the consequences of the writing. This case is therefore analogous to the leading case of Masterson v. Sine, 68 Cal.2d 222, 65 Cal. Rptr. 545, 436 P.2d 561 (1968), where the court, per Chief Justice Traynor, stated:

"* * * There is nothing in the record to indicate that the parties to this [610] family transaction, through experience in land transactions or otherwise, had any warning of the disadvantages of failing to put the whole agreement in the deed. This case is one, therefore, in which it can be said that a collateral agreement such as that alleged `might naturally be made as a separate agreement.'" 65 Cal. Rptr. at 549, 436 P.2d at 565.

Finally, the trial court was entitled to consider the fact that a literal reading of the written contract would have led to an unreasonable result. Plaintiff was contending the wheat crop he had planted would be worth $400 per acre at harvest. The written agreement, standing alone, would have allowed the defendants to exercise the buy out provision the day before harvest and pay plaintiff $70 per acre for wheat worth $400 per acre. While the mere fact that a contract is one-sided does not by itself justify a conclusion that the writing does not embody the entire agreement of the parties, the trial court may consider that fact in deciding whether the parties intended additional provisions to be included in the agreement. TSS Sportswear, Ltd. v. Swank Shop, Inc., supra at 519.

For these reasons, we hold that there was sufficient evidence to justify the trial court's decision to admit the parol evidence. The trial court was entitled to consider "the surrounding circumstances, as well as the written contract * * *." Blehm v. Ringering, supra. Under the circumstances of the present case, the parol evidence was properly admitted, and the question of whether the parties actually agreed to the time limitation was properly left to the jury.

Affirmed.

LENT, Justice, dissenting.

I must respectfully dissent. The majority opinion and the result thereby achieved in this case make the statute meaningless. The statute is clear:

"When the terms of an agreement have been reduced to writing by the parties, it is to be considered as containing all those terms, and therefore there can be, between the parties and their representatives or successors in interest, no evidence of the terms of the agreement, other than the contents of the writing, * * *." ORS 41.740

It excludes any evidence of the terms of an agreement reduced to writing other than the agreement itself. The statute would have to read differently to permit legislatively what this court permits by "interpreting" or "construing" the statute. The effect of this court's decisions has been to revise the statutory language to provide somewhat as follows:

"When the terms of an agreement have been reduced to writing by the parties, it is not to be considered as containing all those terms if there is oral testimony or evidence other than the contents of the writing that the agreement is incomplete."

If that is what the legislature meant to say, it is surprising that they chose the language now found in ORS 41.740 (which is unchanged from Sec. 682 of the Act of October 11, 1862).

The majority says that the statute is a codification of the parol evidence rule known to the common law, and therefore, the exceptions to the common law rule are an existing but unwritten list of exceptions to the statute. Not only that, but the majority seems to say further that whenever a common law court constructs another exception, this court may, if it finds the exception seemly, adopt it as an implied amendment to the 1862 Act. Would the majority apply the statute as written if the next legislative assembly were to reenact the Act of October 11, 1862, and add: "And this time we mean it"?

Were the statute applied as written, those who take the trouble to reduce their agreement to writing should be reasonably certain as to their rights and obligations. Trials would be simpler and cheaper. If it be said that the statute is harsh, I know of no better way to demonstrate its harshness or unfairness than to apply it strictly. The legislature could then actually enact a statute which would read as the majority's version of the present statute.

[611] As to the case at bar the majority says that what the plaintiff contends was an unwritten part and parcel of the written agreement is not "inconsistent" with the part actually written. This will surely surprise the defendant who finds that by the opinion in this case "not to exceed 70 [dollars] per acre" is consistent with $400 per acre. Although he had no lawyer to advise him at the time of making his writing, this plaintiff farmer cannot be so lacking in sophistication as to know or realize that it's just as easy to write "400.00" as it is to write "70.00" if that is truly what the parties intended and agreed.

The majority says generally:

"This is not to say, however, that the trial court should readily admit parol evidence whenever one of the parties claims a writing does not include all the terms of an agreement. The court should presume that the writing was intended to be a complete integration, at least when the writing is complete on its face, and should admit evidence of consistent additional terms only if there is substantial evidence that the parties did not intend the writing to embody the entire agreement."

Whatever the majority may mean by "substantial evidence" the rule just set forth should defeat this plaintiff's claim, not vindicate it. The writing is complete on its face, the additional terms are not consistent, and the "substantial evidence" is the plaintiff's testimony.

I respectfully dissent.

[1]ORS 41.740 states, in pertinent part:

"When the terms of an agreement have been reduced to writing by the parties, it is to be considered as containing all those terms, and therefore there can be, between the parties and their representatives or successors in interest, no evidence of the terms of the agreement, other than the contents of the writing, * * *."

Concededly, a literal reading of this statute would exclude any parol evidence of the terms of an agreement once that agreement had been reduced to writing by the parties. This court, however, has never read the statute in such a manner, but instead has treated the statute as a codification of the common law parol evidence rule. See, e.g., Blehm v. Ringering, 260 Or. 46, 488 P.2d 798 (1971) ("* * * ORS 41.740 is the parol evidence rule"). Consequently, we have recognized the various common law "exceptions" to the parol evidence rule in applying the statute, even though such exceptions do not appear in the statute. DeVore v. Weyerhaeuser Co., 265 Or. 388, 508 P.2d 220 (1973), cert. denied 415 U.S. 913, 94 S.Ct. 1408, 39 L.Ed.2d 467 (1974) (holding the rule inapplicable when the party objecting to the parol evidence admits the oral term was agreed to); Stevens v. Good Samaritan Hosp., 264 Or. 200, 504 P.2d 749 (1972) (recognizing the "partial integration" exception to the rule); National Cash Register Co. v. IMC, Inc., 260 Or. 504, 491 P.2d 211 (1971) (recognizing that the rule does not apply when the parties do not intend the writing to be a "final" statement of their agreement); Sternes v. Tucker, 239 Or. 105, 395 P.2d 881 (1964) (holding that the rule does not bar proof that the parties intended the writing to be subject to an oral condition).

Although these decisions may be inconsistent with a literal reading of the statute, which has been in effect since 1862, they can be justified under the general rule that statutes codifying the common law are to be construed in a manner consistent with the common law. See 2A Sutherland on Statutory Construction § 50.02 (Sands ed. 1973). Without undertaking a comprehensive study of the application of the parol evidence rule at common law, it is sufficient to note for purposes of this opinion that at the time ORS 41.740's original predecessor was enacted (see General Laws of Oregon § 682 (1874)), the "partial integration" doctrine discussed herein was recognized by both courts and commentators. See Batterman v. Pierce, 3 Hill 171 (N.Y. 1842) (note given for wood on plaintiff's land did not bar proof of oral agreement that plaintiff would bear risk of loss of fire); Jefferey v. Walton, 1 Starkie 267 (1816) (written contract to hire horse did not bar proof of oral agreement that hirer took risks of accidents from his shying); 1 G. Greenleaf, A Treatise of the Law of Evidence 331 (13th ed. 1876); T. Starkie, A Practical Treatise on the Law of Evidence 724 (10th ed. 1876).

We note also that the Supreme Court of California, which operates under a statute identical to ORS 41.740, treats its statute as a codification of the common law and has recognized the partial integration doctrine as well. Cal. Code Civ.Pro. § 1856 (West 1955); Masterson v. Sine, 68 Cal.2d 222, 65 Cal. Rptr. 545, 436 P.2d 561 (1968).

[2]Wigmore explains the procedure thusly:

"* * * There is a preliminary question for the judge to decide as to the intent of the parties, and upon this he hears evidence on both sides; his decision here, pro or con, concerns merely this question preliminary to the ruling of law. If he decides that the transaction was covered by the writing, he does not decide that the excluded negotiations did not take place, but merely that if they did take place they are nevertheless legally immaterial. If he decides that the transaction was not intended to be covered by the writing, he does not decide that the negotiations did take place, but merely that if they did, they are legally effective, and he then leaves to the jury the determination of fact whether they did take place." 9 J. Wigmore, Evidence 98, § 2430 (3d ed. 1940) (footnotes omitted).

HOWARD G. HAYDEN ET AL.

v.

MELVIN A. HOADLEY ET AL.

May Term, 1920.


Present: WATSON, C. J., POWERS, TAYLOK, MILES, and SLACK, J J.

Opinion filed October 5, 1920.

Contracts—Written Contract Cannot Be Contradicted or Varied by Parol—Performance Within Reasonable Time Implied When No Time Stated—Excluded Conversation Presumed to Have Been Before Written Contract—Obscure Question —Immaterial Evidence—Cross-examination As to Conversation Does Not Open Door to Entire Conversation—Damages—Rent Paid Because of Failure to Repair House—Instructions—Immaterial Evidence in Case Properly Commented on in Argument.

1. A written contract which contains no latent ambiguity cannot be qualified, controlled, contradicted, enlarged, or diminished by any contemporaneous or antecedent understanding or agreement, and oral testimony can no more be received to vary or contradict the legal intendment of such a contract than to vary or contradict its express terms.

2. Where a written contract by the defendants to make repairs upon certain premises is silent as to the time of performance, it is implied by law that they shall be made within a reasonable time, and that which is so implied is as binding as that which is expressed.

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3. In such case, parol evidence is not admissible to show that at the time the writing was signed it was agreed that the repairs need not be completed until a certain date.

4. Dunnett & Slack v. Gibson, 78 Vt. 439, overruled in part.
5. Such contract being silent as to the amount of money to be expended on the repairs, plaintiffs’ understanding about the amount of money to be paid therefor, and the kind of a wall that should be made, was properly excluded.
6. In such case, the contrary not appearing, it will be assumed in support of the ruling below, that the conversations referred to took place before the written contract was executed.
 The meaning and significance of a question asked one of the plaintiffs on cross-examination, “This wall that was being laid was in the same condition as the old wall at the time, Wasn’t it?” was too obscure to cause error in its exclusion.


8. The suit being for defendants’ breach of their written contract to make repairs on certain premises, defendants’ offer to show that the plaintiff had, since the contract was signed, removed the paper from the walls of the house was properly excluded, as having nothing to do with the issues being tried.


9. The cross-examination of one of the defendants as to a conversation between the parties on a certain occasion before the contract was executed did not open the door to the defendants to show all that was said on that occasion; the rule that the entire conversation is admissible under such circumstances going only so far as is necessary to shield a party from adverse inferences, and only allows an explanation or rebuttal of the evidence received.


10. Such reasonable sum as the plaintiffs had to pay for rent, because of the defendant’s failure to repair the buildings in question so that they could be occupied, from the expiration of a reasonable time from the date of the contract to the date of the bringing of the suit, was recoverable as special damages.

11. Where the closing words of a charge, “But all these things which I have enumerated are material things for you to find,” must have been understood by the jury as referring to all that preceded this clause in that part of the charge, it was reversible error, where one of the preceding questions was “whether the defendants were justified in relying” upon certain false representations of the plaintiffs, a question not in the case.

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12. There was no error in the reference in argument to immaterial evidence, where no objection was made until after the answer was given, and, while the court ruled that the evidence was immaterial, it was not stricken out.

ACTION OF CONTRACT. Plea, the general issue. Trial by jury in the Montpelier City Court, Washington County, Erwin M. Harvey, City Judge. Verdict and judgment for the plaintiffs. The defendants excepted. The opinion states the ease.

Fred L. Laird and Edward H. Deavitt for the defendants.

The parol evidence offered did not contradict the written memorandum, and, since it embraced matters which were a part of the agreement and upon which the memorandum was silent, should have been received in evidence. Wood v. James, 93 Vt. 36, Gilman Bros. v. Williams, 74 Vt. 327; Dunnett & Slack v. Gibson, 78 Vt. 439; Burditt Bros. v. Howe, 69 Vt. 563; Labbee v. Nelson, 66 Vt. 234; Hadley v. Bordo, 62 Vt. 285; Reynolds v. Hassam, 56 Vt. 449; Tillotson v. Ramsay, 51 Vt, 309; Winn v. Chamberlin, 32 Vt. 318; Michigan State Bank v. Peck, 28 Vt. 200; Red-field v. Gleason, 61 Vt. 220.

Fred E. Gleason and Julius A. Willcox for the plaintiffs.

POWERS, J.

The parties to this action exchanged properties, and as a part of the arrangement the defendants gave the plaintiffs the following writing which all signed:

“Memorandum of agreement made this 2nd day of May, A. D. 1919, by and between Melvin A. Hoadley and George A. Peck, both of Montpelier, in the county of Washington and State of Vermont, and Howard G. and Georgia V . Hayden, both of Worcester, in the county of Washington and State of Vermont, witnesseth: We, the said Hoadley and Peck, in consideration of the said Haydens having this day conveyed to us their farm in Worcester aforesaid, and whereas, we, the said Hoadley and Peck, have this day conveyed to the said Haydens certain land and premises situated on the westerly side of North Street in the city of Montpelier, as and for additional consideration for such exchange of properties, bind ourselves and agree to make, without expense to said Haydens, the following repairs upon the

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premises conveyed to the said Haydens as aforesaid, viz.: The said Hoadley and Peek agree to straighten up and shingle the barn on said premises; to straighten up the house; repair and paint the roof, and paint the same back of said house; to repair the cellar wall; and to install a pump in said house.” It is for the noncompliance with this agreement that suit is brought,

[1-4] At the trial, the defendants offered to show that at the time the writing was signed it was agreed that they should have until October 1, 1919, in which to make the repairs, that only $60 need be expended therefor, and that No. 2 shingles were to be used on the barn. These offers were excluded and the defendants excepted. The rulings were correct. The case calls for the application of a rule so often and so recently reaffirmed by this Court that we need take no time in its discussion. A written contract which contains no latent ambiguity cannot be qualified controlled, contradicted, enlarged, or diminished by any contemporaneous or antecedent understanding or agreement; and oral testimony can no more be received to vary or contradict the legal intendment of such a contract than to vary or contradict its express terms. Kinnear & Gager Mfg. Co. v. Miner, 88 Vt. 324, 92 Atl. 459; Wood v. James, 93 Vt. 36, 106 Atl. 566. The legal effect of the contract before us—it being silent as to the time of performance—was to require the repairs specified to be completed within a reasonable time. Reynolds v. Reynolds, 74 Vt. 463, 52 Atl. 1036. This is a provision of the contract implied by the law, and that which is so implied is as binding as that which is expressed. In legal consequence, then, this contract is just what it would be if it was therein expressly provided that the repairs were to be made within a reasonable time. Cocker v. Franklin, etc., Co., 3 Sumn. 530, Fed. Cas. No. 2, 932; Stange v. Wilson, 17 Mich. 342. To admit the testimony offered by the defendants to the effect that the parties agreed upon October 1, as the limit of the time given for the repairs would be to allow the plain legal effect of the written contract to be controlled by oral evidence. That is not permissible. Cameron Coal & Mercantile Co v. Universal Metal Co., 26 Okl. 615, 110 Pac. 720, 31 L. R. A. (N. S.) 618, and note. The contract before us is unequivocal and complete, and to say that parol evidence can be received to fix the time of performance, on the ground that the contract is incomplete, is wholly illogical and wrong, and so much of Dunnett & Slack v. Gibson, 78 Vt. 439, 63 Atl. 141, as

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is to that effect is overruled. From this it is not to be inferred that we question the proposition that an incomplete writing may be supplemented by parol, for this is a rule of unquestioned soundness.

[5-7] The evidence under discussion was not offered on the ground that it was admissible on the question of what was a reasonable time under the circumstances, so we give that question no attention. For the same reason, the questions asked Hayden in cross-examination regarding the understanding about the amount of money to be paid out in the repairs, and the kind of a wall that should be made, were properly excluded. The record does not show when the conversations referred to in this connection took place, so in support of the ruling we assume that it was before the written contract was executed. In further cross-examination Hayden was asked, “This wall that was being laid was in the same condition as the old wall all the time, wasn’t it? “ This question was excluded, and the defendants excepted. The meaning and significance of the question is too obscure to cause error in its exclusion to appear.

[8] The jury took a view of the premises referred to in the contract, and the defendants offered to show that the plaintiffs had, since the contract was signed, removed the paper from the walls of the house. This was properly excluded, for, as stated by the court, it had nothing to do with the issues being tried.

[9] During the cross-examination of defendant Hoadley, his attention was called to a conversation which he had with the plaintiffs the night before the contract was executed; and he was asked what he said to them that night, and replied that he told them what he would do. He was then asked,” What did you say ?” And he replied,” I told them I would make repairs not to exceed sixty—fifty to sixty dollars.” Later, this witness was recalled, and his counsel asked him to state “all that was said there about this trade between you and either one of the Haydens about this transaction.” Subject to the defendant’s exception, this question was excluded. Its admissibility was urged upon the ground that the cross-examination above referred to opened the door to the defendants to show all that was said on that occasion. But the rule invoked by the defendants will not avail them. It is protective, merely. It goes only so far as is necessary to shield a party from adverse inferences, and only allows an explanation or rebuttal of the evidence received. It does not

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open the door to the indiscriminate admission of like evidence touching the ultimate facts in litigation. Bank of Phoenix City v. Taylor, 196 Ala. 665, 72 So. 264; State v. Witham, 72 Me. 631; Mowry v. Smith, 9 Allen (Mass.) 67.

[10] The plaintiffs declared for special damages on account of rent paid by them, which payment was made necessary by the defendants’ failure to repair the buildings in question so that they could be occupied; and the court charged that this was a proper element of the damages recoverable, if in other respects the plaintiffs’ case was made out. To this instruction the defendants excepted. If the plaintiffs, for want of these repairs, were obliged to live in rented premises that summer, such reasonable sum as they had to pay as rent from the expiration of a reasonable time after the date of the contract to the date of the bringing of this suit was recoverable as damages. This would be an expense imposed upon them by the defendants’ default; for, it would be a natural consequence of it.

[11] The defendants by a sufficient answer set up certain false representations made by the plaintiffs concerning the Worcester farm, and relied upon them as a basis of damages in offset. In the course of its charge on this branch of the ease, the court enumerated the questions which the jury was to consider and determine, including therein the question “whether the defendants upon all the facts were justified in relying” upon these representations. And while in another part of the charge immediately following this, the court repeated these questions, omitting this one, this part of the charge closed with the words, “ But all these things which I have enumerated are material things for you to find.” We think the jury must have understood that this clause referred to all that preceded it in that part of the charge, including the question whether the defendants were justified in relying upon the representations. This was error, for that question was not in the ease. Maidment v. Frazier, 90 Vt. 520, 98 Atl. 987; Arnold v. Somers, 92 Vt. 512, 105 Atl. 260. It was harmful in character, and requires a reversal.

[12] There was no error in the reference in argument to the price which the defendants obtained for the farm. Hoadley testified that they sold it for $1,400. No objection was made until after the answer came in, and while the court ruled that the

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price was immaterial, the evidence was not stricken out. It was therefore in the case, and subject to comment.

Judgment reversed, and cause remanded.

Frank A. Fritz, Anthony T. Antinozzi, Frank A. Fritz, Jr., and Vincent Keane for appellants.

Ralph L. McAfee, Edward Q. Carr, Jr., and Arnold Hoffman for respondent.

DESMOND, FULD, VAN VOORHIS and BURKE, JJ., concur with DYE, J.; CONWAY, Ch. J., dissents in an opinion in which FROESSEL, J., concurs.

[458] DYE, J.

On or about July 30, 1948 the plaintiff, hereinafter called Bethlehem, entered into a subcontract with the defendant Turner Construction Company, hereinafter called Turner, to furnish, deliver and erect the structural steel for a 20-story office building on Broadway between 55th and 56th Streets, New York City, which Turner — as general contractor — was to build for the defendant Mutual Life Insurance Company of New York, hereinafter called Mutual, for a fixed fee, Mutual to pay for all other costs. The contract contained a clause providing that in the event the "prices for component materials" increased or decreased, there was to be a corresponding adjustment of the contract prices. Adjustment for increases in the price of steel in any event was limited to $15 per ton.

Pursuant to such provision, Bethlehem rendered periodic bills for materials furnished, which Mutual paid without complaint in respect to items other than the escalation portion of the price, asserting that the term "prices for component materials" as used in the contract had reference to changes in price to Bethlehem for materials it used in progressing the work, that is, if there were increases in the prices paid by Bethlehem in order to obtain the materials necessary to produce steel — which is to say — the cost to Bethlehem in the manufacture of raw steel at the mill, based on the basic elements employed such as iron ore, steel scrap, limestone, etc. Bethlehem refused to accept such an interpretation and insisted that the words "prices for component materials" included the price of steel being regularly charged to the trade which, in this instance, had been increased by $10 per ton for the aggregate of steel items known as steel shapes, plates, bars, sheets, rivets and bolts. Based on this contention, Bethlehem rendered bills aggregating $94,861.15. When Turner and Mutual persisted in their refusal to pay, Bethlehem filed a mechanic's lien against Mutual's building and brought this [459] action for its foreclosure. When issue was joined, Bethlehem moved for summary judgment on the question of Turner's liability to Bethlehem and Bethlehem's right to enforce its lien against the property of Mutual and for an assessment of the amount due. Special Term, although "persuaded by the interpretation given to the words in question by the plaintiff", was nonetheless constrained to deny the motion on the ground that an issue of fact was presented. On appeal to the Appellate Division, that court reversed the Special Term, granted summary judgment in favor of plaintiff and directed an assessment of the amount due.

The basic issue, then, is the meaning of the term "prices for component materials", as used in the price adjustment clause of the contract.

A trial is warranted only in the event that we deem the words ambiguous. No such problem faces us here. Bethlehem agreed to furnish, deliver, erect and paint all structural steel work in accordance with Class A material, A. I. S. C. Code of Standard Practice. Turner was to pay $182 per net ton (2,000 pounds) for the steel, subject to the price adjustment clause in the event of increase or decrease in price. That clause made specific mention of the basis for computing the changes in steel price, viz., designing, fabrication and erection which, by the description, quite obviously has reference to the steel delivered and used on the job. The maximum increase was not to exceed $15 a ton. The increase billed was calculated on the basis of the increase of $10 per ton, which was a publicly quoted uniform price increase charged by Bethlehem to all other purchasers of steel from the mill. It appears without denial that Bethlehem increased the price of steel after the contract although the price increase was in effect before the contract was executed. As matter of undisputed fact, the parties had expressly agreed that the escalation clause was to be effective as of June 28, 1948. In support of their contention, appellants point to the testimony of Mr. Hughes, the controller of Mutual, that he understood the escalation clause to have that meaning. Such a view impresses us as straining the contract language beyond its reasonable and ordinary meaning. If "component materials" mean raw materials used in the production of steel, escalation on account of labor rates would not be limited to those specifically mentioned in connection with design, fabrication and erection, [460] but would have included labor costs at the mill as well. However, it does not. The formula employed referred to the computation of "prices for component materials, labor rates applicable to the fabrication and erection thereof and freight rates". A normal and reasonable meaning of that clause has the word "thereof" referring to the term "component materials" so that component materials signify the materials that Bethlehem contracted to provide in performing the work "furnishing, delivering, erecting and painting all structural steel work in accordance with Class `A' material A. I. S. C. Code of Standard Practice", etc. Mere assertion by one that contract language means something to him, where it is otherwise clear, unequivocal and understandable when read in connection with the whole contract, is not in and of itself enough to raise a triable issue of fact. It has long been the rule that when a contract is clear in and of itself, circumstances extrinsic to the document may not be considered (General Phoenix Corp. v. Cabot, 300 N.Y. 87) and that where the intention of the parties may be gathered from the four corners of the instrument, interpretation of the contract is a question of law and no trial is necessary to determine the legal effect of the contract (Brainard v. New York Central R. R. Co., 242 N.Y. 125; Matter of Western Union Tel. Co. [American Communications Assn.], 299 N.Y. 177).

Appellants argue that unless the escalation clause has the meaning attributed to it by them, Bethlehem has an arbitrary unilateral power to change the price terms of the Bethlehem-Turner contract. In other words, appellants are saying that the contract lacks requisite mutuality and that an escalation clause, in order to be valid, must be based on some extrinsic standard by which escalation can be determined. However, this escalation clause provided for increases or decreases in accordance with changes in Bethlehem's regular prices to all purchasers of plain steel products and such a provision does not give Bethlehem undue power of determination of the contract price (Buggs v. Ford Motor Co., 113 F.2d 618; Ken-Rad Corp. v. R. C. Bohannan, Inc., 80 F.2d 251). The Referee found that Bethlehem in fact charged uniform and regular prices to all purchasers of its plain steel products including its own fabrication and erection division and such a finding is [461] supported by substantial evidence. This finding was unanimously affirmed by the Appellate Division and may not be disturbed by us (Civ. Prac. Act, § 605).

Finally, as a second main point, appellants argue that Bethlehem is not entitled to the claimed price escalation, even under Bethlehem's interpretation of the contract, because it failed to establish that uniform prices were charged by it for structural steel products. The appellants' position on this point is based upon evidence from Bethlehem's records relating to contracts between Bethlehem and others for a variety of jobs involving fabrication and erection. But reliance on this evidence confuses the "contract price" for the job with the "prices for component materials". Certainly the distinction is obvious between a contract price which is a competitively bargained price for a job and includes fabrication and erection as well as the furnishing of plain steel products and, on the other hand, the prices of component materials which are the prices for the structural steel products such as pipes, plates, bars, rivets, nuts and bolts.

The judgment appealed from should be affirmed, with costs.

CONWAY, Ch. J. (dissenting).

Plaintiff agreed to furnish, erect and paint all structural steel work in a building for defendant Mutual Life Insurance Company. The escalator or price adjustment clause in the contract provided: "The price or prices herein stated are based on prices for component materials, labor rates applicable to the fabrication and erection thereof and freight rates, in effect as of the date of this proposal. If, at any time prior to completion of performance of the work to be performed hereunder, any of said material prices, labor rates and/or freight rates shall be increased or decreased, then in respect of any of said work performed thereafter there shall be a corresponding increase or decrease in the prices herein stated."

The case turns upon the construction to be placed upon the words "component materials". It is the position of the plaintiff that by those words it meant the plain steel products such as shapes, bars, sheets and plates which were shipped from its mills to its fabricating works and that the term "prices" meant the price at which it regularly sold such products to others, so that if it increased its prices to others [462] it could increase its price to Mutual. The defendant Mutual claims that under the disputed clause plaintiff was entitled only to increases in the cost of "component materials" which enter into the production of the structural steel to be furnished by it under the contract.

This being an appeal from a judgment of the Appellate Division affirming the Supreme Court judgment fixing damages after entry of an order of the Appellate Division granting summary judgment, we are called upon to determine, merely, whether a triable issue of fact exists for, on a motion for summary judgment "Issue-finding, rather than issue-determination, is the key to the procedure." (Esteve v. Abad, 271 App. Div. 725, 727.) If triable issues are present, the motion for summary judgment must be denied and the case permitted to take its usual course (ibid.) The intent of parties, where the language of a writing is ambiguous, constitutes a question of fact (Italian Benevolent Inst. v. Elaine Co., 240 App. Div. 196). As we recently said in Lachs v. Fidelity & Cas. Co. (306 N.Y. 357, 364), in denying a motion for summary judgment: "We have never departed from our statement in Kenyon v. Knights Templar & Masonic Mut. Aid Assn. (122 N.Y. 247, 254): `It may preliminarily be observed that, as a general rule, the construction of a written instrument is a question of law for the court to determine, but when the language employed is not free from ambiguity, or when it is equivocal and its interpretation depends upon the sense in which the words were used, in view of the subject to which they relate, the relation of the parties and the surrounding circumstances properly applicable to it, the intent of the parties becomes a matter of inquiry, and the interpretation of the language used by them is a mixed question of law and fact.'"

It is suggested that the escalation clause here involved is free from ambiguity and is so clear that it is capable of but one reasonable meaning — and that the one urged by Bethlehem. I cannot agree. In my opinion, the language of the contract is susceptible of more than one reasonable interpretation and so a trial must be had.

As the appellants point out, the usual purpose of an escalation clause is to preserve, substantially, the benefit of a bargain. Such a clause is intended to protect against unanticipated or unpredictable changes which might render the bargain unduly [463] harsh. An escalation clause is not ordinarily intended to enable one party to render the bargain more profitable to himself. It seems to me that the words "prices for component materials" taken in their ordinary meaning can reasonably be understood to refer to the additional prices which Bethlehem would be required to pay in order to obtain and furnish the materials necessary for the performance of the contract work. In other words, those words could reasonably mean that the contract price was to be increased pursuant to the escalation clause, if Bethlehem's costs and expenses increased. Even under Bethlehem's interpretation of the clause, the contract price per net ton of erected steel was to be adjusted if there was an increase or decrease in the prices paid by Bethlehem for labor, freight and such materials as welding rods and paint. From this, one could reasonably conclude that the clause would operate similarly insofar as other materials are concerned and that an increase could be demanded on account of steel produced by Bethlehem only if its costs with respect thereto increased, i.e., if there were increases in the prices paid by Bethlehem in order to obtain the materials necessary to produce steel. In the absence of a special understanding or definition, such view is in accord with reason. It is perfectly consistent with the wording of the contract and is in keeping with the usual purpose of an escalation clause, i.e., to preserve, not better, the bargain already struck.

An additional reason for adopting this interpretation, rather than Bethlehem's, is the rule that the language of a contract is to be construed strictly against the party who drafted it. The clause in question here was prepared by Bethlehem, having been taken verbatim from Bethlehem's original proposal to Mutual.

The fact that the interpretation urged by Bethlehem is other than that ordinarily given an escalation clause, and the fact that Bethlehem seeks to impress technical and uncommon meanings upon general, everyday words demonstrate, to my mind, that the clause in question is at least ambiguous and that its proper meaning cannot be summarily determined without full opportunity for inquiry into the context in which the words in dispute were used, the surrounding circumstances, the negotiations and the understanding of the individual negotiators.

In my judgment, therefore, this is not a case for the granting [464] of summary judgment and I vote to reverse the judgment of the Appellate Division and to deny the motion for summary judgment.

Judgment affirmed.

Present: TAURO, C.J., REARDON, QUIRICO, BRAUCHER, & KAPLAN, JJ.

Robert F. Sylvia for William J. Spence & others.

Leo Sontag (Raymond W. Rawlings with him) for Robert Industries, Inc.

BRAUCHER, J.

The plaintiff filed two bills in the Superior Court. The first sought an accounting for the interference by the defendant Spence, through the defendant corporations controlled by him, with a right granted to the plaintiff by the Metropolitan District Commission (MDC). The second sought a declaration that a lease from the MDC to the plaintiff gave the plaintiff an exclusive right to serve food for money on George's Island in Boston Harbor and also sought an [752] injunction against such activity on the part of Spence and his corporations. One of the defendant corporations in the first suit, Massachusetts Bay Lines, Inc., by counterclaim sought damages for unfair competition.

The judge made findings, rulings and an order for decree in each case, ruled that the plaintiff has the exclusive right it claims, and granted the declaratory relief and injunction prayed for in the second suit. In the first suit he found that the defendants acted in the honest belief, in accordance with an opinion of MDC counsel, that the lease did not grant the exclusive right claimed, and dismissed the bill. In view of his findings in the companion case he found no damage on the counterclaim. The defendants appeal from the final decrees in both suits. The evidence is reported.

We summarize the judge's findings. Before 1967 Spence or his corporation had a lease from the MDC as a concessionaire on George's Island, and ran clambakes. During 1967 and 1968 there was no concessionaire on the island, and the facilities fell into disrepair. During this period Spence or his corporations continued to run clambakes on the island, using some of the same facilities. On May 14, 1969, the MDC leased to the plaintiff for five years portions of three buildings and certain adjoining areas on the island for the purpose of running a food and beverage concession. The lease refers to use of one of the buildings as an "indoor picnic area," and the plaintiff serves clambakes there in inclement weather. The lease also refers to a "Regular Concession Stand," which it also calls a "Regular Snack Bar," and to the use of an adjacent area "for lobster and fish handling." The lease requires the plaintiff to renovate and repair the leased areas, and provides that the MDC shall receive ten per cent of the plaintiff's gross receipts.

The critical provision of the lease is paragraph 8: "The Commission agrees that during the time this concession lease is in force, it shall not grant a lease to any other person or company which shall in any way [753] compete with the concession herein granted. The Commission, however, reserves the right to permit patrons to bring their own food and beverages for their own personal use into and upon the Island." The judge found that provision ambiguous and that the MDC and the plaintiff intended that no other food be served on the island for money except that purchased through the plaintiff. The second sentence of paragraph 8 was intended to permit individuals or small groups of individuals to bring their own picnic lunches or food to the island for preparation in outdoor grills provided by the MDC and to consume it there. It was not the intent of the MDC or the plaintiff to permit the preparation and service of food on the island for profit by any individual or company other than the plaintiff.

Spence, through a corporation whose principal business is the operation of harbor boats on scheduled runs and sightseeing trips, has been advertising and running clambakes on the island during 1969, 1970 and 1971. It solicits the business of groups of individuals and charges a price which includes transportation to and from the island and a price for the clambake. The food is in part prepared on the mainland, taken to the island on small boats, and further prepared, cooked and served on the island in areas not covered by the plaintiff's lease. There is no lease to Spence or his corporations, and they pay no fee to the MDC.

1. Contrary to the defendants' contention, there was no error in the admission of evidence of the facts and circumstances of the transaction, including the situation and relations of the parties, for the purpose of applying the terms of the written contract to the subject matter and removing and explaining any uncertainty or ambiguity which arose from such application. Stoops v. Smith, 100 Mass. 63, 66. A lease is to be read in the light of the circumstances of its execution, which may enable the court to see that its words are really ambiguous. Sheff v. Candy Box Inc. 274 Mass. 402, 406. When the written agreement, as applied to the [754] subject matter, is in any respect uncertain or equivocal in meaning, all the circumstances of the parties leading to its execution may be shown for the purpose of elucidating, but not of contradicting or changing its terms. Smith v. Vose & Sons Piano Co. 194 Mass. 193, 200. Goldenberg v. Taglino, 218 Mass. 357, 359. See Restatement 2d: Contracts (Tent. draft No. 5, March 31, 1970), §§ 235, 236, (Tent. draft No. 6, March 31, 1971), §§ 240, 241. Compare Uniform Commercial Code, G.L.c. 106, § 2-202, inserted by St. 1957, c. 765, § 1. Expressions in our cases to the effect that evidence of circumstances can be admitted only after an ambiguity has been found on the face of the written instrument have reference to evidence offered to contradict the written terms. See Violette v. Rice, 173 Mass. 82, 84; Snider v. Deban, 249 Mass. 59, 61.

2. In view of its completeness and specificity, the lease reasonably appears to be a complete agreement, and it is therefore taken to be a complete agreement in the absence of contrary evidence. Compare Welch v. Bombardieri, 252 Mass. 84, 87; Caputo v. Continental Constr. Corp. 340 Mass. 15, 18; Carlo Bianchi & Co. Inc. v. Builders' Equip. & Supplies Co. 347 Mass. 636, 643-644; Restatement 2d: Contracts (Tent. draft No. 5, March 31, 1970), § 235 (3). In fact, the evidence confirmed the normal inference. The treasurer of the plaintiff, who runs its business, testified that after consulting with counsel he signed the lease at the MDC office. Before signing, he read the lease and told an MDC attorney that he was concerned about a typographical error as to the size of a room. He "was told that where the Commission had signed the lease, that they'd have to redo the whole thing." He also said that he wanted to "make darn sure there's no question that I have any competition.... I don't want any other commercial caterer." The MDC attorney said, "That is all taken care of in the lease," and the plaintiff's treasurer then signed the lease. This testimony shows quite clearly [755] that the parties thought their rights and duties with respect to competing caterers were to be governed by the terms of the written lease.

The interpretation of an integrated agreement is a matter of law on which we are not bound by the trial judge's conclusions unless the problem of interpretation is affected by findings of fact. Quintin Vespa Co. Inc. v. Construction Serv. Co. 343 Mass. 547, 551. Seward v. Weeks, 360 Mass. 410, 413. See Restatement 2d: Contracts (Tent. draft No. 5, March 31, 1970), § 238. Interpretation is directed to the meaning of the terms of the writing in the light of the circumstances, not to the meaning of the conversations of the parties in the course of their negotiations. Wentworth v. Manhattan Mkt. Co. 216 Mass. 374, 376-377. The plaintiff was not "precluded from showing forth the transaction in all its length and breadth." Saltzman v. Barson, 239 N.Y. 332, 336. "After interpretation has called to its help all those facts which make up the setting in which the words are used," however, "the words themselves remain the most important evidence of intention; to put them altogether aside may at times be necessary but it always somewhat savors of usurpation...." National City Bank v. Goess, 130 F.2d 376, 380.

The critical provision of the lease here in issue forbids the MDC to grant a competing "lease"; it also reserves to the MDC "the right to permit" certain activities by "patrons" not described as lessees. If the first part of the provision is limited to leases, the plaintiff argues, the second part has no effect, except perhaps as an unnecessary partial description of what is not a lease. Reading the provision as a whole and seeking to give meaning to each part, the argument continues, we must hold that all that is not permitted is forbidden and that "lease" includes any commercial competition with the plaintiff. But the lease nowhere says that activities not expressly permitted are forbidden. It simply does not deal with competition other [756] than competition by lessees. The plaintiff's reading places a strain on the word "lease" greater than it can bear.

The testimony of the plaintiff's treasurer does not help the plaintiff. That testimony strongly indicates that the witness understood, at the time he signed the lease, that the MDC attorney had no authority to vary the lease terms unless the Commissioners signed the lease again. The witness had consulted with counsel and had read the lease, and there is nothing to indicate that he thought the MDC attorney was giving or was authorized to give an official interpretation of the lease. If he had been authorized to vary or interpret the lease, parol evidence that before the lease was executed the parties had agreed to forbid competition by commercial caterers other than lessees could not be permitted to control the interpretation of the lease as finally drawn up and executed. Burns v. Great Atl. & Pac. Tea Co. 312 Mass. 551, 553.

3. The counterclaim filed by one of the corporate defendants was dismissed solely on the ground that the plaintiff had an exclusive right to put on clambakes on George's Island, and that hence the defendant suffered no damage. Since the plaintiff, under a proper interpretation of the lease, had no such exclusive right, the counterclaim was improperly dismissed.

4. The final decree in each of the two cases is reserved. In the suit for declaratory relief a decree is to enter declaring that the conduct of clambakes on George's Island on premises not covered by the lease between the MDC and the plaintiff does not violate paragraph 8 of that lease. The suit for an accounting is remanded to the Superior Court for trial on the counterclaim of the defendant Massachusetts Bay Lines, Inc. The defendants are to have costs of appeal.

So ordered.

Miller, Van Dorn, Hughes & O'Connor, Richard H. McConnell and Daniel C. Miller for Defendant and Appellant.

Richard H. Peterson, Gilbert L. Harrick and Donald Mitchell for Plaintiff and Respondent.

TRAYNOR, C. J.

Defendant appeals from a judgment for plaintiff in an action for damages for injury to property under an indemnity clause of a contract. [36]

In 1960 defendant entered into a contract with plaintiff to furnish the labor and equipment necessary to remove and replace the upper metal cover of plaintiff's steam turbine. Defendant agreed to perform the work "at [its] own risk and expense" and to "indemnify" plaintiff "against all loss, damage, expense and liability resulting from ... injury to property, arising out of or in any way connected with the performance of this contract." Defendant also agreed to procure not less than $50,000 insurance to cover liability for injury to property.plaintiff was to be an additional named insured, but the policy was to contain a cross-liability clause extending the coverage to plaintiff's property.

During the work the cover fell and injured the exposed rotor of the turbine.plaintiff brought this action to recover $25,144.51, the amount it subsequently spent on repairs. During the trial it dismissed a count based on negligence and thereafter secured judgment on the theory that the indemnity provision covered injury to all property regardless of ownership.

Defendant offered to prove by admissions of plaintiff's agents, by defendant's conduct under similar contracts entered into with plaintiff, and by other proof that in the indemnity clause the parties meant to cover injury to property of third parties only and not to plaintiff's property. ^[402] Although the trial court observed that the language used was "the classic language for a third party indemnity provision" and that "one could very easily conclude that ... its whole intendment is to indemnify third parties," it nevertheless held that the "plain language" of the agreement also required defendant to indemnify plaintiff for injuries to plaintiff's property. Having determined that the contract had a plain meaning, the court refused to admit any extrinsic evidence that would contradict its interpretation.

When the court interprets a contract on this basis, it determines [37] the meaning of the instrument in accordance with the "... extrinsic evidence of the judge's own linguistic education and experience." (3 Corbin on Contracts (1960 ed.) [1964 Supp. 579, p. 225, fn. 56].) The exclusion of testimony that might contradict the linguistic background of the judge reflects a judicial belief in the possibility of perfect verbal expression. (9 Wigmore on Evidence (3d ed. 1940) 2461, p. 187.) This belief is a remnant of a primitive faith in the inherent potency ^[403] and inherent meaning of words. ^[404]

[1] The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible. (Continental Baking Co. v. Katz (1968) 68 Cal.2d 512, 520-521 [67 Cal.Rptr. 761, 439 P.2d 889]; Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865 [44 Cal.Rptr. 767, 402 P.2d 839]; Hulse v. Juillard Fancy Foods Co. (1964) 61 Cal.2d 571, 573 [39 Cal.Rptr. 529, 394 P.2d 65]; Nofziger v. Holman (1964) 61 Cal.2d 526, 528 [39 Cal.Rptr. 384, 393 P.2d 696]; Coast Bank v. Minderhout (1964) 61 Cal.2d 311, 315 [38 Cal.Rptr. 505, 392 P.2d 265]; Imbach v. Schultz (1962) 58 Cal.2d 858, 860 [27 Cal.Rptr. 160, 377 P.2d 272]; Reid v. Overland Machined Products (1961) 55 Cal.2d 203, 210 [10 Cal.Rptr. 819, 359 P.2d 251].)

A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained. [38]

Some courts have expressed the opinion that contractual obligations are created by the mere use of certain words, whether or not there was any intention to incur such obligations. ^[405] Under this view, contractual obligations flow, not from the intention of the parties but from the fact that they used certain magic words. Evidence of the parties' intention therefore becomes irrelevant.

[2] In this state, however, the intention of the parties as expressed in the contract is the source of contractual rights and duties. ^[406] A court must ascertain and give effect to this intention by determining what the parties meant by the words they used. Accordingly, the exclusion of relevant, extrinsic, evidence to explain the meaning of a written instrument could be justified only if it were feasible to determine the meaning the parties gave to the words from the instrument alone.

If words had absolute and constant referents, it might be possible to discover contractual intention in the words themselves and in the manner in which they were arranged. Words, however, do not have absolute and constant referents. [3] "A word is a symbol of thought but has no arbitrary and fixed meaning like a symbol of algebra or chemistry, ..." (Pearson v. State Social Welfare Board (1960) 54 Cal.2d 184, 195 [5 Cal.Rptr. 553, 353 P.2d 33].) The meaning of particular words or groups of words varies with the "... verbal context and surrounding circumstances and purposes in view of the linguistic education and experience of their users and their hearers or readers (not excluding judges). ... A word has no meaning apart from these factors; much less does it have an objective meaning, one true meaning." (Corbin, The Interpretation of Words and the Parol Evidence Rule (1965) 50 Cornell L.Q. 161, 187.) [4] Accordingly, the meaning of a writing "... can only be found by interpretation [39] in the light of all the circumstances that reveal the sense in which the writer used the words. The exclusion of parol evidence regarding such circumstances merely because the words do not appear ambiguous to the reader can easily lead to the attribution to a written instrument of a meaning that was never intended. [Citations omitted.]" (Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 776 (concurring opinion); see also, e.g., Garden State Plaza Corp. v. S. S. Kresge Co. (1963) 78 N.J. Super. 485 [189 A.2d 448, 454]; Hurst v. W. J. Lake & Co. (1932) 141 Ore. 306, 310 [16 P.2d 627, 629, 89 A.L.R. 1222]; 3 Corbin on Contracts (1960 ed.) 579, pp. 412-431; Ogden and Richards, The Meaning of Meaning, op.cit supra 15; Ullmann, The Principles of Semantics, supra, 61; McBaine, The Rule Against Disturbing Plain Meaning of Writings (1943) 31 Cal.L.Rev. 145.)

[5] Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written contract, these terms must first be determined before it can be decided whether or not extrinsic evidence is being offered for a prohibited purpose. The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. That possibility is not limited to contracts whose terms have acquired a particular meaning by trade usage, ^[407] but exists whenever the parties' understanding of the words used may have differed from the judge's understanding.

Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to [40] prove the intention of the parties. ^[408] (Civ. Code, 1647; Code Civ. Proc., 1860; see also 9 Wigmore on Evidence, op. cit. supra, 2470, fn. 11, p. 227.) Such evidence includes testimony as to the "circumstances surrounding the making of the agreement ... including the object, nature and subject matter of the writing ..." so that the court can "place itself in the same situation in which the parties found themselves at the time of contracting." (Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761; Lemm v. Stillwater Land & Cattle Co., supra, 217 Cal. 474, 480-481.) [6] If the court decides, after considering this evidence, that the language of a contract, in the light of all the circumstances, "is fairly susceptible of either one of the two interpretations contended for ..." (Balfour v. Fresno C. & I. Co. (1895) 109 Cal. 221, 225 [41 P. 876]; see also, Hulse v. Juillard Fancy Foods Co., supra, 61 Cal.2d 571, 573; Nofziger v. Holman, supra, 61 Cal.2d 526, 528; Reid v. Overland Machined Products, supra, 55 Cal.2d 203, 210; Barham v. Barham (1949) 33 Cal.2d 416, 422-423 [202 P.2d 289]; Kenney v. Los Feliz Investment Co. (1932) 121 Cal.App. 378, 386-387 [9 P.2d 225]), extrinsic evidence relevant to prove either of such meanings is admissible. ^[409]

[7] In the present case the court erroneously refused to consider extrinsic evidence offered to show that the indemnity clause in the contract was not intended to cover injuries to plaintiff's property. Although that evidence was not necessary to show that the indemnity clause was reasonably susceptible of the meaning contended for by defendant, it was nevertheless relevant and admissible on that issue. Moreover, since that clause was reasonably susceptible of that meaning, [41] the offered evidence was also admissible to prove that the clause had that meaning and did not cover injuries to plaintiff's property. ^[410] Accordingly, the judgment must be reversed.

[8] Two questions remain that may arise on retrial. On the theory that the indemnity clause covered plaintiff's property, the trial court instructed the jury that plaintiff was entitled to recover unless all of "... the following conditions [were found] to exist:"

"1. That Pacific Gas and Electric Company continued to [42] maintain independent operation on the premises whereon the installation of the cover was in progress;"

"2. That the damage to the turbine was unrelated to the Defendant G. W. Thomas Drayage & Rigging Company, Inc.'s performance;"

"3. That the plaintiff was guilty of active, affirmative negligence; and"

"4. That such active negligence related to a matter over which the plaintiff exercised exclusive control."

The instruction was based on certain guidelines discussed in Goldman v. Ecco-Phoenix Elec. Corp. (1964) 62 Cal.2d 40, 45-46 [41 Cal.Rptr. 73, 396 P.2d 377]; Harvey Machine Co. v. Hatzel & Buehler, Inc. (1960) 54 Cal.2d 445, 448 [6 Cal.Rptr. 284, 353 P.2d 924]; and Safeway Stores, Inc. v. Massachusetts Bonding & Ins. Co. (1962) 202 Cal.App.2d 99, 112-113 [20 Cal.Rptr. 820]. Those cases do not hold, however, that all four conditions specified in the instruction must exist for the indemnitor to be relieved of liability. It is sufficient if the indemnitee's own active negligence is a cause of the harm. As stated in Markley v. Beagle (1967) 66 Cal.2d 951, 952 [59 Cal.Rptr. 809, 429 P.2d 129], "An indemnity clause phrased in general terms will not be interpreted ... to provide indemnity for consequences resulting from the indemnitee's own actively negligent acts."

To prove the amount of damages sustained, plaintiff presented invoices received from Ingersoll-Rand, the manufacturer and repairer of the turbine, the drafts by which plaintiff had remitted payment, and testimony that payment had been made. Defendant objected to the introduction of the invoices on the ground that they were hearsay. Subsequently, plaintiff called a mechanical engineer who qualified as an expert witness on the repair of turbines. On the basis of photographs of the damage after the accident, he testified that to repair the turbine it was reasonable and necessary to dismantle it completely, magnaflux all parts, replace all blades in wheels that had been damaged, reassemble the rotor, balance it, "indicate" it and centrifugate it. Similar repairs were listed in the invoices, and over objection the witness was allowed to testify that the amounts charged therefor were reasonable.

[9] Since invoices, bills, and receipts for repairs are hearsay, they are inadmissible independently to prove that liability for the repairs was incurred, that payment was made, or [43] that the charges were reasonable. (Plonley v. Reser (1960) 178 Cal.App.2d Supp. 935, 937-939 [3 Cal.Rptr. 551, 80 A.L.R.2d 911]; Menefee v. Raisch Improvement Co. (1926) 78 Cal.App. 785, 789 [248 P. 1031].) If, however, a party testifies that he incurred or discharged a liability for repairs, any of these documents may be admitted for the limited purpose of corroborating his testimony (Bushnell v. Bushnell (1925) 103 Conn. 583 [131 A. 432, 436, 44 A.L.R. 788]; Cain v. Mead (1896) 66 Minn. 195 [68 N.W. 840, 841]), and if the charges were paid, the testimony and documents are evidence that the charges were reasonable. (Dewhirst v. Leopold (1924) 194 Cal. 424, 433 [229 P. 30]; Smith v. Hill (1965) 237 Cal.App.2d 374, 388 [47 Cal.Rptr. 49]; Meier v. Paul X. Smith Corp. (1962) 205 Cal.App.2d 207, 222 [22 Cal.Rptr. 758]; Malinson v. Black (1948) 83 Cal.App.2d 375, 379 [188 P.2d 788]; Laubscher v. Blake (1935) 7 Cal.App.2d 376, 383 [46 P.2d 836]. See also Gimbel v. Laramie (1960) 181 Cal.App.2d 77, 81 [5 Cal.Rptr. 88].) Since there was testimony in the present case that the invoices had been paid, the trial court did not err in admitting them.

[10] The individual items on the invoices, however, were read, not to corroborate payment or the reasonableness of the charges, but to prove that these specific repairs had actually been made. No qualified witness was called to testify that the invoices accurately recorded the work done by Ingersoll-Rand, and there was no other evidence as to what repairs were made. This use of the invoices was error. (California Steel Buildings, Inc. v. Transport Indemnity Co. (1966) 242 Cal.App.2d 749, 759 [51 Cal.Rptr. 797]. Accord, Bushnell v. Bushnell, supra, 103 Conn. 583 [131 A. 432, 436]; Ferraro v. Public Service Ry. Co. (1928) 6 N.J. Misc. 463 [141 A. 590]; Nock v. Lloyd (1911) 32 R.I. 313 [79 A. 832, 833].) An invoice submitted by a third party is not admissible evidence on this issue unless it can be admitted under some recognized exception to the hearsay rule. ^[411]

[11] Since plaintiff's expert's testimony as to the reasonableness of the charges was based on hearsay evidence inadmissible to prove that the repairs had been made, defendant's [44] objections to it should have been sustained. "[A]n expert must base his opinion either on facts personally observed or on hypotheses that find support in the evidence." (George v. Bekins Van & Storage Co. (1949) 33 Cal.2d 834, 844 [205 P.2d 1037]. See also Kastner v. Los Angeles Metropolitan Transit Authority (1965) 63 Cal.2d 52, 58 [45 Cal.Rptr. 129, 403 P.2d 385]; Commercial Union Assur. Co. v. Pacific Gas & Electric Co. (1934) 220 Cal. 515, 524 [31 P.2d 793]; Behr v. County of Santa Cruz (1959) 172 Cal.App.2d 697, 709 [342 P.2d 987]; 2 Jones on Evidence (5th ed. 1958) 416, pp. 782-783.)

The judgment is reversed.

Peters, J., Mosk, J., Burke, J., Sullivan, J., and Peek, J., ^[412] concurred.

McComb, J., dissented.

Plaintiff's assertion that the use of the word "all" to modify "loss, damage, expense and liability" dictates an all inclusive interpretation is not persuasive. If the word "indemnify" encompasses only third-party claims, the word "all" simply refers to all such claims. The use of the words "loss," "damage," and "expense" in addition to the word "liability" is likewise inconclusive. These words do not imply an agreement to reimburse for injury to an indemnitee's property since they are commonly inserted in third-party indemnity clauses, to enable an indemnitee who settles a claim to recover from his indemnitor without proving his liability. (Carpenter Paper Co. v. Kellogg (1952) 114 Cal.App.2d 640, 651 [251 P.2d 40]. Civ. Code, 2778, provides: "1. Upon an indemnity against liability ... the person indemnified is entitled to recover upon becoming liable; 2. Upon an indemnity against claims, or demands, or damages, or costs ... the person indemnified is not entitled to recover without payment thereof; ...")

The provision that defendant perform the work "at his own risk and expense" and the provisions relating to insurance are equally inconclusive. By agreeing to work at its own risk defendant may have released plaintiff from liability for any injuries to defendant's property arising out of the contract's performance, but this provision did not necessarily make defendant an insurer against injuries to plaintiff's property. Defendant's agreement to procure liability insurance to cover damages to plaintiff's property does not indicate whether the insurance was to cover all injuries or only injuries caused by defendant's negligence.

[402] 1. Although this offer of proof might ordinarily be regarded as too general to provide a ground for appeal (Evid. Code, 354, subd. (a); Beneficial etc. Ins. Co. v. Kurt Hitke & Co. (1956) 46 Cal.2d 517, 522 [297 P.2d 428]; Stickel v. San Diego Elec. Ry. Co. (1948) 32 Cal.2d 157, 162-164 [195 P.2d 416]; Douillard v. Woodd (1942) 20 Cal.2d 665, 670 [128 P.2d 6]), since the court repeatedly ruled that it would not admit extrinsic evidence to interpret the contract and sustained objections to all questions seeking to elicit such evidence, no formal offer of proof was required. (Evid. Code, 354, subd. (b); Beneficial etc. Ins. Co. v. Kurt Hitke & Co., supra, 46 Cal.2d 517, 522; Estate of Kearns (1950) 36 Cal.2d 531, 537 [225 P.2d 218].)

[403] 2. E.g., "The elaborate system of taboo and verbal prohibitions in primitive groups; the ancient Egyptian myth of Khern, the apotheosis of the words, and of Thoth, the Scribe of Truth, the Giver of Words and Script, the Master of Incantations; the avoidance of the name of God in Brahmanism, Judaism and Islam; totemistic and protective names in mediaeval Turkish and Finno-Ugrian languages; the misplaced verbal scruples of the 'Precieuses'; the Swedish peasant custom of curing sick cattle smitten by witchcraft, by making them swallow a page torn out of the psalter and put in dough. ...' from Ullman, The Principles of Semantics (1963 ed.) 43. (See also Ogden and Richards, The Meaning of Meaning (rev. ed. 1956) pp. 24- 47.)

[404] 3. " 'Rerum enim vocabula immutabilia sunt, homines mutabilia,' " (Words are unchangeable, men changeable) from Dig. XXXIII, 10, 7, 2, de sup. leg. as quoted in 9 Wigmore on Evidence, op. cit. supra, 2461, p. 187.

[405] 4. "A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent." (Hotchkiss v. National City Bank of New York (S.D.N.Y. 1911) 200 F. 287, 293. See also C. H. Pope & Co. v. Bibb Mfg. Co. (2d Cir. 1923) 290 F. 586, 587; see 4 Williston on Contracts (3d ed. 1961) 612, pp. 577-578, 613, p. 583.)

[406] 5. "A contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful." (Civ. Code, 1636; see also Code Civ. Proc., 1859; Universal Sales Corp. v. California Press Mfg. Co. (1942) 20 Cal.2d 751, 760 [128 P.2d 665]; Lemm v. Stillwater Land & Cattle Co. (1933) 217 Cal. 474, 480 [19 P.2d 785].)

[407] 6. Extrinsic evidence of trade usage or custom has been admitted to show that the term "United Kingdom" in a motion picture distribution contract included Ireland (Ermolieff v. R.K.O. Radio Pictures, Inc. (1942) 19 Cal.2d 543, 549-552 [122 P.2d 3]); that the word "ton" in a lease meant a long ton or 2,240 pounds and not the statutory ton of 2,000 pounds (Higgins v. California Petroleum etc. Co. (1898) 120 Cal. 629, 630-632 [52 P. 1080]); that the word "stubble" in a lease included not only stumps left in the ground but everything "left on the ground after the harvest time" (Callahan v. Stanley (1881) 57 Cal. 476, 477-479); that the term "north" in a contract dividing mining claims indicated a boundary line running along the "magnetic and not the true meridian" (Jenny Lind Co. v. Bower (1858) 11 Cal. 194, 197-199) and that a form contract for purchase and sale was actually an agency contract. (Body-Steffner Co. v. Flotill Products (1944) 63 Cal.App.2d 555, 558-562 [147 P.2d 84]). See also Code Civ. Proc., 1861; Annot., 89 A.L.R. 1228; Note (1942) 30 Cal.L.Rev. 679.)

[408] 7. When objection is made to any particular item of evidence offered to prove the intention of the parties, the trial court may not yet be in a position to determine whether in the light of all of the offered evidence, the item objected to will turn out to be admissible as tending to prove a meaning of which the language of the instrument is reasonably susceptible or inadmissible as tending to prove a meaning of which the language is not reasonably susceptible. In such case the court may admit the evidence conditionally by either reserving its ruling on the objection or by admitting the evidence subject to a motion to strike. (See Evid. Code, 403.)

[409] 8. Extrinsic evidence has often been admitted in such cases on the stated ground that the contract was ambiguous (e.g., Universal Sales Corp. v. California Press Mfg. Co., supra, 20 Cal.2d 751, 761). This statement of the rule is harmless if it is kept in mind that the ambiguity may be exposed by extrinsic evidence that reveals more than one possible meaning.

[410] 9. The court's exclusion of extrinsic evidence in this case would be error even under a rule that excluded such evidence when the instrument appeared to the court to be clear and unambiguous on its face. The controversy centers on the meaning of the word "indemnify" and the phrase "all loss, damage, expense and liability." The trial court's recognition of the language as typical of a third party indemnity clause and the double sense in which the word "indemnify" is used in statutes and defined in dictionaries demonstrate the existence of an ambiguity. (Compare Civ. Code, 2772, "Indemnity is a contract by which one engages to save another from a legal consequence of the conduct of one of the parties, or of some other person," with Civ. Code, 2527, "Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability, arising from an unknown or contingent event." Black's Law Dictionary (4th ed. 1951) defines "indemnity" as "A collateral contract or assurance, by which one person engages to secure another against an anticipated loss or to prevent him from being damnified by the legal consequences of an act or forbearance on the part of one of the parties or of some third person." Stroud's Judicial Dictionary (2d ed. 1903) defines it as a "Contract ... to indemnify against a liability. ..." One of the definitions given to "indemnify" by Webster's Third New International Dict. (1961 ed.) is "to exempt from incurred liabilities.")

[411] 10. It might come in under the business records exception (Evid. Code, 1271) if "... supported by the testimony of a witness qualified to testify as to its identity and the mode of its preparation." (California Steel Buildings, Inc. v. Transport Indemnity Co., supra, 242 Cal.App.2d 749, 759.)

[412] *. Retired Associate Justice of the Supreme Court sitting under assignment by the Chairman of the Judicial Council.

[615] [616] Denis McInerney, Cahill Gordon & Reindel, Charles A. Gilman, New York City, W. Donald McSweeney, Schiff Hardin & Waite, Allan Horwich, Chicago, Ill., for defendants-appellants.

William E. Rattner, Hopkins & Sutter, Paul K. Vickrey, Thomas M. Dethlefs, Chicago, Ill., for plaintiff-appellee.

Before BAUER, Chief Judge, and POSNER and RIPPLE, Circuit Judges.

Rehearing and Rehearing En Banc Denied September 11, 1989.

POSNER, Circuit Judge.

This case began as a diversity suit (governed, the parties agree, by Illinois law) for fraud. The plaintiff was Continental Illinois National Bank, the defendants W.R. Grace & Co. and its wholly owned subsidiary, Grace Petroleum Corporation. The parties treat the two Graces as interchangeable; so shall we. The appeal presents questions of contract law and damages.

Continental had made a $75 million nonrecourse production payment loan to Grace to enable it to develop some natural-gas fields in Mississippi, and when one of the fields turned out to be worthless Continental contended that Grace had induced the loan by fraud. Shortly after filing the suit [617] Continental assigned the loan to the Federal Deposit Insurance Corporation, which had bailed out the failing Continental. The FDIC substituted itself for Continental as the plaintiff and switched the statutory basis of federal jurisdiction from 28 U.S.C. § 1332 (diversity) to 28 U.S.C. § 1345 (suits "commenced by" the United States), 12 U.S.C. § 1819 (the Federal Deposit Insurance Corporation Act), and 28 U.S.C. § 1331 (federal-question jurisdiction). After a four-week trial a jury awarded the FDIC $25 million in compensatory damages and $75 million in punitive damages. The district judge cut the award of punitive damages to $25 million.

Grace appeals, raising a variety of grounds of which the first and least is that there is no federal jurisdiction. The jurisdiction of suits by and against the FDIC is specified in section 1819 Fourth of the Banking Code, which provides that all suits to which the FDIC is a party shall be deemed to arise under the laws of the United States (thus bringing section 1331, the federal-question statute, into play), unless the FDIC is a party "in its capacity as receiver of a State bank." Since Continental is a national bank rather than a state bank, this exception to federal jurisdiction would not apply even if the FDIC had been suing as a receiver, which it was not; an assignee is not a receiver. See, e.g., FDIC v. Braemoor Associates, 686 F.2d 550, 552-53 (7th Cir.1982); FDIC v. Elefant, 790 F.2d 661, 665 (7th Cir.1986) (dictum). Elefant hints that substituting the FDIC for a state bank in a diversity suit that had already been filed would not destroy diversity jurisdiction, see id. at 666, unless the assignment was for the purpose of conferring federal jurisdiction where it would not otherwise exist. See 28 U.S.C. § 1359; Hartford Accident & Indemnity Co. v. Sullivan, 846 F.2d 377, 382 (7th Cir.1988). Jurisdiction normally depends on the facts when the case was brought rather than on what happens later. But no more than in Elefant need we resolve the issue in order to confirm the district court's jurisdiction; Continental was not a state bank.

Grace has not shown any error in the district judge's jury instructions or evidentiary rulings, so we take the facts to be as favorable to the FDIC as a reasonable jury could have found them to be. In 1980 Grace decided to bid for a 50 percent interest in three natural-gas fields owned by a subsidiary of Centex Corporation — the Thomasville, East Thomasville, and Southwest Piney Woods fields, all in the same part of Mississippi. Four wells had already been drilled in the first two fields and three were planned for Southwest Piney Woods, of which one had been drilled but was not yet producing. To finance the purchase, Grace went to its long-time banker, Continental, for a $75 million "nonrecourse production payments loan" — a loan repayable only out of the revenues from the gas fields and not out of Grace's other assets. If the fields proved to be nonproductive, the loan would not be repaid and Continental would have no remedy for the default.

Officers of Grace showed Continental a reserve report prepared by an independent engineering firm. The report showed Southwest Piney Woods with 42 percent of the total gas reserves in the fields, although none of the proven reserves because no producing wells had been drilled yet in that field. A petroleum engineer employed by Continental reviewed the reserve report and concluded that the proven reserves in the other two fields — all he considered — had a loan value of $75 million. This was exactly equal to the loan that Grace was seeking and so left no margin for error. Next to the Southwest Piney Woods estimates the engineer wrote, "all assumed Dry!" Apparently this was his way of saying that in order to be ultraconservative in his evaluation he had ignored Southwest Piney Woods because it had no producing wells as yet. (In other words, the emphasis falls on the word "assumed.") Despite his evaluation of the Thomasville and East Thomasville fields, he told his boss that he was uncomfortable about the loan, but his boss reassured him by pointing out that the Southwest Piney Woods field could be pledged to repay the loan too, and this would provide insurance in case the Thomasville fields turned out to be less [618] productive than expected or the price of gas fell. Consistent with this assurance, when Grace asked Continental to exclude Southwest Piney Woods from the properties dedicated to the repayment of the loan Continental refused.

On March 14, 1980, Continental wrote Grace that it was "pleased to commit to provide $75,000,000 in a production payment loan for the benefit of W.R. Grace & Co. The terms of the loan are summarized below." Provisions follow regarding interest rate (prime plus one percent), balances, maturity (December 31, 1987), security, etc., followed by the statement, "This commitment is, of course, subject to satisfactory documentation." Continental followed up with another letter to Grace on April 1, setting forth in five single-spaced pages "the principal terms and conditions of the financing" and stating at the end that "the above discussion does not constitute an exhaustive list of all the terms and conditions of the financing, but does cover those items of major importance." A virtually identical letter, differing only in being slightly longer, was sent on April 7. The final loan agreement, in which satisfactory final loan documentation is made a condition precedent to Continental's duty to perform, was signed on July 1, and disbursal of the $75 million to Grace followed shortly.

Centex had accepted Grace's $87 million bid for the Mississippi properties early in April, and the parties to that deal had agreed to close on May 23. On May 8, Grace, which pursuant to its still-executory contract with Centex was receiving frequent reports on the progress of the gas-exploration activities in the properties, learned that "Pursue Ridgeway," the well that had been drilled in the Southwest Piney Woods field, had struck water instead of gas. This was bad enough; but by May 18 Grace had discovered that the field would produce no gas, from any well. Grace was horrified. It had valued Pursue Ridgeway at $15.5 million even though the well had not yet started producing any gas. This was 17.1 percent of the entire deal. The well, along with the rest of the field, was now revealed to be worthless. Grace tried to back out of the deal with Centex, but when Centex threatened to sue, Grace decided to go ahead with the deal, which closed on May 27 with a covenant allowing Grace to sue Centex.

The next day Centex issued a press release announcing the sale to Grace and mentioning in passing that Pursue Ridgeway was "non-commercial." A news service to which Continental subscribed carried the release, but no one at Continental concerned with the Grace loan noticed it. Although Grace had issued its own press release on April 22 announcing the signing of the contract with Centex to buy the Mississippi properties, it issued no press release announcing the actual purchase. And it did not tell Continental about the problem with the Southwest Piney Woods field until, three years after the loan was closed, it sent Continental a copy of the complaint it had filed against Centex, alleging that Centex had defrauded Grace by failing to disclose the water problem in Southwest Piney Woods. That suit was later settled for $13 million. The present suit was filed in 1984 and came to trial in 1987, at which time the balance of the $75 million loan, consisting both of principal and of unpaid interest, exceeded $76 million, even though the loan was due to be repaid in only three months. The Thomasville fields were and are productive, but gas prices had tumbled, and the volume of production was not high enough to generate revenues sufficient to repay the loan — which to this day has not been repaid.

Several points raised by Grace are shallow:

1. The fact that Continental may have been deficient in alertness in failing to notice the item in the press release about Pursue Ridgeway might be relevant if this were a suit for negligence, but it is a suit for deliberate fraud, and contributory negligence is not a defense to an intentional tort. See, e.g., Tan v. Boyke, 156 Ill.App.3d 49, 57, 108 Ill.Dec. 229, 234, 508 N.E.2d 390, 395 (1987); Carter v. Mueller, 120 Ill.App.3d 314, 319-20, 75 Ill.Dec. 776, 781, 457 N.E.2d 1335, 1340 (1983); [619] Mother Earth, Ltd. v. Strawberry Camel, Ltd., 72 Ill.App.3d 37, 51-52, 28 Ill.Dec. 226, 328-29, 390 N.E.2d 393, 405-06 (1979); General Motors Acceptance Corp. v. Central National Bank, 773 F.2d 771, 782 (7th Cir.1985) (construing Illinois law); Cenco, Inc. v. Seidman & Seidman, 686 F.2d 449, 454 (7th Cir.1982) (same); Teamsters Local 282 Pension Trust Fund v. Angelos, 762 F.2d 522, 527-28 (7th Cir.1985); Prosser and Keeton on the Law of Torts 462 (5th ed. 1984).

2. That Continental's petroleum engineer, in assessing the loan value of the three fields, assumed the Southwest Piney Woods field to be nonproducing does not prove that the fraud was immaterial. Continental regarded the Southwest Piney Woods field as an important back-up to the Thomasville fields. The fact that this was a nonrecourse loan made Grace's failure to disclose the fate of that field particularly significant. Continental could not look to Grace for repayment of the loan but only to the revenues generated by the gas fields themselves, revenues dependent on production as well as on the price of gas. Any diminution in that revenue potential was ominous. Grace's own reaction when it heard that the Southwest Piney Woods field was worthless bears eloquent witness to the perceived value of that field.

3. Grace's complaints about the jury instructions, the admission of certain evidence, and the sufficiency of the evidence to demonstrate its intention to conceal material information from Continental have no merit.

The difficult question on liability is whether Grace was required to volunteer to Continental, before the loan closed, the bad news about the Southwest Piney Woods field. An omission can of course be actionable as a fraud. See, e.g., Tan v. Boyke, supra, 156 Ill.App.3d at 54, 108 Ill.Dec. at 232, 508 N.E.2d at 393; Chapman v. Hosek, 131 Ill.App.3d 180, 186-88, 86 Ill.Dec. 379, 384-85, 475 N.E.2d 593, 598-99 (1985); Central States Joint Board v. Continental Assurance Co., 117 Ill.App.3d 600, 604, 73 Ill.Dec. 107, 110, 453 N.E.2d 932, 935 (1983); Allensworth v. Ben Franklin Savings & Loan Ass'n, 71 Ill.App.3d 1041, 27 Ill.Dec. 620, 389 N.E.2d 684 (1979). But not every failure by a seller (or borrower, or employee, etc.) to disclose information to the buyer (or lender, or employer, etc.) that would cause the latter to reassess the deal is actionable. A general duty of disclosure would turn every bargaining relationship into a fiduciary one. There would no longer be such a thing as arm's-length bargaining, and enterprise and commerce would be impeded. The seller who deals at arm's length is entitled to "take advantage" of the buyer at least to the extent of exploiting information and expertise that the seller expended substantial resources of time or money on obtaining — otherwise what incentive would there be to incur such costs? See Teamsters Local 282 Pension Trust Fund v. Angelos, supra, 762 F.2d at 528; United States v. Dial, 757 F.2d 163, 168 (7th Cir.1985); Kronman, Mistake, Disclosure, Information, and the Law of Contracts, 7 J.Legal Stud. 1 (1978). But when the seller has without substantial investment on his part come upon material information which the buyer would find either impossible or very costly to discover himself, then the seller must disclose it — for example, must disclose that the house he is trying to sell is infested with termites. See, e.g., Posner v. Davis, 76 Ill.App.3d 638, 32 Ill.Dec. 186, 395 N.E.2d 133 (1979) (basement flooding). The distinction between the two classes of case is illustrated by Lenzi v. Morkin, 103 Ill.2d 290, 82 Ill.Dec. 644, 469 N.E.2d 178 (1984), where the failure to disclose an assessor's valuation was held not to be actionable, since the valuation was a matter of public record and therefore ascertainable by the buyer at reasonable cost. See also Illinois Central Gulf R.R. v. Department of Local Government Affairs, 169 Ill.App.3d 683, 120 Ill.Dec. 137, 523 N.E.2d 1048 (1988).

The situation of the would-be lender who discovers that his collateral (or a major part of it) is worthless because of circumstances that the borrower learned without effort or expertise but that the lender could not have learned without a substantial investment of time or effort seems [620] assimilable to that of the seller of the termite-infested house. But this we need not decide for certain, since we do not understand Grace to be contesting the issue of duty but only to be arguing that Continental had made a firm commitment by April 7 (if not earlier) — a commitment that it could not have backed out of even if Grace had come to it on May 8 and told it that the Loch Ness monster had swallowed the entire State of Mississippi so that Continental would not recoup a penny of the $75 million loan that it had not yet made but was committed to make. If the commitment was that firm, the fraud was immaterial. See Jordan v. Duff & Phelps, Inc., 815 F.2d 429, 447 (7th Cir.1987) (dissenting opinion), and cases cited there. If not, then we do not (to repeat) understand Grace to be arguing that it was entitled to stand mute when the time came to make the final agreement. If you go to a bank for a loan on your house, and the bank tentatively agrees to make it, and on the day before the loan papers are to be signed the house is destroyed by a flood and you don't disclose the fact at the signing, then we suppose — and, more to the point, Grace appears to concede — that you are guilty of fraud even if you made no representation that the house was still in existence. This case is less dramatic inasmuch as the security for the loan was not rendered completely worthless by the Pursue Ridgeway disaster — but more dramatic in that the lender here, unlike the lender in the house example, could not sue the borrower if the assets pledged to repay the loan proved insufficient, because it was a nonrecourse loan.

So it is crucial to determine whether there was a commitment before May 8. The March and April letters were preliminary to a final agreement, but not necessarily on that account unenforceable. The question when a preliminary agreement is enforceable is a vexed one, as we noted recently in Empro Mfg. Co. v. Ball-Co Mfg., Inc., 870 F.2d 423 (7th Cir.1989); see also Farnsworth, Precontractual Liability and Preliminary Agreements: Fair Dealing and Failed Negotiations, 87 Colum.L.Rev. 217, 249-63 (1987). But Illinois law is reasonably clear in making the issue one of the parties' intentions as gleaned from the agreement itself if the agreement is unambiguous and, if it is ambiguous, from all pertinent evidence. See Anand v. Marple, 167 Ill.App.3d 918, 118 Ill.Dec. 826, 522 N.E.2d 281 (1988); Ebert v. Dr. Scholl's Foot Comfort Shops, Inc., 137 Ill.App.3d 550, 559, 92 Ill.Dec. 323, 330, 484 N.E.2d 1178, 1185 (1985); Inland Real Estate Corp. v. Christoph, 107 Ill.App.3d 183, 185-86, 63 Ill.Dec. 9, 11, 437 N.E.2d 658, 660 (1981); Interway, Inc. v. Alagna, 85 Ill.App.3d 1094, 41 Ill.Dec. 117, 407 N.E.2d 615 (1980). In cases where a preliminary agreement has been superseded by a final one, the parol evidence rule forbids the use in evidence of the preliminary agreement to alter the terms in the final one. See Fidelity & Deposit Co. v. City of Sheboygan Falls, 713 F.2d 1261, 1271 (7th Cir.1983); Patton v. Mid-Continent Systems, Inc., 841 F.2d 742, 745 (7th Cir.1988); Farnsworth, Contracts 451 (1982). But here we have no final integrated agreement — no agreement into which any preliminary agreements would merge and disappear — so the rule is inapplicable.

With the parol evidence rule out of the way, two types of ambiguity can usefully be distinguished. One is internal ("intrinsic"), and is present when the agreement itself is unclear. The other is external ("extrinsic") and is present when, although the agreement itself is a perfectly lucid and apparently complete specimen of English prose, anyone familiar with the real-world context of the agreement would wonder what it meant with reference to the particular question that has arisen. See, e.g., Patton v. Mid-Continent Systems, Inc., supra, 841 F.2d at 745; Amoco Oil Co. v. Ashcraft, 791 F.2d 519, 521 (7th Cir.1986). So parol and other extrinsic evidence is admissible, even in a case involving a contract with an integration clause, to demonstrate that the contract is ambiguous. See, e.g., Stamatakis Industries, Inc. v. King, 165 Ill.App.3d 879, 887, 117 Ill.Dec. 419, 424, 520 N.E.2d 770, 775 (1987); [621] Zale Construction Co. v. Hoffman, 145 Ill.App.3d 235, 241, 98 Ill.Dec. 708, 712, 494 N.E.2d 830, 834 (1986); UIDC Management, Inc. v. Sears Roebuck & Co., 141 Ill.App.3d 227, 230, 95 Ill.Dec. 691, 693, 490 N.E.2d 164, 166 (1986); Sunstream Jet Express, Inc. v. International Air Service Co., 734 F.2d 1258, 1268 (7th Cir.1984) (construing Illinois law); Marmon Group, Inc. v. Rexnord, Inc., 822 F.2d 31, 34 (7th Cir.1987) (per curiam). Admissible, that is to say, even if the contract has no intrinsic ambiguity — even if it would seem perfectly clear to a normal reader of English, although to persons knowledgeable about the circumstances in which the contract had been intended to apply the "normal" reading might be nonsense. See Lucie v. Kleen-Leen, Inc., 499 F.2d 220 (7th Cir.1974) (per curiam); Isbrandtsen v. North Branch Corp., 556 A.2d 81, 83-85 (Vt.1988); Farnsworth, supra, at 501. That is what it means to say that extrinsic evidence is admissible to demonstrate an ambiguity. There is no ambiguity on the surface of the document; the ambiguity appears only when extrinsic evidence is considered.

The Illinois cases provide firmer support for allowing extrinsic evidence when the contract is patently ambiguous than for allowing such evidence to establish that an otherwise clear contract is (to those in the know) ambiguous. See, e.g., LaSalle National Bank v. General Mills Restaurant Group, Inc., 854 F.2d 1050, 1052 (7th Cir.1988) (applying Illinois law). The Illinois Appellate Court is, as we noted in Metalex Corp. v. Uniden Corp., 863 F.2d 1331, 1335-36 (7th Cir.1988), divided on the latter question. Compare, for example, URS Corp. v. Ash, 101 Ill.App.3d 229, 233-35, 56 Ill.Dec. 749, 753-54, 427 N.E.2d 1295, 1299-1300 (1981), with United Equitable Ins. Co. v. Reinsurance Co., 157 Ill.App.3d 724, 730-31, 109 Ill.Dec. 846, 810-11, 510 N.E.2d 914, 918-19 (1987). The Supreme Court of Illinois has not resolved the conflict. Although United Equitable opines that the supreme court did resolve it, against allowing extrinsic evidence to demonstrate an ambiguity, in Rakowski v. Lucente, 104 Ill.2d 317, 323, 84 Ill.Dec. 654, 657, 472 N.E.2d 791, 794 (1984), many of the cases that allow the admission of extrinsic evidence for such purpose were decided after Rakowski and find that decision distinguishable.

The older view, sometimes called the "four corners" rule, which excludes extrinsic evidence if the contract is clear "on its face," is not ridiculous. (There is ancient wisdom as well as ancient prejudice.) The rule tends to cut down on the amount of litigation, in part by reducing the role of the jury; for it is the jury that interprets contracts when interpretation requires consideration of extrinsic evidence. Parties to contracts may prefer, ex ante (that is, when negotiating the contract, and therefore before an interpretive dispute has arisen), to avoid the expense and uncertainty of having a jury resolve a dispute between them, even at the cost of some inflexibility in interpretation.

We suspect that the alleged conflict within the Illinois Appellate Court is a pseudo-conflict; one straw in the wind is that the author of United Equitable also wrote Zale. Most of the modern cases in the "four corners" line stand for the unexceptionable proposition that "language in a contract is not rendered ambiguous simply because the parties do not agree upon its meaning." Reynolds v. Coleman, 173 Ill.App.3d 585, 593, 123 Ill.Dec. 259, 265, 527 N.E.2d 897, 903 (1988). In Rakowski itself the extrinsic evidence that Lucente sought to introduce was an affidavit that "contains only his unsubstantiated assertion that he did not intend to include his right to seek contribution in the matters released." 104 Ill.2d at 324, 84 Ill.Dec. at 657, 472 N.E.2d at 794; see also Forty-Eight Insulations, Inc. v. Acevedo, 140 Ill.App.3d 107, 113-14, 94 Ill.Dec. 329, 333, 487 N.E.2d 1206, 1210 (1986). The fact that parties to a contract disagree about its meaning does not show that it is ambiguous, for if it did, then putting contracts into writing would provide parties with little or no protection. Several of the cases in the "four corners" line involve releases, and the courts stress the importance of encouraging settlements by enforcing releases according to their tenor. Rakowski was such a case; also [622] Kolar v. Ray, 142 Ill.App.3d 912, 97 Ill.Dec. 240, 492 N.E.2d 899 (1986). These cases stand for the proposition that the words of the contract are not lightly to be ignored. The nature of the offer of proof to show an ambiguity is therefore critical. Although a self-serving statement, a la Lucente, that a party did not understand the contract to mean what it says (or appears to say) will not suffice, an offer to show that anyone who understood the context of the contract would realize it couldn't mean what an untutored reader would suppose it meant will.

Both forms of ambiguity, the intrinsic (or internal) and the extrinsic (or external), are present here and made the meaning of the contract a question for the jury, whose answer we can disturb only if it is unreasonable. First, the term "subject to satisfactory documentation," which was implicit in the April 1 and April 7 letters even though not recited in them, is ambiguous. It could mean just proof of the assumptions underlying the terms and conditions set forth in the letters, assumptions such as that Grace would own the Mississippi properties by the time the loan was closed. Or it could entitle Continental to insist that Grace document any material assumptions on which Continental's willingness to commit $75 million to Grace was based. On this reading, if Continental had discovered before the closing that the reserve report on which it had relied in evaluating the loan was inaccurate, it could have required Grace to demonstrate that the loan was nevertheless as secure as Continental had originally believed. Cf. UCC § 2-609.

The external ambiguity lies in the fact that, to anyone cognizant of the commercial setting, the agreement was incomplete. It did not address a range of possible risks that might materialize between the commitment and the closing. Cf. Fidelity & Deposit Co. v. City of Sheboygan Falls, supra, 713 F.2d at 1271. For example, it would have been odd if by virtue of making a loan commitment Continental had become in effect the fire insurer of the Mississippi properties on the theory that it would have owed Grace $75 million even if the properties had been destroyed by fire between April 7 and the July closing and, given the nonrecourse feature of the loan, could not have gotten the money back. It may be that the commitment was implicitly conditioned on the circumstances of the loan remaining materially unchanged between the commitment date and the closing. This is a possible, not a necessary, interpretation. Grace may have wanted a firmer commitment before agreeing to lay out $87 million to buy the properties from Centex. The only question for us is whether the agreement was so plainly a commitment by Continental to make a nonrecourse loan of $75 million to Grace come what may that the jury would have had to be irrational to find that Grace's failure to inform Continental about the disaster that befell the Southwest Piney Woods field was material. This we cannot say. The jury was entitled to conclude that the commitment fee (a modest one-half of one percent per annum on the unused portion of the loan, i.e., on any part of the $75 million that Grace decided not to take up) was to compensate Continental for agreeing to make the loan at the agreed interest rate, and other terms and conditions, provided nothing new and material came to light between the commitment and the closing. Perhaps the most telling piece of extrinsic evidence is Grace's own conduct in trying to conceal the bad news from Continental; it would have had no reason to do so under the interpretation of the contract that it is now pressing.

We turn to the issue of damages. Grace focuses most of its attack on the award of punitive damages, which it contends violates the excessive-fines clause of the Eighth Amendment and other provisions of the Constitution. Twenty-five million dollars is of course a large amount, but its reasonableness must be assessed in relation to the amount of injury done by the tortfeasor. The concern in recent cases dealing with the constitutionality of punitive-damages awards has centered on awards that are huge multiples of the compensatory damages, as in Kelco Disposal, Inc. v. Browning-Ferris Industries, Inc., 845 F.2d 404, 410 (2d Cir.), cert. granted, [623] 488 U.S. 980, 109 S.Ct. 527, 102 L.Ed.2d 559 (1988) (argued before the Supreme Court on April 18), where the punitive damages awarded were more than 100 times greater than the compensatory damages. Treble damages are a common form of punitive damages, and we do not understand their constitutionality to be in question. The FDIC received only double damages.

The most straightforward rationale for punitive damages, as for fines and other criminal punishments that exceed the actual injury done by (or profit obtained by) the tortfeasor or criminal, is that they are necessary to deter torts or crimes that are concealable. Suppose the average defrauder is brought to book only half the time. To confront him with a sanction that will make fraud worthless to him and thus deter him, it is necessary that when he is caught he be made to pay twice as much as his profits. In such a case double damages would certainly not be problematic. Fraud is a concealable tort, and indeed concealment was the essence of Grace's fraud. Only after Grace thought it was home free — in fact three years after it thought it was home free — did it reveal the fraud by sending Continental a copy of the complaint it had filed charging Centex with fraud.

Concealment is not the only rationale for punitive damages, although no other one is necessary to establish the propriety of an award of punitive damages in this case. Another rationale is that punitive damages provide surer deterrence than actual damages of conduct that we very much want to deter because it is highly anti-social. Fraud, a form of intentional wrongdoing, is in that category. Under this rationale, too, the ratio of punitive to actual damages is highly pertinent. A $100 fraud might be securely deterred by a $500 penalty on top of compensatory damages, making a total of $600; a $25 million fraud would not be securely deterred by a $500 penalty, making a total of $25,000,500. The common law of Illinois authorizes substantial awards of punitive damages in cases of fraud. See West v. Western Casualty & Surety Co., 846 F.2d 387, 398-401 (7th Cir.1988). The award here was excessive neither by Illinois nor by federal constitutional standards.

The problem is with the award of compensatory damages. We have railed repeatedly against the extraordinary casualness that otherwise proficient trial lawyers display at the remedy stage in commercial litigation. See Patton v. Mid-Continent Systems, Inc., supra, 841 F.2d at 748 (collecting cases). All their energies seem to be used up in proving (or disproving) liability. This case is no exception despite the huge stakes. It would have been easy to estimate the present value of the loan to Grace at the time of trial, to add the interest that Continental had already received on the loan, and to subtract the sum from the principal and interest that Continental would have obtained from an alternative use of the $75 million that it disbursed on the loan. For that is the measure of what Continental lost as a result of the fraud. One alternative, of course, is that Continental would have made a smaller loan to Grace, and placed the difference elsewhere; then the experience of the sum of these hypothetical loans, compared to the experience of the actual loan, would provide the measure of Continental's loss.

Suppose hypothetically that at the time of trial, the present value of the $75 million loan that Continental made to Grace was $30 million (representing a heavy discount from the face amount of the loan, in recognition of the unlikelihood that it will actually be repaid), and Continental had already received $65 million in interest. Then the total benefit to Continental from the loan (ignoring as we shall throughout this example, for simplicity's sake, adjustments necessary to reflect changes in the value of the dollar due to inflation) would be $95 million. Suppose further that if Grace had disclosed the Pursue Ridgeway disaster to Continental, then, instead of making the $75 million nonrecourse loan to Grace, Continental would have placed the $75 million in a loan or loans (perhaps including a smaller loan to Grace) that would have yielded Continental a benefit to the date of [624] trial of $130 million. Then its damages would be $35 million ($130 million minus $95 million).

No evidence enabling such a computation to be made was presented. The jury was allowed to pick a figure out of the air after hearing testimony that Grace's own projections of price and production from the producing fields showed that the loan would probably never be repaid. The underlying figures were not placed in evidence. Although Grace can be faulted for having failed to offer its own evidence of damages — a fault we have noted in recent cases, see, e.g., Lancaster v. Norfolk & Western Ry., 773 F.2d 807, 823 (7th Cir.1985); see also Wallace Motor Sales, Inc. v. American Motor Sales Corp., 780 F.2d 1049, 1062 (1st Cir.1985), and cases cited there — the FDIC had the burden of proving what it lost, and it failed to carry the burden, resulting in a multi-million-dollar damages verdict that is pure guesswork. This is not a case where the defendant's wrongful conduct made it difficult to establish the plaintiff's damages, a situation where lenity in proof of damages is traditionally allowed. See, e.g., Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 266, 66 S.Ct. 574, 580, 90 L.Ed. 652 (1946); Bob Willow Motors, Inc. v. General Motors Corp., 872 F.2d 788, 799 (7th Cir.1989); Jay Edwards, Inc. v. New England Toyota Distributor, Inc., 708 F.2d 814, 821 (1st Cir.1983).

Grace is entitled to a new trial, though one limited to damages. The amount of punitive damages, related as they are to compensatory damages, will have to be redetermined as well in the new trial that we are ordering. We could take the position that the first trial fixed the ratio of punitive to compensatory damages as one to one, so that whatever the next award of compensatory damages is it will just have to be doubled to yield the final judgment (before interest). But proportionality to actual damages is not the only consideration in determining how large the award of punitive damages should be, so the ratio will have to be redetermined in the new trial that we are ordering on damages.

The judgment is affirmed in part and reversed in part, and the case remanded for a new trial limited to damages. There shall be no award of costs in this court.

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED WITH DIRECTIONS.

[393] Anthony A. Froio, Christopher P. Sullivan, Carolan, Sullivan & Greeley, Boston, Mass., for plaintiffs.

William A. Zucker, Gadsby & Hannah, Boston, Mass., for defendants.

Laura Steinberg, Cynthia M. Clarke, Sullivan & Worcester, Boston, Mass., for Acton Corp.

OPINION

KEETON, District Judge.

This case turns on the interpretation of eleven Settlement Agreements ("Agreements"), of like terms in all relevant respects. All parties to each Agreement assert as their primary positions that their Agreement is integrated. Nevertheless, they urge contrasting interpretations and, in the alternative, each party asks the court to consider extrinsic evidence to support its proposed answer to the central question at issue in this case. What effect does a reverse stock split, voted by Acton Corporation ("Acton") about a year after the Agreements were made, have upon the amount defendants owe plaintiffs under a payment option exercised by plaintiffs two years later — three years after the Agreements were made? For reasons explained in this Opinion, I conclude that the Agreements did not address an eventuality such as a reverse stock split. In circumstances such as these, a court must determine the meaning of an Agreement, as applied to the question at issue, by examining the parties' mutual expression — the Agreement itself. In the present case, however, I find that I must reach the same result even if taking into account the extrinsic evidence offered at trial. For the reasons explained in this Opinion, judgment will be entered for the defendants.

I.

At a bench trial on June 14, 1991, the court received in evidence the uncontested portions of Plaintiffs' Proposed Findings of Fact ("Uncontested Findings," Docket No. 43, filed May 17, 1991) and adopted them as findings of the court. Additional findings, as well as conclusions of law, are stated and explained in this Opinion.

II.

In or near June, 1986, defendants entered into Agreements with each of the eleven plaintiff partnerships and at that time paid each partnership $10,000. At issue in this case is a provision in Section 2.2 of each of the Agreements regarding the possibility of an additional payment:

the Partnership shall be entitled to receive, upon written demand made within the three years following the execution of the Settlement Agreement (the "Exercise Date"), the following one time payment: the sum of "X" times a multiple of 7,500 where "X" equals the "price" of one share of Acton Corporation's common stock on the Exercise Date less $7.00.

In June, 1987, Acton's shareholders authorized what is described in common jargon as a "one-for-five reverse stock split" of Acton common stock. Described another way, the transaction was one in which for each five shares of their Acton common stock, existing before this date, holders were entitled to one share of common stock existing after this date. The new value in the market on the day after the reverse split was in fact, as would reasonably have been expected, approximately five times the old value.

In May, 1989, each of the partnerships made a written demand for payment under Section 2.2 of the Agreement, alleging that the price of one share of common stock as calculated under the Agreement was $20.54, far in excess of the $7.00 trigger price established by Section 2.2. Defendants [394] rejected the demands for payment, explaining that the reverse stock split, which combined five shares into one, had the effect of raising the trigger price from $7.00 to $35.00. Expressed another way, the substantive effect of the position defendants took, and now take, is that the trigger price remains $7.00 and the price to compare with it is one-fifth of the May 1989 price of Acton stock, because of the five-for-one combination that occurred after the trigger price was set.

III.

Plaintiffs argue that the plain language of the provision about the "`price' of one share of Acton Corporation's common stock on the Exercise Date" must be taken to mean the "price" of "one share" as the shares were structured and defined on the "Exercise Date," not the "price" on the "Exercise Date" of "one share of Acton Corporation's common stock" as the common stock was structured and defined when the Agreements were made. Plaintiffs claim to be entitled to payment calculated on the basis that the price of "one share of Acton Corporation's common stock on the Exercise Date" was $20.54, irrespective of the fact that the increase in the price of the stock over its very low value when the Agreements were made (well under $7.00) was caused primarily, if not solely, by the reverse stock split and not by any change in the financial fortunes of Acton. Plaintiff also argues that the defendants accepted the risk of such a reverse stock split by not insisting upon or even negotiating for an antidilution clause in the body of the Agreements.

In contrast, defendants say that the "share of ... common stock" referred to in the Agreements plainly means the form of common stock in existence when the Agreements were signed. Since that form of common stock is no longer in existence, the argument goes, one share of today's stock must be viewed as equivalent to five old shares. Defendants argue that, in determining defendants' payment obligation under Section 2.2, the trigger price must be adjusted from $7.00 to $35.00. As noted in Part II, another way of expressing a contention having the same substantive effect is to say that the May 1989 price of $20.54 must be divided by five, yielding $4.11, which is below the trigger price of $7.00.

IV.

Examining some basic ideas about "expression" and "meaning" may help us understand and interpret the documents that the contracting parties called their "Settlement Agreements."

Consider, first, an expression of a single author. What is the "meaning" of the author's "expression"? The question has its own imprecision. Does it ask a "subjective" question — a state-of-mind question about what the author intended the meaning to be, regardless of how clearly or unclearly that meaning was expressed? Or, does it ask an "objective" question — what did the author's expression objectively manifest as the author's meaning, or as the meaning of the expression itself? Consider additional nuances of the question when two or more authors make a joint or — as we more commonly say about contracts — "mutual" expression. Does "meaning" refer to a meaning intended subjectively by all the authors, in which case there is no "meaning" if there was no "meeting of the minds"? Or, is meaning to be determined objectively — by determining objectively the manifested meaning?

Analogies from communications outside ordinary legal discourse may be useful. What was, or is, the "meaning" of Rodin's The Inner Voice? Of Venus de Milo? What was, or is, the meaning intended by each sculptor? Was there, or is there, a manifested meaning?

Neither of these works of art now has arms. Venus de Milo shows clear signs of alteration after it left the control of the artist. The Inner Voice, on the other hand, appears intact. Thus, from examination of the form and structure of each work itself — entirely without consideration of extrinsic evidence — we may infer that one, but not the other, is the sculptor's complete expression.

[395] A piece of sculpture that is merely a torso, or even a classic statue with arms or legs missing, may be nevertheless quite complete as a design, though from a physiological point of view there is evidently something missing. Thus Rodin did not destroy the completeness of his statue The Inner Voice — later used for the Victor Hugo monument — when he left off the arms because arms, he said, imply action, and action is the enemy of meditation.

M. Beardsley, Aesthetics: Problems in the Philosophy of Criticism 193 (1958). See also J. Toran, 'Tis a Gift to Be Simple: Aesthetics and Procedural Reform, 89 Mich.L.Rev. 352, 360-61 and n. 35 (1990). The point remains valid, even if we credit a somewhat different historical account than that implicit in Rodin's having "left off the arms" — that, instead, as described by Albert E. Elsen, The Inner Voice is one state of a figure of which Rodin fashioned many, with arms in differing positions, and in this state Rodin struck the arms before releasing the sculpture we know as The Inner Voice because they interfered with "the sense of the woman's inner listening." See A. Elsen, In Rodin's Studio 169 (1980). Professor Toran also quotes Beardsley for the proposition that "[t]o say that an object has completeness `is to say that it appears to require, or call upon, nothing outside itself; it has all that it needs; it is all there.'" Toran at 360-61, quoting Beardsley at 192. The Inner Voice is "complete" in this sense. Venus de Milo, as we may observe it today, is not.

V.

Each Agreement in this case is complete in the same sense that The Inner Voice is complete.

Regardless of whether a trial court's determination of completeness in this sense is viewed as a "conclusion" to be reviewed nondeferentially by a higher court (as I believe it to be), or instead a "finding," the determination is in this instance supported by an examination of the document as a whole. The determination of completeness is reinforced by an "integration clause" included in Section 11 of each Agreement. Such a clause is said to create a presumption that the parties intended the contract to be the complete statement of their agreement. SAPC, Inc. v. Lotus Development Corp., 921 F.2d 360, 362 (1st Cir. 1990).

An expression may be complete in the sense The Inner Voice illustrates and yet be ambiguous. Indeed, human limitations make it inevitable that every expression — every artistic work, every written document, every contract, every statute, every judicial opinion — will be less than complete in a thoroughly comprehensive sense. Ambiguity will remain about some matters that might have been addressed and were not.

Ambiguity, however, is not an all or nothing matter. Demonstrating ambiguity in one respect does not prove ambiguity in another. Before deciding whether the parol evidence rule (or the rule of completeness or integration) permits or prohibits consideration of extrinsic evidence in aid of resolving a particular dispute, a court must first, at a minimum, determine whether the mutual expression of the parties is ambiguous on the very point at issue.

Turning to the interpretation of the Agreements, I conclude that neither the reading of the Agreements suggested by the plaintiffs nor that suggested by the defendants is precisely correct. Each party asserts that the "plain language" bears no other interpretation than that the party advances as its contention. The truth is, instead, that the language used by the parties does not explicitly address the question at issue. One who reads each Agreement entirely, with the most thorough care, is driven to conclude that in drafting their Agreement the parties never specifically addressed the possibility of either a future stock split by Acton or, as is the case here, a reverse stock split. Whatever may have been the reasons for the parties' failure to address stock splits and reverse stock splits, the fact that they did fail to do so is manifest. Not a single word or phrase explicitly about stock splits or reverse [396] stock splits appears anywhere in the Agreements.

Even in integrated agreements, contractual language "is not self-interpreting — no form of words is....", Antonellis v. Northgate Construction Corp., 362 Mass. 847, 851, 291 N.E.2d 626, 628 (1973). When a court reads a contract with the purpose of understanding and "making sense" of it, this is not "tantamount to re-writing it." Fay, Spofford & Thorndike, Inc. v. Massachusetts Port Auth., 7 Mass.App.Ct. 336, 342, 387 N.E.2d 206, 210 (1979). Instead, the court applies

the principle that a literal interpretation of a word or phrase may be qualified by the context in which it appears, by the general purpose manifested by the entire contract, and by the circumstances existing at the time of execution.

Id.

When a document contains no internal indicia that the parties manifested an agreement with each other about an issue, we may need to do some reality testing of litigation positions. One way of doing so, suggested by Holmes, is to wash each party's current contention about meaning in "cynical acid." For example, consider how each assertion now made would have fared during negotiations if it had been explicitly stated then. Make this judgment as best we can from the evidence available to us in the content and structure of the parties' mutual expression. Heed the inner voice of the expression itself.

Plaintiffs argue that the omission of antidilution language allocates the risk of a reverse stock split to defendants. If that is so, then the inference is likewise compelling that this omission allocates to the plaintiffs the risk of a regular stock split. Such a reading would allow defendants, should market conditions cause the price to rise near the trigger price, unilaterally to deprive the plaintiffs of their expected benefits under the Agreements by splitting the stock. Although plaintiffs gallantly assured the court in oral argument that this would be their position if such an eventuality had occurred, the idea that plaintiffs would willingly have entered into an agreement that allocated such a unilateral right to defendants utterly fails reality testing. Given the joint expression the parties agreed upon, it defies common sense to infer that plaintiffs, if focusing upon this issue during negotiations, would have agreed to answering it explicitly in the way the plaintiffs now contend.

In searching for the parties' manifested meaning a court is both guided and constrained by the form, structure, sense, and internally manifested design of the contract itself — the mutual expression of the parties. The answer the decisionmaker is seeking is not the answer the decisionmaker would think best if left entire freedom of choice. It is fundamental to the integrity of the decisionmaking process that the decisionmaker accept both the guidance and the constraints to be found in the parties' own mutual expression of their agreement.

VI.

The conclusion I have reached as to the meaning of the Agreements themselves in relation to the issue in dispute is not contradicted by the extrinsic evidence offered by the parties in this case. Rather, as factfinder, I find that the extrinsic evidence proffered by the plaintiffs, either taken alone or together with the extrinsic evidence proffered by the defendants, reinforces this meaning. For this reason, all objections to evidence on which I reserved ruling at trial are moot.

VII.

In summary, it would be as surely a departure from manifested meaning to add to the Agreements in this case a windfall compensation provision contingent on a stock split or reverse stock split as to design a mechanical device that would attach flailing arms to The Inner Voice.

Judgment will be entered for the defendants.

Riggs, Ferris & Geer, New York City (John P. Hale, New York City, of counsel), for plaintiff.

Sereni, Herzfeld & Rubin, New York City (Herbert Rubin, Walter Herzfeld, New York City, of counsel), for defendant.

FRIENDLY, Circuit Judge.

The issue is, what is chicken? Plaintiff says "chicken" means a young chicken, suitable for broiling and frying. Defendant says "chicken" means any bird of that genus that meets contract specifications on weight and quality, including what it calls "stewing chicken" and plaintiff pejoratively terms "fowl". Dictionaries give both meanings, as well as some others not relevant here. To support its, plaintiff sends a number of volleys over the net; defendant essays to return them and adds a few serves of its own. Assuming that both parties were acting in good faith, the case nicely illustrates Holmes' remark "that the making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs—not on the parties' having meant the same thing but on their having said the same thing." The Path of the Law, in Collected Legal Papers, p. 178. I have concluded that plaintiff has not sustained its burden of persuasion that the contract used "chicken" in the narrower sense.

The action is for breach of the warranty that goods sold shall correspond to the description, New York Personal Property Law, McKinney's Consol. Laws, c. 41, § 95. Two contracts are in suit. In the first, dated May 2, 1957, defendant, a New York sales corporation, confirmed the sale to plaintiff, a Swiss corporation, of

"US Fresh Frozen Chicken, Grade A, Government Inspected, Eviscerated

2½-3 lbs. and 1½-2 lbs. each

all chicken individually wrapped in cryovac, packed in secured fiber cartons or wooden boxes, suitable for export

75,000 lbs. 2½-3 lbs........@$33.0025,000 lbs. 1½-2 lbs........@$36.50per 100 lbs. FAS New York

scheduled May 10, 1957 pursuant to instructions from Penson & Co., New York."^[1]

The second contract, also dated May 2, 1957, was identical save that only 50,000 lbs. of the heavier "chicken" were called for, the price of the smaller birds was $37 per 100 lbs., and shipment was scheduled for May 30. The initial shipment under the first contract was short but the balance was shipped on May 17. When the initial shipment arrived in Switzerland, plaintiff found, on May 28, that the 2½-3 lbs. birds were not young chicken suitable for broiling and frying but stewing chicken or "fowl"; indeed, many of the cartons and bags plainly so indicated. Protests ensued. Nevertheless, shipment under the second contract was made on May 29, the 2½-3 lbs. birds again being stewing chicken. Defendant stopped the transportation of these at Rotterdam.

This action followed. Plaintiff says that, notwithstanding that its acceptance was in Switzerland, New York law controls under the principle of Rubin v. Irving Trust Co., 1953, 305 N.Y. 288, 305, 113 N.E.2d 424, 431; defendant does not dispute this, and relies on New York decisions. I shall follow the apparent agreement of the parties as to the applicable law.

Since the word "chicken" standing alone is ambiguous, I turn first to see whether the contract itself offers any aid to its interpretation. Plaintiff says the 1½-2 lbs. birds necessarily had to be young chicken since the older birds do not come in that size, hence the 2½-3 lbs. birds must likewise be young. This is unpersuasive—a contract for "apples" of two different sizes could be filled with different kinds of apples even though only one species came in both sizes. Defendant notes that the contract called not simply for chicken but for "US Fresh Frozen Chicken, Grade A, Government Inspected." It says the contract thereby incorporated by reference the Department of Agriculture's regulations, which favor its interpretation; I shall return to this after reviewing plaintiff's other contentions.

The first hinges on an exchange of cablegrams which preceded execution of the formal contracts. The negotiations leading up to the contracts were conducted in New York between defendant's secretary, Ernest R. Bauer, and a Mr. Stovicek, who was in New York for the Czechoslovak government at the World Trade Fair. A few days after meeting Bauer at the fair, Stovicek telephoned and inquired whether defendant would be interested in exporting poultry to Switzerland. Bauer then met with Stovicek, who showed him a cable from plaintiff dated April 26, 1957, announcing that they "are buyer" of 25,000 lbs. of chicken 2½-3 lbs. weight, Cryovac packed, grade A Government inspected, at a price up to 33¢ per pound, for shipment on May 10, to be confirmed by the following morning, and were interested in further offerings. After testing the market for price, Bauer accepted, and Stovicek sent a confirmation that evening. Plaintiff stresses that, although these and subsequent cables between plaintiff and defendant, which laid the basis for the additional quantities under the first and for all of the second contract, were predominantly in German, they used the English word "chicken"; it claims this was done because it understood "chicken" meant young chicken whereas the German word, "Huhn," included both "Brathuhn" (broilers) and "Suppenhuhn" (stewing chicken), and that defendant, whose officers were thoroughly conversant with German, should have realized this. Whatever force this argument might otherwise have is largely drained away by Bauer's testimony that he asked Stovicek what kind of chickens were wanted, received the answer "any kind of chickens," and then, in German, asked whether the cable meant "Huhn" and received an affirmative response. Plaintiff attacks this as contrary to what Bauer testified on his deposition in March, 1959, and also on the ground that Stovicek had no authority to interpret the meaning of the cable. The first contention would be persuasive if sustained by the record, since Bauer was free at the trial from the threat of contradiction by Stovicek as he was not at the time of the deposition; however, review of the deposition does not convince me of the claimed inconsistency. As to the second contention, it may well be that Stovicek lacked authority to commit plaintiff for prices or delivery dates other than those specified in the cable; but plaintiff cannot at the same time rely on its cable to Stovicek as its dictionary to the meaning of the contract and repudiate the interpretation given the dictionary by the man in whose hands it was put. See Restatement of the Law of Agency, 2d, § 145; 2 Mecham, Agency § 1781 (2d ed. 1914); Park v. Moorman Mfg. Co., 1952, 121 Utah 339, 241 P.2d 914, 919, 40 A.L.R.2d 273; Henderson v. Jimmerson, Tex.Civ.App.1950, 234 S.W. 2d 710, 717-718. Plaintiff's reliance on the fact that the contract forms contain the words "through the intermediary of: ", with the blank not filled, as negating agency, is wholly unpersuasive; the purpose of this clause was to permit filling in the name of an intermediary to whom a commission would be payable, not to blot out what had been the fact.

Plaintiff's next contention is that there was a definite trade usage that "chicken" meant "young chicken." Defendant showed that it was only beginning in the poultry trade in 1957, thereby bringing itself within the principle that "when one of the parties is not a member of the trade or other circle, his acceptance of the standard must be made to appear" by proving either that he had actual knowledge of the usage or that the usage is "so generally known in the community that his actual individual knowledge of it may be inferred." 9 Wigmore, Evidence (3d ed. 1940) § 2464. Here there was no proof of actual knowledge of the alleged usage; indeed, it is quite plain that defendant's belief was to the contrary. In order to meet the alternative requirement, the law of New York demands a showing that "the usage is of so long continuance, so well established, so notorious, so universal and so reasonable in itself, as that the presumption is violent that the parties contracted with reference to it, and made it a part of their agreement." Walls v. Bailey, 1872, 49 N.Y. 464, 472-473.

Plaintiff endeavored to establish such a usage by the testimony of three witnesses and certain other evidence. Strasser, resident buyer in New York for a large chain of Swiss cooperatives, testified that "on chicken I would definitely understand a broiler." However, the force of this testimony was considerably weakened by the fact that in his own transactions the witness, a careful businessman, protected himself by using "broiler" when that was what he wanted and "fowl" when he wished older birds. Indeed, there are some indications, dating back to a remark of Lord Mansfield, Edie v. East India Co., 2 Burr. 1216, 1222 (1761), that no credit should be given "witnesses to usage, who could not adduce instances in verification." 7 Wigmore, Evidence (3d ed. 1940), § 1954; see McDonald v. Acker, Merrall & Condit Co., 2d Dept.1920, 192 App.Div. 123, 126, 182 N.Y.S. 607. While Wigmore thinks this goes too far, a witness' consistent failure to rely on the alleged usage deprives his opinion testimony of much of its effect. Niesielowski, an officer of one of the companies that had furnished the stewing chicken to defendant, testified that "chicken" meant "the male species of the poultry industry. That could be a broiler, a fryer or a roaster", but not a stewing chicken; however, he also testified that upon receiving defendant's inquiry for "chickens", he asked whether the desire was for "fowl or frying chickens" and, in fact, supplied fowl, although taking the precaution of asking defendant, a day or two after plaintiff's acceptance of the contracts in suit, to change its confirmation of its order from "chickens," as defendant had originally prepared it, to "stewing chickens." Dates, an employee of Urner-Barry Company, which publishes a daily market report on the poultry trade, gave it as his view that the trade meaning of "chicken" was "broilers and fryers." In addition to this opinion testimony, plaintiff relied on the fact that the Urner-Barry service, the Journal of Commerce, and Weinberg Bros. & Co. of Chicago, a large supplier of poultry, published quotations in a manner which, in one way or another, distinguish between "chicken," comprising broilers, fryers and certain other categories, and "fowl," which, Bauer acknowledged, included stewing chickens. This material would be impressive if there were nothing to the contrary. However, there was, as will now be seen.

Defendant's witness Weininger, who operates a chicken eviscerating plant in New Jersey, testified "Chicken is everything except a goose, a duck, and a turkey. Everything is a chicken, but then you have to say, you have to specify which category you want or that you are talking about." Its witness Fox said that in the trade "chicken" would encompass all the various classifications. Sadina, who conducts a food inspection service, testified that he would consider any bird coming within the classes of "chicken" in the Department of Agriculture's regulations to be a chicken. The specifications approved by the General Services Administration include fowl as well as broilers and fryers under the classification "chickens." Statistics of the Institute of American Poultry Industries use the phrases "Young chickens" and "Mature chickens," under the general heading "Total chickens." and the Department of Agriculture's daily and weekly price reports avoid use of the word "chicken" without specification.

Defendant advances several other points which it claims affirmatively support its construction. Primary among these is the regulation of the Department of Agriculture, 7 C.F.R. § 70.300-70.370, entitled, "Grading and Inspection of Poultry and Edible Products Thereof." and in particular § 70.301 which recited:

"Chickens. The following are the various classes of chickens:

(a) Broiler or fryer . . .

(b) Roaster . . .

(c) Capon . . .

(d) Stag . . .

(e) Hen or stewing chicken or fowl . . .

(f) Cock or old rooster . . .

Defendant argues, as previously noted, that the contract incorporated these regulations by reference. Plaintiff answers that the contract provision related simply to grade and Government inspection and did not incorporate the Government definition of "chicken," and also that the definition in the Regulations is ignored in the trade. However, the latter contention was contradicted by Weininger and Sadina; and there is force in defendant's argument that the contract made the regulations a dictionary, particularly since the reference to Government grading was already in plaintiff's initial cable to Stovicek.

Defendant makes a further argument based on the impossibility of its obtaining broilers and fryers at the 33¢ price offered by plaintiff for the 2½-3 lbs. birds. There is no substantial dispute that, in late April, 1957, the price for 2½-3 lbs. broilers was between 35 and 37¢ per pound, and that when defendant entered into the contracts, it was well aware of this and intended to fill them by supplying fowl in these weights. It claims that plaintiff must likewise have known the market since plaintiff had reserved shipping space on April 23, three days before plaintiff's cable to Stovicek, or, at least, that Stovicek was chargeable with such knowledge. It is scarcely an answer to say, as plaintiff does in its brief, that the 33¢ price offered by the 2½-3 lbs. "chickens" was closer to the prevailing 35¢ price for broilers than to the 30¢ at which defendant procured fowl. Plaintiff must have expected defendant to make some profit—certainly it could not have expected defendant deliberately to incur a loss.

Finally, defendant relies on conduct by the plaintiff after the first shipment had been received. On May 28 plaintiff sent two cables complaining that the larger birds in the first shipment constituted "fowl." Defendant answered with a cable refusing to recognize plaintiff's objection and announcing "We have today ready for shipment 50,000 lbs. chicken 2½-3 lbs. 25,000 lbs. broilers 1½-2 lbs.," these being the goods procured for shipment under the second contract, and asked immediate answer "whether we are to ship this merchandise to you and whether you will accept the merchandise." After several other cable exchanges, plaintiff replied on May 29 "Confirm again that merchandise is to be shipped since resold by us if not enough pursuant to contract chickens are shipped the missing quantity is to be shipped within ten days stop we resold to our customers pursuant to your contract chickens grade A you have to deliver us said merchandise we again state that we shall make you fully responsible for all resulting costs."^[2] Defendant argues that if plaintiff was sincere in thinking it was entitled to young chickens, plaintiff would not have allowed the shipment under the second contract to go forward, since the distinction between broilers and chickens drawn in defendant's cablegram must have made it clear that the larger birds would not be broilers. However, plaintiff answers that the cables show plaintiff was insisting on delivery of young chickens and that defendant shipped old ones at its peril. Defendant's point would be highly relevant on another disputed issue—whether if liability were established, the measure of damages should be the difference in market value of broilers and stewing chicken in New York or the larger difference in Europe, but I cannot give it weight on the issue of interpretation. Defendant points out also that plaintiff proceeded to deliver some of the larger birds in Europe, describing them as "poulets"; defendant argues that it was only when plaintiff's customers complained about this that plaintiff developed the idea that "chicken" meant "young chicken." There is little force in this in view of plaintiff's immediate and consistent protests.

When all the evidence is reviewed, it is clear that defendant believed it could comply with the contracts by delivering stewing chicken in the 2½-3 lbs. size. Defendant's subjective intent would not be significant if this did not coincide with an objective meaning of "chicken." Here it did coincide with one of the dictionary meanings, with the definition in the Department of Agriculture Regulations to which the contract made at least oblique reference, with at least some usage in the trade, with the realities of the market, and with what plaintiff's spokesman had said. Plaintiff asserts it to be equally plain that plaintiff's own subjective intent was to obtain broilers and fryers; the only evidence against this is the material as to market prices and this may not have been sufficiently brought home. In any event it is unnecessary to determine that issue. For plaintiff has the burden of showing that "chicken" was used in the narrower rather than in the broader sense, and this it has not sustained.

This opinion constitutes the Court's findings of fact and conclusions of law. Judgment shall be entered dismissing the complaint with costs.

[1] The Court notes the contract provision whereby any disputes are to be settled by arbitration by the New York Produce Exchange; it treats the parties' failure to avail themselves of this remedy as an agreement eliminating that clause of the contract.

[2] These cables were in German; "chicken", "broilers" and, on some occasions, "fowl," were in English.

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.

[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.

Bicksler, Smith, Parke & Catlin and Frank D. Catlin, Jr., for Appellant.

Glen Behymer and B. L. Hoyt for Respondent.

Houser, J.

From the "findings of fact" made pursuant to the trial of the action, it appears that plaintiff, who was of the age of eighty-six years, although not a dealer in violins, had been a collector of rare violins for many years; "that defendant was a violinist of great prominence, internationally known, and himself the owner and collector of rare and old violins made by the old masters"; that at the suggestion of a third person, and without the knowledge by plaintiff of defendant's intention in the matter, defendant visited plaintiff at the home of the latter and there asked plaintiff if he might see plaintiff's collection of old violins; that in the course of such visit and inspection, "plaintiff showed a part of his collection to defendant; that defendant picked up one violin and asked plaintiff what he would take for the violin, calling it a 'Stradivarius'; that plaintiff did not offer his violins, or any of them, for sale, but on account of his age, after he had been asked what he would take for them, said he would not charge as much as a regular dealer, but that he would sell it for $5,000; that thereafter [326] defendant picked up another violin, calling it a 'Guarnerius', and asked plaintiff what he would take for that violin, and plaintiff said if defendant took both violins, he could have them for $8,000; that the defendant said 'all right', thereupon stating his financial condition and asking if he could pay $2,000 cash and the balance in monthly payments of $1,000." Thereupon a memorandum was signed by defendant as follows:

"I hereby acknowledge receipt of one violin by Joseph Guarnerius and one violin by Stradivarius dated 1717 purchased by me from George Smith for the total sum of Eight Thousand Dollars toward which purchase price I have paid Two Thousand Dollars the balance I agree to pay at the rate of one thousand dollars on the fifteenth day of each month until paid in full."

In addition thereto, a "bill of sale" in the following language was signed by plaintiff:

"This certifies that I have on this date sold to Mr. Efrem Zimbalist one Joseph Guarnerius violin and one Stradivarius violin dated 1717, for the full price of $8,000.00 on which has been paid $2,000.00."

"The balance of $6,000.00 to be paid $1,000.00 fifteenth of each month until paid in full. I agree that Mr. Zimbalist shall have the right to exchange these for any others in my collection should he so desire."

That at the time said transaction was consummated each of the parties thereto "fully believed that said violins were made one by Antonius Stradivarius and one by Josef Guarnerius"; that preceding the closing of said transaction "plaintiff made no representations and warranties as to said violins, or either of them, as to who their makers were, but believed them to have been made one by Antonius Stradivarius and one by Josef Guarnerius in the early part of the eighteenth century; that plaintiff did not fraudulently make any representations or warranties to defendant at the time of said purchase"; that there was "a preponderance of evidence to the effect that said violins are not Stradivarius or Guarnerius violins, nor made by either Antonius Stradivarius or Josef Guarnerius, but were in fact made as imitations thereof, and were not worth more than $300.00". [327]

The action which is the foundation of the instant appeal was brought by plaintiff against defendant to recover judgment for the unpaid balance of the purchase price of the two violins.

[1] As is shown by the conclusions of law reached by the trial court from such facts, the theory upon which the case was decided was that the transaction in question was the result of "a mutual mistake on the part of plaintiff and defendant", and consequently that plaintiff was not entitled to recover judgment. From a judgment rendered in favor of defendant, plaintiff has appealed to this court.

In urging a reversal of the judgment, it is the contention of appellant that the doctrine of caveat emptor should have been applied to the facts in the case; that is to say, that in the circumstances shown by the evidence and reflected in the findings of fact, the trial court should have held that defendant bought the violins at his own risk and peril.

The substance of the argument presented by appellant is a recast of the decision at nisi prius in the case of Jendwine v. Slade, (1797) 2 Espinasse, 572. The syllabus in that case is as follows:

"The putting down the name of an artist in a catalogue as the painter of any picture, is not such a warranty as will subject the party selling to an action, if it turns out that he might be mistaken, and that it was not the work of the artist to whom it was attributed."

It there appears that therein (as similarly in the instant case) "several of the most eminent artists and picture dealers were called, who differed in their opinions respecting the originality of the pictures".

Lord Kenyon (the nisi prius judge) said: "It was impossible to make this the case of a warranty; the pictures were the work of artists some centuries back, and there being no way of tracing the picture itself, it could only be matter of opinion whether the picture in question was the work of the artist whose name it bore, or not. What then does the catalogue import? That, in the opinion of the seller, the picture is the work of the artist whose name he has affixed to it. The action in its present shape must go on the ground of some fraud in the sale. But if the seller only represents what he himself believes, he can be guilty of no fraud. The [328] catalogue of the pictures in question leaves the determination to the judgment of the buyer, who is to exercise that judgment in the purchase. ..."

In the case of Chandelor v. Lopus, (1603) 2 Cr. Rep. 4, 79 English Rep. 3 (Full Reprint), which in the state of New York for many years was relied upon as the leading authority in situations similar to that present herein, it was held that where one sold a jewel as a bezoar stone which in truth it was not, no action would lie, unless in the complaint or declaration it was alleged that the seller knew that it was not a bezoar stone, or that he warranted the stone to be such.

In Seixas v. Woods, (1804) 2 Caines (N.Y.), 48 [2 Am. Dec. 215] (Chancellor Kent writing a concurring opinion), a sale of wood which both parties to the transaction supposed was brazilletto, when in fact it was peachum,--in the absence of express warranty by the seller, was held binding on the buyer. It was also ruled that "mentioning the wood as brazilletto wood in the bill of parcels and in the advertisement some days previous to the sale, did not amount to a warranty to the plaintiffs".

In the case of Swett v. Colgate, (1822) 20 Johns. (N.Y.) 196 [11 Am. Dec. 266], it was held that where one, without express warranty, sold what he supposed was barilla, which he advertised as barilla, which he invoiced as barilla, and which prior to the sale thereof the purchaser examined "several times", but which after the sale was found to be kelp, the rule of caveat emptor, as announced in Chandelor v. Lopus, supra, would apply. And so in Welsh v. Carter, (1828) 1 Wend. (N.Y.) 185 [19 Am. Dec. 473], which likewise involved the sale of an article known as barilla, but which in fact was a fraudulent imitation of it and entirely worthless, the contract was held binding on the purchaser who, before the sale, was told that he "must judge for himself", and who had a sample of the "barilla" analyzed.

But with reference to the first cited case (Seixas v. Woods, supra, in which Chancellor Kent wrote a concurring opinion), in 2 Kent's Commentaries, section 479, in part it is said:

"There is no doubt of the existence of the general rule of law, as laid down in Seixas v. Woods; and the only doubt is whether it was well applied in that case, where [329] there was a description in writing of the article by the vendor which proved not to be correct, and from which a warranty might have been inferred. But the rule fitly applies to the case where the article was equally open to the inspection and examination of both parties, and the purchaser relied on his own information and judgment, without requiring any warranty of the quality; ..."

Likewise, in 2 Blackstone's Commentaries, *451, the exception to the general rule is there noted as follows: "But with regard to the goodness of the wares so purchased, the vendor is not bound to answer; unless he expressly warrants them to be sound and good, or unless he knew them to be otherwise, and hath used no art to disguise them, or unless they turn out to be different from what he represented them to the buyer."

In Hart v. Wright, (1837) 17 Wend. (N.Y.) 267, in commenting on the rule applied in Seixas v. Woods, supra, it is said:

"These cases have not been overruled, and their principles have not been seriously questioned anywhere. It has been doubted whether those which deny a warranty to be implied by description in a sale note, bill of parcels, &c.;, were not a wrong application of the common law rule (2 Kent's Comm., 479, 3d ed.); and they have been severely criticized and generally repudiated in our sister states, whose courts hold, with the English cases, that such a description is a warranty of kind and quality, as far as it goes (Yates v. Pym, 6 Taunt. 446; 2 Marsh. 141, S. C.; Shepherd v. Kain, 5 Barn. & Ald. 240; Gardiner v. Grey, 4 Campb., 144, as explained [Hastings v. Lovering], 2 Pick. (Mass.) 219, 220; Bridge v. Wain, 1 Stark. R. 504; Rowe v. Osborne, 1 Stark. R. 140; Prosser v. Hooper, 1 Moore, 106; Osgood v. Lewis, 2 Harr. & Gill, (Md.) 495, 522 to 527 [18 Am. Dec. 317]; Hastings v. Lovering, 2 Pick. (Mass.) 214, 220 [13 Am. Dec. 420]; Borrekins v. Bevan, 3 Serg. & Rawle, (Pa.) 23 [23 Am. Dec. 85]; contra, see Jendwine v. Slade, 2 Esp. R. 572; Conner v. Henderson, 15 Mass. 319 [8 Am. Dec. 103], and see Henderson v. Sevey, 2 Greenl. (2 Me.) 139)."

In Hawkins v. Pemberton, (1872) 51 N.Y. 198 [10 Am. Rep. 595], where a sale by auction had been made of what was assumed to be "blue vitriol", but which in fact was "mixed vitriol", after an extensive review of [330] the authorities it was held that the contract was unenforceable. And in the same case, in referring to the case of Chandelor v. Lopus, (1603) 2 Cr. Jac. 4, 79 English Rep. 3 (Full Reprint), upon the decision of which many of the former cases relied as an authority, in part the court said: "The doctrine (there) laid down is that a mere affirmation or representation as to the character or quality of goods sold will not constitute a warranty; and that doctrine has long since been exploded and the case itself is no longer regarded as good law in this country or England." (Citing authorities.) To the same effect, see Dounce v. Dow, 64 N.Y. 411; White v. Miller, 71 N.Y. 118 [27 Am. Rep. 13].

A case which in its facts closely resembles those in the instant case is that of Power v. Barham, (1836) 4 Ad. & E., 473, 111 English Repts., Full Reprint, (K. B.) 865. Therein the early case of Jendwine v. Slade, 2 Espinasse, 572 (1797), to which reference hereinbefore has been had, is cited and "distinguished". The syllabus in Power v. Barham, supra, is as follows: "In assumpsit for breach of a warranty of pictures, it was proved, among other things, that the defendant, at the time of the sale, gave the following bill of parcels: "Four pictures, Views in Venice, Canaletto, 1601'. The Judge left it to the jury upon this and the rest of the evidence, whether the defendant had contracted that the pictures were those of the artist named, or whether his name had been used merely as matter of description, or intimation of opinion, the jury found for the plaintiff, saying that the bill of parcels amounted to a warranty: Held, that the question had been rightly left to jury, and that the verdict was not to be disturbed.""

An American case which in principle is clearly applicable to the facts herein is that of Sherwood v. Walker, 66 Mich. 568 [33 N.W. 919, 11 Am.St.Rep. 531]. It there appears that the subject of the sale was a "blooded" polled Angus cow that both parties to the transaction assumed was barren and hence useless as breeding stock. In such assumed conditions the owner agreed to sell and the purchaser agreed to buy the cow at the market price of beef cattle, to wit, five and one-half cents per pound, or what amounted to about $80. Before the day arrived when the cow was to be delivered by the seller to the purchaser, it was discovered that the cow was with calf and consequently [331] that the cow was worth at least $750. It was held that the owner of the cow had the right to rescind the agreement of sale. But to the contrary of such ruling on practically similar facts, see Wood v. Boynton, 64 Wis. 265 [25 N.W. 42, 54 Am. Rep. 610].

In the case of Henshaw v. Robins, 9 Met. (50 Mass.) 83 [43 Am. Dec. 367], where the authorities are reviewed, the facts and the law are indicated in the syllabus as follows: "When a bill of parcels is given, upon a sale of goods, describing the goods, or designating them by a name well understood, such bill is to be considered as a warranty that the goods sold are what they are thus described or designated to be. And this rule applies, though the goods are examined by the purchaser, at or before the sale, if they are so prepared, and present such an appearance, as to deceive skilful dealers."

Reflecting particularly upon the situation shown by the facts in the instant case, is the following language which occurs in the course of the opinion: "But we are of opinion that the examination of the article by the plaintiff, at the time of the sale, is no evidence of his intention to waive any legal right. If the spurious nature of the article might have been detected on inspection, it might have been otherwise; but we must infer, from the instruction of the court, that the jury found that the article was so disguised that the deception could not have been detected by a skilful dealer in indigo, without resorting to an analytical experiment; so that no neglect can be imputed to the plaintiff in not making a careful examination." (See, also, Hecht v. Batcheller, 147 Mass. 335 [17 N.E. 651, 9 Am.St.Rep. 708].)

On examination of the case of Henshaw v. Robins, supra, the similarity of the facts therein to the facts in the instant case will immediately be noted, and the language of the opinion to the effect that if "the article was so disguised that the deception could not have been detected by a skilful dealer" so closely applies to the situation in the instant case that the conclusion reached by the court in the cited case is particularly important in reaching a conclusion herein.

The governing principle of law to the effect that an article described in a "bill of parcels", or, as in the instant [332] case, in a "bill of sale", amounts to a warranty that such article in fact conforms to such description and that the seller is bound by such description, has been applied in this state in the case of Flint v. Lyon, 4 Cal. 17, wherein it was held that where the defendant purchased an entire cargo of flour which was described as "Haxall" flour, he was not required by the contract to accept the same flour which in reality was "Gallego" flour, but which was of as excellent quality as "Haxall" flour. Therein, in part, the court said:

"What the inducement was to the defendant to purchase Haxall, we know not; but having purchased that particular brand, he was entitled to it, and could not be compelled to accept any other as a substitute. The use of the word 'Haxall' in the sale note amounted to a warranty that the flour was Haxall. (Citing authorities.) How, then, stands the case? The contract was founded in mistake, both parties supposing they were contracting concerning a certain article which had no existence, consequently the contract was void for want of the substance of the thing contracted for. Could then the acceptance of a different article than the one sold by Gorham, the sub-vendee, conclude the defendant? Certainly not! ..."

In principle, to the same effect, see, also, Burge v. Albany Nurseries, etc., 176 Cal. 313 [168 P. 343]; Barrios v. Pacific States Trading Co., 41 Cal.App. 637 [183 P. 236]; Firth v. Richter, 49 Cal.App. 545 [196 P. 277]; Rauth v. Southwest Warehouse Co., 158 Cal. 54 [109 P. 839]; Brock v. Newmark G. Co., 64 Cal.App. 577 [222 P. 195]; Brandenstein v. Jackling, 99 Cal.App. 438 [278 P. 880].

[2] Although it may be that by some authorities a different rule may be indicated, it is the opinion of this court that, in accord with the weight of the later authorities to which attention hereinbefore has been directed, the strict brule of caveat emptor may not be applied to the facts of the instant case, but that such rule is subject to the exception thereto to the effect that on the purported sale of personal property the parties to the proposed contract are not bound where it appears that in its essence each of them is honestly mistaken or in error with reference to the identity of the subject-matter of such contract. In other [333] words, in such circumstances, no enforceable sale has taken place. [3] But if it may be said that a sale, with a voidable condition attached, was the outcome of the transaction in the instant case, notwithstanding the "finding of fact" by the trial court that "plaintiff made no representations and warranties as to said violins", from a consideration of the language employed by the parties in each of the documents that was exchanged between them (to which reference hereinbefore has been had), together with the general conduct of the parties, and particularly the acquiescence by plaintiff in the declaration made by defendant regarding each of the violins and by whom it was made,--it becomes apparent that, in law, a warranty was given by plaintiff that one of the violins was a Guarnerius and that the other was a Stradivarius.

The findings of fact unquestionably show that each of the parties believed and assumed that one of said violins was a genuine Guarnerius and that the other was a genuine Stradivarius; the receipt given by defendant to plaintiff for said violins so described them, and the "bill of sale" given by plaintiff to defendant certifies that plaintiff "sold to Mr. Efrem Zimbalist (defendant) one Joseph Guarnerius violin and one Stradivarius violin dated 1717 for the full price of $8,000.00 on which has been paid $2,000.00. ..."

Without burdening this opinion with the citation of additional authorities, it may suffice to state that, although the very early decisions may hold to a different rule, all the more modern authorities, including many of those in California to which attention has been directed (besides the provision now contained in section 1734, Civ. Code), are agreed that the description in a bill of parcels or salenote of the thing sold amounts to a warranty on the part of the seller that the subject-matter of the sale conforms to such description. (See, generally, 22 Cal.Jur. 994; 55 Cor. Jur. 738 et seq.; 24 R. C. L. 171; and authorities respectively there cited.)

It is ordered that the judgment be and it is affirmed.

Conrey, P. J., and York, J., concurred.

54 Cal.2d 380 (1960)

ELSINORE UNION ELEMENTARY SCHOOL DISTRICT OF RIVERSIDE COUNTY, Respondent,
v.
E. J. KASTORFF et al., Appellants.

L. A. No. 25739.
Supreme Court of California. In Bank.
July 1, 1960.

Wallace & Wallace, W. W. Wallace and A. W. Wallace for Appellants.

Ray T. Sullivan, Jr., County Counsel, and James H. Angell, Assistant County Counsel, for Respondent.

SCHAUER, J.

Defendants, who are a building contractor and his surety, appeal from an adverse judgment in this action [382] by plaintiff school district to recover damages allegedly resulting when defendant Kastorff, the contractor, refused to execute a building contract pursuant to his previously submitted bid to make certain additions to plaintiff's school buildings. We have concluded that because of an honest clerical error in the bid and defendant's subsequent prompt rescission he was not obliged to execute the contract, and that the judgment should therefore be reversed.

Pursuant to plaintiff's call for bids, defendant Kastorff secured a copy of the plans and specifications of the proposed additions to plaintiff's school buildings and proceeded to prepare a bid to be submitted by the deadline hour of 8 p. m., August 12, 1952, at Elsinore, California. Kastorff testified that in preparing his bid he employed work sheets upon which he entered bids of various subcontractors for such portions of the work as they were to do, and that to reach the final total of his own bid for the work he carried into the right hand column of the work sheets the amounts of the respective sub bids which he intended to accept and then added those amounts to the cost of the work which he would do himself rather than through a subcontractor; that there is "a custom among subcontractors, in bidding on jobs such as this, to delay giving . . . their bids until the very last moment"; that the first sub bid for plumbing was in the amount of $9,285 and he had received it "the afternoon of the bid-opening," but later that afternoon when "the time was drawing close for me to get my bids together and get over to Elsinore (from his home in San Juan Capistrano) he received a $6,500 bid for the plumbing. Erroneously thinking he had entered the $9,285 plumbing bid in his total column and had included that sum in his total bid and realizing that the second plumbing bid was nearly $3,000 less than the first, Kastorff then deducted $3,000 from the total amount of his bid and entered the resulting total of $89,994 on the bid form as his bid for the school construction. Thus the total included no allowance whatsoever for the plumbing work."

Kastorff then proceeded to Elsinore and deposited his bid with plaintiff. When the bids were opened shortly after 8 p.m. that evening, it was discovered that of the five bids submitted that of Kastorff was some $11,306 less than the next lowest bid. The school superintendent and the four school board members present thereupon asked Kastorff whether he was sure his figures were correct, Kastorff stepped out into the [383] hall to check with the person who had assisted in doing the clerical work on the bid, and a few minutes later returned and stated that the figures were correct. He testified that he did not have his work sheets or other papers with him to check against at the time. The board thereupon, on August 12, 1952, voted to award Kastorff the contract.

The next morning Kastorff checked his work sheets and promptly discovered his error. He immediately drove to the Los Angeles office of the firm of architects which had prepared the plans and specifications for plaintiff, and there saw Mr. Rendon. Mr. Rendon testified that Kastorff

"had his maps and estimate work-sheets of the project, and indicated to me that he had failed to carry across the amount of dollars for the plumbing work. It was on the sheet, but not in the total sheet. We examined that evidence, and in our opinion we felt that he had made a clerical error in compiling his bill. . . . In other words, he had put down a figure, but didn't carry it out to the 'total' column when he totaled his column to make up his bid. . . . He exhibited . . . at that time . . . his work-sheets from which he had made up his bid."

That same morning (August 13) Rendon telephoned the school superintendent and informed him of the error and of its nature and that Kastorff asked to be released from his bid. On August 14 Kastorff wrote a letter to the school board explaining his error and again requesting that he be permitted to withdraw his bid. On August 15, after receiving Kastorff's letter, the board held a special meeting and voted not to grant his request. Thereafter, on August 28, written notification was given to Kastorff of award of the contract to him.^[1] Subsequently plaintiff submitted to Kastorff a contract to be signed in accordance with his bid, and on September 8, 1952, Kastorff returned the contract to plaintiff with a letter again explaining his error and asked the board to reconsider his request for withdrawal of his bid.

Plaintiff thereafter received additional bids to do the subject construction; let the contract to the lowest bidder, in the amount of $102,900; and brought this action seeking to recover from Kastorff the $12,906 difference between that [384] amount and the amount Kastorff had bid.^[2] Recovery of $4,499.60 is also sought against Kastorff's surety under the terms of the bond posted with his bid.

Defendants in their answer to the complaint pleaded, among other things, that Kastorff had made an honest error in compiling his bid; that "he thought he was bidding, and intended to bid, $9500.00 more, making a total of $99,494.00 as his bid"; that upon discovering his error he had promptly notified plaintiff and rescinded the $89,994 bid. The trial court found that it was true that Kastorff made up a bid sheet, which was introduced in evidence; that the subcontractor's bids thereupon indicated were those received by Kastorff; that he "had 16 subcontracting bids to ascertain from 31 which were submitted"; and that Kastorff had neglected to carry over from the left hand column on the bid sheet to the right hand column on the sheet a portion of the plumbing (and heating) subcontractor's bid. Despite the uncontradicted evidence related hereinabove, including that of plaintiff's architect and of its school superintendent, both of whom testified as plaintiff's witnesses, the court further found, however, that

"it is not true that the right hand column of figures was totaled for the purpose of arriving at the total bid to be submitted by E. J. Kastorff . . . It cannot be ascertained from the evidence for what purpose the total of the right hand column of figures on the bid sheet was used nor can it be ascertained from the evidence for what purpose the three bid sheets were used in arriving at the total bid."

And although finding that "on or about August 15, 1952," plaintiff received Kastorff's letter of August 14 explaining that he "made an error of omitting from my bid the item of Plumbing," the court also found that

"It is not true that the plaintiff knew at any time that defendant Kastorff's bid was intended to be other than $89, 994.00 . . . It is not true that the plaintiff knew at the time it requested the execution of the contract by defendant Kastorff that he had withdrawn his bid because of an honest error in the compilation thereof. It is not true that plaintiff had notice of an error in the compilation of the bid by defendant Kastorff and tried nevertheless to take advantage of defendant Kastorff by forcing him to enter a contract on the basis [385] of a bid he had withdrawn. . . . It is not true that it would be either inequitable or unjust to require defendant Kastorff to perform the contract awarded to him for the sum of $89,994.00, and it is not true that he actually intended to bid for said work the sum of $99,494.00."^[3]

Judgment was given for plaintiff in the amounts sought, and this appeal by defendants followed.

In reliance upon M. F. Kemper Const. Co. v. City of Los Angeles (1951), 37 Cal.2d 696 [235 P.2d 7], and Lemoge Electric v. County of San Mateo (1956), 46 Cal.2d 659, 662, 664 [1a, 1b, 2, 3] [297 P.2d 638], defendants urge that where, as defendants claim is the situation here, a contractor makes a clerical error in computing a bid on a public work he is entitled to rescind.

In the Kemper case one item on a work sheet in the amount of $301,769 was inadvertently omitted by the contractor from the final tabulation sheet and was overlooked in computing the total amount of a bid to do certain construction work for the defendant city. The error was caused by the fact that the men preparing the bid were exhausted after working long hours under pressure. When the bids were opened it was found that plaintiff's bid was $780,305, and the next lowest bid was $1,049,592.plaintiff discovered its error several hours later and immediately notified a member of defendant's board of public works of its mistake in omitting one item while preparing the final accumulation of figures for its bid. Two days later it explained its mistake to the board and withdrew its bid. A few days later it submitted to the board evidence which showed the unintentional omission of the $301,769 item. The board nevertheless passed a resolution accepting plaintiff's erroneous bid of $780,305, and plaintiff refused to enter into a written contract at that figure. The board then awarded the contract to the next lowest bidder, the city demanded forfeiture of plaintiff's bid bond, and plaintiff brought action to cancel its bid and obtain discharge of the bond. The trial court found that the bid had been submitted as the result of an excusable and honest mistake of a material and fundamental character, that plaintiff [386] company had not been negligent in preparing the proposal, that it had acted promptly to notify the board of the mistake and to rescind the bid, and that the board had accepted the bid with knowledge of the error. The court further found and concluded that it would be unconscionable to require the company to perform for the amount of the bid, that no intervening rights had accrued, and that the city had suffered no damage or prejudice.

On appeal by the city this court affirmed, stating the following applicable rules (pp. 700-703 of 37 Cal.2d):

"[1] Once opened and declared, the company's bid was in the nature of an irrevocable option, a contract right of which the city could not be deprived without its consent unless the requirements for rescission were satisfied. [Citations.] . . . [2] . . . the city had actual notice of the error in the estimates before it attempted to accept the bid, and knowledge by one party that the other is acting under mistake is treated as equivalent to mutual mistake for purposes of rescission. [Citations.] [3] Relief from mistaken bids is consistently allowed where one party knows or has reason to know of the other's error and the requirements for rescission are fulfilled. [Citations.]"

"[4] Rescission may be had for mistake of fact if the mistake is material to the contract and was not the result of neglect of a legal duty, if enforcement of the contract as made would be unconscionable, and if the other party can be placed in statu quo. [Citations.] In addition, the party seeking relief must give prompt notice of his election to rescind and must restore or offer to restore to the other party everything of value which he has received under the contract. [Citations.]"

"[5] Omission of the $301,769 item from the company's bid was, of course, a material mistake. . . . [E]ven if we assume that the error was due to some carelessness, it does not follow that the company is without remedy. Civil Code section 1577, which defines mistake of fact for which relief may be allowed, describes it as one not caused by 'the neglect of a legal duty' on the part of the person making the mistake. [6] It has been recognized numerous times that not all carelessness constitutes a 'neglect of legal duty' within the meaning of the section. [Citations.] On facts very similar to those in the present case, courts of other jurisdictions have stated that there was no culpable negligence and have granted relief from erroneous bids. [Citations.] [7] The type of error here involved is one which will sometimes occur in the conduct of reasonable and cautious businessmen, and, under all the circumstances, [387] we cannot say as a matter of law that it constituted a neglect of legal duty such as would bar the right to equitable relief."

"[8] The evidence clearly supports the conclusion that it would be unconscionable to hold the company to its bid at the mistaken figure. The city had knowledge before the bid was accepted that the company had made a clerical error which resulted in the omission of an item amounting to nearly one third of the amount intended to be bid, and, under all the circumstances, it appears that it would be unjust and unfair to permit the city to take advantage of the company's mistake. [9, 10] There is no reason for denying relief on the ground that the city cannot be restored to status quo. It had ample time in which to award the contract without readvertising, the contract was actually awarded to the next lowest bidder, and the city will not be heard to complain that it cannot be placed in statu quo because it will not have the benefit of an inequitable bargain. [Citations.] [11] Finally, the company gave notice promptly upon discovering the facts entitling it to rescind, and no offer of restoration was necessary because it had received nothing of value which it could restore. [Citation.] We are satisfied that all the requirements for rescission have been met."

In the Lemoge case (Lemoge Electric v. County of San Mateo (1956), supra, 46 Cal.2d 659, 662, 664 [1a, 1b, 2, 3]), the facts were similar to those in Kemper, except that plaintiff Lemoge did not attempt to rescind but instead, after discovering and informing defendant of inadvertent clerical error in the bid, entered into a formal contract with defendant on the terms specified in the erroneous bid, performed the required work, and then sued for reformation. Although this court affirmed the trial court's determination that plaintiff was not, under the circumstances, entitled to have the contract reformed, we also reaffirmed the rule that

"Once opened and declared, plaintiff's bid was in the nature of an irrevocable option, a contract right of which defendant could not be deprived without its consent unless the requirements for rescission were satisfied. [Citation.]plaintiff then had the right to rescind, and it could have done so without incurring any liability on its bond."

(See also Brunzell Const. Co. v. G. J. Weisbrod, Inc. (1955), 134 Cal.App.2d 278, 286-287 [1, 2] [285 P.2d 989]; Klose v. Sequoia Union High School Dist. (1953), 118 Cal.App.2d 636, 641-642 [5] [258 P.2d 515].)

The rules stated in the Kemper and Lemoge cases would [388] appear to entitle defendant to relief here, were it not for the findings of the trial court adverse to defendant. However, certain of such findings are clearly not supported by the evidence and others are immaterial to the point at issue. [1] The finding that it is not true that the right hand column of figures on the bid sheet was totaled for the purpose of arriving at the total bid, and that it cannot be ascertained from the evidence for what purpose either the bid sheets or the right hand column total thereon were used in arriving at the total bid, is without evidentiary support in the face of the work sheets which were introduced in evidence and of the uncontradicted testimony not alone of defendant Kastorff, but also of plaintiff's own architect and witness Rendon, explaining the purpose of the work sheets and the nature of the error which had been made. We have examined such sheets, and they plainly show the entry of the sums of $9,285 and of $6,500 in the left hand columns as the two plumbing sub bids which were received by defendant, and the omission from the right hand totals column of any sum whatever for plumbing.

[2] The same is true of the finding that although "on or about August 15" plaintiff received Kastorff's letter of August 14 explaining the error in his bid, it was not true that plaintiff knew at any time that the bid was intended to be other than as submitted. Again, it was shown by the testimony of plaintiff's architect, its school superintendent, and one of its school board members, all produced as plaintiff's witnesses, that the board was informed of the error and despite such information voted at its special meeting of August 15 not to grant defendant's request to withdraw his bid.

[3] Further, we are persuaded that the trial court's view, as expressed in the finding set forth in the margin,^[4] that "Kastorff had ample time and opportunity after receiving his last subcontractor's bid" to complete and check his final bid, does not convict Kastorff of that "neglect of legal duty" which would preclude his being relieved from the inadvertent clerical error of omitting from his bid the cost of the plumbing. (See Civ. Code, 1577; M. F. Kemper Const. Co. v. City of Los Angeles (1951), supra, 37 Cal.2d 696, 702 [6].) Neither should he be denied relief from an unfair, inequitable, and unintended bargain simply because, in response to inquiry from the board when his bid was discovered to be much the lowest submitted, he informed the board, after checking with his clerical assistant, that the bid was correct. He did not have his [389] work sheets present to inspect at that time, he did thereafter inspect them at what would appear to have been the earliest practicable moment, and thereupon promptly notified plaintiff and rescinded his bid. Further, as shown in the margin,^[5] Kastorff's bid agreement, as provided by plaintiff's own bid form, was to execute a formal written contract only after receiving written notification of acceptance of his bid, and such notice was not given to him until some two weeks following his rescission.

If the situations of the parties were reversed and plaintiff and Kastorff had even executed a formal written contract (by contrast with the preliminary bid offer and acceptance) calling for a fixed sum payment to Kastorff large enough to include a reasonable charge for plumbing but inadvertently through the district's clerical error omitting a mutually intended provision requiring Kastorff to furnish and install plumbing, we have no doubt but that the district would demand and expect reformation or rescission. In the case before us the district expected Kastorff to furnish and install plumbing; surely it must also have understood that he intended to, and that his bid did, include a charge for such plumbing. The omission of any such charge was as unexpected by the board as it was unintended by Kastorff. Under the circumstances the "bargain" for which the board presses (which action we, of course, assume to be impelled by advice of counsel and a strict concept of official duty) appears too sharp for law and equity to sustain.

[4] Plaintiff suggests that in any event the amount of the plumbing bid omitted from the total was immaterial. The bid as submitted was in the sum of $89,994, and whether the sum for the omitted plumbing was $6,500 or $9,285 (the two sub bids), the omission of such a sum is plainly material to the total. In Lemoge (Lemoge Electric v. County of San Mateo (1956), supra, 46 Cal.2d 659, 661-662) the error which it was declared would have entitled plaintiff to rescind was the listing of the cost of certain materials as $104.52, rather than $10,452, in a total bid of $172,421. Thus the percentage of error here was larger than in Lemoge, and was plainly material.

The judgment is reversed.

Gibson, C. J., Traynor, J., McComb, J., Peters, J., White, J., and Dooling, J., concurred.

[1] On the bid form, provided by plaintiff, the bidder agreed

"that if he is notified of the acceptance of the proposal within forty-five (45) days from the time set for the opening of bids, he will execute and deliver to you within five (5) days after having received written notification a contract as called for in the 'Notice to Contractors.'" (Italics added.)

[2] Plaintiff's original published call for bids contained the following statement: "No Bidder may withdraw his bid for a period of forty-five (45) days after the date set for the opening thereof." Whether upon Kastorff's rescission for good cause prior to expiration of the 45 day period plaintiff could have accepted the next lowest bid is not an issue before us.

[3] Other findings are that Kastorff

"in the company of his wife and another couple left San Juan Capistrano for Elsinore . . . at 6:00 P.M. on August 12, 1952, a distance of 34 miles by way of California State Highway . . . Kastorff had ample time and opportunity after receiving his last subcontractor's bid to extend the figures on his bid sheet from one column to the other, to check and recheck his bid sheet figures and to take his papers to Elsinore and to check them there prior to close of receipt of bids at 8:00 P.M."

[4] See footnote 3, supra.

[5] See footnote 1, supra.

[1090] Eugene L. Resnick, Seyfarth, Shaw, Fairweather & Geraldson, Chicago, Ill., for plaintiff-appellant.

Steven P. Handler, Hannafan & Handler, Chicago, Ill., for defendant-appellee.

Before CUDAHY, COFFEY and FLAUM, Circuit Judges.

CUDAHY, Circuit Judge.

Plaintiff appeals from a finding of unilateral mistake and rescission of a contract of sale. We affirm the judgment of the district court.

I.

Plaintiff-appellant S.T.S. Transport Service, Inc. ("S.T.S.") is an Illinois corporation whose principal place of business is located in Alsip, Illinois. Since its incorporation in 1978, S.T.S. has leased tractor trucks and trailers to other companies and has also hauled freight for customers. Volvo White Truck Corporation ("Volvo White") is a Virginia corporation with its principal place of business in Greensboro, North Carolina. There is a branch dealership of Volvo White in Alsip, Illinois. In 1979 and 1980 S.T.S. bought trucks and heavy equipment from White Motor Company ("White Motor"), a truck manufacturer whose assets were purchased in 1981 by Volvo White.

Early in 1981 S.T.S. expressed an interest in purchasing eight new tractor trucks from White Motor in Alsip. In order to avoid a down payment, S.T.S. wanted to trade in trucks it already owned and use its equity in those trucks as a down payment. After appraising the trucks S.T.S. intended to trade in, and after some negotiations concerning the appraised value, White Motor offered to sell S.T.S. eight 1981 Road Commander trucks on the following terms:

(a.) The 1981 Road Commander trucks would be sold to S.T.S. for a price of $58,749 each;

(b.) S.T.S. would trade White Motor one used truck for each new truck purchased;

(c.) S.T.S. would continue to make payments (to financing companies) on the used trucks through July, 1981;

(d.) White Motor would value six of the used trucks at the same amount that S.T.S. would owe on them in July, 1981; $26,560 each;

(e.) White Motor would give S.T.S. a credit of $25,000 on another of the trucks;

(f.) White Motor would arrange financing for S.T.S.

Provision (d.) meant that S.T.S. would receive no credit for any equity in six of the trucks it owned, but that White Motor would simply pay off the amount still owed by S.T.S. on those trucks. The list price of the Road Commander trucks was $80,784. The offer price of $58,749 was reached by adding a profit of $2,200 to the Alsip branch's base cost of $56,549 for the trucks. These terms were confirmed in a March 10, 1981 letter from White Motor to S.T.S. Apparently they were not satisfactory to S.T.S., and negotiations were suspended.

In August, 1981, while White Motor was the subject of bankruptcy proceedings, S.T.S. solicited a new offer from them. White Motor recalculated its costs and sent a letter, dated August 17, 1981, which set out the specifications of the eight Road Commander Trucks, and which concluded with the following paragraphs:

Net delivered price F.O.B. Alsip, including preparation, but excluding state/local taxes is..... $273,176.00.

We will pay off balance due to White Motor Credit Corporation on the (6) 1979 Western Stars. We assume you will make your payment to White Motor Credit Corporation on December 14, 1981, and then begin a new note with White Motor Credit Corporation effective January 30, 1982, as your first payment on the new equipment. There will be no prepayment return to you, that figure ($9,035) is included in the above figures.

[1091] We will also pay off the "estimated" money owed to I.T.T. of $31,755 once your trades are turned in. This is the estimated balance after your November 30, 1981 payment to I.T.T. We will receive the 1978 Freightliner and 1977 Peterbilt as trades and we will also receive the 1979 Western Stars.

Hope this isn't confusing. I just net'd everything out and gave you the bottom line. It's a good deal for you for 2 reasons, there is a $3,500.00 U.T.A. on this deal, and we expect 6% 1982 increase by September 1, 1981. You are actually purchasing 1982 units at 1981 prices with $3,500 off on top.

What do you think!!!!!!!!

A moment's calculations makes clear how widely the price suggested in the August 12 letter diverges from the earlier price. Eight trucks at the March 10 price of $58,749 would total $469,992; there was to be no credit for the equity of any of the trucks traded in, except for one, and the credit for that one was to be $25,000. Subtracting that credit from the total for the eight trucks would result in a net price of something just under $445,000. The new net price named in the August letter is some $170,000 — over $20,000 a truck — less.

Appellee Volvo White claims that the August figure was the result of a miscalculation. Intending to offer the eight new trucks for the lower price of $56,530 each, for a total of $452,240, White Motor subtracted from that figure not only $42,000 in credit that it was now willing to allow on the trade-in of two trucks, but the $137,064 in assessed value on six other trucks, an amount which equalled the outstanding debt on the trucks. Since S.T.S. was to be credited with no equity on those six used trucks, the assessed value should not have been subtracted from the price of the new trucks. White Motor merely intended to wipe out S.T.S.'s remaining debt on those trucks. By subtracting the amount they did from the price of the new trucks, White Motor in effect offered to credit S.T.S. with an amount equal to the amount of the debt remaining on each truck.

In response to further inquiries by S.T.S., White Motor sent out a second letter on September 2, 1981. This letter was in all respects identical to the August 17 letter, except that in place of the last line of the August letter the September 2 letter contained the following paragraph regarding interest rate charges:

If prime rate increases from todays [sic] rate of 20.5%, your rate to be charged will be 2.5% below the existing prime on date of delivery. If prime decreases, your rate will be the then existing add on rate charged by White Motor Credit Corporation.

Both letters were sent out by Joseph LaSpina, manager of the Alsip branch. LaSpina admitted at trial that he did not review the August 17 letter before it went out, and that he did not review or sign the September 2d letter; his name was signed on the first page by his secretary.

S.T.S. accepted the offer. In December, 1981, S.T.S. turned over to Volvo White all of the trade-in vehicles. S.T.S. also entered into a new lease agreement with Suburban Truck & Trailer, under the terms of which Suburban would lease five of the new trucks from S.T.S. for three years. S.T.S. expected the lease to produce gross income before expenses of $37,876.49 per truck per year.

In January, 1982, the parties became aware of the problem. Volvo White informed S.T.S. that the net purchase price for the new trucks was $452,000, and S.T.S. insisted that under the contract the purchase price was $273,176. On January 15, 1982, Volvo White sent a letter admitting that it had made a clerical error in the contract. It offered to go ahead at the $452,000 price or to call off the transaction, and it confirmed that the eight trade-ins, now in Volvo White's lot, would remain the property of S.T.S. until the deal was closed. Maintaining that it could not use the trade-in vehicles in its new leasing contract with Suburban, and maintaining that under the terms of the contract Volvo White should have taken over payments of the used trucks, S.T.S. neither reclaimed the trucks [1092] nor kept up payments on them. They were repossessed and sold later in the year for approximately $20,000 per truck.

S.T.S. claims that it lost an equity of $70,900 which it had built up in those trade-in units. It also claims that it lost a profit of $372,352 that it would have earned under its lease with Suburban.

S.T.S. had apparently been experiencing some financial difficulty in the latter half of 1981. In January and February, 1982, it sold its remaining tractor trucks. This lawsuit was commenced on June 11, 1982. A trial in the Northern District of Illinois was held during the week of June 13, 1983. S.T.S. sought as damages its lost profits under the Suburban lease. Volvo White counterclaimed for an unpaid balance on parts and materials Volvo White had provided to S.T.S.

The district court found first that S.T.S. had a duty to mitigate its damages. It found that S.T.S. should have gone ahead with the purchase at the higher price, so that it might fulfill its own commitment to provide trucks for Suburban, reserving the right to sue Volvo White for the difference under the U.C.C. It found that since the plaintiff did not mitigate in that way, it could not realize any of the damages it claimed.

But the district judge also found that the contract contained a mistake with respect to the price term, a mistake that would not have been discovered by merely proof-reading the document. Since she found a mistake, she also found that the mistake could be excused and the contract rescinded if the plaintiff could be returned to the status quo ante. She found that the costs of the parts and labor which were the subject of Volvo White's counterclaim were incurred in the process of getting the trucks ready for the trade-in, so that the status quo could be restored with respect to those obligations by excusing them. On the other hand, she was persuaded by the testimony of witnesses that S.T.S. intended to go out of business at the end of 1981, and that "there is nothing really to restore it to in that regard." Accordingly, she entered judgment for the plaintiff on the counterclaim but against the plaintiff on its principal claim.

On the question of equity, the district judge found that the used trucks probably could have been sold by S.T.S. for more than they were sold for after repossession, but that since S.T.S. had not taken advantage of the opportunity to reclaim the trucks, it was stuck with the price the trucks had actually been sold for. At that price, there was no equity, since the truck were sold for less than the amount owed on them.

II.

If the contract is void because of a mistake, then there is no question of mitigation, since the duty to mitigate (if there is such a duty) arises out of the breach of a valid contract. Where the court applies the doctrine of mistake, the parties are excused from the contract and consequently there is no breach. Thus, if the district court properly found a mistake concerning the price term and properly voided the contract, we need not reach the issue of mitigation.

The parties have stipulated that Illinois law governs. The sale of the trucks would be governed by the Uniform Commercial Code, chapter 26 of the Illinois Revised Code; but under § 1-103 of the Code, mistake and certain other questions are governed by the common law. 26 Ill.Rev.Stat. § 1-103.

Although the traditional case in which a contract is found to contain a mistake is one in which the parties understand a key term differently (hence, a case in which the mistake is mutual), the cases have also voided contracts — though more reluctantly — where only one party is mistaken as to the facts. In the typical case of this sort, a seller or contractor will miscalculate in adding up a list of items. Under the appropriate circumstances courts will now recognize a right to avoidance of this sort of mistake.

[1093] It is true that in an early case, Steinmeyer v. Schroeppel, 226 Ill. 9, 80 N.E. 564 (1907), the Illinois Supreme Court denied relief to sellers of lumber who had erred in addition of the items in a contract, saying that if it could be set aside for that reason it could be set aside for errors of judgment. 80 N.E. at 566. For example, if the mistake resulted from a miscalculation as to the economic climate, to undo the contract would fly in the face of the very reason for having contracts in the first place. Wil-Fred's Inc. v. Metropolitan Sanitary District of Greater Chicago, 57 Ill.App.3d 16, 14 Ill.Dec. 667, 372 N.E.2d 946 (1978). But that problem is solved by excluding miscalculations of judgment. E. FARNSWORTH, Contracts 666 (1982).

As the law now stands, three conditions must be fulfilled before a contract can be rescinded: (1) the mistake must relate to a material feature of the contract; (2) it must have occurred despite the exercise of reasonable care; and (3) the other party must be placed in the position it was in before the contract was made. John J. Calnan Co. v. Talsma Builders, Inc., 67 Ill.2d 213, 10 Ill.Dec. 242, 245, 367 N.E.2d 695, 698 (1977); Wil-Fred's Inc. v. Metropolitan Sanitary District of Greater Chicago, 372 N.E.2d at 951.

The mistake in this case relates to the price, which must be conceded to be material. The mistake must also have occurred in spite of the exercise of reasonable care. Although reasonable care is as difficult to be precise about in this sort of case as it is elsewhere, there are some fairly clear groupings of mistake cases that can serve as guideposts. Most helpful is the knowledge that Illinois courts will generally grant relief for errors "which are clerical or mathematical." Cummings v. Dusenbury, 129 Ill.App.3d 338, 84 Ill.Dec. 615, 619, 472 N.E.2d 575, 579 (1984) (citing Wil-Fred's, Inc. v. Metropolitan Sanitary District, supra). The reason for the special treatment for such errors, of course, is that they are difficult to prevent, and that no useful social purpose is served by enforcing the mistaken term. No incentives exist to make such mistakes; all the existing incentives work, in fact, in the opposite direction. There is every reason for a contractor to use ordinary care, and, if errors of this sort — clerical or mathematical — slip through anyway, the courts will generally find it more useful to allow the contract to be changed or rescinded than to enforce it as it is. Naturally there are cases of extreme negligence to which this presumption should not apply; and there is an exception of sorts where the contract has been relied upon. We will have something to say about this last at a later point.

Although it would be wrong to suppose that "merely" mathematical or clerical errors are easily distinguished from other errors such as those of judgment — a miscalculation about the economic climate, say — the distinction is clear enough for ordinary purposes. A merely mathematical or clerical error occurs when some term is either one-tenth or ten times as large as it should be; when a term is added in the wrong column; when it is added rather than subtracted; when it is overlooked.

The error involved here is of that sort, but if anything more difficult to detect. The Alsip manager, LaSpina, made the crucial calculations. The assessed value of the used trucks was subtracted from the price of the new trucks. Such a procedure is perfectly appropriate, ordinarily; whoever buys a new car expects to have the price reduced by the value of the trade-in. Here, however, the assessed value was set so as to match the outstanding debt on the trucks. Even so, had the offer been for S.T.S. to pay off the remaining debt on the trucks before they were traded in, the calculation would have been correct. But that was not the offer; Volvo White offered to take over the remaining debt on the trade-ins, so that there was nothing in the way of trade-in value to be subtracted from the purchase price. The assessed value was completely offset by the outstanding debt.

However foolish this mistake, once made it would not easily have been detected. [1094] S.T.S. points out that Volvo White conceded in testimony that neither of the two letters containing the term in question were reviewed by LaSpina before going out. But such an omission ought to bar recision only if it would have resulted in the error's being detected. Here, the mistaken calculations were made by LaSpina, and there is little reason to suppose that he would have detected the error had he proof-read the errors before they went out. The error involved, therefore, was not one that would have been detected by the exercise of ordinary care, and we do not think that the trial judge erred in rejecting the defense of negligence.

The question of reliance is no different from the question whether the parties can be put into the position they were in at the time the contract was signed. Here, S.T.S. claims that it lost the equity it had in the trucks traded in. If it did in fact lose those trucks because of reliance on the contract; and if in fact there was equity in the trucks — that is, if the market value of the trucks exceeded the remaining debt; then S.T.S. is entitled to claim that equity as the price of putting it back into the position it would have been in had it not relied on the contract.

The district court found that S.T.S. could have reclaimed its trucks at any time. At the time it became apparent that Volvo White was not going to honor the contract as written, sometime in January, 1982, S.T.S. could have arranged to sell the trucks on its own. A party to a contract cannot be allowed to create damages by continuing to rely on a contract which has either been breached, or been void from the start. As of January, 1982, S.T.S. was on notice that one of those two situations applied.

Moreover, there is no reason why the district court is obliged to do for S.T.S. what S.T.S. could easily have done on its own — namely, sell trucks at the market price. It would have been difficult to ascertain the January, 1982 market price when the trial took place in 1984; it would have been much easier to do by actually selling the trucks when the contract fell through.

Instead, S.T.S. refused to make further payments, and the trucks were repossessed and sold for amounts less than the amounts still owed on each. S.T.S. might have complained of the reasonableness of these sales, but it did not; in any case the sales do not appear to have been unreasonable.^[1] The district court therefore correctly found that any loss of equity — if there was equity to begin with — was due to conduct of S.T.S., and that restoring S.T.S. to the status quo did not require payment for lost equity.

S.T.S. also incurred certain obligations in preparing the trucks for the trade-in; Volvo White has counterclaimed for repayment of approximately $9500 for parts and services priced during this period. The district judge found that these obligations were legitimately incurred in reliance on the contract and that before the contract can be rescinded those obligations must be excused. She therefore dismissed the counterclaim and rescinded the contract. Volvo White does not reassert its counterclaim on appeal.

Since the district court properly rescinded the contract, the question of mitigation does not arise. The judgment of the district court is affirmed.

[1] The trucks were sold for $20,000 each. Volvo White had appraised the trucks at $22,000-23,000; testimony for S.T.S. would have set the value at $30,000. Considering the conditions under which the trucks were sold, the selling price does not appear unreasonable, whichever estimate of market value we choose.

[106] Gaylord & Singleton by L. W. Gaylord, Jr., Greenville, for defendants-appellants.

Everett & Cheatham by C. W. Everett, Sr., Bethel, for plaintiff-appellee.

COPELAND, Justice.

Plaintiff excepted to the signing and entry of the foregoing judgment and this constitutes her only assignment of error on appeal. An exception to a judgment rendered by the trial court, without an exception to the evidence or to the court's findings of fact, presents for appellate review the sole question of whether the facts found support the judgment. See, e. g., St. George v. Hanson, 239 N.C. 259, 78 S.E.2d 885 (1954); Best v. Garris, 211 N.C. 305, 190 S.E. 221 (1937). See also Parker v. Insurance Co., 259 N.C. 115, 130 S.E.2d 36 (1963); Putnam v. Triangle Publications, Inc., 245 N.C. 432, 96 S.E.2d 445 (1957).

G.S. § 1A-1, Rule 52(a)(1) provides that "[i]n all actions tried upon the facts without a jury or with an advisory jury, the court shall find the facts specially and state separately its conclusions of law thereon and direct the entry of the appropriate judgment." (Emphasis supplied.) This rule has been interpreted by this Court to require the trial judge to do the following three things in writing: "(1) To find the facts on all issues of fact joined on the pleadings; (2) to declare the conclusions of law arising on the facts found; and (3) to enter judgment accordingly." Coggins v. City of Asheville, 278 N.C. 428, 434, 180 S.E.2d 149, 153 (1971). This was also the rule under former G.S. § 1-185. See, e. g., Morehead v. Harris, 255 N.C. 130, 120 S.E.2d 425 (1961); City of Goldsboro v. Atlantic Coast Line Ry. Co., 246 N.C. 101, 97 S.E.2d 486 (1957).

[107] In the instant case the court found the facts to be as stipulated and thereafter directed entry of judgment in favor of defendants. However, the court failed to state separately its conclusions of law. The mere assertion that "plaintiff is not entitled to the relief prayed for by her," without stating the grounds for such a bare legal conclusion, does not comply with the requirements of Rule 52(a)(1). The purpose for requiring the conclusions of law to be stated separately is to enable appellate courts to determine what law the trial court applied in directing the entry of judgment in favor of one of the parties. See, e. g., Morehead v. Harris, supra; Jamison v. City of Charlotte, 239 N.C. 423, 79 S.E.2d 797 (1954).

The problems engendered by non-compliance with Rule 52(a)(1) are readily apparent in the instant case. We do not know what law or legal theory the trial court applied to the facts in denying plaintiff the relief prayed for. We can only assume that the trial court found none of plaintiff's legal theories to be persuasive. Plaintiff states in her sole assignment of error that she relies on the following legal points in support of her exception to the judgment:

"1. That the stipulated facts show that there was a mutual mistake of an existing material fact, common to both parties, and by reason thereof each has done what neither intended, coupled with a failure of consideration.

"2. That in a conveyance of land by deed containing restrictions therein which restrict the use of the property for a certain purpose, the grantor thereby warrants that the property so conveyed and restricted can be used for the specific purpose to which its use is restricted by the deed of conveyance."

In general, we are bound by the findings of fact unless such facts are not supported by any competent evidence. See, e. g., Blackwell v. Butts, 278 N.C. 615, 180 S.E.2d 835 (1971); Knutton v. Cofield, 273 N.C. 355, 160 S.E.2d 29 (1968). Here the facts are conclusive since no exception was taken by either party to the court's findings. On the other hand, we are not precluded from reviewing the trial court's view of the applicable law arising on the facts. See generally 1 McIntosh N. C. Practice and Procedure §§ 1372-74 (1956) (Phillips' 1970 Supp.); 5A Moore's Federal Practice § 52.03(2) (1974); Wright & Miller, Federal Practice and Procedure: Civil § 2588 (1971). Hence, in the interest of justice, we deem it appropriate to proceed to determine the proper legal conclusions to be drawn from the trial court's findings.

Based on these uncontroverted facts, the Court of Appeals held that plaintiff was entitled to rescind the contract on the grounds of "mutual mistake of material fact" coupled with a "total failure of consideration." 24 N.C.App. at 238-39, 210 S.E.2d at 502-03. Assuming, arguendo, that the Court of Appeals was correct, and that this is a true mistake case, then it is one that must necessarily involve a mistaken assumption of the parties in the formation of the contract of purchase. In these mistaken assumption cases, unlike other kinds of mistake cases, the parties communicate their desires to each other perfectly; they intend to complete a sale, or a contract of sale, and their objective acts are in accord with their intent. Difficulties subsequently arise because at least one of the parties has, either consciously or unconsciously, mistaken beliefs concerning facts that make the sale appear more attractive to him than it actually is. For many cases see, e. g., J. Wade, Cases on Restitution (1966); J. Dawson & J. Palmer, Cases on Restitution (1958). See generally 3 A. Corbin, Contracts §§ 579-to-621 (2d ed. 1960); Restatement of Contracts § 502 (1962); Restatement of Restitution (1937); 6 S. Williston, Contracts (rev. ed. 1937); Annot., Vendor and Purchaser: Mutual Mistake as to Physical Condition of Realty as Ground for Rescission, 50 A.L.R.3d 1188 (1973); Atiyah & Bennion, Mistake in the Construction of Contracts, 24 Modern L.Rev. 421 (1961); Foulke, Mistake in the Formation and Performance [108] of a Contract, 11 Colum.L.Rev. 197 (1911).

In attempting to determine whether the aggrieved party is entitled to some kind of relief in these mistaken assumption cases, courts and commentators have suggested a number of factors as relevant. E. g., was the mistake bilateral or unilateral; was it palpable or impalpable; was one of the parties unjustly enriched; was the other party unjustly impoverished; was the risk assumed by one of the parties (i. e., subjective ignorance); was the mistake fundamental or collateral; was the mistake related to present facts or to future expectations; etc. See Rabin, A Proposed Black-Letter Rule Concerning Mistaken Assumptions in Bargain Transactions, 45 Tex.L. Rev. 1273 (1967) (hereinafter cited as Rabin). See also D. Dobbs, Remedies 716-84 (West 1973).

Our research has failed to disclose a prior North Carolina case applying the doctrine of mutual mistake pertaining to a physical condition of real property as a ground for rescission. But see MacKay v. McIntosh, 270 N.C. 69, 153 S.E.2d 800 (1967). However, we have found a few cases from other jurisdictions.

In Blythe v. Coney, 228 Ark. 824, 310 S.W.2d 485 (1958), the court allowed rescission where the vendor and purchaser of a residence were mistaken as to the adequacy of water pressure. The court declared that a contract may be rescinded for a mutual mistake regarding a material fact and that the mistaken assumption of the parties could be characterized as such a mistake in view of the evidence that the water meter in the home was unconnected at the time it was shown to the purchasers so that neither party was aware of the water shortage until after the sale.

Likewise, in Davey v. Brownson, 3 Wash. App. 820, 478 P.2d 258 (1970), cert. denied, 78 Wash.2d 997 (1971), the court relied on the doctrine of mutual mistake of a material fact in rescinding the sale of, inter alia, a 26-unit motel that, unknown to either party at the time of signing the contract, was infested with termites, a condition that could only be corrected by substantial structural repair. The court, quoting from Lindeberg v. Murray, 117 Wash. 483, 495, 201 P. 759, 763 (1921), stated: "We think it is elementary that, where there is a clear bona fide mistake regarding material facts, without culpable negligence on the part of the person complaining, the contract may be avoided, and equity will decree a rescission. We take it that the true test in cases involving mutual mistake of fact is whether the contract would have been entered into had there been no mistake. . . ." Id. at 824, 478 P.2d at 260.

One court has held that there were sufficient grounds for rescission of a sale of realty where both the vendor and the vendee were mistaken as to the suitability of the soil or the terrain for agricultural purposes. See, e. g., Binkholder v. Carpenter, 260 Iowa 1297, 152 N.W.2d 593 (1967); McDonald v. Benge, 138 Iowa 591, 116 N.W. 602 (1908); Smith v. Bricker, 86 Iowa 285, 53 N.W. 250 (1892); Hood v. Smith, 79 Iowa 621, 44 N.W. 903 (1890). Suffice it to say, all four decisions appear to be contra to the traditional doctrine of caveat emptor.

The closest mistaken assumption case we have found to our fact situation is A & M Land Development Co. v. Miller, 354 Mich. 681, 94 N.W.2d 197 (1959). In that case, the court held that the trial judge was correct in refusing to rescind the sale of 42 building lots slated for subdivision and development, because of mutual mistake regarding the poor absorptive qualities of the soil that resulted in a tentative refusal of septic tank permits to the subdivider. The court concluded that assuming there was a mutual mistake, to grant rescission would be improper since the purchaser received the property for which he contracted, notwithstanding that it was less attractive and less valuable to him than he had anticipated.

There are, however, several important distinguishing factors between the Miller case and our case. First, the purchaser in [109] Miller was a developer-speculator; in our case the purchaser is a consumer-widow. Second, the property in Miller was not rendered valueless for its intended use, but only rendered less valuable because it could not be developed as densely as originally anticipated; in our case the property was rendered totally valueless for the intended use.

In our view, the difficulty with the above listed factors and with the decisions we have examined is that in any given case several factors are likely to be present, and each may point toward a different result. For example, in A & M Land Development Co. v. Miller, supra, the mistake appears to have been mutual and it also appears to have been induced by misrepresentations of the vendor (i. e., vendor furnished reports of privately engaged engineers and local public sanitation officials indicating that the character of the soil was suitable for the use of individual septic tank systems). Yet, the court held that rescission would be improper since the purchaser received the property for which he had contracted. Perhaps the court felt that since the vendee was a developer-speculator he assumed the risk of soil defects. In short, the relation of one factor to another is not clear. Compare Vickerson v. Frey, 100 Cal.App.2d 621, 224 P.2d 126 (1950) (mistake regarding effect of building code held no grounds for rescission) with MacKay v. McIntosh, supra (mistake regarding zoning ordinance held grounds for rescission). But see Rabin, supra. In any event, because of the uncertainty surrounding the law of mistake we are extremely hesitant to apply this theory to a case involving the completed sale and transfer of real property. Its application to this type of factual situation might well create an unwarranted instability with respect to North Carolina real estate transactions and lead to the filing of many nonmeritorious actions. Hence, we expressly reject this theory as a basis for plaintiff's rescission.

Is plaintiff therefore without a remedy? Did plaintiff buy this property "at the end of the halter" (an expression of horse traders)? At this moment, plaintiff has naked legal title to a tract of real estate whose use to her is limited by the restrictive covenants and by the facts as stipulated to what she calls "the dubious pleasure of viewing the same." On the other hand, defendants have $3,500 of plaintiff's money. There can be no question but that the parties to this transaction never contemplated this particular use of the subject property. In fact, the deed, by its very terms, makes it clear that the intended use was for the construction of a single-family residence, strictly limited as to costs and as to design. The stipulation further indicates that both prior to and at the time of the conveyance neither defendants nor plaintiff knew that the property would not support a septic tank or on-site sewage disposal system.

In the face of these uncontroverted facts, defendants rely upon the doctrine of caveat emptor as a legal defense to plaintiff's action for rescission.

The common law doctrine of caveat emptor historically applied to sales of both real and personal property. Its application to personal property sales, however, has been restricted by the Uniform Commercial Code. See G.S. § 25-2-314 et seq. Over the years, as to real property, the number of cases that strictly apply the rule of caveat emptor appears to be diminishing, while there is a distinct tendency to depart therefrom, either by way of interpretation, or exception, or by simply refusing to adhere to the rule where it would work injustice. See, e. g., 7 Williston, Contracts §§ 926 and 926A (3d ed. 1963); 77 Am.Jur.2d Vendor and Purchaser §§ 329-37 (1975); 67 Am. Jur.2d Sales § 462 (1973); Haskell, The Case for an Implied Warranty of Quality in Sales of Real Property, 53 Geo.L.J. 633 (1965) (hereinafter cited as Haskell); Seavey, Caveat Emptor as of 1960, 38 Texas L.Rev. 439 (1960). See generally Annot., 50 A.L.R.3d 1188, supra; Annot., Liability of Builder-Vendor or Other Vendor of New Dwelling for Loss, Injury, or Damage Occasioned [110] by Defective Condition Thereof, 25 A.L.R.3d 383 (1969).

In recent years the rule of caveat emptor has suffered severe inroads in sales of houses to be built or in the course of construction. See generally Bearman, Caveat Emptor in Sales of Realty—Recent Assaults Upon the Rule, 14 Vand.L.Rev. 541 (1961); Bixby, Let the Seller Beware: Remedies for the Purchase of a Defective Home, 49 J. Urban Law 533 (1971); Haskell, supra; Jaeger, The Warranty of Habitability, 46 Chi-Kent L.Rev. 123 (1969) (Part I); 47 Chi-Kent L.Rev. 1 (1970) (Part II); Roberts, The Case of the Unwary Home Buyer: The Housing Merchant Did It, 52 Cornell L.Q. 835 (1967); Comment, Buyer's Remedies in the Sale of Real Property in California, 53 Calif.L.Rev. 1062 (1965); Note, Implied Warranties in the Sale of New Houses, 27 Md.L.Rev. 299 (1967). Today, it appears that a majority of the states imply some form of warranty in the purchase of a new home by a first purchaser from a buildervendor. See, e. g., Annot., 25 A.L.R.3d 383, supra, for a collection of the cases. See also M. Friedman, Contracts and Conveyances of Real Property 30-35 (3d ed. 1975) (hereinafter cited as Friedman).

During the course of this litigation, and subsequent to the oral arguments of this case in the Court of Appeals, this Court decided the case of Hartley v. Ballou, 286 N.C. 51, 209 S.E.2d 776 (1974). In that case, this Court, in an opinion by Chief Justice Bobbitt, approved the "relaxation of the rule of caveat emptor" in respect of defects of which the purchaser of a recently completed or partially completed dwelling was unaware and could not discover by a reasonable inspection, and substituted therefore, for the first time in this State, an implied warranty defined as follows:

"[I]n every contract for the sale of a recently completed dwelling, and in every contract for the sale of a dwelling then under construction, the vendor, if he be in the business of building such dwellings, shall be held to impliedly warrant to the initial vendee that, at the time of the passing of the deed or the taking of possession by the initial vendee (whichever first occurs), the dwelling, together with all its fixtures, is sufficiently free from major structural defects, and is constructed in a workmanlike manner, so as to meet the standard of workmanlike quality then prevailing at the time and place of construction; and that this implied warranty in the contract of sale survives the passing of the deed or the taking of possession by the initial vendee." Id. at 62, 209 S.E.2d at 783. At the same time, Hartley made it clear that such implied warranty falls short of "an absolute guarantee." "An implied warranty cannot be held to extend to defects which are visible or should be visible to a reasonable man . . . ." Id. at 61, 209 S.E.2d at 782. As to what constitutes a "reasonable inspection" under diverse factual situations, see, e. g., Performance Motors, Inc. v. Allen, 280 N.C. 385, 186 S.E.2d 161 (1972); Douglas v. W. C. Mallison & Son, 265 N.C. 362, 144 S.E.2d 138 (1965); Insurance Co. v. Don Allen Chevrolet Co., 253 N.C. 243, 116 S.E.2d 780 (1960); Driver v. Snow, 245 N.C. 223, 95 S.E.2d 519 (1956). Cf. G.S. § 25-2-316(3)(b).

We believe that many of the mutual mistake cases discussed supra were in fact embryo implied warranty cases. For example in Davey v. Brownson, supra, the purchaser obtained rescission because of termites on the ground of mutual mistake. Although the court denied its decision was based on implied warranty, it is difficult to understand the application of the mutual mistake doctrine. See also Blythe v. Coney, supra. See generally Friedman, supra, at 30-37. In this context, Hartley could easily be classified as a mutual mistake case, i. e., both parties assumed that the basement wall was sufficiently free from structural defects so as to prevent any water leakage. But, in Hartley we recognized the implied warranty as a limited exception to the general rule of caveat emptor; if we had elected to totally abolish the doctrine, then perhaps application of the mutual mistake theory [111] would have been appropriate. Hartley is not an abrogation of the doctrine of caveat emptor; on the contrary it is only a well-reasoned exception.

Concededly, this is not the Hartley fact situation. Hartley involved a buildervendor of new homes and a consumervendee. Nonetheless, we believe that Hartley provides the legal precedent for deciding this case. The basic and underlying principle of Hartley is a recognition that in some situations the rigid common law maxim of caveat emptor is inequitable. We believe this is one of those situations. As a result, we hold that where a grantor conveys land subject to restrictive covenants that limit its use to the construction of a single-family dwelling, and, due to subsequent disclosures, both unknown to and not reasonably discoverable by the grantee before or at the time of conveyance, the property cannot be used by the grantee, or by any subsequent grantees through mesne conveyances, for the specific purpose to which its use is limited by the restrictive covenants, the grantor breaches an implied warranty arising out of said restrictive covenants.

Defendant contends that if plaintiff is permitted to rescind, then any contract or conveyance can be set aside under a set of circumstances rendering the land no longer attractive to a purchaser. If we applied the mutual mistake doctrine, then there might be some merit to this argument. But, under the rule we have announced, a purchaser is bound by patent defects or by facts a reasonable investigation would normally disclose. In the instant case, it is clear that a reasonable inspection by the grantee either before or at the time of conveyance would not have disclosed that the property could not support a septic tank or on-site sewage disposal system.

Therefore, under the facts of this case, we hold that defendant grantors have breached the implied warranty, as set out above, and that plaintiff, by timely notice of the defect, once it was discovered, is entitled to full restitution of the purchase price; provided that she execute and deliver a deed reconveying the subject lot to defendants. The judgment of the Court of Appeals, as modified herein, is thus affirmed.

Modified and affirmed.

SHARP, C. J., and LAKE and MOORE, JJ., concur in result.

84 CLR 377
HCA 79; (1951)

McRae
v.
Commonwealth Disposals Commission

 HIGH COURT OF AUSTRALIA.
(27 August 1951).

Webb J.(1)

Dixon(2), McTiernan(3) and Fullagar(2) JJ.

HEARING

Melbourne, 1950, March 20-24, 27, 28;
Sydney, 1950, May 8;
Melbourne, 1950, May 23. 23:5:1950
Melbourne, 1951, February 23, 26-28; March 1, 2, 5; August 27. 27:8:1951
APPEAL from Webb J.

DECISION

[378] 1950, May 8.

WEBB J. delivered the following written judgment:—

The plaintiffs claim against the defendants damages for breach of contract, the plaintiffs by the defendant Commonwealth Disposals Commission in April 1947.

[379] The defendants offered to deliver to the plaintiffs an oil barge as being the oil tanker sold, but the plaintiffs refused to accept delivery of it as not being an oil tanker. The defendants submit that a barge is an oil tanker, or alternatively, that if it is not an oil tanker, then there was a misdescription of the thing sold, and the defendants are not liable under the conditions of tender and the conditions of the sales advice note. In the further alternative the defendants submit that, if there was not a misdescription, then there had been a mutual mistake as to the identity of the subject matter, and therefore no contract. They also denied deceit and negligence.

I find that sometime before April 1945 an oil barge was wrecked on a reef surrounding Jomard Islands. Its position on the reef was latitude eleven degrees sixteen minutes forty seconds south, longitude one hundred and fifty-two degrees eight minutes east. It was still in that position when the defendants offered to give delivery of it to the plaintiffs. It was a steel vessel two hundred feet six inches long, forty feet broad and fourteen feet deep. It contained four tanks for the carriage of liquid cargo. It was not self-propelled. It was inspected by a salvage officer on behalf of the Commonwealth on 9th April 1945. Nos. 1 and 4 tanks were then dry and Nos. 2 and 3 contained about 1,000 tons of oil. On 11th April 1945 the Commonwealth endeavoured to salvage the vessel by lightening the buoyance by discharging some of the oil and towing the vessel off the reef. As a result the transverse bulkheads were strained and Nos. 2, 3 and 4 tanks contained about the same amount of oil; the hull was straining badly, and on 20th April there was a constant oil slick spreading.

[380] In October 1946 one Jarrett, an officer of the civil administration in New Guinea, told Bowser, who was then regional manager in New Guinea for the defendant Commission, that he wanted to make an offer for an oil tanker, which he said was within a radius of 200 miles of Samarai. He would not give Bowser a more precise position. Jarrett made an offer of 50 pounds. This offer was chiefly for the oil, but was for the tanker as well. Bowser told Jarrett the offer appeared too low, and that he could not consider it until Jarrett could tell him where the tanker was. Bowser suggested that Jarrett should see Sheehan, who was then the district superintendent of the defendant Commission at Port Moresby. Jarrett then saw Sheehan and told him he knew of an oil tanker and wanted to buy it; that it was outside Samarai, and that only he, Jarrett, knew where it was, and that it contained oil. Sheehan asked Jarrett what price he was offering. Jarrett asked Sheehan what he thought would be a fair price. Sheehan said he did not know. Then Jarrett asked whether 50 pounds would be a fair price. Sheehan again said he did not know. Jarrett said he was not particularly interested in the boat; that he was more interested in the oil. Sheehan suggested to Jarrett that he should make an offer. Jarrett agreed and dictated one. In this written offer Jarrett described the goods as "Contents of wrecked vessel situated at Jormound Islands — Fuel oil". Sheehan told Jarrett he would not approve of the sale, as he did not know whether the offer was reasonable, and would have to try to trace the oil tanker in the office lists. The next day Jarrett told Sheehan it was an American vessel as far as he knew. Sheehan replied that if it was it would not be on the Commission's lists. Sheehan, however, had authority to sell it even if it were an American vessel. He did not find it on the lists. He then sent a signal to the district officer at Samarai (Exhibit 6), stating that an application had been received for the purchase of "fuel oil said to be on reef at Jormound Islands" and asking whether the district officer knew anything about it. On 7th November 1946 one McMullen, who was the defendant Commission's liaison officer in New Guinea, told Sheehan he knew of a wrecked tanker on Jomard Island. Sheehan replied that he had received an offer of 50 pounds for its contents. McMullen inquired whether Sheehan meant "that American tanker". He promised Sheehan he would see what he could find out about it. Later he told Sheehan he did not get any information. In the same month, November 1946, one Davis, the general manager of the defendant Commission, was in New Guinea and wrote a memorandum to Bowser reading: "I discussed with Mr. McMullen this morning the question of the tanker lying on a reef about a hundred miles north of Samarai. Mr. McMullen was good enough to indicate that he would send out a party and I suggest that Mr. Strange go with this party to establish whether she is worthwhile for sale as a salvage job. If there is equipment of value on her, she could be offered for sale at the termination of the Rabaul Sale whilst the buyers from the South who will be interested in such vessels as the Naroota are still in the area."

Bowser believed Davis was referring to the same vessel as Jarrett. Bowser then spoke to McMullen, who said he was sending signals to the district officers.

In December 1946 Bowser took up a position in the Melbourne headquarters of the defendant Commission in charge of clearance of goods declared but not cleared in New Guinea.

On 5th January 1947 Sheehan wrote to the Australian Broadcasting Commission at Port Moresby arranging for the broadcasting on 7th, 8th and 9th January of the following announcement:—

"The Commonwealth Disposals Commission invites tenders for an oil tanker wrecked on Jourmaund Reef approximately 100 miles north Samarai. The vessel is said to contain oil. . . . Tenders should be lodged not later than 25th January 1947."

A copy of this letter was sent by Sheehan to the defendant Commission in Melbourne.

[381] On 13th February 1947 Bowser sent a signal to Sheehan at Port Moresby asking whether "the vessel containing oil and approximately 200 miles off Samarai" had been sold, and he received a reply that no offers had been made.

On 10th March 1947 Sheehan again wrote to the Australian Broadcasting Commission arranging for a similar announcement to be made on 12th, 13th and 14th March.

Bowser referred to Currie, who was the sales superintendent of the defendant Commission in Melbourne, the copy of the Port Moresby announcement received from Sheehan. Tenders were then advertised for in the Melbourne papers from about 7th March. There were three such advertisements, the last being on 29th March. Whether the advertisements in Melbourne were all in the same terms as the Port Moresby announcement does not appear; but the following advertisement appeared in the Melbourne Argus of 29th March 1947:— "Tenders are invited for the purchase of an oil tanker lying on Jourmaund Reef, which is approximately 100 miles North of Samarai. The vessel is said to contain oil. Offers to purchase the vessel and its contents should be submitted to the Commonwealth Disposals Commission . . . and should be lodged not later than 2 p.m. March 31, 1947."

[382] About the middle of March the plaintiff F. E. McRae, who is a Melbourne merchant dealing in metals and chemicals in partnership with the other plaintiff Keith McRae, as McRae Trading Company, and two other men saw Currie at the Commission's office in Melbourne. McRae said he had seen an advertisement regarding a "wrecked tanker" and would like to get additional information. Currie told him he had no further information than appeared in the advertisement, but that Bowser might know something. Currie also told McRae that from the very limited information available he did not think any considerable tender would be warranted. He then introduced McRae and the men with him to Bowser. Currie told Bowser that McRae was interested in the tanker on the Jourmaund Reef and would like additional information. Bowser said he was sorry he could not add to the information already given to McRae. He added that when he was in New Guinea he received an offer for "the wreck and contents" and that it was refused. McRae told Bowser either that he was going or thought of going to New Guinea. He asked what surplus goods were available there, and if there were any other wrecks. Bowser replied there were wrecks in New Guinea, but he was not sure whether they had been sold, and that McRae should talk to Sheehan about them when he reached New Guinea.

Before tendering McRae looked at maps and could not find Jourmaund Reef but he found Jomard Reef. He took this to be the one with which he was concerned.

Bowser next saw the plaintiff F. E. McRae about 2 p.m. on 31st March 1947, when the latter put an envelope on the typiste's table in the defendant Commission's Melbourne office. Bowser asked McRae whether he had managed to get to New Guinea. McRae replied that he had not. He added "that one often had a couple of hundred pounds on a horse on a Saturday and I might as well have a gamble on this". The plaintiff's tender was as follows:— "Offer for Vessel on Jourmaund Reef by McRae Trading Co. 345 Exhibition Street, Melbourne. 1 oil tanker as advertised 'Age' 29.3.47, 'Argus' 29.3.47. Lying on the Jourmaund Reef off Samarai. Price 285 pounds. Cheque enclosed deposit 20% 28 pounds 10.0."

On 11th April the Commission wrote a letter to the plaintiff informing him that his tender had been accepted. The letter also stated that a sales advice note to cover the transaction would be forwarded in the course of the next few days. On 15th April the sales advice note was sent to the plaintiffs by the defendant Commission. It states inter alia "your offer to purchase, the general conditions contained in Form O, and this acceptance shall constitute the contract". Form O contains four conditions, including Condition 3, which reads:— "Condition of property: The property shall be sold as and where it lies, with all faults, (if any), and save as expressly notified to the purchaser no warranty or condition whatsoever is given by the Commonwealth. While every effort shall be made to describe property correctly, the Commonwealth shall not be liable for compensation or otherwise by reason of any misdescription or alleged variation of property delivered, from sample or property inspected. Where, however, any purchaser considers himself prejudiced by reason of any alleged misdescription or variation from sample or property inspected, the Commonwealth, at its discretion may make such adjustment as is fair and reasonable."

[383] During the first half of April 1947 native craft had been wrecked or blown out of their course by storms in the vicinity of the Solomons. Shortly after, Sheehan met Campbell, the Harbour Master at Port Moresby, and asked him how far along the coast the storms would extend. Sheehan added that the defendant Commission had "a wrecked tanker for sale up Jomard way". Campbell replied that it could be blown off or washed off the reef, but he could not say definitely. On 14th April Sheehan sent a signal to the district officer Samarai (Exhibit X) reading:— "Would appreciate urgent reply details oil tanker Jourmaund Reef. Understand vessel now moved under water and contents nil. Can this be confirmed."

Actually Sheehan had no information except what Campbell gave him. He had no understanding that a vessel had moved under water and that the contents were nil. He said he sent the signal in this form for the sake of brevity, and, with some hesitation, I believe him. I can suggest no reason why he should be disbelieved. The barge had not moved under water, and it is common ground that there was in fact no oil tanker there. To this signal Sheehan received the following reply on 17th April (Exhibit Y):—

"Large approx. 100 ft. barge type tanker carrying oil machinery etc. apparently drifted on reef Jomard Entrance high water during 1944. When inspected . . . 1945 large hole stern admitted sea. Machinery ruined. Understand oil still in hold but quantity unknown. Vessel exposed low tide. Only partly submerged high tide. Can inspect when district vessel available. . . . . D.O. Misima"

Apparently Sheehan's signal to Samarai was referred to the assistant district officer Misima.

[384] On 15th April McRae asked Bowser whether he could give him a better position of the vessel, as otherwise he might spend some days searching for it. McRae mentioned that Jomard was more east of Samarai than north. Bowser said he would try to get some more information and would wire the district superintendet at Port Moresby, who Bowser said he assumed would obtain information from the district officers at Samarai and Misima. He also told McRae they were the people who would assist him in finding the locality. McRae asked Bowser whether he could give the name and size of the tanker. Bowser replied that he could not. Bowser then suggested that what McRae was endeavouring to get was the latitude and longitude. McRae assented. Bowser then sent a signal to Sheehan at Port Moresby. On receipt of this signal Sheehan took it to the Harbour Master, Campbell, and asked Campbell whether he could give the information. Campbell replied that he could, and appeared to work out bearings from a map and read them to Sheehan. Sheehan telegraphed them to Melbourne on 17th April. In this telegram the latitude was given as eleven degrees sixteen and a half minutes south and longitude one hundred and fifty-one degrees fifty-eight minutes east. The contents of this telegram were telephoned to the plaintiffs and then confirmed by letter on 18th April. On 19th April Sheehan wrote to the Melbourne office confirming his telegram of 17th April and enclosing a copy of the reply he had received from the assistant district officer Misima about the vessel on the reef at Jomard Entrance and the ruined condition of its machinery. This letter was received in the defendant Commission's Melbourne office on 22nd April.

On 23rd April the plaintiffs paid the balance of the purchase money, 256 pounds 10s. 0d.

On receipt by the plaintiffs of the particulars of location the Gippsland, which was then being altered for the King Island trade, was refitted for service in the tropics. A diver was engaged and salvage equipment obtained.

On 24th April Sheehan received a letter from the general manager of the defendant Commission stating that payment for the oil tanker had been effected and that a copy of the sales advice note had been forwarded to Port Moresby. Sheehan then advised the assistant district officer, Misima, that the vessel had been sold, and that the inspection referred to in the latter's telegram to Sheehan of 17th April, was not required.

In May 1947 Lindsay McRae, a brother of the plaintiffs, produced a copy of the sales advice note to Sheehan at Port Moresby. He had flown there with one Johnstone. Lindsay McRae said he had bought the tanker. Sheehan told him he could not personally deliver the tanker as he had never seen it, and that Lindsay McRae would have to go down to the district officer at Samarai or Misima and show him the sales advice note. He also told Lindsay McRae that Jarrett had made an offer earlier, but that he did not know where Jarrett was. Further conversation followed, which is now rejected. It was admitted under the impression at the time that the McRae who produced the sales advice note to Sheehan was one of the plaintiffs. Lindsay McRae asked for the bearings of the tanker and Sheehan showed him the letter he had sent to Melbourne on 19th April containing the bearings. He told Lindsay McRae he had obtained them from Campbell, and introduced him to Campbell.

[385] On 28th June the Gippsland left Sydney for Port Moresby and foundered on 24th July. The plaintiffs were on board, but they and the master and crew reached Port Moresby, where the Betty Joan was chartered by the plaintiffs for salvage operations. On 15th August 1947 Johnstone and Lindsay McRae proceeded in the Jessie from Port Moresby to the location given by the defendant Commission. They went ashore and walked around the reef there. They saw no boat or ship or any sign of wreckage; but they saw a log sixty feet long.

In October plaintiff F.E. McRae saw Bowser at the latter's office in Melbourne and told him a cable had been received from New Guinea that a through search had been made for the tanker at the location given by the defendant Commission; and that only a log was found; but that there was a barge eleven or twelve miles away to the east. Bowser said he would signal New Guinea and endeavour to get some information. He then sent the following signal to Civil Administration Port Moresby, dated 17th October (Exhibit E):— "Commission sold oil tanker located Jourmaund Reef to McRae Trading Company Melbourne. Grateful you check bearing supplied by District Officer Misima April 1947, latitude eleven degrees sixteen and half minutes south longitude one hundred and fifty one degrees fifty eight minutes east. Previous advices indicated location approximately one hundred miles north Samarai. Firm alleges thorough search made for oil tanker in area specified but unable locate. Understand barge containing oil and machinery located approximately twelve miles from bearing specified. Appreciate advice indicating whether barge was confused with oil tanker and any further details enable firm locate oil tanker. . . . Disposals".

On 11th December 1947 the acting general manager of the defendant Commission wrote to the plaintiffs (Exhibit I) setting out the following information received from the Acting Administrator of the Territory in reply to the defendant Commission's signal:— "Investigation into the matter contained in the attached signal has disclosed that on the last maintenance trip to Jomard Reef Light on 29.7.47, a search was made for the tanker in question. The search was carried out by Mr. B.M. Ritchie of this Department and Lieut, Salisbury, R.A.N.R. (S) of H.M.A.S. Tarangau. No trace of the wreck was found, but a number of objects resembling ship's frames were sighted in the position given by the District Officer Misima, and, as the barge (which is in fact an L.S.T. loaded with oil drums) was also sighted in its accepted position, there seems no doubt that the tanker has disintegrated and slipped into deeper water. There has been definitely no confusion between barge and tanker."

[386] After some correspondence between the solicitors for the parties the Commonwealth Crown Solicitor for the defendants wrote to the plaintiff's solicitors on 29th October 1948 (Exhibit R) stating that at the date of sale the vessel was located approximately in the position mentioned in the defendant Commission's letter to the plaintiffs of 18th April 1947 and that it was still there in May 1948. The letter proceeded to say the confusion that might have arisen from the Acting Administrator's letter of 11th December was regretted and that the defendants were prepared to make a refund or to make the vessel available.

[387] However, I do not think that this oil barge was an oil tanker as that term was understood in shipping circles in Melbourne and by the parties. In the American book by Day, published in 1923, there is a glossary of terms used in the petroleum industry, and the term "oil tanker" is defined to include an oil barge. This book was said by Johnstone, an expert witness for the plaintiffs, to be authoritative, although Johnstone did not agree with that definition. But whatever may have been the meaning of "oil tanker" in America in 1923 I am satisfied that in 1947 in Australia an oil tanker was understood to be a vessel not merely specially constructed for the carriage of oil in bulk but also self-propelled and ocean-going. Currie thought an oil tanker would be self-propelled. When Bowser on 17th October inquired whether the oil tanker had been confused with the barge he indicated his understanding that they were different types of vessel. Therefore the defendants cannot rely on the barge being an oil tanker. Nor can they set up that the barge was sold but was misdescribed as an oil tanker and that they are expressly exempted from liability for misdescription under the conditions of contract. If the defendants, knowing what the vessel they advertised was like, yet wrongly described it as a barge, it might be a case of misdescription, because an oil tanker and an oil barge are vessels and also have in common the feature of special construction for the carriage of oil in bulk, although a barge is not self-propelled or ocean-going. But neither Bowser nor Currie, nor any other servant of the defendants having any power or duty in connection with this transaction, thought that an oil barge was an oil tanker. What both the plaintiffs and the defendants had in mind throughout was an oil tanker as distinct from an oil barge. But there was no oil tanker to sell, and so there was no contract (Couturier v. Hastie [1856] EngR 713; (1856) 5 HLC 673 (10 ER 1065)). It was conceded by counsel for the plaintiffs that, if Jarrett had told the plaintiffs and the defendants that there was an oil tanker on the reef at Jomard Islands and thereupon the plaintiffs and the defendant Commission agreed on a sale, there would be no contract. But counsel also submitted that this was not the position because on 15th April 1947 the plaintiffs asked for the location of the vessel, and it was pin-pointed by giving Latitude and longitude. Counsel submitted that the plaintiffs could assume from this that there was something valuable at the location, and that, as the plaintiffs acted upon this information to their prejudice, the defendants were estopped from denying the existence of an oil tanker there. But, to furnish ground for an estoppel the statement must have been made as an inducement. It was not made to induce a contract, as the tender had then been accepted. The inducement, if any, could only have been to pay the balance of purchase money, which was still unpaid on 15th April, and to proceed to take delivery of the vessel at the location given. But I find that the only purpose the plaintiffs had in asking for the exact location, and that the defendant Commission had in giving it, was to save the time of the plaintiffs in looking for the vessel on the reef. The plaintiff, F.E. McRae, told Bowser as much on 15th April 1947. He admitted he had a conversation with Bowser on those lines.

Then as to the claim for damages for deceit or neglect of duty: The plaintiffs submit that the information in the telegram from the assistant district officer Misima to Sheehan on 17th April, stating that the vessel was a 100 ft. barge-type tanker and its machinery ruined, should have been disclosed to the plaintiffs forthwith or at latest on 22nd April 1947 when it was received in Melbourne. The balance of the purchase money was not paid until 23rd April. This information revealed that the vessel was not an oil tanker of a type the parties had in mind. Bowser then had a duty to inform the plaintiffs on 22nd April of the mutual mistake of the parties. But he remained silent and has failed to give a satisfactory explanation why he did so. Even if he thought that the plaintiff F.E. McRae had gone to New Guinea he could still have communicated with him or with the other plaintiff or with the office of the McRae Trading Company in Melbourne. The natural consequence of his silence was that the plaintiffs paid the balance of the purchase money, and went to the expense of searching for the oil tanker. But the refitting and equipment of the Gippsland and her dispatch to the wreck before it was surveyed was not a natural consequence. I find that Bowser, in keeping silent, intended these natural consequences, and that the defendant Commission is liable for the resulting damages to the plaintiffs. I assess the damages at 756 pounds 10s. 0d.

I find no further deceit or negligence.

I give judgment for the plaintiffs for 756 pounds 10s. 0d. As to the costs I desire to give the parties an opportunity of being heard. I will hear argument if necessary in Melbourne on May 23rd at 9.30 a.m.

[388] His Honour awarded the plaintiffs half the costs of the action.

From the above decision in so far as it was unfavourable to them the plaintiffs appealed to the Full Court of the High Court, and the defendants cross-appealed.  

[393] O.J. Gillard K.C. (with him L.S. Lazarus) for the appellants. 1. The Commission agreed to sell and the plaintiffs agreed to purchase "an oil tanker lying on Jourmaund Reef" for the sum of 285 pounds on the terms and conditions indorsed on the tender form on Exhibit B. 2. The agreement is comprised of the following documents:— (a) Advertisement in Argus 29/3/47, incorporated by reference in Exhibit B. (b) Tender Form, Exhibit B. (c) Letter dated 11th April 1947 from the Commission to the plaintiffs. 3. (a) The Court is bound to look at the whole correspondence between the parties to discover if and when the parties entered into contractual relations (Hussey v. Horne-Payne (1879) 4 App Cas 311; Williams v. Brisco (1882) 22 Ch D 441, at p 448, per Jessel M.R.). (b) But, there being a clear acceptance of the tender by letter dated 11th April 1947, any correspondence thereafter was otiose (Perry v. Suffields Ltd. (1916) 2 Ch 187; Lennon v. Scarlett & Co. [1921] HCA 42;(1921) 29 CLR 499). (c) If any new term were intended to be introduced into the contract by reference to the "sales advice note" so as to defeat the clear acceptance of the tender, then the expression of such intention should have been clear and unambiguous (Proprietors &c. of the English & Foreign Credit Co. Ltd. v. Arduin (1871) LR 5 HL 64, at p 79, per Lord Westbury). (d) The mere reference in the letter of 11th April to the forwarding of a sales note was at the most an ambiguous introduction of a new term into the contractual relations. (e) By the letter a definite contract of sale consisting of an accepted tender, the notification of acceptance thereof and the conditions therein set out was expressly established. 4. The contract so established requires the Commission to deliver "an oil tanker", and a failure to do so is a breach of condition, at least (Couchman v. Hill (1947) KB 554): cf. s. 18 of the Goods Act 1928 (Vict.). 5. The exonerating clause in clause 8, Exhibit B, only covers "warranty or guarantee", not "condition", and accordingly does not exonerate the Commission from delivering "an oil tanker" (Wallis, Son & Wells v. Pratt & Haynes (1911) AC 394; Baldry v. Marshall (1925) 1 KB 260; Andrews Bros. (Bournemouth) Ltd. v. Singer & Co. Ltd. (1934) 1 KB 17; Nicholson & Venn v. Smith Marriott (1947) 177 LT 189: cf. Hope v. R.C.A. Phototone of Australia Pty. Ltd. [1937] HCA 90; (1937) 59 CLR 348; L'Estrange v. F. Graucob Ltd. (1934) 2 KB 394. 6. The provision that the goods are sold "as and where they lie with all faults (if any)" means "an oil tanker" with all faults and does not exonerate the Commission from delivering "an oil tanker" (Shepherd v. Kain (1821) 5 B & Ald 240 (106 ER 1180); Taylor v. Bullen [1850] EngR 844; (1850) 5 Ex 779, at p 784 [1850] EngR 844; (155 ER 341, at p 343); Cowdoy v. Thomas (1877) 36 LT 22; Robert A. Munro & Co. Ltd. v. Meyer (1930) 2 KB 312, at p 327, per Wright J.): cf. Champanhac & Co. Ltd. v. Waller & Co. Ltd. (1948) 2 All ER 724, at p 726, per Slade J. 7. Alternatively by the terms of reference in the letter of 11th April 1947 the contract is comprised of the documents mentioned in clause 2 above, together with the sales advice note. 8. In the absence of proof the plaintiffs received or knew of Form O, it is submitted that they are not bound by the conditions. There was no proof that Form O was ever sent to or received by the plaintiffs, and until the conclusion of the case no reliance was placed on this document in the pleadings. (He referred to Cheshire & Fifoot, Law of Contracts, 1st ed. (1945), p. 87; Olle v. Marlborough Court Ltd. (1949) 1 KB 532, at p 549.) 9. If Form O is incorporated, then:— (a) In order to relieve the Commission from liability for non-delivery, it must be expressed in clear and unambiguous terms. "An ambiguous document is no protection" (per Lord Macnaghten in Elderslie S.S. Co. Ltd. v. Borthwick (1905) AC 93, at p 96 ): see also Wallis, Son & Wells v. Pratt & Haynes (1910) 2 KB 1003, at p 1016, per Fletcher Moulton L.J.; s.c. in House of Lords (1911) AC 394 ; Chartered Bank of India, Australia & China v. British India Steam Navigation Co. Ltd. (1909) AC 369, at p 375; Szymonowski & Co. v. Beck & Co. (1923) 1 KB 457, at pp 464, 466; (1924) AC 43, at p 48. (b) Form O was devised alio intuitu and was never intended to relieve the Commission from its responsibility to carry out the fundamental condition of delivering an oil tanker: see Vigers Bros. v. Sanderson Bros. (1901) 1 KB 608; J. Aron & Co. v. Comptoir Wegimont (1921) 3 KB 435; Szymonowski's Case (1923) 1 KB, at p 467; Green v. Arcos (1931) 47 TLR 262, at p 336; Wilensko &c. v. Fenwick & Co. (West Hartlepool) Ltd. (1938) 3 All ER 429. 10. To evade responsibility to deliver an oil tanker the defendants over there is no contract because— (a) the parties were under a mutual mistake of fact as to the existence of an oil tanker on Jourmaund Reef, or (b) alternatively it was an implied condition that there was an oil tanker lying on the reef. 11. As to the mutual mistake:— (a) There was no mutual mistake on the facts. There was a vessel which the Commission and Bowser chose to describe as an oil tanker, and this was the subject of the contract. The nature of the vessel which Bowser or Currie intended to sell is irrelevant; the vendor was the Commission (or Commonwealth). (He referred to Clare v. Lamb (1875) LR 10 CP 334, at p 338; Barker v. Janson (1868) LR 3 CP 303.) (b) The defendants Bowser and Currie and the Commission were negligent in representing that there was an oil tanker on Jourmaund Reef which induced the plaintiffs to enter into contract; they cannot rely upon any mistake induced by their own carelessness (Anson on Contracts, 19th ed. (1945), p. 159; Pollock on Contracts, 12th ed. (1946), pp. 400-402). Bowser on behalf of the Commission assumed the risk of the ability of the Commonwealth to perform the contract entered into with the plaintiffs. (He referred to Williston, Law of Contracts (1938), vol. 1, p. 31. s. 20; Smith v. Hughes (1871) LR 6 QB 597, at p 606; Raffles v. Wichelhaus (1864) 2 H & C 906 (159 ER 375); Scott v. Littledale (1858) 8 El & Bl 815, at p 821 [1858] EngR 226; (120 ER 304, at p 306).) (c) Assuming that there was no contract initially, then after the representation implied in the letter of 18th April 1947 written by the defendant Currie on behalf of the Commission and the conversation with Bowser at that time, the Commission is estopped from denying the existence of the contract or of the oil tanker (Low v. Bouverie (1891) 3 Ch D 82, at p 111, per Kay L.J.; Cornish v. Abington (1859) 4 H & N 549, at p 556 [1859] EngR 512; (157 ER 956); Smith v. Hughes (1871) LR 6 QB 597, at pp 606, 607; Sullivan v. Constable (1932) 48 TLR 267, at p 369; Balkis Consolidated Co. Ltd. v. Tomkinson (1893) AC 396, at pp 407, 410, 412; Consensus & Estoppel, by Prof. Hughes, 54 L.Q.R. 370; Cheshire and Fifoot, Law of Contracts (1945), pp. 194-196: Salmond & Williams, Law of Contracts, 2nd ed. (1945), p. 239; Pollock, Principles of Contract, 12th ed. (1946), pp. 421, 501). (d) Since Bell v. Lever Bros. Ltd. [1931] UKHL 2; (1932) AC 161 the proper analysis of the law is that the fact of non-existence does not bring about an avoidance on the ground of mistake, but results in non-performance of an implied condition as to the continued existence of the subject matter (per Denning L.J. in Solle v. Butcher (1950) 1 KB 671, at p 691): cf. Barr v. Gibson (1838) 3 M & W 390, at pp 399, 400 [1836] EngR 984; (150 ER 1196, at pp 1200, 1201); and Couturier v. Hastie [1856] EngR 713; (1856) 5 HLC 673 (10 ER 1065); ss. 11, 12, Goods Act. The test is: On what basis did the parties intend to contract? Here Bowser and the Commission intended to sell the vessel on the reef of Jourmaund Island and represented it as an oil tanker. The plaintiffs purchased the vessel so described. No implication can be made in these circumstances that it was fundamental to the contract, or there was a condition precedent thereto, that an oil tanker existed. 12. The duty of the Commission or the Commonwealth was to deliver an oil tanker. What was tendered was an oil barge, not an oil tanker. Even if there was formal delivery of the barge qua tanker at Port Moresby, the plaintiffs are not to be taken to have accepted until they have had a reasonable opportunity of examining the vessel (ss. 39 and 41, Goods Act 1928 (Vict.)). 13. The plaintiffs are entitled to the estimated loss directly and naturally resulting in the ordinary course of events from the seller's breach of contract (s. 55(2), Goods Act 1928). 14. In the alternative, the plaintiffs sue for damages for deceit arising out of— (a) the advertisement Exhibit A; (b) the letter Exhibit D. 15. The Commission and the Commonwealth were vicariously guilty of deceit through their officers, as at least McMullen knew of the oil barge and deliberately described it as an oil tanker. The others were so ignorant of the true position that with the knowledge they possessed they could not reasonably have believed that "an oil tanker" was lying on Jourmaund Reef 100 miles north of Samarai. (He referred to Derry v. Peek (1889) 14 App Cas 337, at p 376 , per Lord Herschell; Kerr on Fraud and Mistake, 6th ed. (1929), p. 33.) They were recklessly careless as to whether the statement was true or false. 16. In the alternative, knowledge of the true facts must be imputed to the Commonwealth, which (having this knowledge) made a false representation to induce persons to purchase an oil tanker. See Pearson & Son Ltd. v. Dublin (1907) AC 381; London County Freehold & Leasehold Properties Ltd. v. Berkeley Property & Investment Co. Ltd. (1936) 2 All ER 1039. 17. "There is a duty upon a seller to disclose to a buyer the fact that material representations true when made have become false before final consummation of the sale" (Williston, Law of Contracts (1938), vol. 5, p. 4187, s. 1499; Davies v. London & Provincial Marine Insurance Co. (1878) 8 Ch D 469, at p 475; Dalgety & Co. Ltd. v. Australian Mutual Provident Society [1908] VicLawRp 70; (1908) VLR 481, at p 506; [1908] VicLawRp 70; 14 ALR 299, at p 308; Brownlie v. Campbell (1880) 5 App Cas 925, at pp 949, 950; With v. O'Flanagan (1936) Ch 575 ; Bradford Third Equitable Benefit Building Soc. v. Borders (1941) 2 All ER 205, at p 220; Robertson & Moffat v. Belson (1905) VLR 555; Salmond & Williams, Law of Contracts, 2nd ed. (1945), p. 247; Cheshire and Fifoot, Law of Contracts (1945), p. 173). See also per Romer L.J. in Scott v. Coulson (1903) 2 Ch 249, at p 252; cf. Arkwright v. Newbold (1879) 17 Ch D 301. 18. As to damages for deceit, the plaintiffs are entitled to such expenses as they have incurred by reason of the misrepresentation, setting off any benefit gained by them (Halsbury, 2nd ed., vol. 23, p. 60; Mullett v. Mason (1866) LR 1 CP 559; Nicholls v. Taylor [1939] VicLawRp 20; (1939) VLR 119; Neal v. Ayers [1940] HCA 21; (1940) 63 CLR 524; Potts v. Miller [1940] HCA 43; (1940) 64 CLR 282, at p 294; McAllister v. Richmond Brewing Co. N.S.W. Pty. Ltd. (1942) 42 SR (NSW) 187; 59 WN 147; Milne v. Marwood [1855] EngR 181; (1855) 15 CB 778 (139 ER 632); Burrows v. Rhodes (1899) 1 QB 816, at p 834; Barley v. Walford [1846] EngR 7; [1846] EngR 7; (1846) 9 QB 197 (115 ER 1249)). 19. As to the action for negligence, it is submitted that, because of the relationship created by the tender and its acceptance, both parties were under a duty to co-operate in doing such things as were necessary to carry out the terms of the contract (Mackay v. Dick (1881) 6 App Cas 251, at p 263, per Lord Blackburn; Marshall v. Colonial Bank of Australasia [1904] HCA 31; (1904) 1 CLR 632, at pp 647, 652; Mona Oil Equipment & Supply Co. v. Rhodesia Railways Ltd. (1949) 2 All ER 1014, at p 1017; Luxor (Eastbourne) Ltd. v. Cooper (1941) AC 108, at p 118 , per Viscount Simon L.C.). As there was great doubt as to the true location of the subject matter, the Commission, in order to give effectual delivery, was under a duty to give a better location than set out in the advertisement and sales advice note. 20. In carrying out this co-operation the law would treat the Commission and the plaintiffs as "neighbours", thereby requiring the Commission to exercise proper care in giving the location of the subject matter of the contract. Heaven v. Pender (1883) 11 QBD 503; M'Alister (or Donoghue) v. Stevenson [1931] UKHL 3; (1932) AC 562; Le Lievre v. Gould (1893) 1 QB 491 and Old Gate Estates Ltd. v. Toplis (1939) 3 All ER 209 are distinguishable. (He referred to Grant v. Australian Knitting Mills (1936) AC 85, at p 103.). See also Winfield, Law of Tort, 3rd ed. (1946), pp. 377-379; International Products Co. v. Erie R.R. Co. (1927) 244 NY 331. Cf. Courteen Seed Co. v. Hong Kong & Shanghai Banking Corporation (1927) 245 NY 377; Halsbury, 2nd ed., vol. 7, p. 147. 21. As to damages for breach of contract, omnia praesumuntur contra spoliatorum (Wilson v. Northampton & Banbury Junction Railway Co. (1874) LR 9 Ch App 279 ). 22. What was purchased and sold was an oil tanker, and the plaintiffs should be compensated for the failure to deliver, remembering that the contract provided for delivery at some far distant place, thereby requiring the plaintiffs to incur expense (Monarch S.S. Co. Ltd. v. Karlshamns Oljefabriker(1948) AC 196, at pp 204, 210; Victoria Laundry (Windsor) Ltd. v. Newman Industries Ltd. (1949) 2 KB 528 ). Assuming "foreseeability" to be necessary for an award of substantial damages (see per Denning J. in Minister of Pensions v. Chennell (1947) KB 250 , the nature of the contract required the plaintiffs to take delivery, involving salvage operations. The plaintiffs were bound to accept delivery, which required them to undertake expensive provision therefor. It was "on the cards" that the plaintiffs, having acquired such a valuable thing cheaply, would make all preparations to recover it. 23. Difficulty in assessing damages is no reason for refusing substantial damages. It is necessary to distinguish between cases where there is no proof of loss at all and those in which there is difficulty in proving the value of the loss (Chaplin v. Hicks (1911) 2 KB 786; Howe v. Teefy (1927) 27 SR (NSW) 301; 44 WN 102: Cf. Sapwell v. Bass (1910) 2 KB 486 ; Fink v. Fink [1946] HCA 54; [1946] HCA 54; (1946) 74 CLR 127.

[395] J.B. Tait K.C. (with him P. Murphy), for the respondents. Logically the first question is whether any enforceable contract arose out of the circumstances of this case. It is submitted, in the first place, that — unless the barge is to be regarded as a "tanker"— Webb J. was right to the extent to which he decided, on the authority of Couturier v. Hastie [1856] EngR 713; (1856) 5 HLC 673 (10 ER 1065), that the purported contract was void. If, however, it must be assumed that there was a contract, the conditions of the sales advice note are necessarily a part of it. It may be that the letter of 11th April 1947 advising the plaintiffs that their tender was accepted fixes the day of acceptance; but this letter refers to the sales advice note. It is submitted, therefore, that the note fixes the date; and this note is not pleaded as part of the contract. It may well be that great difficulty could occur in reconciling and applying provisions of the various documents which would have to be looked at as constituting the contract; but the parties themselves (including the plaintiffs) are to blame for that. If they will incorporate documents in stereotyped form which are not appropriate and then add further provisions by correspondence, they take on themselves the burden of difficulties of interpretation; but that does not mean that, when they do incorporate a particular document which presents difficulty, the Court can treat it as not being part of the contract. If there was a contract, the sale was by description, and what the plaintiffs' got was an "oil tanker" within the description of the thing sold. The test is whether the thing delivered (or tendered) differs so greatly from the thing described that they are really different things. That is not so here. There is no implication that what is sold is of any substantial value; indeed, the tender price suggests otherwise. The only implication is, under the Goods Act (Vict.), that the thing sold shall be of merchantable quality. Whatever provisions of the documents may be inappropriate, the exception relating to misdescription is certainly not so. It precisely meets this case. If the barge was not a "tanker", then the exception applies. Such an exception is clearly intended to put the responsibility on the buyer. It is the sort of provision one would expect to find in contracts of sale made by the Disposals Commission. The proper measure of damages for non-delivery of the thing contracted to be sold is the estimated loss directly and naturally resulting in the ordinary course of events (Pollock on Contracts, 12th ed. (1946), p. 529). Regard must be had to such consequences as may reasonably be supposed to be in the contemplation of the parties at the time the contract was made. The buyer is entitled to be put in the position in which he would have stood if the thing sold had been delivered (Williams Bros. v. Ed. T. Agius Ltd. (1914) AC 510; Benjamin on Sale, 7th ed. (1931), p. 1001; Goods Act (Vict.), s. 51(3)). See also Hasell v. Bagot Shakes & Lewis Ltd. [1911] HCA 62; (1911) 13 CLR 374, at p 381. The true practical measure of damages here on the assumption that there was non-delivery is at most the sum the plaintiffs were prepared to pay for what they expected to get — the tender price of 285 pounds. An objection to many of the items of damage claimed by the plaintiffs is that they were not proved in the sense of having been shown to flow from the non-delivery. Moreover, the loss of the ship Gippsland could not have been within the contemplation of the parties. As to the expense of the salvage expedition as a whole, it does not appear that this was lost because there was no tanker at the place specified. If there had been a tanker there but it had proved not worth the expense of salvage, the plaintiffs would have had the same loss, but it would not have been due to any breach of contract. As to deceit, it is submitted that there is no warrant in the evidence for the decision of Webb J. against the defendants. The most that appears from the evidence is innocent — not fraudulent — misrepresentation. As to the claim on the basis of negligence, it does not appear that at the relevant time the defendants were under any duty of care in relation to the plaintiffs. See Charlesworth on Negligence, 2nd ed. (1938), p. 14. In any event the observation already made as to the loss of the expense of the salvage expedition would apply similarly on the question of damages under this head. (He referred to Mayne on Damages, 11th ed. (1946), at pp. 75 et. seq., and, in particular, as to damages in tort, to Re An Arbitration between Polemis and Furness, Withy & Co. Ltd. (1921) 3 KB 560; Weld-Blundell v. Stephens (1920) AC 956, at pp 983, 984.) There is no parallel between this case and Chaplin v. Hicks (1911) 2 KB 786 . In the latter it was certain that a prize of fixed value would go to someone. In the present case it cannot be shown that the plaintiffs would have received anything of value under the contract.

O.J. Gillard K.C., in reply.

Cur. adv. vult.

1951, August 27.

The following written judgments were delivered:—

DIXON AND FULLAGAR JJ. This is an appeal from a judgment of Webb J. in an action in which the plaintiffs claimed damages on three causes of action alleged alternatively — breach of contract, deceit and negligence. The judgment, as passed and entered, was in favour of the plaintiffs against the Commonwealth Disposals Commission for 756 pounds 10s. 0d. as damages for deceit, and his Honour awarded the plaintiffs one-half of the costs of the action. The plaintiffs appeal, asserting that they are entitled to damages far in excess of 756 pounds 10s. 0d. The defendants cross-appeal, asserting that the maximum amount recoverable by the plaintiffs on any view of the case was 285 pounds. The amounts actually claimed by the statement of claim were, on the basis of one set of allegations, some 250,000 pounds, and, on the basis of another set of allegations, some 10,000 pounds.

[396] The case presents serious difficulties, the facts being in some respects of an extraordinary character. Some aspects of them are probably not fully explained by anything that appears in the evidence. They are summarized chronologically in the judgment of Webb J., and that summary need not be repeated here. Though it may be necessary for some purposes to go back in point of time, we think that, for the purposes of this appeal, the proper starting-point is the acceptance by the Commission of a tender by the plaintiffs for the purchase from the Commission of a wrecked or stranded oil tanker. It would be premature to speak of that acceptance as creating a contract, because the defendants have contended throughout that the "contract" was "void", or, in other words, that no contract was ever made. Only one thing need be said before proceeding to the starting point. In the assumed background of the case lay the facts that during the war a considerable number of ships, including "oil tankers", became wrecked or stranded in the waters adjacent to New Guinea, that after the war the Commission had the function of disposing of these as it thought fit, and that a purchaser from the Commission of any of these wrecked or stranded vessels might, but not necessarily would, make a very large profit by salving and selling the vessel, or the materials of her hull and equipment, or her cargo. The realization of a profit in this way (and the evidence suggests that a purchaser would not contemplate a realization of profit by an immediate resale of what he had bought as such) could, of course, only be achieved after the expenditure of large sums of money. Such a purchaser would naturally regard himself as acquiring, at best, a chance of making a profit. But he would not regard himself as acquiring a certainty of making a loss.

[397] In the Melbourne newspapers, Age and Argus, of 29th March 1947, appeared an advertisement inserted by the Commission. The advertisement read:— "Tenders are invited for the purchase of an OIL TANKER lying on JOURMAUND REEF, which is approximately 100 miles NORTH OF SAMARAI. THE VESSEL IS SAID TO CONTAIN OIL. OFFERS TO PURCHASE THE VESSEL AND ITS CONTENTS should be submitted to the COMMONWEALTH DISPOSALS COMMISSION, Nicholas Building, 37 Swanston Street, Melbourne, indorsed 'OFFER FOR VESSEL ON JOURMAUND REEF', and should be lodged not later than 2 p.m., March 31, 1947." In response to this advertisement, the plaintiffs, who are brothers trading in partnership, submitted a tender dated 31st March 1947. The tender was on a printed form. It was headed "Offer for vessel on Jourmaund Reef". The form was divided into columns. In a column headed "Description of Goods" the words "1 oil tanker lying on Jourmaund Reef as advertised Age, Argus, 29/3/47" were inserted. In the next column, which was headed "Location of Goods" the words "On Jourmaund Reef, off Samarai" were inserted. The price quoted was 285 pounds, and a cheque for 28 pounds 10s. 0d. being the required deposit of ten per cent, was forwarded with the tender. Indorsed on the printed form of tender were a number of conditions. On 11th April 1947 the Commission wrote to the plaintiffs a letter saying:— "With reference to your tender of 31st March 1947, I desire to advise that your offer of 285 pounds net has been accepted. A sales advice note to cover this transaction will be forwarded in the course of the next few days." This letter was followed by another letter of 15th April 1947, which says:— "I wish to inform you that your offer to purchase dated 31.3.47 is accepted for the quantities, the items, and at the price set out hereunder and/or in the attachment hereto bearing the same sales advice number as this acceptance". Below appear the words "One (1) Oil Tanker including Contents wrecked on Jourmaund Reef approximately 100 miles north of Samarai. Price 285 pounds." Then come some provisions as to payment and delivery, followed by the signature on behalf of the Commission. After the signature come the words "Your offer to purchase, the general conditions contained in Form O, and this acceptance, shall constitute the contract. Kindly acknowledge receipt of this communication by return post". Finally, certain further "terms" are set out. The plaintiffs apparently did not, by return post or otherwise, acknowledge in writing the receipt of this remarkable "communication". Form O is a printed form which contains a number of "conditions of sale", most of which are entirely inappropriate to the particular case.

[398] The contention of the Commission that no contract ever came into existence between itself and the plaintiffs was based on extrinsic facts which will have to be considered in a moment. It was not denied that, apart from those facts, a contract would have been made, and, on the assumption that a contract was made, a good deal of argument took place as to what were the terms of that contract. It will be convenient to deal with this matter at this stage. No less than five documents are involved — the advertisement, the tender, the letter of 11th April, the letter of 15th April, and "Form O". Mr. Gillard, for the plaintiffs, contended that the terms of the contract made were to be found in the first three documents only. He said that the letter of 11th April was an unequivocal acceptance of the offer contained in the tender, that the reference to "sales advice note" was not to be understood as contemplating the addition of further terms so as to make the letter in effect a counter-offer, and that the letter of 15th April was merely an ineffective attempt to add further terms to a contract which was concluded on the receipt of the plaintiffs' letter of 11th April. He referred to a well-known line of cases of which Bellamy v. Debenham (1890) 45 Ch D 481 and Lennon v. Scarlett & Co. [1921] HCA 42; (1921) 29 CLR 499 are good examples. Mr. Tait, for the Commission, contended that the plaintiffs must be taken to have accepted the terms set out and referred to in the second letter, and that the terms of the contract were to be found in all five of the documents. He admitted that in the terms so found there was overlapping and inconsistency, and that some of those terms were entirely inappropriate to the subject matter of the contract, but he said that these facts merely meant that difficult problems of construction might arise. We are disposed to accept the view put by Mr. Gillard, but the question does not seem to us to matter, and for this reason. The only condition on which Mr. Tait affirmatively relied was a condition which is contained in clause 8 of the terms indorsed on the tender form. That clause provides that the goods "are sold as and where they lie with all faults" and that no warranty is given as to "condition description quality or otherwise". This clause cannot, in our opinion, help the Commission in this case. What the Commission sold was an "oil tanker". It was, therefore, a condition of the contract that what was supplied should conform to the description of an oil tanker, and it is settled that such a clause as clause 8 has no application to such a condition: see, e.g., Wallis, Son & Wells v. Pratt & Haynes (1911) AC 394 and Robert A. Munro & Co. Ltd. v. Meyer (1930) 2 KB 312; and cf. Shepherd v. Kain (1821) 5 B & Ald 240 (106 ER 1180).

[399] There was, however, another communication from the Commission to the plaintiffs, which is of considerable importance. The accepted tender described the subject matter as an "oil tanker lying on Jourmaund Reef as advertised Age, Argus, 29/3/47". The advertisement described her as "lying on Jourmaund Reef, which is approximately 100 miles North of Samarai". Now there appears to be no reef anywhere in the locality which is charted or officially known as "Jourmaund Reef". There is a channel between two islands or reefs charted as "Jomard Entrance", and a few miles to the east of that channel is an island or reef charted as "Jomard Island". Jomard Island, however, is not approximately 100 miles from Samarai, but approximately 170 miles from Samarai, and its bearing from Samarai is not North but a little South of East. The plaintiffs, having bought as they thought, their tanker, looked for "Jourmaund Reef" on a map. They, of course, failed to find it, but they found Jomard Island, and thereupon, not unnaturally, asked the Commission to give them the precise latitude and longitude of the tanker. The Commission gave a latitude and longitude by telephone on 18th April, and confirmed this by a letter written on the same day. The letter read:— "Confirming our telephone conversation of this morning, in connection with the location of the Oil Tanker on Jourmond" (sic) "Reef, I wish to advise it is located as follows:— Latitude 11 degrees 16 1/2 minutes South: Longitude 151 degrees 58 minutes East". The result of this letter was to resolve any ambiguity in the description of the locality of the tanker and to identify with precision, as against the defendant Commission, the place referred to in the relevant documents as the place where the thing which they were purporting to sell was lying.

Now, the simple fact is that there was not at any material time any oil tanker lying at or anywhere near the location specified in the letter of 18th April. There was, at a point about eleven miles east of the location specified, a wrecked vessel described as an "oil barge". Some years before 1947 strenuous but unavailing efforts to salve this vessel had been made by a fully equipped expedition sent out by the Commonwealth Salvage Board. It was contended before Webb J., and also, though faintly, before us, that this vessel was a tanker and that delivery of her to the plaintiffs would constitute performance of the contract by the Commission. Webb J. rejected this contention, and the evidence clearly establishes that a "tanker", according to common understanding, is a self-propelled, ocean-going vessel, fully equipped both for navigation and for the carriage of oil in bulk. A barge is merely a floating repository for oil, adapted to be towed, but not otherwise capable of movement under control. The existence of the wrecked barge in question here is not, we think, a directly relevant factor in the case, though it may serve to explain to some extent how a rumour that there was a wrecked tanker somewhere began to circulate in the offices of the Commission.

[400] We say advisedly that such a rumour began to circulate, because there was indeed no better foundation for any supposition on the part of the officers of the Commission that they had a tanker to sell. They had no more definite information than was derived from an offer by a man named Jarrett to buy for 50 pounds the contents of a wrecked vessel, which he said was within a radius of 200 miles from Samarai, and from what can be quite fairly described as mere gossip. The reckless and irresponsible attitude of the Commission's officers is clearly indicated by the description in the advertisement of the locality of the tanker. In an even worse light appears an attempt which was made later, without any foundation whatever, to suggest that at the time of the making of the contract there had been a tanker in the place specified but that she had since been washed off the reef in a storm. Unfortunately the plaintiffs, for their part, took the matter seriously. They believed, and there is evidence that they had some reason for believing, that an oil tanker wrecked at the place indicated was likely to prove a profitable proposition, and accordingly they paid on 23rd April the balance of their purchase money, and then proceeded to fit up a small ship, which they owned, with diving and salvage equipment, and they engaged personnel, and proceeded from Melbourne to New Guinea. It is sufficient at this stage to say that they expended a large sum of money in discovering that they had bought a non-existent tanker.

The plaintiffs, as has been said, based their claim for damages on three alternative grounds. They claimed, in the first place, for damages for breach of a contract to sell a tanker lying at a particular place. Alternatively they claimed damages for a fraudulent representation that there was a tanker lying at the place specified. In the further alternative, they claimed damages for a negligent failure to disclose that there was no tanker at the place specified after that fact became known to the Commission. The second and third of these alleged causes of action depend wholly or partly on certain further facts which have not so far been mentioned. On 19th April 1947 a telegram was sent from the District Officer at Misima to the Port Moresby office of the Commission, which read: "Your S4382 stop Large approx. 100 ft. barge type tanker carrying oil machinery etc. apparently drifted on reef, Jomard Entrance high water during 1944 stop When inspected by Lieut. Middleton 1945 large hole stern admitted sea Machinery ruined stop Understand oil still in hold but quantity unknown Vessel exposed low tide only partly submerged high tide Can inspect when district vessel available". This unquestionably refers to the wrecked barge. How and why this telegram came to be sent is one of the minor mysteries of this case: no Port Moresby message numbered S4382 was produced. It seems reasonable to infer that the plaintiffs' request for a precise "fix" for their tanker prompted the making of inquiries which ought to have been made much earlier, and that the missing "S4382" was a belated attempt to find out whether the Commission had really had anything to sell to the plaintiffs. On 14th April the Port Moresby office of the Commission had telegraphed the District Officer at Samarai, saying:— "S4392 Would appreciate urgent reply details oil tanker Jourmaund Reef stop Understand vessel now moved under water and contents nil stop Can this be confirmed?" It seems quite possible that one of the quoted numbers is a mistake for the other, and that the telegram of 17th April is really in response to that of 14th April, which had been passed on from Samarai to Misima. Anyhow, the telegram of 17th April was set out in a letter of 19th April from the Port Moresby office to the Melbourne office of the Commission. The letter was minuted by Bowser, one of the officers of the Commission who were mainly responsible for the "selling" of the "tanker", as follows:—

"Received 21/4/47. McRae (successful tenderer) already advised and confirmed by letter location of vessel". In the meantime Port Moresby had replied to Misima, saying:— "Appreciate report stop Vessel sold Melbourne syndicate Inspection not required".

[401] The plaintiffs put their claim in deceit in this way. They said, first, that there was a false and fraudulent representation in the original advertisement. They said, secondly, that, even if the original representation as to the existence of a tanker was innocent, the representation was a continuing representation and the Commission knew, on 21st April at the latest, that it was false. By thereafter allowing the plaintiffs, on the faith of the truth of the representation, to pay the balance of purchase money and incur expenditure, they rendered themselves liable in deceit. The plaintiffs put their final alternative claim in this way. They said that, when the Commission was asked for the precise location of the vessel, they owed to the plaintiffs a duty to exercise reasonable care in obtaining the information required. The duty arose from the position of the parties. They at least believed that they were contractually bound. It must have been obvious to the Commission that the plaintiffs were likely to spend real money in reliance on the information supplied. So far from exercising any sort of care in the matter, they merely obtained a rough estimate of the latitude and longitude of Jomard Entrance and gave the result to the plaintiffs. The grossness of the negligence is emphasised by the fact that, on the very day (17th April) on which the latitude and longitude were telegraphed from Port Moresby to Melbourne, the Port Moresby office of the Commission received the telegram from Misima which should, the plaintiffs say, have made it plain to them that there was no tanker at Jomard Entrance.

[402] Webb J. held that the contract for the sale of a tanker was void — in other words, that no contract for the sale of a tanker was ever made. He considered that the well-known case of Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); [1853] EngR 764; (1853) 9 Ex 102 (156 ER 43); [1856] EngR 713; (1856) 5 HLC 673 (10 ER 1065) compelled him to this conclusion. His Honour held, however, as we read his judgment, that the plaintiffs had made out their case on the second aspect of their claim in deceit. He assessed damages on the basis that the plaintiffs were entitled to the return of the price paid plus an amount (necessarily, of course, approximate only) representing what it would have cost (without any preparations for salvage operations) to inspect the locality and ascertain that there was no tanker there. His Honour has not expressly stated the basis of his assessment, but it was common ground before us that this was the basis on which he proceeded.

The first question to be determined is whether a contract was made between the plaintiffs and the Commission. The argument that the contract was void, or, in other words, that there was no contract, was based, as has been observed, on Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065). It is true that Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065) has been commonly treated in the text-books as a case of a contract avoided by mutual mistake, and it is found cited in the company of such cases as Gompertz v. Bartlett [1853] EngR 970; (1953) 2 El & Bl 849 (118 ER 985) and Strickland v. Turner [1852] EngR 199; (1852) 7 Ex 208 (155 ER 919). Section 7 of the English Sale of Goods Act 1893 is generally regarded as expressing the effect of the case. The case has not, however, been universally regarded as resting on mistake, and Sir Frederick Pollock, in his preface to vol. 101 of the Revised Reports, at p. vi, says:— "Couturier v. Hastie shows how a large proportion of the cases which swell the rubric of relief against mistake in the textbooks (with or without protest from the text-writer) are really cases of construction". And in Solle v. Butcher (1950) 1 KB, at p 691 Denning L.J. observed that the cases which it had been usual to classify under the head of "mistake" needed reconsideration since the decision of the House of Lords in Bell v. Lever Bros. Ltd. [1931] UKHL 2; (1932) AC 161. No occasion seems to have arisen for a close examination of Couturier v. Hastie [1852] EngR 774; [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); [1853] EngR 764; (1853) 9 Ex 120 (156 ER 43); (1856) 5 HLC 673(10 ER 1065), but such an occasion does now arise.

[403] The facts of the case were simple enough. A question of del credere agency was involved, which has no relevance to the present case, and the facts may be stated without reference to that question. A sold to B "1,180 quarters of Salonica Indian corn of fair average quality when shipped, at 27/- per quarter f.o.b., and including freight and insurance, to a safe port in the United Kingdom, payment at two months from date upon handing over shipping documents." At the date of the contract the vessel containing the corn had sailed from Salonica, but, having encountered very heavy weather, had put in at Tunis. Here the cargo had been found to have become so heated and fermented that it could not be safely carried further. It had accordingly been landed at Tunis and sold there. These facts were unknown to either party at the date of the contract. On discovering them, B repudiated the contract. After the expiration of the two months mentioned in the contract, A, being able and willing to hand over the shipping documents, sued B for the price. The case came on for trial before Martin B. and a jury. Martin B. directed the jury that "the contract imported that, at the time of the sale, the corn was in existence as such, and capable of delivery" (1852) 8 Ex, at p 47 (155 ER, at pp 1253, 1254). The jury found a verdict for the defendant, and the plaintiff had leave to move. The Court of Exchequer (Parke B. and Alderson B., Pollock C.B. dissenting) made absolute a rule to enter a verdict for the plaintiff. This decision was reversed in the Court of Exchequer Chamber, and the House of Lords, after consulting the Judges, affirmed the decision of the Exchequer Chamber, so that the defendant ultimately had judgment.

[404] In considering Couturier v. Hastie [1852] EngR 774; (1952) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065) it is necessary to remember that it was, in substance, a case in which a vendor was suing for the price of goods which he was unable to deliver. If there had been nothing more in the case, it would probably never have been reported: indeed the action would probably never have been brought. But the vendor founded his claim on the provision for "payment upon handing over shipping documents". He was not called upon to prove a tender of the documents, because the defendant had "repudiated" the contract, but he was able and willing to hand them over, and his argument was, in effect, that by handing them over he would be doing all that the contract required of him. The question thus raised would seem to depend entirely on the construction of the contract, and it appears really to have been so treated throughout. In the Court of Exchequer, Pollock C.B., in the course of argument, said (1852) 8 Ex, at p 49 (155 ER, at p 1254):— "The question is purely one of construction. I certainly think that the plain and literal meaning of the language here used imports that the thing sold, namely the cargo, was in existence and capable of being transferred." This was, in effect, what Martin B. had told the jury, and what it means is that the plaintiff had contracted that there was a cargo in existence and capable of delivery. Parke B., in giving the judgment of the majority of the Court (1852) 8 Ex, at p 54 (155 ER, at p 1256), said:—

"It is very true that, when there is a sale of a specific chattel, there is an implied undertaking that it exists; and, if there were nothing in this case but a bargain and sale of a certain cargo on the 15th May, there would be an engagement by the vendor, or a condition, that the cargo was in existence at that time." He went on to say, however, that there was very much more in the contract, and that there was enough to make it plain "that the true meaning of the contract was that the purchaser bought the cargo if it existed at the date of the contract, but that, if it had been damaged or lost, he bought the benefit of insurance but no more" (1852) 8 Ex, at p 55 (155 ER, at p 1257).

[405] The judgment of the Exchequer Chamber was delivered by Coleridge J. The view that the contract was void is probably derived from certain expressions which were used in the course of this judgment. But it does seem clear that again the question of construction was regarded as the fundamental question in the case. In stating the question for decision Coleridge J. (1853) 9 Ex, at p 106 (156 ER, at p 45) refers first to the direction of Martin B. to the jury, and says that the Lord Chief Baron had agreed with the opinion of Martin B. whereas the other learned Barons had differed from him. The judgment below, he says (1853) 9 Ex, at p 107 (156 ER, at pp 45, 46), "turned entirely on the meaning of the contract", and he proceeds to set out its terms in full. "The question", he says, "turns entirely upon the terms of the contract". The argument for the defendant is then put as including the proposition "that a vendor of goods undertakes that they exist", and (1853) 9 Ex, at p 108 (156 ER, at p 46) the argument for the plaintiff as being "that this was not a mere contract for the sale of an ascertained cargo, but that the purchaser bought the adventure, and took upon himself all risks from the shipment of the cargo". The final conclusion reached is expressed at the end of the judgment (1853) 9 Ex, at p 110 (156 ER, at pp 46, 47) by saying that "the basis of the contract in this case was the sale and purchase of goods, and all the other terms in the bought note were dependent upon that, and we cannot give to it the effect of a contract for goods lost or not lost". In the light of these passages it seems impossible to regard the expressions (1853) 9 Ex, at p 109 (156 ER, at p 46) "If the contract for the sale of the cargo was valid" and "the contract failed as to the principal subject-matter of it" as meaning that the contract was treated as being void. All that the passages in which those expressions occur seem in their context to mean is that the principal subject matter of the contract was a cargo of goods, that the purchaser did not buy shipping documents representing non-existent goods, that the consideration to the purchaser had failed, and that he could not therefore be liable to pay the contract price.

In the House of Lords again the Lord Chancellor, in giving judgment (1856) 5 HLC, at p 681 (10 ER, at pp 1068, 1069), said:— "The whole question turns upon the meaning and construction of the contract". A little later he said:— "What the parties contemplated . . . was that there was an existing something to be sold and bought, and, if sold and bought, then the benefit of insurance should go with it." In other words, there was not an absolute obligation to pay the price on delivery of the shipping documents (as the plaintiff contended), but an obligation to pay on delivery of those documents only if they represented at the time of the making of the contract goods in existence and capable of delivery. And this is all that the Lord Chancellor really had in mind, we think, when later he says:—

"If the contract of the 15th May had been an operating contract, and there had been a valid contract at that time existing, I think the purchaser would have had the benefit of insurance in respect of all damage previously existing."

[406] In Bell v. Lever Bros. Ltd. [1931] UKHL 2; (1932) AC 161, at pp 218-222 Lord Atkin, though he does not mention Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 E.R., 1065). itself, discusses Gompertz v. Bartlett [1853] EngR 970; (1853) 2 El & Bl 849 (118 ER 985) and Gurney v. Womersley [1854] EngR 845;[1854] EngR 845; (1854) 4 El & Bl 133 (119 ER 51) and other cases which have sometimes been regarded as turning on mistake avoiding a contract ab initio, and His Lordship concludes the discussion with a very important observation. He says (1932) AC, at p 222:— "In these cases I am inclined to think that the true analysis is that there is a contract, but that the one party is not able to supply the very thing, whether goods or services, that the other party contracted to take; and therefore the contract is unenforceable by the one if executory, while, if executed, the other can recover back money paid on the ground of failure of the consideration". This observation accords with the reasons actually given for the decisions in Gompertz v. Bartlett [1853] EngR 970; [1853] EngR 970; (1853) 2 El & Bl 849(118 ER 985) and Gurney v. Womersley (1854) 4 El & Bl 133 (119 ER 51) . In the former case, in which the action was for money had and received, Lord Campbell C.J. (1853) 2 El & Bl, at p 853 (118 ER, at p 987) said:— "The action is maintainable on the ground that the article does not answer the description of that which was sold." And Coleridge J. (1853) 2 El & Bl, at pp 854, 855 (118 ER, at pp 987, 988) said:— "The vendee is entitled to have an article answering the description of that which he bought". So in Gurney v. Womersley [1854] EngR 845; (1854) 4 El & Bl 133 (119 ER 51), where also the action was for money had and received, Wightman J. (1854) 4 El & Bl, at p 142 (119 ER, at p 55) said that the defendants had "professed to sell a genuine bill" and that the bill given "failed in what was the substance of the description". So again in Strickland v. Turner [1852] EngR 199; (1852) 7 Ex 208 (155 ER 919) the case is put by Pollock C.B., who delivered the judgment of the Court, entirely on the ground of failure of consideration. "The money which was paid", he said, "was paid wholly without consideration, and may be recovered back" (1852) 7 Ex, at p 219 (155 ER, at p 924). This language clearly imports the existence of a contract. If there were no contract, there could be no failure of consideration. The case of Scott v. Coulson (1903) 1 Ch 453; (1903) 2 Ch 249 stands on a different footing and belongs to a class of case in which relief is given on equitable grounds.

[408] The observation of Lord Atkin in Bell v. Lever Bros. Ltd. (1932) AC, at p 222 seems entirely appropriate to Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); [1853] EngR 764; (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 E.R. 1065). In that case there was a failure of consideration, and the purchaser was not bound to pay the price: if he had paid it before the truth was discovered, he could have recovered it back as money had and received. The construction of the contract was the vital thing in the case because, and only because, on the construction of the contract depended the question whether the consideration had really failed, the vendor maintaining that, since he was able to hand over the shipping documents, it had not failed. The truth is that the question whether the contract was void, or the vendor excused from performance by reason of the non-existence of the supposed subject matter, did not arise in Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 E.R. 1065).  It would have arisen if the purchaser had suffered loss through non-delivery of the corn and had sued the vendor for damages. If it had so arisen, we think that the real question would have been whether the contract was subject to an implied condition precedent that the goods were in existence. Prima facie, one would think, there would be no such implied condition precedent, the position being simply that the vendor promised that the goods were in existence. That is the real meaning of the direction of Martin B. to the jury, and so the argument for the defendant, as has already been pointed out, included the proposition that "a vendor of goods undertakes that they exist and that they are capable of being tranferred, although he may not stipulate for their condition" (1853) 9 Ex, at p 107 (156 ER, at p 46). So in Barr v. Gibson [1836] EngR 984; (1838) 3 M & W 390 (150 ER 1196) , where the contract was for the sale of a ship, Parke B. (1838) 3 M & W, at pp 399, 400 (150 ER, at pp 1200, 1201) said:— "And therefore the sale in this case of a ship implies a contract that the subject of transfer did exist in the character of a ship". It should be noted in this connection that in Solle v. Butcher (1950) 1 KB 671, at pp 691, 692 Denning L.J. said that the doctrine of French law, as enunciated by Pothier, is no part of English law. His Lordship was without doubt thinking of the passage quoted from Pothier in a note to the report of the argument in the House of Lords in Couturier v. Hastie (1856) 5 HLC, at p 678 (10 ER, at pp 1067, 1068). Although we would not be prepared to assent to everything that is said by Denning L.J. in the course of this judgment, we respectfully agree with this observation. When once the common law had made up its mind that a promise supported by consideration ought to be performed, it was inevitable that the theorisings of the civilians about "mistake" should mean little or nothing to it. On the other hand, the question whether a promisor was excused from performance by existing or supervening impossibility without fault on his part was a practical every-day question of which the common law has been vividly conscious, as witness Taylor v. Caldwell (1863) 3 B & S 826 (122 ER 309), with its innumerable (if sometimes dubious) successors. But here too the common law has generally been true to its theory of simple contract, and it has always regarded the fundamental question as being: "What did the promisor really promise?" Did he promise to perform his part at all events, or only subject to the mutually contemplated original or continued existence of a particular subject-matter? So questions of intention or "presumed intention" arise, and these must be determined in the light of the words used by the parties and reasonable inferences from all the surrounding circumstances. That the problem is fundamentally one of construction is shown clearly by Clifford v. Watts (1870) LR 5 CP 577.

[409] If the view so far indicated be correct, as we believe it to be, it seems clear that the case of Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43);(1856) 5 HLC 673 (10 E.R. 1065). does not compel one to say that the contract in the present case was void. But, even if the view that Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); [1856] EngR 713; (1856) 5 HLC 673 (10 E.R. 1065). was a case of a void contract be correct, we would still think that it could not govern the present case. Denning L.J. indeed says in Solle v. Butcher (1950) 1 KB, at p 692:— "Neither party can rely on his own mistake to say it was a nullity from the beginning, no matter that it was a mistake which to his mind was fundamental, and no matter that the other party knew he was under a mistake. A fortiori if the other party did not know of the mistake, but shared it". But, even if this be not wholly and strictly correct, yet at least it must be true to say that a party cannot rely on mutual mistake where the mistake consists of a belief which is, on the one hand, entertained by him without any reasonable ground, and, on the other hand, deliberately induced by him in the mind of the other party. It does not seem possible on the evidence to say that Bowser or Sheehan was guilty of fraud in the sense that either knew at the date of the contract that the Commission had no tanker to sell. And even at the later stage, after the receipt of the message from Misima, it is difficult to impute to them actual knowledge that there was no tanker at Jomard Entrance. The message should have conveyed to them the fact that the only vessel lying in the vicinity was almost certainly worthless, and ordinary commonsense and decency would have suggested that the contents of the message ought to be communicated to the plaintiffs. But the message referred to a "barge type tanker", and it is quite possible that this description would fail to bring home to their minds that there was no tanker. A finding of actual knowledge that they had nothing to sell does not seem justified by the evidence, though it is difficult to credit them at the time of the publication of the advertisements with any honest affirmative belief that a tanker existed. The confusion as to locality in the description advertised is almost enough to exclude the inference of any such affirmative belief. But, even if they be credited with a real belief in the existence of a tanker, they were guilty of the grossest negligence. It is impossible to say that they had any reasonable ground for such a belief. Having no reasonable grounds for such a belief, they asserted by their advertisement to the world at large, and by their later specification of locality to the plaintiffs, that they had a tanker to sell. They must have known that any tenderer would rely implicitly on their assertion of the existence of a tanker, and they must have known that the plaintiffs would rely implicitly on their later assertion of the existence of a tanker in the latitude and longitude given. They took no steps to verify what they were asserting, and any "mistake" that existed was induced by their own culpable conduct. In these circumstances it seems out of the question that they should be able to assert that no contract was concluded. It is not unfair or inaccurate to say that the only "mistake" the plaintiffs made was that they believed what the Commission told them.

[410] The position so far, then, may be summed up as follows. It was not decided in Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065) that the contract in that case was void. The question whether it was void or not did not arise. If it had arisen, as in an action by the purchaser for damages, it would have turned on the ulterior question whether the contract was subject to an implied condition precedent. Whatever might then have been held on the facts of Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065), it is impossible in this case to imply any such term. The terms of the contract and the surrounding circumstances clearly exclude any such implication. The buyers relied upon, and acted upon, the assertion of the seller that there was a tanker in existence. It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition precedent to the creation of contractual obligations. The officers of the Commission made an assumption, but the plaintiffs did not make an assumption in the same sense. They knew nothing except what the Commission had told them. If they had been asked, they would certainly not have said: "Of course, if there is no tanker, there is no contract". They would have said: "We shall have to go and take possession of the tanker. We simply accept the Commission's assurance that there is a tanker and the Commission's promise to give us that tanker." The only proper construction of the contract is that it included a promise by the Commission that there was a tanker in the position specified. The Commission contracted that there was a tanker there. "The sale in this case of a ship implies a contract that the subject of the transfer did exist in the character of a ship" (Barr v. Gibson (1838) 3 M& W, at pp 399, 400 (150 ER, at pp 1200, 1201)). If, on the other hand, the case of Couturier v. Hastie [1852] EngR 774; [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); [1853] EngR 764; (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065) and this case ought to be treated as cases raising a question of "mistake", then the Commission cannot in this case rely on any mistake as avoiding the contract, because any mistake was induced by the serious fault of their own servants, who asserted the existence of a tanker recklessly and without any reasonable ground. There was a contract, and the Commission contracted that a tanker existed in the position specified. Since there was no such tanker, there has been a breach of contract, and the plaintiffs are entitled to damages for that breach.

Before proceeding to consider the measure of damages, one other matter should be briefly mentioned. The contract was made in Melbourne, and it would seem that its proper law is Victorian law. Section 11 of the Victorian Goods Act 1928 corresponds to s. 6 of the English Sale of Goods Act 1893, and provides that "where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made the contract is void". This has been generally supposed to represent the legislature's view of the effect of Couturier v. Hastie [1852] EngR 774; [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); [1856] EngR 713; (1856) 5 HLC 673 (10 ER 1065). Whether it correctly represents the effect of the decision in that case or not, it seems clear that the section has no application to the facts of the present case. Here the goods never existed, and the seller ought to have known that they did not exist.

The conclusion that there was an enforceable contract makes it unnecessary to consider the other two causes of action raised by the plaintiffs. As to each of these, the plaintiffs would have been, to say the least, faced with serious obstacles. We have already referred to the evidence bearing on the issue of fraud. And the claim based on negligence would have encountered the difficulties which were held by a majority of the Court of Appeal to be fatal to the plaintiff in Candler v. Crane Christmas & Co. (1951) 1 All ER 426.

[411] The question of damages, which is the remaining question, again presents serious difficulties. It is necessary first to arrive at the appropriate measure of damages. The contract was a contract for the sale of goods, and the measure of damages for non-delivery of goods by a seller is defined in very general terms by s. 55(2) of the Goods Act 1928 as being "the estimated loss directly and naturally resulting in the ordinary course of events from the seller's breach of contract". This states, in substance, the general prima-facie rule of the common law as to the measure of damages for breach of contract. But, if we approach this case as an ordinary case of wrongful non-delivery of goods sold, and attempt to apply the ordinary rules for arriving at the sum to be awarded as damages, we seem to find ourselves at once in insuperable difficulties. There was obviously no market into which the buyers could go to mitigate their loss, and the rule normally applied would require us to arrive at the value of the goods to the buyer at the place where they ought to have been delivered and at the time when they ought to have been delivered. But it is quite impossible to place any value on what the Commission purported to sell. The plaintiffs indeed, on one basis of claim which is asserted in their statement of claim, assessed their damages on the basis of an "average-sized tanker, 8,000-10,000 ton oil tanker, valued at 1,000,000 pounds, allowing for the said tanker lying on Jourmaund Reef, valued at 250,000 pounds", and, for good measure, they added their "estimated value of cargo of oil" at the figure of 50,000 pounds. But this, as a basis of damages, seems manifestly absurd. The Commission simply did not contract to deliver a tanker of any particular size or of any particular value or in any particular condition, nor did it contract to deliver any oil.

[412] It was strongly argued for the plaintiffs that mere difficulty in estimating damages did not relieve a tribunal from the responsibility of assessing them as best it could. This is undoubtedly true. In the well-known case of Chaplin v. Hicks (1911) 2 KB 786, at p 792 Vaughan Williams L.J. said:— "The fact that damages cannot be assessed with certainty does not relieve the wrongdoer of the necessity of paying damages for his breach of contract". That passage, and others from the same case, are quoted by Street C.J. in Howe v. Teefy (1927) 27 SR (NSW) 301, at pp 305-306; 44 WN 102, at pp 103, 104, but the learned Chief Justice (1927) 27 SR (NSW), at p 306; 44 WN, at p 104 himself states the position more fully. He says:— "The question in every case is: has there been any assessable loss resulting from the breach of contract complained of? There may be cases where it would be impossible to say that any assessable loss had resulted from a breach of contract, but, short of that, if a plaintiff has been deprived of something which has a monetary value, a jury is not relieved from the duty of assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty". The present case seems to be more like Sapwell v. Bass (1910) 2 KB 486 than Chaplin v. Hicks (1911) 2 KB 786. And see Fink v. Fink [1946] HCA 54; (1946) 74 CLR 127, at p 143, per Dixon and McTiernan JJ. It does not seem possible to say that "any assessable loss has resulted from" non-delivery as such. In Chaplin v. Hicks (1911) 2 KB 786, if the contract had been performed, the plaintiff would have had a real chance of winning the prize, and it seems proper enough to say that that chance was worth something. It is only in another and quite different sense that it could be said here that, if the contract had been performed, the plaintiffs would have had a chance of making a profit. The broken promise itself in Chaplin v. Hicks (1911) 2 KB 786 was, in effect, "to give the plaintiff a chance": here the element of chance lay in the nature of the thing contracted for itself. Here we seem to have something which cannot be assessed. If there were nothing more in this case than a promise to deliver a stranded tanker and a failure to deliver a stranded tanker, the plaintiffs would, of course, be entitled to recover the price paid by them, but beyond that, in our opinion, only nominal damages.

[413] There is, however, more in this case than that, and the truth is that to regard this case as a simple case of breach of contract by non-delivery of goods would be to take an unreal and misleading view of it. The practical substance of the case lies in these three factors— (1) the Commission promised that there was a tanker at or near to the specified place; (2) in reliance on that promise the plaintiffs expended considerable sums of money; (3) there was in fact no tanker at or anywhere near to the specified place. In the waste of their considerable expenditure seems to lie the real and understandable grievance of the plaintiffs, and the ultimate question in the case (apart from any question of quantum) is whether the plaintiffs can recover the amount of this wasted expenditure or any part of it as damages for breach of the Commission's contract that there was a tanker in existence. In the opinion of Webb J. it would have been reasonable, and within the proper contemplation of the Commission, that the plaintiffs should take steps, but should do no more than take steps, to see whether there was a tanker in the locality given, and, if so, whether any and what things should be done to turn her to account. And his Honour estimated the reasonable cost of taking such steps at the sum of 500 pounds. This view, however, seems to assume that the plaintiffs would be, or ought to be, in doubt as to whether they really had succeeded in buying a tanker. But they were clearly entitled to assume that there was a tanker in the locality given. The Commission had not, of course, contracted that she or her cargo was capable of being salved, but it does not follow that the plaintiffs' conduct in making preparations for salvage operations was unreasonable, or that the Commission ought not to have contemplated that the course in fact adopted would be adopted in reliance on their promise. It would be wrong, we think, to say that the course which the plaintiffs took was unreasonable, and it seems to us to be the very course which the Commission would naturally expect them to take. There was evidence that salvage operations at the locality given would not have presented formidable difficulties in fair weather. The plaintiffs were, of course, taking a risk, but it might very naturally seem to them, as business men, that the probability of successful salvage was such as to make the substantial expense of a preliminary inspection unwarranted. It was a matter of business, of weighing one consideration with another, a matter of which business men are likely to be the best judges. So far as the purpose of the expenditure is concerned, the case seems to fall within what is known as the second rule in Hadley v. Baxendale [1854] EngR 296; (1854) 9 Ex 341 (156 ER 145). A fairly close analogy may be found in a case in which there is a contract for the sale of sheep, and the buyer sends a drover to take delivery. There are no sheep at the point of delivery. Sheep have not risen in price, and the buyer has suffered no loss through non-delivery as such. But he will be entitled to recover the expense which he has incurred in sending the drover to take delivery: cf. Pollock v. Mackenzie (1866) 1 QSCR 156 , and see also Foaminol Laboratories Ltd. v. British Ortid Plastics Ltd. (1941) 2 All ER 393, esp at p 397.

[414] There is, however, still another question. Mr. Tait not only strongly opposed the view so far expressed, but he also contended that, even if that view were accepted, it still could not be held that the alleged damage flowed from the alleged breach. Let it be supposed, he said in effect, that the plaintiffs acted reasonably in what they did, and let it be supposed that the Commission ought reasonably to have contemplated that they would so act. Still, he said, the plaintiffs are faced with precisely the same difficulty with which they are faced if the case is regarded as a simple and normal case of breach by non-delivery. Suppose there had been a tanker at the place indicated. Non constat that the expenditure incurred by the plaintiffs would not have been equally wasted. If the promise that there was a tanker in situ had been performed, she might still have been found worthless or not susceptible of profitable salvage operations or of any salvage operations at all. How, then, he asked, can the plaintiffs say that their expenditure was wasted because there was no tanker in existence?

The argument is far from being negligible. But it is really, we think, fallacious. If we regard the case as a simple and normal case of breach by non-delivery, the plaintiffs have no starting-point. The burden of proof is on them, and they cannot establish that they have suffered any damage unless they can show that a tanker delivered in performance of the contract would have had some value, and this they cannot show. But when the contract alleged is a contract that there was a tanker in a particular place, and the breach assigned is that there was no tanker there, and the damages claimed are measured by expenditure incurred on the faith of the promise that there was a tanker in that place, the plaintiffs are in a very different position. They have now a starting-point. They can say: (1) this expense was incurred; (2) it was incurred because you promised us that there was a tanker; (3) the fact that there was no tanker made it certain that this expense would be wasted. The plaintiffs have in this way a starting-point. They make a prima-facie case. The fact that the expense was wasted flowed prima facie from the fact that there was no tanker; and the first fact is damage, and the second fact is breach of contract. The burden is now thrown on the Commission of establishing that, if there had been a tanker, the expense incurred would equally have been wasted. This, of course, the Commission cannot establish. The fact is that the impossibility of assessing damages on the basis of a comparison between what was promised and what was delivered arises not because what was promised was valueless but because it is impossible to value a non-existent thing. It is the breach of contract itself which makes it impossible even to undertake an assessment on that basis. It is not impossible, however, to undertake an assessment on another basis, and, in so far as the Commission's breach of contract itself reduces the possibility of an accurate assessment, it is not for the Commission to complain.

[415] For these reasons we are of opinion that the plaintiffs were entitled to recover damages in this case for breach of contract, and that their damages are to be measured by reference to expenditure incurred and wasted in reliance on the Commission's promise that a tanker existed at the place specified. The only problem now remaining is to quantify those damages, but this is itself a most serious problem, because the evidence is left by the plaintiffs in a highly unsatisfactory state. Whether the evidence has been so left because of the loss of records or because of misplaced confidence in the view that any wrecked or stranded tanker must be worth something like a quarter of a million pounds need not be considered. Two things seem clear, for what they are worth. The first is that the plaintiffs did expend and waste a sum of money very considerably in excess of 500 pounds. The second is that the plaintiffs have, in their statement of claim, and also in their evidence, sought to exaggerate grossly the amount of their claim.

What actually happened may be summarized as follows. The plaintiffs owned a small steam vessel named the Gippsland. This vessel was, at the date of the making of the contract, being refitted in Sydney for trading between Melbourne and King Island. After the making of the contract the plan of refitting seems to have been modified in some respects with a view to making her suitable for salvage work. Certain salvage equipment was purchased and placed on board. A crew was engaged, and Mr. J.E. Johnstone, a shipwright and diver, and an acknowledged expert in salvage work, was also engaged. The ship sailed from Sydney for the supposed locality of the tanker on 28th June 1947. While she was on the voyage north, Mr. Johnstone and a brother of the plaintiffs proceeded together by air to Port Moresby. The ship foundered in the vicinity of Port Moresby on 24th July 1947. Why she took so long to reach this locality from Sydney is not explained, but she appears to have called at Brisbane and other northern ports. No lives were lost when she sank, and the ship's company landed at Port Moresby. Mr. F.E. McRae, one of the plaintiffs, entered into negotiations for the charter of a vessel named the Betty Joan, but in the meantime his brother and Mr. Johnstone went to Samarai and there chartered a boat named the Jessie for the purpose of looking for the tanker. They found, of course, no tanker, and returned to Port Moresby, where they informed Mr. McRae of the position.

[416] The plaintiffs make their claim on the basis of wasted expenditure under ten heads, several of which it is plainly impossible to support at all. The first claim is under the head of "equipment", and relates to certain equipment purchased for the Gippsland. This claim is wholly untenable. Some of the items in it, such as navigating lights and signalling lamps, are ordinary necessities of a ship's equipment, and some were purchased months before the date of the contract. But in any case this was all capital expenditure represented by acquired assets, and it is out of the question to claim it as damages. One would assume, though there is no clear evidence on the matter, that it was covered by insurance.

The second claim is under the head of "reconditioning", and refers to work done on the Gippsland herself. Again it is plain that this claim must be wholly disallowed. About one-third of the amount claimed proves to relate to work done long before the date of the contract, but again the whole of it is capital expenditure.

[417] The third claim is of a different character and does not relate to actual expenditure at all. It is made under the head of "loss of revenue", and represents the profit which the Gippsland might have been expected to make if she had not been devoted to the futile tanker enterprise. As framed, this claim was based on the profit anticipated as likely to accrue from the use of the vessel under a contract with a company called King Island Scheelite No Liability. In April 1947 no contract with that company had been concluded, but negotiations were proceeding for the use of the vessel in trading between King Island and Melbourne. Mr. Laird, the witness who gave evidence for the plaintiffs on these matters, said that in consultation with Captain Guthrie he had estimated that, if the last offer of the King Island company had been accepted, a profit of 75 pounds per week would have been realized, and he said or implied that that offer would have been accepted if better terms could not have been obtained. On this basis the claim ultimately put forward under this head was for 1,050 pounds, a sum which represents 75 pounds per week for fourteen weeks. Put baldly as a claim for this estimated loss of profit as such, the claim might be thought to be in its nature too remote, and in its amount conjectural to a degree. But the plaintiffs would be entitled to include in their damages the daily value of their vessel for a period which would not be excessively estimated as ten weeks, and the estimate based on Mr. Laird's calculations may be used as a basis — though it can only provide a rough and approximate basis — for arriving at this daily value. It would appear from cross-examination that the estimate was made after taking into account the obvious physical contingencies, but it has, we think, to be substantially discounted for the contingency of the ship being idle for part of the period. There is no evidence as to her earnings in the past. To allow 50 pounds per week does not seem unreasonable, and at that rate the plaintiffs should be allowed 500 pounds under this head.

The next four heads of claim are heads under which we think that the plaintiffs are entitled to recover damages. But, whereas one would have expected that the claim in each of these four cases would be capable, if not of precise computation, at least of a close approximation, we find that the evidence is for the most part of the vaguest kind. In most cases it is not possible to do more than make an estimate as best one can.

The fourth claim is made under the head of travelling expenses. It is difficult to avoid the conclusion that better evidence could have been given about this. It is said by Mr. Laird to include 200 pounds for the cost of searching for the wreck, and, as such, may be taken to include the cost incurred by McRae and Johnstone in going from Port Moresby to Samarai and the hire of the Jessie. We know also that McRae and Johnstone travelled by air from Melbourne to Port Moresby, and it seems proper to allow a further sum of 200 pounds in respect of this expense. Beyond this, either the evidence is too vague to justify any claim or it shows that the claim is unjustified or made under another head. The plaintiffs should recover 400 pounds under this head.

The fifth claim is made under the head of "Ship's Stores, etc." The plaintiffs would, we should think, be entitled to the value of coal and other stores consumed before the Gippsland foundered but not for what went down with the ship. So far as coal is concerned, an invoice in Exhibit NN shows that about sixty tons was loaded at Bowen at a cost of about 100 pounds, and a note on the invoice states that the balance on board when the ship went down was twenty-five tons. Since Bowen is about half-way between Sydney and Port Moresby, this probably justifies an estimate that the ship had used about seventy tons between leaving Sydney and foundering and an allowance of 120 pounds for coal consumed may be made. Beyond this, there is no real material on which to found any estimate. Exhibit NN consists simply of a mass of invoices, which include a host of articles which are not ship's stores in any relevant sense, and for which no claim could be made. The best that can be done seems to be to make a rough man-day estimate for two months, and allow (say) 720 pounds. We would allow 840 pounds under the fifth head of claim.

[418] The sixth head of claim relates to special expenses of Mr. Johnstone, which are itemised in Exhibit PP. The account has only been paid in part by the plaintiffs. Mr. Johnstone's travelling expenses have already been allowed at 100 pounds under the fourth head of claim. It is not clear why he spent eight weeks in Port Moresby, though the amount claimed in respect of these eight weeks seems moderate enough. He had some undefined financial interest in the venture, and no clear evidence was given as to his contract or arrangement with the plaintiffs. Mr. Johnstone, however, had very special qualifications and experience in matters of salvage. It was certainly reasonable to engage his services, and his claim cannot be narrowly scanned. The sum of 400 pounds should be allowed under this head of claim.

The seventh head of claim relates to "crew's wages". Here at last we get something like definite evidence, though it reveals that the amount of the claim is again exaggerated, and the evidence is still defective. However, it finally appeared from evidence given by Captain Guthrie that a total sum of 1,400 pounds was paid in wages. This sum apparently includes Captain Guthrie's own salary, and it covers a period commencing on 13th November 1946 and ending on the dates on which the members of the crew arrived back at their home ports. But, while this figure may be taken to represent the whole wages bill of the Gippsland for the period mentioned, it cannot be taken to mean that all the members of the crew who sailed from Sydney were paid from 13th November 1946, because Captain Guthrie gave the monthly rate of pay of each man, and, if every man were paid at the rate stated for the whole period mentioned, the total sum paid would be very much larger than 1,400 pounds. The monthly rates of pay given by Captain Guthrie seem reasonable and it seems proper to allow a wages bill at those rates for two months. On this basis we arrive at a figure of 768 pounds.

Nothing can be claimed under either of the next two heads of claim. The eighth is "Claims by Crew" and represents amounts claimed by the crew in respect of clothing and other property lost when the ship foundered. These claims appear to have been, in part at least, covered by insurance and met by the insurers, but the Commission cannot in any case be responsible for consequences of the sinking of the ship. The ninth claim is for insurance premiums. The carrying of insurance is an ordinary incident of the ownership and operation of a ship, whatever she is doing. The tenth and last claim is for 150 pounds for office expenses. It seems reasonable to suppose that some office expenses were incurred and wasted, and, though nothing much better than a guess is possible, it is probably fair enough to add 100 pounds for these.

[419] The total amount now arrived at is 3,008 pounds, and we may fairly take the figure of 3,000 pounds as representing, as nearly as can be estimated on the very defective evidence, the loss suffered by the plaintiffs for which damages are recoverable. To this must be added the sum of 285 pounds paid by the plaintiffs.

For convenience we have throughout treated the Commission as the party responsible to the plaintiffs. But, in our view, the cause of action lies in contract, and reg. 7 of the National Security (Disposal of Commonwealth Property) Regulations provides that the Commission may make contracts on behalf of the Commonwealth. Accordingly we think that the judgment should be against the Commonwealth.

The appeal should be allowed and the judgment of Webb J. set aside. In lieu thereof there should be judgment for the plaintiffs against the Commonwealth for the sum of 3,285 pounds as damages for breach of contract. There is no reason why the plaintiffs should not have the full costs of the appeal. With regard to the costs of the action, Webb J. gave no reasons for allowing the plaintiffs only one-half of their costs, but it was doubtless because he considered that the costs had been increased by the raising of matters (whether technically "issues" or not) on which the plaintiffs had failed and by the generally extravagant nature of their claim. We think that the costs may have been to some extent increased by the raising of unjustifiable claims. On the other hand, the whole case was one of very exceptional difficulty, the plaintiffs were fully justified in raising alternative bases of claim, and the extent to which costs were necessarily increased by the claim based on the supposed value of a tanker and by the unwarranted claims in respect of expenditure would be proportionately very small and hardly such as, in our opinion, to justify any attempt to apportion costs either by direct order or on taxation. It may be added that the conduct of the Commission's officers throughout, including their attitude when a claim was first made, is not such as would incline any court readily to exercise any discretion in favour of the defendants. We think that the plaintiffs should have their costs of the action. The cross-appeal should be dismissed with costs.

[420] McTIERNAN J. I concur in the conclusions that there was a contract, that it was not void for mistake and that the plaintiffs should recover from the Commonwealth Disposals Commission the sum mentioned in the order of the Court as damages for breach of the contract; that the appeal should be allowed and the cross-appeal dismissed, in each case with costs.

ORDER

Appeal allowed with costs. Discharge judgment of Webb J., and in lieu thereof adjudge that plaintiffs do recover from the defendant Commonwealth of Australia the sum of 3,285 pounds as damages for breach of contract. Order that defendant Commonwealth pay plaintiffs' taxed costs of action. Cross-appeal dismissed with costs.

Wendy P. Solovay, Boston, with whom Marshall F. Newman and Newman & Newman, P.C., Boston, were on brief for appellants.

[22] Brian R. Merrick with whom Burke, Wieners, Moran, Hurley & Merrick, Boston, was on brief for appellee.

Before COFFIN, BREYER and TORRUELLA, Circuit Judges.

BREYER, Circuit Judge.

Thomas Mundy, an assistant district attorney of Suffolk County, Massachusetts, and his wife, Madelon, have sued their insurer in an effort to recover the actual value of some silver that was stolen from their home. Since the policy in effect at the time of the burglary limited recovery for loss of silverware to $1000, the company refused to pay them any more. The Mundys noted, however, that an earlier policy had not contained such a limit. They argued that the company did not give them adequate notice of the change when it sent them the policy renewal. And, this failure, in their view, entitles them to recovery under state law theories of contract, tort or unfair trade practice.

The district court granted the company's motion for summary judgment, for the court believed that the record showed — beyond genuine dispute — that the company's notice was adequate. The Mundys now appeal that decision.

The Mundys say in their brief that the "declarations page" of the policy (which they received) said nothing about the change, though "apparently ... there was buried in the fine print of the policy a limitation of $1,000.00 with respect to a loss of silverware." The policy itself, however, tells a rather different story.

Mundy testified that Exhibit 4 was the very policy he received "in the form in which [he] ... received it." On the jacket (apparently the inside cover) is a table of contents. The page also contains five short sentences in capital letters at its bottom. Four of those sentences read as follows:

THIS IS A NEW EASY TO READ POLICY. PLEASE READ YOUR POLICY. THERE ARE SOME COVERAGE CHANGES. IF THERE ARE ANY QUESTIONS, CALL YOUR AGENT OR THE COMPANY RIGHT AWAY.

There follows a declarations page containing the cost of premiums for coverages in effect. The declarations page is followed by two slips of paper (about half the ordinary page size) each with one or two sentences (about inflation protection and nonresidential theft). Then, there is a one-page summary of the changes made. Each change noted in the summary is in a separate paragraph, set off from the others by added space and black dots. The relevant paragraph says:

Theft of silverware and guns is now limited to $1,000. Should you wish more coverage for such items, contact your agent.

The remainder of the booklet consists of the twelve-page policy itself. On page 2, the policy says:

Special Limits of Liability ...

7. $1000 for loss by theft of silverware, silverplated ware, goldware, gold-plated ware and pewterware.

The whole policy is written in readable English in good-sized print with certain words, such as "Special Limits of Liability," set off in boldface type.

We find nothing in the record that fairly can be read as disputing these facts. Mundy at one point said that the summary of changes was stapled "somewhere" in the policy; but the word "somewhere" is consistent with his concession that Exhibit 4 presents the pages in the proper order. As the district court noted, these facts bring this case well within the scope of Epstein v. Northwestern National Insurance Co., 267 Mass. 571, 166 N.E. 749 (1929), which binds an insured by the terms of a renewal insurance policy as long as he receives it.

The Mundys argue that Epstein is now out of date and a minority position. As Mundy recognized, these are not adequate reasons for disregarding Massachusetts case law. Nor do we believe the question should be certified to the Massachusetts Supreme Judicial Court, Mass.S.J.C. Rule 1:03, for, in any event, the Mundys cannot prevail. The facts here make this case [23] very similar to GEICO v. United States, 400 F.2d 172, 175 (10th Cir.1968), where even "a casual reading of the mailed material" would have given the plaintiffs adequate notice. And, we find nothing in the cases they cite from other jurisdictions that would require a different result. Compare Noyes Supervision, Inc. v. Canadian Indemnity Co., 487 F.Supp. 433, 436 (D.Colo.1980) (endorsement not added until after loss); Giles v. St. Paul Fire & Marine Ins. Co., 405 F.Supp. 719, 725-26 (N.D.Ala.1975) (coverage change not included in summary of changes, therefore insurer bound by original policy as modified according to summary); Pennsylvania Millers Mutual Ins. Co. v. Dunlap, 153 Ga.App. 116, 264 S.E.2d 483 (1980) (endorsement limiting liability for silverware not received); Industro Motive Corp. v. Morris Agency, Inc., 76 Mich.App. 390, 256 N.W.2d 607 (1977) (insurer estopped from relying on 20 percent coverage limitation in policy because of affirmative representations that insured was 50 percent covered); Canadian Universal Ins. Co. v. Fire Watch, Inc., 258 N.W.2d 570, 574 (Minn.1979) (undisputed that no notice given); Bauman v. Royal Indemnity Co., 36 N.J. 12, 174 A.2d 585, 591-92 (1961) (insured not bound by terms of renewal policy unless notice that there are changes in coverage is given); Aetna Ins. Co. v. Lythgoe, 618 P.2d 1057 (Wyo. 1980) (no dispute that insured's attention was not specifically directed to coverage change).

The judgment of the district court is

Affirmed. Double costs to Appellee.

[1010] For the plaintiff-appellant-petitioner there were briefs by David M. Erspamer and Erspamer Law Office, Amery and oral argument by David M. Erspamer.

For the defendant-respondent there was a brief by Mark E. Coe and Coe, Dalrymple, Heathman, Coe & Zabel, S.C., Rice Lake and oral argument by Mark E. Coe.

ABRAHAMSON, J.

This is a review of an unpublished decision of the court of appeals filed on January 20, 1993, affirming a judgment of the circuit court for Barron County, Edward R. Brunner, Circuit Judge. The circuit court granted summary judgment to Monkem Company, the defendant, dismissing the complaint with prejudice. It held that the form signed by Jerilyn Richards, the plaintiff, was an exculpatory contract that was not void or unenforceable as contrary to public policy. It further held that the plaintiff's claim for injuries suffered while riding as a passenger in a truck operated by Leo Richards, her husband, and owned by Monkem Company, her husband's employer, was clearly within the contemplation of the parties at the time the exculpatory contract was executed. The circuit court thus foreclosed the plaintiff's claim as a matter of law. The court of appeals affirmed the judgment of the circuit court. We reverse and remand for further proceedings.

[1,2]

The issue before this court is whether the form the plaintiff executed constitutes a valid exculpatory contract releasing the plaintiff's claims against Monkem Company, thereby barring this lawsuit. This issue arose in a motion for summary judgment, and this [1011] court is reviewing a decision affirming the summary judgment. Therefore the standard of review is the same as the standard used by the circuit court to determine whether to grant the motion for summary judgment. Dobratz v. Thomson, 161 Wis.2d 502, 513, 468 N.W.2d 654 (1991). If an exculpatory contract is found to be invalid on its face, the defendant's motion for summary judgment will be denied. Dobratz v. Thomson, 161 Wis.2d at 526. Thus, this court must determine whether, as a matter of law, the form was a valid exculpatory contract that bars the plaintiff's claim.

[3]

We conclude that the form at issue here is an exculpatory contract void as against public policy. As is often the case, neither a prior decision of the court nor the facts of a prior case is directly on point. An examination of the principles underlying the determination of the validity of exculpatory contracts leads us to the conclusion that the form is an unenforceable exculpatory contract due to a combination of three factors. None of these factors alone would necessarily invalidate the release; however, taken together they demand the conclusion that the contract is void as against public policy. First, the contract serves two purposes, not clearly identified or distinguished. Second, the release is extremely broad and all-inclusive. Third, the release is in a standardized agreement printed on the Company's form, offering little or no opportunity for negotiation or free and voluntary bargaining.

The facts relevant to our determination of the validity of the form as an exculpatory contract are not in dispute. In February of 1990, Leo Richards was hired by Monkem Company as an over-the-road truck driver. Shortly thereafter, the plaintiff and her husband discussed the possibility of her riding as a [1012] passenger with him. Before the plaintiff could accompany her husband, however, Monkem Company required that she sign a form entitled "Passenger Authorization," and she did so on or about May 22, 1990.

The "Passenger Authorization" form used by Monkem Company appears to have two purposes. First, it served as Monkem Company's authorization to the passenger to ride in a company truck. Second, it serves as a passenger's general release of all claims against the Company. The language of release attempts to transform the "Passenger Authorization" form into an exculpatory contract relieving Monkem Company and all of its affiliated companies, partnerships, individuals and corporations (as well as others) from any and all liability for harm to the person signing the form. See Merten v. Nathan, 108 Wis.2d 205, 210, 321 N.W.2d 173 (1982). The form reads as follows: [1013]

[1014] In addition, the form contains an insert asking for the passenger's height, weight, hair color, eye color, driver's license number, and social security number. The appropriate information about the plaintiff was inserted on the form. The release was signed by Leo Richards as driver, Jerilyn Richards as passenger, and C.L. McCarley, Director of Risk Management for Monkem Company.

On June 14, 1990, the plaintiff accompanied her husband on one of his scheduled trips. When the truck, negotiating a left curve, overturned, the plaintiff was pinned inside the vehicle. The injuries she sustained as a result of this accident are the basis for the current lawsuit.

The principles applicable to the determination of the validity of exculpatory contracts were recently set forth by the court in Dobratz v. Thomson, 161 Wis.2d 502, 514-20, 468 N.W.2d 654 (1991), which incorporated, explained, and elaborated on the principles set forth in several earlier cases. See, e.g., Discount Fabric House v. Wisconsin Telephone Co., 117 Wis.2d 587, 345 N.W.2d 417 (1984) (contract releasing liability of telephone company for negligent omission of and from yellow pages); Arnold v. Shawano Co. Agr. Socy, 111 Wis.2d 203, 330 N.W.2d 773 (1983) (contract releasing liability of race track to driver), overruled on other grounds, Green Spring Farms v. Kersten, 136 Wis.2d 304, 314, 401 N.W.2d 816 (1987); Merten v. Nathan, 108 Wis.2d 205, 321 N.W.2d 173 (1982) (contract releasing liability of horseback riding school to pupil); and College Mobile Home Park & Sales v. Hoffmann, 72 Wis.2d 514, 241 N.W.2d 174 (1976) (contract releasing liability of landlord to tenant).

[1015] [4]

We now reiterate several of the principles from these cases which are relevant to the case at bar. Exculpatory contracts are not favored by the law because they tend to allow conduct below the acceptable standard of care applicable to the activity. Exculpatory contracts are not, however, automatically void and unenforceable as contrary to public policy. Arnold v. Shawano Co. Agr. Socy, 111 Wis.2d 203, 209, 330 N.W.2d 773 (1983), overruled on other grounds, Green Spring Farms v. Kersten, 136 Wis.2d 304, 314, 401 N.W.2d 816 (1987); Dobratz v. Thomson, 161 Wis.2d 502, 514, 468 N.W.2d 654 (1991). Rather, a court closely examines whether such agreements violate public policy and construes them strictly against the party seeking to rely on them. Merten v. Nathan, 108 Wis.2d 205, 211, 321 N.W.2d 173 (1982).

[5]

In determining whether an exculpatory agreement violates public policy and is therefore void, courts recognize that public policy is not an easily defined concept. The concept embodies the common sense and common conscience of the community. Public policy is that principle of law under which "freedom of contract is restricted by law for the good of the community." Merten v. Nathan, 108 Wis.2d 205, 213, 321 N.W.2d 173 (1982) (quoting Higgins v. McFarland, 86 S.E.2d 168, 172 (Va. 1955). An exculpatory agreement will be held to contravene public policy if it is so broad "that it would absolve [the defendant] from any injury to the [plaintiff] for any reason." College Mobile Home Park & Sales v. Hoffmann, 72 Wis.2d 514, 521-22, 241 N.W.2d 174 (1976). See also Arnold v. Shawano Co.Agr.Socy, 111 Wis.2d 203, 210, 330 N.W.2d 773 (1983), citing College Mobile Home Park with approval. In Dobratz v. [1016] Thomson, 161 Wis.2d 502, 520, 468 N.W.2d 654 (1991), a unanimous court, striking down an overly broad release, stated that "this court will not favor an exculpatory contract that is broad and general in its terms."

In reviewing an exculpatory agreement for violation of public policy, a court attempts to accommodate the tension between the principles of contract and tort law that are inherent in such an agreement. The law of contract is based on the principle of freedom of contract; people should be able to manage their own affairs without government interference. Freedom of contract is premised on a bargain freely and voluntarily made through a bargaining process that has integrity. Contract law protects justifiable expectations and the security of transactions. The law of torts is directed toward compensation of individuals for injuries resulting from the unreasonable conduct of another. Tort law also serves the "prophylactic" purpose of preventing future harm; tort law seeks to deter certain conduct by imposing liability for conduct below the acceptable standard of care. Merten v. Nathan, 108 Wis.2d 205, 211-212, 214, 321 N.W.2d 173 (1982).

Applying these principles to this case we conclude that the exculpatory contract at issue is void as against public policy. In this case, the public policy "of imposing liability on persons whose conduct creates an unreasonable risk of harm" outweighs the public policy of "freedom of contract." Merten v. Nathan, 108 Wis.2d 205, 215, 321 N.W.2d 173 (1982). Accordingly we conclude that it would be contrary to public policy to enforce the exculpatory language in Monkem Company's "Passenger Authorization" form. A combination of three factors in this case leads us to this conclusion.

[1017] [6]

First, the contract serves two purposes, not clearly identified or distinguished. As we stated previously, those purposes appear to be: (1) the Company authorizes the passenger to ride in a Company truck, and (2) the passenger releases the Company and others from liability. This dual function, however, is not made clear in the title of the contract; the form is designated merely as a "Passenger Authorization." The written terms clearly state that the document is a release of liability. A person signing a document has a duty to read it and know the contents of the writing. State Farm Fire & Casualty Co. v. Home Ins. Co., 88 Wis.2d 124, 129, 276 N.W.2d 349 (Ct. App. 1979). Nevertheless it is not reasonably clear to the signer of a form entitled "Passenger Authorization" that the document would in reality be the passenger's agreement to release the Company (and others) from liability. Rather the title "Passenger Authorization" implies that only the Company is making the concessions and only the Company is bound. We conclude that in this case the release should have been conspicuously labelled as such to put the person signing the form on notice. Moreover, to prevent confusion under these circumstances, the passenger's release of the Company from liability should have been carefully identified and distinguished from the Company's authorization for a passenger to ride along. Identifying and distinguishing clearly between those two contractual arrangements could have provided important protection against a signatory's inadvertent agreement to the release.

[7]

Second, the release is extremely broad and allinclusive. It purports to excuse intentional, reckless, and negligent conduct not only by the Company but by [1018] another entity (Joplin Hiway, Inc.) and by all affiliated, associated, or subsidiary companies, partnerships, individuals, or corporations, and all other persons, firms or corporations. Further, although the passenger's release is combined with the Company's authorization to the plaintiff to ride in a specified Company vehicle during a specified period, the release does not refer to an injury the plaintiff may sustain while riding as a passenger in the specified Company vehicle during the specified time period. It purports to release the Company from liability for any and all injury to the plaintiff while the plaintiff is a passenger in any vehicle (not necessarily one owned by the Company) at any time and while the plaintiff is on any and all Company property at any time. The release, unlike the authorization, is not limited to a specified vehicle or to a specified time period. Had the Company intended that it be released from liability to the plaintiff while she was riding with her husband in the Company truck during the period the Company authorized, that is not what the release says. The very breadth of the release raises questions about its meaning and demonstrates its one-sidedness; it is unreasonably favorable to the Company, the drafter of the contract.

With respect to overly broad releases, three lines of cases have developed. In College Mobile Home Park & Sales v. Hoffmann, 72 Wis.2d 514, 241 N.W.2d 174 (1976), the court concluded that an exculpatory contract contravenes public policy when it would absolve the tortfeasor from any injury to the victim for any reason. In Arnold v. Shawano Co. Agr. Socy, 111 Wis.2d 203, 330 N.W.2d 773 (1983), the court remanded the summary judgment case to the circuit court to determine at trial whether the accident was within the contemplation of the parties to a release which the [1019] court characterized as broad and ambiguous. In contrast, in Dobratz v. Thomson, 161 Wis.2d 502, 468 N.W.2d 654 (1991), the court struck down on summary judgment a broad release on the ground that it was ambiguous and unclear, and that, as a matter of law, no contract was formed. The facts of the three cases are different and determined the outcomes. In regard to the issue of overly broad releases, however, the court's resolution of the effect of the overly broad releases in College Mobile Home Park & Sales and Dobratz is more pertinent to the very broad and inclusive release in the case at bar than is the court's treatment of the more limited release in the Arnold case.

[8]

Third, this contract is a standardized agreement on the Company's printed form which offers little or no opportunity for negotiation or free and voluntary bargaining. According to the record, when the Company forwarded the form to the plaintiff its cover letter did not advise her that the document was a release of all claims and did not advise her of the legal significance attached to her signing of the document. The employee handbook advised employees that Company authorization was needed for a passenger to ride along but did not advise employees that the passenger would have to release all claims against the Company.

The fact that a release is printed in a standardized form is not, by itself, enough to invalidate it. However, the plaintiff's lack of an opportunity for discussing and negotiating the contract is significant when considered with the breadth of the release. If her plans to ride with her husband were to go forward, the plaintiff simply had to adhere to the terms of the written form. While the Company had the time and resources to draft the provisions and plan their effect, the plaintiff did not. [1020] Had the plaintiff been afforded the opportunity to negotiate a release, she might have declined to release the Company from liability for intentional or reckless actions or the driver's negligence, or from liability for its defective equipment. Because the Company probably derives some benefit from allowing family members to join drivers on the road, such as improving employee morale, the Company might not necessarily have rejected such proposals out of hand.

As we have said, none of these factors alone would necessarily have warranted invalidation of the exculpatory contract. Under the circumstances in the case at bar, a combination of these factors demonstrate that adherence to the principle of freedom of contract is not heavily favored. The principle of tort law, to compensate persons for injuries resulting from unreasonable conduct of another, prevails. Accordingly, we conclude that the document contravenes public policy and is void and unenforceable. The decision of the court of appeals is reversed and the cause remanded for proceedings not inconsistent with this opinion.

By the Court.—The decision of the court of appeals is reversed and the cause remanded to the circuit court.

DAY, J. (dissenting).

Leo J. Richards (Mr. Richards) was a truck driver in the employ of Monkem Company, a trucking company. Jerilyn Richards (Mrs. Richards), his wife, wished to travel in the truck with Mr. Richards during one of his trips. The release at issue was signed by Mrs. Richards and her husband as a condition for allowing Mrs. Richards to travel with her husband while he drove a truck owned by Monkem Company. The release was broad, but it was clearly within the contemplation of the parties that the release [1021] would cover an injury to Mrs. Richards while riding as a passenger in the truck during an accident caused by her husband's negligence.

The majority opinion lists three reasons which purportedly require invalidation of the release as a matter of law. The reasons given are: (1) "the contract serves two purposes, not clearly identified or distinguished"; (2) "the release is extremely broad and allinclusive"; (3) "the release is in a standardized agreement printed on the Company's form, offering little or no opportunity for negotiation or free and voluntary bargaining." 181 Wis. 2d at 1011. I dissent as to each reason given by the majority opinion for invalidating this release, and I dissent as to their application in "combination."

I agree that exculpatory releases are not generally favored and, therefore, will be construed strictly. Arnold v. Shawano County Agr. Society, 111 Wis. 2d 203, 209, 330 N.W.2d 773 (1983); Dobratz v. Thomson, 161 Wis. 2d 502, 514, 468 N.W.2d 654 (1991). However, the fact that exculpatory releases are "not favored" does not mean that the majority should invent new "rules" without precedent or support. None of the reasons cited by the majority justifies summary invalidation of this release. This the majority admits. Nor is summary invalidation of this release justified by these "reasons" in some unspecified "combination." Whether in "combination" or not, reasons (1) and (3) are "rules" created in this opinion, and reason (2) does not lead to automatic invalidation. The whole is not more than the sum of the parts here. None of these rationales justifies invalidation of the release as a "matter of law," and the facts of this case neither warrant nor support the rules created by the majority, whether applied singly or in combination. I would hold [1022] that the release should be enforced to the extent it covers what was clearly contemplated by the parties when executing the release. The accident which occurred was clearly the kind of occurrence contemplated in the release.

The first reason given by the majority opinion for invalidating the release as against "public policy" is that the release "serves two purposes." 181 Wis. 2d at 1011. There is no such "rule," however. No legal authority is cited by anyone, neither the parties nor the majority opinion, to support such a rule. Quite simply, this "rule" appears for the first time in the majority opinion. Moreover, this new "rule" conflicts with legal precedent and serves no practical purpose.

The majority opinion disapproves the fact that the release serves not only to release claims against the company but that it also serves to document the company's authorization of a passenger. However, a release in the present circumstances is best viewed as condition that must be met before permission is granted. Since permission is not given until the condition is met, the release must necessarily serve two purposes. By definition, it serves both to release claims and to satisfy a condition for permission. The signed release merely documents that the condition has been met.

This practice is quite common. Many cases have enforced releases which serve both to release claims and to document that permission has been granted upon satisfaction of the condition. For instance, most jurisdictions routinely enforce releases which were the condition for granting permission to applicants and participants in races and other recreational activities. See, Hammer v. Road America, Inc., 614 F. Supp. 467, 470 (E.D.Wis. 1985), aff'd., 793 F.2d 1296 (7th Cir. [1023] 1986); Arnold, 111 Wis. 2d at 213 n.4. Both Arnold and Merten v. Nathan, 108 Wis. 2d 205, 321 N.W.2d 173 (1982), involved releases which then served as conditions for participation. Neither of those opinions indicates any problem with that fact. Quite simply, there is no rule that a release "serving two purposes" must be invalid. There is no rule that a release "serving two purposes" is even presumptively invalid.

The only way that "serving two purposes" could lead to invalidation of a release is if "serving" the second purpose made an otherwise clear release unclear. For instance, one can conceive of a situation in which the addition of information extraneous to the release is interwoven with the language of the release in such a way that the release itself is made unclear. The release would therefore be unenforceable to the extent it was rendered unclear. see Arnold, 111 Wis. 2d at 211. Problems would also arise if a phrase or two containing release language were buried within a document otherwise devoted to matters unrelated to the release, so that it became unclear that a release was even contained within the document. See, e.g. Restatement (Second) of Torts § 496B, Comment C. Neither of these situations is present here, however.

Mrs. Richards complained that the release was invalid as a matter of law because the release document also served to satisfy federal requirements for information about passengers authorized to accompany truck drivers. However, as discussed above, there is no rule of law which suggests that a signed release may not be used to serve any number of purposes. Nor is there any reason why a document containing a release may not solicit other information from the signatory so long as the release itself remains clear.

[1024] The majority opines that "to prevent confusion under these circumstances, the passenger's release of the Company from liability should have been carefully identified and distinguished from the Company's authorization for a passenger to ride along." 181 Wis. 2d at 1017. However, besides the fact that there was no evidence of confusion in the record, there is no basis in fact or in law to even claim confusion in this case.

First, the release itself was clearly a release by its terms, and its function as a release was not obscured by the addition of a separate section asking for identification information about the passenger.

The "PASSENGER AUTHORIZATION" is a one-page document consisting of two sections. The first section is entitled: "FULL AND FINAL RELEASE ..." followed by the body of the release. The body of the release occupies approximately § 23 of the page and is written in capital lettering. The word "RELEASE" appears no less than four times in the release. In fact, no other single word with more than four letters appears more often in the release than the word "RELEASE"; only the name "MONKEM COMPANY" appears as many times as the word "RELEASE" in the release. The title to the release uses the word "RELEASE"; the final sentence before the signature portion of the release uses the word "RELEASE"; and the word "RELEASE" appears prominently in both of the two intervening paragraphs of the release. The final sentence of the release, located just above the space where the passenger applicant and driver are to sign, states: "THIS PERMISSION IS GIVEN ONLY UPON FULL UNDERSTANDING OF THE ABOVE RELEASE AND IS ACCEPTED AND EXECUTED AND ACKNOWLEDGED BY SIGNATURE OF THE PERSON BELOW:". Both Mrs. Richards and her husband [1025] signed the release in the appropriate space immediately following that statement.

The second section of the document, entitled, "PASSENGER INFORMATION," is located in the lower right hand corner of the document. It consists of entry blanks for the height, weight, hair color, eye color, driver's license number and social security number of the passenger. It occupies less than two square inches of space on the document. This section is clearly neutral, if not innocuous.

Any claim that the presence of the passenger information section could confuse anyone into believing that the rest of the document ceased to be a release is completely untenable. It is especially untenable when alleged by someone such as Mrs. Richards who did not even read or fill-out the passenger information section. See, footnote number 1, infra.

The majority concedes that the facts relevant to the determination of the validity of the release are not in dispute. 181 Wis. 2d at 1011. Those undisputed facts include the following:

Mrs. Richards claims in her brief that it was "undisputed that despite reasonable diligence by the plaintiff to find out the purpose of this agreement, she did not know and was not advised that the agreement was an exculpatory contract." And she claims that she "went through efforts to find out the reason for the agreement." Her "efforts," however, evidently did not include reading the release itself. Mrs. Richards' deposition testimony indicates that she did not read much of the document and did not read carefully those parts she may have read.^[1] Her efforts did not include asking the company any questions or even indicating any dissatisfaction [1026] with the release. Her efforts did not [1027] include reading the memo from the company carefully, and her efforts did not include contacting the Director of Risk Management referred to in the employee [student] handbook. Thus, when the majority opinion argues that "it is not reasonably clear to the signer of a form entitled `Passenger Authorization' that the document would in reality be the passenger's agreement to release the Company (and others) from liability," 181 Wis. 2d at 1017 it refers to no more than Mrs. Richards herself remembers reading carefully, namely, the first two words at the top of the document.

[1028] I agree with the court of appeals when it concludes that, "Jerilyn's assertions that she did not understand the language of the exculpatory contract but signed it anyway are insufficient to invalidate its effect. Failure to read or understand a contract will generally not affect its validity because a court will not protect a person who fails to take reasonable steps for her own protection." Richards v. Richards, 173 Wis. 2d 908, 499 N.W.2d 301 (Table), 1993 WL 8053 (Wis. App.), p. 2, (Unpublished Opinion). There is no reason why this court should credit Mrs. Richards' claim that she was or even could have been somehow confused about this being a release.

Nor is it credible on the facts as alleged to suggest or imply that Mr. Richards was somehow confused. As his deposition indicates, he knew that the Passenger Authorization contained a release. He knew that the release was required because Monkem Company was worried about accidents involving passengers. He admits that he did not read the release before signing it, and he admits that he did not ask anyone at Monkem Company to clarify it for him. There is no clear evidence that he read the student handbook carefully as to this issue, much less that he was, or in any way could have been, confused that this was a release. Rather he admits that all drivers knew ahead of time about the requirements.^[2] Thus, clearly, if Mrs. Richards [1029] was confused because she relied upon Mr. Richards' explanations of the release without really reading the release and without asking the company for clarification, that is her fault, and not any confusion caused by Monkem or the structure or wording of the document, as a matter of law.

The second reason given for invalidation of the release by the majority opinion is that the release is "extremely broad and all-inclusive." 181 Wis. 2d at 1011. I agree that the release is very broad. However, it is not the law in Wisconsin that just because a release is "extremely broad and all-inclusive" that it is automatically [1030] void as against public policy. This court held in Arnold, 111 Wis. 2d at 211, that the rule on broad and general exculpatory releases is as follows: "Exculpatory agreements that are broad and general in terms will bar only those claims that are within the contemplation of the parties when the contract was executed."^[3]

It must be emphasized that Mrs. Richards does not argue that the release was so obtuse that it could not be understood. Rather, Mrs. Richards argues that the release should be invalid because it is overbroad. Mrs. Richards complains that, "[i]t was simply impossible for the parties to contemplate the scope and breadth of the purported damages and actions that they were releasing." That may be true, but this case does not involve any bizarre hypotheticals, and the rule is that the parties will be held to what was clearly contemplated in the situation.

[1031] Thus the proper question in this context is what was clearly contemplated by the parties. Was it clearly contemplated that the release would cover Monkem? Was it clearly contemplated that the release would cover an accident in which Mrs. Richards was injured while riding as a passenger in the truck? And was it clearly contemplated that this release would prevent Mrs. Richards from recovering against the company for acts of negligence caused by her husband while driving Monkem's truck? The answer to each of these questions is "yes."

These questions may be determined as a matter of law. In Plummer v. Leonhard, 44 Wis. 2d 686, 692, 172 N.W.2d 1 (1969), citing 76 C.J.S. Release § 72 (1952), this court noted that normally the determination of the intent of the parties to a release, and the scope of a release, are questions of fact for the jury. However, the meaning, construction, and legal effect of a release are questions for determination by the court, where there is no ambiguity in the instrument, or where the evidence in connection with the release is undisputed. Specifically, the construction of a written release as operating to discharge particular claims is a determination made by the court. See, 76 C.J.S. Release § 72 (1952); and Arnold, 111 Wis. 2d at 212.

As to the first question, Mrs. Richards admits that the release is clear in its intent to release liability as to Monkem. "Obviously," Mrs. Richards writes in her brief, "the release itself purports to excuse negligence not only on behalf of Leo Richards' employer, Monkem Company, but in addition purports to release liability on behalf of some separate entity known as `Joplin Hiway, Inc.'" Her complaint at that point is that the identity of Joplin Hiway, Inc., etc., is not given, and therefore the scope of the release is overbroad. I might [1032] agree that the enforcement of the release as to unknown or undefined entities may or may not be permissible under the terms of this release. That is an open question. However, the fact that the release "obviously" covered Monkem means that was clearly contemplated by the parties and should therefore be enforced to that extent.

As to the second question, Mrs. Richards argued that the broad language of the release could cover an almost unlimited number of bizarre hypothetical situations and is therefore invalid. However, again, while the release will not be extended beyond those situations clearly contemplated by the parties, the rule of Arnold is that it will be applied to those situations clearly contemplated. The release clearly covers the situation in which the passenger is injured while riding in the truck, and this is precisely what happened to Mrs. Richards.

As to the third question, I agree with the court of appeals and conclude that it was clearly contemplated that the release obviously covered claims against the company based upon the spouse's negligent driving. Richards v. Richards, 173 Wis. 2d at 908, 1993 WL 8053 (Wis. App.), p. 2, (Unpublished Opinion).

Applying the rule of Arnold, the release should be enforced to the extent it covers situations clearly contemplated by the parties. I agree with the circuit court and court of appeals that Mrs. Richards clearly contemplated that the release would cover an injury sustained while Mrs. Richards was riding in the truck as a passenger during an accident caused by her husband's negligence, and that Monkem, at least, would be covered.

How and why the majority avoids the rule of Arnold is unclear. Arnold establishes that exculpatory [1033] clauses, while not favored, will be enforced to the extent they cover situations clearly contemplated by the parties executing the release. Accordingly, the fact that the release in Arnold was broad and ambiguous did not result in invalidation of the release. Instead, the court in Arnold remanded the summary judgment case to the circuit court to determine whether the specific accident which occurred was within the contemplation of the parties to the release.

The court in Arnold did not say that all questions of what was clearly contemplated must be returned to the circuit court when a release is broad in its terms. Quite to the contrary, the court explicitly noted that certain types of situations may reasonably be concluded were contemplated by the parties. The release in Arnold concerned the activity of racing. The court noted that "it would be reasonable to assume that this exculpatory contract was intended to preclude liability for such things as negligent maintenance of the track or the negligent driving of another driver participant ...." Arnold, 111 Wis. 2d at 212. The court's only concern was that it was unclear whether "rescue operations" were to be covered. Nor did the court say that rescue operations could not be covered by a broad release; rather it held only that it was not clear whether that particular type of situation had been contemplated and remanded for a factual determination on that question.

Precisely the same analysis should be applied to the present case. Clearly the parties here must be held to have contemplated that the release would cover injuries sustained by Mrs. Richards while riding as a passenger during an accident caused by her husband's negligence. That much was clearly contemplated and should be enforced to that extent. Had Mrs. Richards [1034] been injured in some other way, then we would have to confront whether that situation was clearly contemplated or not. But that is not our case. Thus regardless of how many hypotheticals are engaged to avoid Arnold, that case and the cases subsequent to Arnold still stand for the rule that exculpatory contracts will be enforced to the extent they cover situations clearly contemplated by the parties. Neither Dobratz nor any other decision has repealed that basic rule.

The majority cites Dobratz for the statement that "this court will not favor an exculpatory contract that is broad and general in its terms." I agree. However, Dobratz does not say that broad and general releases are invalid. Quite to the contrary, Dobratz, 161 Wis. 2d at 521, cites to Arnold and explicitly endorses the analysis and conclusion of Arnold.

Nor does College Mobile Home Park & Sales provide a legitimate basis to avoid the rule of Arnold. The majority claims that College Mobile Home Park & Sales is "more pertinent" to the present situation than is Arnold. 181 Wis. 2d at 1011. However, the majority does not explain how or why. College Mobile Home Park & Sales cannot be more "pertinent" than Arnold, neither in fact nor in law. On the facts, College Mobile Home Park & Sales concerns the specialized area of landlord-tenant law, an area now covered by statute. The release in Arnold, which is a condition of permission for a discretionary activity and which concerns injuries occurring while riding in a vehicle, is clearly more analogous to the present situation. Likewise, in the law, Arnold supersedes College Mobile Home Park & Sales. Arnold establishes the rule that broad exculpatory releases will be enforced to the extent they cover situations clearly contemplated by the parties. It refers to College Mobile Home Park & Sales as an example of [1035] landlord-tenant law and cites that case and others as consistent with the rule promulgated in Arnold. Accordingly, College Mobile Home Park & Sales does not overrule or displace the rule established in Arnold.

The third reason given for invalidation of this release by law is that "the release is in a standardized agreement printed on the Company's form, offering little or no opportunity for negotiation or free and voluntary bargaining." 181 Wis. 2d at 1011. This "reason" is, of course, actually a combination of several factors, none of which supports a "rule" for invalidation by law.

First, the suggestion that there is something inherently or presumptively wrong with releases written in standardized forms is without foundation. There is plenty of authority that standardized contracts will be read strictly and will be construed against the drafter, etc. see e.g. Restatement (Second) of Torts § 496B, Comments C and D; Restatement (Second) of Contracts § 195, Comment B. However, there is no authority cited that a standardized form is inherently or even presumptively invalid in this context or any other. Again, this "rule," if it is to be that, appears for the first time in the majority opinion.

Such a rule, which would effectively ban standardized releases, also conflicts with prior case law. Many, if not all, of the cases in which releases have been enforced involve pre-printed and standardized forms. For instance, in Arnold, 111 Wis. 2d at 211, this court specifically commented on the standardized nature of the exculpatory contract in that case. Significantly, the court did not take issue with the fact that the form was standardized. The problem in Arnold was lack of clarity in the terms of the clause, not the fact that the form was standardized. There is nothing in Arnold to suggest [1036] that the standardized nature of the release was itself the source of reservations, much less that standardized agreements are somehow presumptively invalid.

Nor does the proposed rule against standardized forms have a practical purpose. The majority opinion explains that "[w]hile the Company had the time and resources to draft the provisions and plan their effect, the plaintiff did not." 181 Wis. 2d at 1007. I find no legal or practical reason why the company should not take the "time and resources to draft the provisions and plan their effect." We should hope that all drafters would use such circumspection. Is it seriously suggested that the release would be more acceptable had it been improvised hurriedly on a piece of blank paper? Would public policy be favored if the company could prove it gave no thought to the effect of the provisions or if it could prove it had incorrectly planned the effect of the provisions? Again, assuming that public policy is not otherwise violated, all that is required is that the release be clear. It will be enforced to the extent it covers what was clearly contemplated by the parties.

Second, the imposition of a "bargaining" requirement has no legal foundation in this context and makes little practical sense. It is true that the courts will sometimes compensate for the weaker bargaining power of certain actors in contract cases. However, these cases are typically limited to special situations and special areas of the law. For instance, as this court explains in Arnold, 111 Wis. 2d at 210:

"There are a variety of other situations in which courts have refused to enforce exculpatory contracts on grounds of public policy. They include: excusing a party from tort liability for harm caused intentionally or recklessly; excusing an employer [1037] from liability to an employee for injury in the course of his employment; relieving a party charged with performing a service of great importance to the public; and excusing a party invoking exculpation who possesses a decisive advantage in bargaining strength."

Arnold does include unequal bargaining strength as a factor. However, the source for this analysis is § 195 of the Restatement (Second) of Contracts which does not list unequal bargaining strength as an independent factor. Similarly, the Restatement (Second) of Torts § 496B, Comment J, also mentions the "disparity of bargaining power," but limits this factor to special contexts in which there are other factors involved, for instance, when there is no "free choice" on the part of the plaintiff owing to the "necessities" and "exigencies" of the situation.

No cases are cited—from any jurisdiction—which suggest that the mere fact that the parties to a contract possess unequal bargaining strength means that no exculpatory clauses or releases are permissible. When this court has applied the unequal bargaining strength rationale, as in Discount Fabric House v. Wis. Tel. Co., 117 Wis. 2d 587, 345 N.W.2d 417 (1984), it rejected that view. In Discount Fabric House, the unequal bargaining factor was explicitly linked to (and limited to) the public service context of the situation:

This exculpatory clause in this private contract is against public policy in that the parties are not on equal bargaining terms and the telephone company has created a public interest in the publication of the yellow pages which requires that the telephone company perform its private duty to the ad subscriber without negligence or be held for damages. (emphasis supplied). Id. 117 Wis. 2d at 600.

[1038] The court in Discount Fabric House emphasized the "indispensable" nature of the service:

In publishing the yellow pages the telephone company is engaged in performing a service of great, if not essential, importance to the public and it holds itself out as willing to give reasonable public service to all who apply to place ads in the yellow pages. The telephone company possesses a decisive advantage of bargaining strength. Id. 117 Wis. 2d at 596.

Finally, the court in Discount Fabric House, 117 Wis. 2d at 600-601, cited with approval a case which expressed the rule as follows:

There are then two inquiries in a case [involving unequal bargaining strength]: (1) What is the relative bargaining power of the parties, their relative economic strength, the alternative sources of supply, in a word what are their options?; (2) Is the challenged term substantively reasonable? ... Thus merely because the parties have different options or bargaining power, unequal or wholly out of proportion to each other, does not mean that the agreement of one of the parties to a term of a contract will not be enforced against him; if the term is substantively reasonable it will be enforced. By like token, if the provision is substantively unreasonable, it may not be enforced without regard to the relative bargaining power of the contracting parties. (emphasis supplied).

Accordingly, then, none of these rationales applies to the present context. Monkem is not providing a public service or fulfilling a public duty in permitting Mrs. Richards to ride with her husband. Monkem is not entering a market transaction. Nor is this in any sense a "necessity" for Mrs. Richards. The majority opinion [1039] laments that, "[i]f her plans to ride with her husband were to go forward, the plaintiff simply had to adhere to the terms of the written form." 181 Wis. 2d at 1019. However, the mere fact that she made "plans" to do something which was not authorized cannot by itself inject any requirement for "bargaining." Nor can the mere fact that one party sets a condition mean that unequal bargaining power has been employed. The company is under no obligation to allow any passengers. It is willing to entertain applications upon request, but only if the spouse-passengers sign releases of claims against the company for injuries they might sustain while being a passenger. Such a requirement is neither unfair nor surprising.

As such, this newly created "bargaining" requirement, if it be that, is issued without any ascertainable standards. The majority has failed to explain when or why the newly created bargaining requirement is to be applied and the opinion does not begin to explain how it is to be applied. Is it applied because of something Monkem has done? At one point the majority implies that the bargaining requirement is to be applied because the company "probably derives some benefit" from a situation. However, besides the fact that this is pure speculation (Mrs. Richards never claims this), is there any situation in which one could not speculate that one party or another "probably derives some benefit"? Clearly such a rule would know no boundaries. And, again, there is no law cited from any jurisdiction or source suggesting anything even close to a "rule" that just because someone "probably derives some benefit" that that party must "afford" the other party an "equal opportunity to negotiate."

Perhaps the newly created bargaining requirement is applied because of something Mrs. Richards [1040] might have done—assuming she had read the release, of course. At one point the majority suggests that, "[h]ad the plaintiff been afforded the opportunity to negotiate a release, she might have declined to release the Company from liability for intentional or reckless actions ..." 181 Wis. 2d at 1020. Ironically, however, such claims would not need to be "declined" because they are unenforceable anyway. There is already a rule against releasing claims for intentional or reckless actions. That rule is to decline enforcement in those instances, not to invalidate the release as a whole. If Mrs. Richards had been injured by defective equipment, then, we would have to address the question of whether that type of risk was clearly contemplated by the parties or not. However, the mere fact that one can think of some hypothetical which might not be covered does not mean that the release as a whole is invalid. Were that so, the rule in Arnold would have no meaning.

Both practitioner and court are left without a clue as to what it means to "afford" Mrs. Richards "the equal opportunity to negotiate a release." First, it is unclear when, why or how this "opportunity to negotiate" should be "afforded." Is the company to ask all spouse-applicants if they wish to negotiate? On the facts of the present case it makes little sense to say that Mrs. Richards was not "afforded" an "opportunity" when she failed to really read the release and never asked anyone at the company any questions about the release and did not even indicate any dissatisfaction with the release to the company. How and why can the majority imply that the company somehow failed to "afford" Mrs. Richards "opportunity" when she never requested any such "opportunity"?

[1041] Second, what does it mean to "negotiate" in this context, and how would the company ensure that the negotiations were "equal"? Are we to assess the competency of Mrs. Richards to negotiate and assume that any deficiencies must somehow be compensated for in substance by the company? What if Mrs. Richards is offered an entire brochure on negotiation skills but fails to read it, just as she failed to really read the one page release? Or is it suggested that the company appoint someone to help Mrs. Richards draft a counter-proposal? Must the company then negotiate—in good faith, of course—about which terms of its own release it might be willing to drop in "negotiations"? And what if, despite very skilled and fair negotiations on both sides, Mrs. Richards nevertheless agrees to accept the full release. The majority opinion implies that this result would be presumptively suspect.... The questions and problems these new "rules" raise are without visible end or solution.

Third, I disagree with majority's comments about the cover letter and the employee handbook. The majority opinion does not claim that the cover letter or the employee (student) handbook were in any way affirmatively misleading. However, the majority opinion does suggest that one or both of these materials extraneous to the release should have explained the release to Mrs. Richards by law. The majority opinion states that the "cover letter did not advise [Mrs. Richards] that the document was a release of all claims and did not advise her of the legal significance attached to her signing of the document." 181 Wis. 2d at 1019. Likewise, the majority opinion complains that the "employee handbook advised employees that Company authorization was needed for a passenger to ride along but did not advise employees that the passenger would [1042] have to release all claims against the Company." 181 Wis. 2d at 1019.

Thus, as written, the majority opinion implies that an otherwise clear standardized clause would require non-standardized extraneous matter to explain the contents and effect of the clause. That is not the law. The cover letter and employee handbook are extraneous to the release. As such, they are relevant only to the extent they could either clarify or confuse the original release. If the release is itself clear, then, there might be a question of whether the cover letter or employee handbook, when read together with the clause, made the release unclear. However, on the facts of this case, both the cover letter and the handbook were neutral and factually accurate.^[4] There is no law that a cover letter which accompanies a release must reemphasize that the document it accompanies is a release when the document itself makes that clear. Nor is there any requirement that a cover letter explain the "legal significance" of the document it accompanies when the document itself is clear. Finally, there is no reason that the employee handbook must assume this responsibility, especially since it was not presented to Mrs. Richards, and she did not read it carefully, if at all. Thus, so long as these extraneous materials do not [1043] detract from the release, then the release stands on its own.

Finally, the majority opinion attempts to characterize this result as necessary to "accommodate" the "tension between the principles of contract and tort law" which is inherent in exculpatory agreements. 181 Wis. 2d at 1016. The principle of tort law "prevails" in this instance, the majority opinion explains, because we should "impos[e] liability on persons whose conduct creates an unreasonable risk of harm." (emphasis supplied) 181 Wis. 2d at 1015. However, in the present context, it is not Monkem who "creates" an unreasonable risk of harm, but rather it is Mrs. Richards who brought the risk into being by requesting authorization to be a passenger in the truck, and it was Mrs. Richards' husband who caused the accident through his own negligence.^[5] Monkem company was only attempting to protect itself from claims in which a passengerspouse sues the employer-owner on the basis of the spouse-driver's negligence. Since allowing passengers is entirely within the discretion of the company and is not favored generally by Federal law (hence the authorization requirement), it surely is not against public policy for a company in Monkem's position to demand a release of claims related to being a passenger before it gives authorization for the spouse-passenger to accompany the spouse-driver. Afterall, Monkem was [1044] doing Mr. & Mrs. Richards a favor by granting permission for Mrs. Richards to accompany her husband in the truck.

The sweeping condemnation of this release by the majority opinion, however, coupled with the refusal to enforce even those aspects of the release which were "obvious" to even Mrs. Richards, leaves companies such as Monkem clueless as to how one might craft a valid release. After reading the majority opinion, one might conclude that a valid release may be executed only if the document is not standardized, only if the company has not planned the effect of the document, only if the document says "RELEASE" more than once in each paragraph, only if a copy of the release and an explanation of the release are included in all correspondence to the prospective signatory and in all other materials such as student handbooks which might fall into the hands of a prospective spouse-passenger applicant, and, finally, only if the company provides for real and effective "bargaining" for spouse-passenger applicants.

Because the majority opinion ignores our past precedents and creates new "rules" that are in my opinion unnecessary and unwise, I dissent.

I am authorized to state that JUSTICES STEINMETZ and WILCOX join in this dissenting opinion.

[1]The following are excerpts from Mrs. Richards' deposition. (Record, 12:26-27, 29-30).

Q: And you read the complete document from top to bottom?

A: No.

Q: You didn't read the complete document. What did you read and what did you not read?

A: That it was basically it. From the top you can tell and from the memo it was a Passenger Authorization and down here that I needed to make a signature where my name was typed.

Q: Did you read the first paragraph commencing with `Full and final release' ending with the word `future'?

A: I may have.

Q: And did you read the second paragraph commencing with `I/we' ending with `property'?

A: I didn't understand it enough to read it.

Q: Well, did you read it?

A: I can't recall for sure if I read it or not, the whole thing.

Q: Did you read the third paragraph commencing with the words `It is expressly' ending with the words `consequences thereof?

A: I don't recall if I read what exact parts for sure of all or any of the document.

Q: All right. Likewise, Paragraph 4 commencing with the words `Permission is granted' ending with the words `person below:'?

[Mrs. Richards' attorney]: Okay. Same answer as previously, that you don't know if you read it or not?

A: Yes. I don't know....

Q: Do you know who inserted the information concerning the passenger that's on the right-hand portion of the lower third of the document?

A: No, I don't.

Q: Is that your handwriting?

A: I do not believe that it is....

Q: Did you read that it was a release of all claims that you may have against Monkem Company for riding as a passenger?

A: I'm not sure.

Q: Did you understand that this authorization was also a release of future causes of action or future claims that you may have against Monkem Company for riding as a passenger or being injured while riding as a passenger with Monkem?

A: I didn't understand it to mean that.

Q: Did you seek any assistance prior to signing this with regard to the portions that you've indicated that you did not understand?

A: No, I did not.

Q: So even though you didn't understand some of the contents of this authorization, you went ahead and signed it anyway?

A: Yes....

Q: Did you discuss with Mr. Richards, your husband, the fact that [the Passenger Authorization] not only released or authorized you to ride as a passenger but released claims that you may have for being injured while riding as a passenger with Mr. Richards in a Monkem vehicle?

A: I did mention to him that I didn't understand it, and he had talked to someone, a secretary or someone at Monkem, and she just said that it just needed to be signed before I could go with him was what I understood from what he had told me from the conversation with her.

Q: Did you talk to the secretary?

A: No, I did not.

[2]The following are excerpts from Mr. Leo J. Richards' deposition. (Record, 11:23-24, 26-27).

Q: Was reference made to [the passenger] authorization [form]?

A: Well, we knew by federal law that you had to have a rider's permit for any passenger, and they mentioned that we would have to get one and that the only passengers they would authorize was immediate family.

Q: And did [Monkem Company] indicate a purpose for that authorization?

A: Yeah.

Q: What was that purpose that was communicated to you?

A: Well because they have a high percentage of accidents of passengers getting in and out of the vehicle, and they had to sign the release, and they also had to have a doctor's statement that they're physically able to climb in and out of the vehicle....

Q: Did the secretary in the Safety Office [at Monkem Company] explain the purpose that they—or the reason that they required [the passenger authorization] to be executed?

A: No. No. All drivers know that you have to have a Passenger Authorization. Even if you own the vehicle yourself, you still have to make one out.

Q: Prior to signing that agreement or that authorization did you have an opportunity to read it?

A: I glanced at it, but it's all legal mumbo jumbo, you know....

Q: Okay. Did you question anybody concerning its contents prior to signing it?

A: No.

Q: So you signed the agreement even though you didn't understand what it said?

A: Well, the only thing I looked at was to see that my truck number and stuff was right, and that's about all....

[3] Arnold was overruled on other grounds, Green Springs Farms v. Kersten, 136 Wis. 2d 304, 317, 401 N.W.2d 816 (1987). The rule as concerns overbroad exculpatory clauses in Arnold was reaffirmed in Dobratz, 161 Wis. 2d at 523, 525. Dobratz, at 523, holds that no contract was formed in that case owing to the uncertainty and ambiguity of the document. It distinguishes that situation from cases involving overbroad exculpatory clauses. Dobratz, at 525, explicitly approves of Arnold and Trainor v. Aztalan Cycle Club, Inc., 147 Wis. 2d 107, 432 N.W.2d 626 (Ct. App. 1988) in how they handle overbroad release analysis. Nor does College Mobile Home Park & Sales v. Hoffmann, 72 Wis. 2d 514, 241 N.W.2d 174 (1976) stand for the proposition that broad leases in any or all subject areas may be held invalid just because they are broad. It specifically sets its holding in the framework of the public policy in landlord-tenant law, and has been interpreted by subsequent cases as an example of landlord-tenant law. see Arnold, 111 Wis. 2d at 210.

[4] The cover letter was addressed to Mrs. Jerilyn Richards and read as follows: "Both of you should sign where indicated on the attached form. Please return the yellow copy in the enclosed envelope to this office and keep the original on the truck with you at all times. If you have any questions, please contact us." The entry in the employee handbook was merely stating that a passenger authorization was possible. It described the eligibility requirements and made clear that the process of applying would be handled through the Director of Risk Management of the company.

[5] It was noted in Discount Fabric House, 117 Wis. 2d at 600, that exculpatory clauses are not favored because "such provisions tend to induce a want of care ..." However, in this instance, there is no hint, no allegation, and certainly no showing, that Monkem Company's level of care diminished in connection with the release or otherwise. Nor would there be any incentive to reduce the level of care because the company would still be liable to all others, and to the driver, in particular.

[149] Fogel and Lamber, P.A. by Dennis M. Lamber and Kenneth J. Love and Gage and Mathers, Ltd. by G. David Gage, Phoenix, for plaintiff-appellant.

Snell & Wilmer by Barry D. Halpern, John C. West, Bob J. McCullough, Robert H. Oberbillig, Phoenix, for defendant-appellee Abortion Services of Phoenix.

The Langerman Law Offices by Amy G. Langerman, Phoenix, for amicus curiae Ariz. Trial Lawyers Ass'n.

Bob Gibbons, Austin, Tex., and Jeffrey R. White, Washington, D.C., for amicus curiae Ass'n of Trial Lawyers of America.

Snell & Wilmer by Lawrence F. Winthrop, Phoenix, for amicus curiae Ariz. Medical Ass'n.

MOELLER, Vice Chief Justice.

STATEMENT OF THE CASE

Melinda Kay Broemmer (plaintiff) asks this court to review a court of appeals opinion that held that an "Agreement to Arbitrate" which she signed prior to undergoing a clinical abortion is an enforceable, albeit an adhesive, contract. Broemmer v. Otto, 169 Ariz. 543, 821 P.2d 204 (1991). The opinion affirmed the trial court's grant of summary judgment in favor of Abortion Services of Phoenix and Dr. Otto (defendants). Because we hold the agreement to arbitrate is unenforceable as against plaintiff, we reverse the trial court and vacate in part the court of appeals opinion. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

FACTS AND PROCEDURAL HISTORY

In December 1986, plaintiff, an Iowa resident, was 21 years old, unmarried, and 16 or 17 weeks pregnant. She was a high school graduate earning less than $100.00 a week and had no medical benefits. The father-to-be insisted that plaintiff have an abortion, but her parents advised against it. Plaintiff's uncontested affidavit describes the time as one of considerable confusion and emotional and physical turmoil for her.

Plaintiff's mother contacted Abortion Services of Phoenix and made an appointment for her daughter for December 29, 1986. During their visit to the clinic that day, plaintiff and her mother expected, but did not receive, information and counselling on alternatives to abortion and the nature of the operation. When plaintiff and her mother arrived at the clinic, plaintiff was escorted into an adjoining room and asked to complete three forms, one of which is the agreement to arbitrate at issue in this case. The agreement to arbitrate included language that "any dispute aris[ing] between the Parties as a result of the fees and/or services" would be settled by binding arbitration and that "any arbitrators appointed by the AAA [American Arbitration Association] shall be licensed medical doctors who specialize in obstetrics/gynecology." [150] The two other documents plaintiff completed at the same time were a 2-page consent-to-operate form and a questionnaire asking for a detailed medical history. Plaintiff completed all three forms in less than 5 minutes and returned them to the front desk. Clinic staff made no attempt to explain the agreement to plaintiff before or after she signed, and did not provide plaintiff with copies of the forms.

After plaintiff returned the forms to the front desk, she was taken into an examination room where pre-operation procedures were performed. She was then instructed to return at 7:00 a.m. the next morning for the termination procedure. Plaintiff returned the following day and Doctor Otto performed the abortion. As a result of the procedure, plaintiff suffered a punctured uterus that required medical treatment.

Plaintiff filed a malpractice complaint in June 1988, approximately 1 1/2 years after the medical procedure. By the time litigation commenced, plaintiff could recall completing and signing the medical history and consent-to-operate forms, but could not recall signing the agreement to arbitrate. Defendants moved to dismiss, contending that the trial court lacked subject matter jurisdiction because arbitration was required. In opposition, plaintiff submitted affidavits that remain uncontroverted. The trial court considered the affidavits, apparently treated the motion to dismiss as one for summary judgment, and granted summary judgment to the defendants. Plaintiff's motion to vacate, quash or set aside the order, or to stay the claim pending arbitration, was denied.

On appeal, the court of appeals held that although the contract was one of adhesion, it was nevertheless enforceable because it did not fall outside plaintiff's reasonable expectations and was not unconscionable. Following the court of appeals opinion, the parties stipulated to dismiss the Ottos from the lawsuit and from this appeal. We granted plaintiff's petition for review.

ISSUE

Plaintiff presents 5 potential issues in her petition for review. Some of the parties and amici have urged us to announce a "bright-line" rule of broad applicability concerning the enforceability of arbitration agreements. Arbitration proceedings are statutorily authorized in Arizona, A.R.S. §§ 12-1501 to -1518, and arbitration plays an important role in dispute resolution, as do other salutary methods of alternative dispute resolution. Important principles of contract law and of freedom of contract are intertwined with questions relating to agreements to utilize alternative methods of dispute resolution. We conclude it would be unwise to accept the invitation to attempt to establish some "bright-line" rule of broad applicability in this case. We will instead resolve the one issue which is dispositive: Under the undisputed facts in this case, is the agreement to arbitrate enforceable against plaintiff? We hold that it is not.

DISCUSSION

I. The Contract is One of Adhesion

When the facts are undisputed, this court is not bound by the trial court's conclusions and may make its own analysis of the facts or legal instruments on which the case turns. Tovrea Land & Cattle Co. v. Linsenmeyer, 100 Ariz. 107, 114, 412 P.2d 47, 51 (1966). A.R.S. § 12-1501 authorizes written agreements to arbitrate and provides that they are "valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract." Thus, the enforceability of the agreement to arbitrate is determined by principles of general contract law. The court of appeals concluded, and we agree, that, under those principles, the contract in this case was one of adhesion.

An adhesion contract is typically a standardized form "offered to consumers of goods and services on essentially a `take it or leave it' basis without affording the consumer a realistic opportunity to bargain and under such conditions that the consumer cannot obtain the desired product or services except by acquiescing in the form contract." Wheeler v. St. Joseph Hosp., 63 Cal. App.3d 345, 356, 133 Cal. Rptr. 775, 783 [151] (1976) (citations omitted); see also Burkons v. Ticor Title Ins. Co. of Cal., 165 Ariz. 299, 311, 798 P.2d 1308, 1320 (App. 1989), rev'd on other grounds, 168 Ariz. 345, 813 P.2d 710 (1991) (essence of adhesion contract is that it is offered to consumers on essentially a "take it or leave it" basis). The Wheeler court further stated that "[t]he distinctive feature of a contract of adhesion is that the weaker party has no realistic choice as to its terms." 63 Cal. App.3d at 356, 133 Cal. Rptr. at 783 (citations omitted). Likewise, in Contractual Problems in the Enforcement of Agreements to Arbitrate Medical Malpractice, 58 Va.L.Rev. 947, 988 (1972), Professor Stanley Henderson recognized "the essence of an adhesion contract is that bargaining position and leverage enable one party `to select and control risks assumed under the contract.'" (quoting Friedrich Kessler, Contracts of Adhesion — Some Thoughts About Freedom of Contract, 43 Colum.L.Rev. 629 (1943)).

The printed form agreement signed by plaintiff in this case possesses all the characteristics of a contract of adhesion. The form is a standardized contract offered to plaintiff on a "take it or leave it" basis. In addition to removing from the courts any potential dispute concerning fees or services, the drafter inserted additional terms potentially advantageous to itself requiring that any arbitrator appointed by the American Arbitration Association be a licensed medical doctor specializing in obstetrics/gynecology. The contract was not negotiated but was, instead, prepared by defendant and presented to plaintiff as a condition of treatment. Staff at the clinic neither explained its terms to plaintiff nor indicated that she was free to refuse to sign the form; they merely represented to plaintiff that she had to complete the three forms. The conditions under which the clinic offered plaintiff the services were on a "take it or leave it" basis, and the terms of service were not negotiable. Applying general contract law to the undisputed facts, the court of appeals correctly held that the contract was one of adhesion.

II. Reasonable Expectations

Our conclusion that the contract was one of adhesion is not, of itself, determinative of its enforceability. "[A] contract of adhesion is fully enforceable according to its terms [citations omitted] unless certain other factors are present which, under established legal rules — legislative or judicial — operate to render it otherwise." Graham v. Scissor-Tail, Inc., 28 Cal.3d 807, 171 Cal. Rptr. 604, 611, 623 P.2d 165, 172 (1981) (footnotes omitted). To determine whether this contract of adhesion is enforceable, we look to two factors: the reasonable expectations of the adhering party and whether the contract is unconscionable. As the court stated in Graham:

Generally speaking, there are two judicially imposed limitations on the enforcement of adhesion contracts or provisions thereof. The first is that such a contract or provision which does not fall within the reasonable expectations of the weaker or "adhering" party will not be enforced against him. [citations omitted] The second — a principle of equity applicable to all contracts generally — is that a contract or provision, even if consistent with the reasonable expectations of the parties, will be denied enforcement if, considered in its context, it is unduly oppressive or "unconscionable."

171 Cal. Rptr. at 612, 623 P.2d at 172-73 (citations omitted). See also Huff v. Bekins Moving & Storage Co., 145 Ariz. 496, 498, 702 P.2d 1341, 1343 (App. 1985).

Plaintiff argues that the trial court should have adopted, and we should now adopt, the analysis provided in Obstetrics & Gynecologists v. Pepper, 101 Nev. 105, 693 P.2d 1259 (1985), because it is virtually indistinguishable from the present case. In Pepper, the patient was required to sign an agreement before receiving treatment which waived her right to jury trial and submitted all disputes to arbitration. The clinic did not explain the contents of the agreement to the patient. The clinic's practice was to have staff instruct patients to complete two medical history forms and the agreement to arbitrate and to inform patients that any questions would be answered. [152] If the patient refused to sign the agreement, the clinic refused treatment.

The plaintiff in Pepper signed the agreement, but did not recall doing so, nor did she recall having the agreement explained to her. The plaintiff later brought suit for injuries suffered due to improperly prescribed oral contraceptives. The trial court made no findings of fact or conclusions of law, but the Nevada Supreme Court, upon review of the record before it, held the agreement unenforceable because plaintiff did not give a knowing consent to the agreement to arbitrate.

The facts in the instant case present an even stronger argument in favor of holding the agreement unenforceable than do the facts in Pepper. In both cases, plaintiffs stated that they did not recall signing the agreement to arbitrate or having it explained to them. Unlike the clinic in Pepper, the clinic in this case did not show that it was the procedure of clinic staff to offer to explain the agreement to patients. The clinic did not explain the purpose of the form to plaintiff and did not show whether plaintiff was required to sign the form or forfeit treatment. In Pepper, the fact that both parties were waiving their right to a jury trial was explicit, which is not so in the present case.

Clearly, the issues of knowing consent and reasonable expectations are closely related and intertwined. In Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388 (1984), this court used the Restatement (Second) of Contracts § 211 (Standardized Agreements), as a guide to analyzing, among other things, contracts that contain non-negotiated terms. The comment to subsection (3), quoted with approval in Darner, states in part:

Although customers typically adhere to standardized agreements and are bound by them without even appearing to know the standard terms in detail, they are not bound to unknown terms which are beyond the range of reasonable expectation.

See 140 Ariz. at 391, 682 P.2d at 396.

The Restatement focuses our attention on whether it was beyond plaintiff's reasonable expectations to expect to arbitrate her medical malpractice claims, which includes waiving her right to a jury trial, as part of the filling out of the three forms under the facts and circumstances of this case. Clearly, there was no conspicuous or explicit waiver of the fundamental right to a jury trial or any evidence that such rights were knowingly, voluntarily and intelligently waived. The only evidence presented compels a finding that waiver of such fundamental rights was beyond the reasonable expectations of plaintiff. Moreover, as Professor Henderson writes, "[i]n attempting to effectuate reasonable expectations consistent with a standardized medical contract, a court will find less reason to regard the bargaining process as suspect if there are no terms unreasonably favorable to the stronger party." Henderson, supra, at 995. In this case failure to explain to plaintiff that the agreement required all potential disputes, including malpractice disputes, to be heard only by an arbitrator who was a licensed obstetrician/gynecologist requires us to view the "bargaining" process with suspicion. It would be unreasonable to enforce such a critical term against plaintiff when it is not a negotiated term and defendant failed to explain it to her or call her attention to it.

Plaintiff was under a great deal of emotional stress, had only a high school education, was not experienced in commercial matters, and is still not sure "what arbitration is." Given the circumstances under which the agreement was signed and the nature of the terms included therein, our reading of Pepper, Darner, the Restatement and the affidavits in this case compel us to conclude that the contract fell outside plaintiff's reasonable expectations and is, therefore, unenforceable. Because of this holding, it is unnecessary for us to determine whether the contract is also unconscionable.

III. A Comment on The Dissent

In view of the concern expressed by the dissent, we restate our firm conviction that arbitration and other methods of alternative [153] dispute resolution play important and desirable roles in our system of dispute resolution. We encourage their use. When agreements to arbitrate are freely and fairly entered, they will be welcomed and enforced. They will not, however, be exempted from the usual rules of contract law, as A.R.S. § 12-1501 itself makes clear.

We also restate that we decline the invitation to write a sweeping, legislative rule concerning all agreements to arbitrate. Instead, we decide this case. In this case, the facts concerning the signing of the document have all come from the plaintiff and all are uncontradicted. Under the undisputed facts in this case, the document involved is a contract of adhesion. Our enthusiasm for arbitration in general does not permit us to ignore the realities present in this case.

The dissent is concerned that our decision today sends a "mixed message." It is, however, our intent to send a clear message. That message is: Contracts of adhesion will not be enforced unless they are conscionable and within the reasonable expectations of the parties. This is a well-established principle of contract law; today we merely apply it to the undisputed facts of the case before us.

DISPOSITION

Those portions of the opinion of the court of appeals inconsistent with this opinion are vacated. The judgment of the trial court is reversed and this case is remanded for further proceedings consistent with this opinion. Because plaintiff has successfully overcome defendant's claimed contractual defense, the trial court may entertain an application for fees incurred at the trial court and appellate level. Wagenseller v. Scottsdale Memorial Hosp., 147 Ariz. 370, 391-95, 710 P.2d 1025, 1046-50 (1985).

FELDMAN, C.J., and CORCORAN and ZLAKET, JJ., concur.

MARTONE, Justice, dissenting.

The court's conclusion that the agreement to arbitrate was outside the plaintiff's reasonable expectations is without basis in law or fact. I fear today's decision reflects a preference for litigation over alternative dispute resolution that I had thought was behind us. I would affirm the court of appeals.

We begin with the undisputed facts that the court ignores. Appendix "A" to this dissent is the agreement to arbitrate. At the top it states in bold capital letters "PLEASE READ THIS CONTRACT CAREFULLY AS IT EFFECTS [sic] YOUR LEGAL RIGHTS." Directly under that in all capital letters are the words "AGREEMENT TO ARBITRATE." The recitals indicate that "the Parties deem it to be in their respective best interest to settle any such dispute as expeditiously and economically as possible." The parties agreed that disputes over services provided would be settled by arbitration in accordance with the rules of the American Arbitration Association. They further agreed that the arbitrators appointed by the American Arbitration Association would be licensed medical doctors who specialize in obstetrics/gynecology. Plaintiff, an adult, signed the document.

Under A.R.S. § 12-1501, a written contract to submit to arbitration any controversy that might arise between the parties is "valid, enforceable and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract." The statute applies to any controversy. Under A.R.S. § 12-1503, if the arbitration agreement provides a method of appointment of arbitrators, "this method shall be followed." Under A.R.S. § 12-1518, the American Arbitration Association is expressly acknowledged as an entity that the state itself may use in connection with arbitration. There is judicial review of any award. A.R.S. § 12-1512. Thus, on the face of it, the contract to arbitrate is plainly reasonable and enforceable unless there are grounds to revoke it. A.R.S. § 12-1501.

The court seizes upon the doctrine of reasonable expectations to revoke this contract. But there is nothing in this record that would warrant a finding that an agreement to arbitrate a malpractice claim was [154] not within the reasonable expectations of the parties. On this record, the exact opposite is likely to be true. For all we know, both sides in this case might wish to avoid litigation like the plague and seek the more harmonious waters of alternative dispute resolution.^[1] Nor is there anything in this record that would suggest that arbitration is bad. Where is the harm? In the end, today's decision reflects a preference in favor of litigation that is not shared by the courts of other states and the courts of the United States.

In Doyle v. Giuliucci, 62 Cal.2d 606, 43 Cal. Rptr. 697, 699, 401 P.2d 1, 3 (1965), Chief Justice Roger J. Traynor of the California Supreme Court said, in connection with a medical malpractice claim, that "[t]he arbitration provision in such contracts is a reasonable restriction, for it does no more than specify a forum for the settlement of disputes." And, in Madden v. Kaiser Foundation Hospitals, 17 Cal.3d 699, 131 Cal. Rptr. 882, 890, 552 P.2d 1178, 1186 (1976), the California Supreme Court outlined "the benefits of the arbitral forum":

[t]he speed and economy of arbitration, in contrast to the expense and delay of jury trial, could prove helpful to all parties; the simplified procedures and relaxed rules of evidence in arbitration may aid an injured plaintiff in presenting his case. Plaintiffs with less serious injuries, who cannot afford the high litigation expenses of court or jury trial, disproportionate to the amount of their claim, will benefit especially from the simplicity and economy of arbitration; that procedure could facilitate the adjudication of minor malpractice claims which cannot economically be resolved in a judicial forum.^[2]

The Federal Arbitration Act, 9 U.S.C. § 2, is just like Arizona's, A.R.S. § 12-1501. There was a time when judicial antipathy towards arbitration prevailed. Poor Justice Frankfurter had to say in dissent in Wilko v. Swan, 346 U.S. 427, 439, 74 S.Ct. 182, 189, 98 L.Ed. 168 (1953) that "[t]here is nothing in the record before us, nor in the facts of which we can take judicial notice, to indicate that the arbitral system ... would not afford the plaintiff the rights to which he is entitled."

Justice Frankfurter's views have now been vindicated. The Supreme Court of the United States has upheld arbitration agreements under the Federal Arbitration Act in a variety of contexts, from the commercial setting in Shearson/American Express Inc. v. McMahon, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (Securities Exchange Act of 1934 and RICO claims) and Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989) (Securities Act of 1933) to employment discrimination claims. Gilmer v. Interstate/Johnson Lane Corp., ___ U.S. ___, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) (Age Discrimination in Employment Act claim).

Indeed, in Gilmer, the Supreme Court expressly rejected the arguments that regrettably this court has accepted. ___ U.S. at ___-___, 111 S.Ct. at 1654-55. The Supreme Court has expressly rejected the "outmoded presumption" and "suspicion of arbitration as a method of weakening the protections afforded in the substantive law." Rodriguez de Quijas, 490 U.S. at 481, 109 S.Ct. at 1920.

Against this background, how does this court reach its conclusion that arbitration [155] is beyond the reasonable expectations of the parties? Its reliance on Obstetrics and Gynecologists v. Pepper, 101 Nev. 105, 693 P.2d 1259 (1985), Darner Motor Sales, Inc. v. Universal Underwriters Insurance Co., 140 Ariz. 383, 682 P.2d 388 (1984), and the Restatement (Second) of Contracts § 211 (1979), is misplaced.

Pepper is a brief per curiam opinion of the Nevada Supreme Court which merely affirmed the finding of a trial court. The trial court held a hearing to determine whether there was an enforceable arbitration contract. However, the trial court did not make findings of facts and conclusions of law. That court simply denied a motion to stay pending arbitration. The Nevada Supreme Court said "[t]he district court could certainly have found that the arbitration agreement was an adhesion contract." 693 P.2d at 1260. It then said "[s]ince appellant's counsel failed to pursue the entry of findings of facts and conclusions of law, we are bound to presume that the district court found that respondent did not give a knowing consent to the arbitration agreement prepared by appellant clinic." Id., 693 P.2d at 1261. If Pepper stands for anything, it stands for the proposition that "knowing consent" is a factual question, and that an appellate court will affirm a factual finding if there is any evidence to support it. The basis for the court's decision was "knowing consent" under Nevada law, not reasonable expectations under ours.

Nor are Darner and the Restatement support for this court's conclusion. Darner held that an adhesive contract term that is "contrary to the negotiated agreement made by the parties," 140 Ariz. at 387, 682 P.2d at 392, will not be enforced because it collides with expectations that "have been induced by the making of a promise." 140 Ariz. at 390, 682 P.2d at 395 (quoting 1 Corbin, Contracts § 1 at 2 (1963)). The defendant here did not promise the plaintiff that malpractice claims could be litigated. Thus, the agreement to arbitrate is not contrary to any negotiated deal.

Gordinier v. Aetna Casualty & Surety Co., 154 Ariz. 266, 742 P.2d 277 (1987), of course, extended Darner to the entire scope of the Restatement (Second) of Contracts § 211 (1979). But even that section does not support today's decision. Under Restatement (Second) of Contracts § 211(3), standardized agreements are enforceable except where a party has reason to believe that the other party would not manifest assent if he knew that the writing contained a particular term. Comment f to § 211 tells us:

Such a belief or assumption may be shown by the prior negotiations or inferred from the circumstances. Reason to believe may be inferred from the fact that the term is bizarre or oppressive, from the fact that it eviscerates the non-standard terms explicitly agreed to, or from the fact that it eliminates the dominant purpose of the transaction. The inference is reinforced if the adhering party never had an opportunity to read the term, or if it is illegible or otherwise hidden from view.

Plainly, there are no facts in this case to support any of these factors. There were no prior negotiations that were contrary to arbitration. An agreement to arbitrate is hardly bizarre or oppressive. It is a preferred method of alternative dispute resolution that our legislature has expressly acknowledged in A.R.S. § 12-1501. Arbitration does not eviscerate any agreed terms. Nor does it eliminate the dominant purpose of the transaction. The plaintiff here had an opportunity to read the document, the document was legible and was hardly hidden from plaintiff's view. This arbitration agreement was in bold capital letters. Thus, the reasonable expectations standard of the Restatement (Second) of Contracts § 211 does not support this court's conclusion.

There is another reason why § 211(3) fails to support the court's conclusion. The Restatement (Second) of Contracts chapter 8 describes the whole range of unenforceable contracts. Its introductory note states:

[156] A particularly important change has been effected by statutes relating to arbitration, which have now been enacted in so many jurisdictions that it seems likely that even in the remaining states, there has been a change in the former judicial attitude of hostility toward agreements to arbitrate future disputes.... Such agreements are now widely used and serve the public interest by saving court time. The rules stated in this Chapter do not preclude their enforcement even in the absence of legislation.

Restatement (Second) of Contracts ch. 8, intro. note at 4 (emphasis added). It is difficult to reconcile the court's reliance on the Restatement in light of this.

The court tells us that there is no explicit waiver of the fundamental right to a jury trial in the arbitration agreement. But under Rule 38(d), Ariz.R.Civ.P., the failure of a party to serve a demand for a jury trial and file it constitutes a waiver by that party of a trial by jury. In contrast to the criminal process, no complicated proceeding is required to waive a trial by jury in a civil case. It is ironic that the majority prefers litigation, in which the plaintiff would lose her right to trial by jury by failing to know about it and demand it under Rule 38, but then somehow assumes that a document which in bold capital letters informs the plaintiff that it affects her legal rights and is denominated in bold capital letters as "agreement to arbitrate" is insufficient warning.

At bottom, all that could explain the court's decision is a preference for litigation over arbitration. The court expresses sympathy for the plaintiff as though arbitration were harmful to her interests. But Arizona public policy has long supported arbitration as good, not evil. Court annexed arbitration of civil actions under A.R.S. § 12-133 is now an entrenched part of our culture. About 90% of these cases end at arbitration and are not appealed.^[3] Arizona Supreme Court Commission on the Courts, Report of the Commission on the Courts 36 (1989). Indeed, the Commission on the Courts specifically recommended that medical malpractice cases be subject to alternative dispute resolution procedures. Id. at 38. It noted that many lawyers will not take a malpractice case unless the damages exceed $100,000. "A large number of potential plaintiffs, therefore, may never receive the representation and opportunity for compensation they deserve. Both plaintiff and defense attorneys indicate that they would prefer a different form of dispute resolution." Id. at 39.

Ironically, this court was instrumental in establishing an alternative dispute resolution fund under which we promote alternative dispute resolution and administer the fund. A.R.S. § 12-135.

And, we recently amended our rules of civil procedure to encourage trial judges to "[c]onsider alternative dispute resolution." Ariz.R.Civ.P. 16(c)(11). The committee comment to this 1991 amendment notes that "Rule 16(c)(11) is intended by the Committee to be a strong suggestion that the court explore the possibility of alternative dispute resolution including binding and non-binding arbitration...." Rule 16(c)(11), Ariz.R.Civ.P. comment (emphasis added).

Today's decision sends a mixed message. In light of all of these developments, how can it be that an agreement to arbitrate "fell outside plaintiff's reasonable expectations?" The court's answer, Part III, ante, at 152, 840 P.2d at 1017, merely confuses the concept of a contract of adhesion with the doctrine of reasonable expectations. The court says it will enforce arbitration agreements "freely and fairly entered," ante, at 153, 840 P.2d at 1018, and that "the document involved is a contract of adhesion." Id. But the court's own framework of analysis acknowledges that its "conclusion that the contract was one of adhesion is not, of itself, determinative of its enforceability." Ante, at 151, 840 P.2d at 1016. It acknowledges that once it is determined that an adhesive contract exists, [157] one looks to (1) reasonable expectations and (2) conscionability. Id. No one doubts that this was a contract of adhesion. And the court holds that because "the contract fell outside plaintiff's reasonable expectations" it is unenforceable, and therefore it is not necessary "to determine whether the contract is also unconscionable." Ante, at 152, 840 P.2d at 1017. Thus the court does not reach conscionability.

The only basis for the court's decision is "reasonable expectations," but words such as "freely and fairly entered," or "contract of adhesion" are irrelevant to that inquiry. If it is not "free" it is a contract of adhesion. If it is "unfair" it is unconscionable. Nowhere does the court's "Comment on The Dissent" provide the basis for its legal conclusion that this adhesive agreement to arbitrate fell outside of plaintiff's reasonable expectations. In the end we are left to conclude that people reasonably expect litigation over alternative dispute resolution. For all these reasons, I dissent.

[158]

[1] According to a national survey on American attitudes towards dispute resolution, 82% of the American public, once informed, is willing to use dispute resolution, particularly mediation and arbitration. NIDR Releases Findings of National Survey on Public Attitudes Towards DR, Forum, Summer 1992 at 26.

[2] Following these decisions, the California legislature adopted Cal.Civ.Proc.Code § 1295, which expressly regulates such provisions. California has acknowledged the validity of contracts in compliance with the statute even where the patient is illiterate and, as here, claims not to remember signing it. Bolanos v. Khalatian,231 Cal. App.3d 1586, 283 Cal. Rptr. 209, 211 (1991).

Michigan has a statute similar to California's, Mich. Stat. Ann. §§ 27A. 5040-27A. 5065, and its court has rejected arguments that arbitration agreements in compliance with the statute are adhesive, unconscionable, or deny people their rights to jury trials. Morris v. Metriyakool, 418 Mich. 423, 344 N.W.2d 736 (1984).

[3] In 1987 and 1988, in Maricopa County, there were 290 appeals from 2,945 terminated arbitration cases.

[156] [157] Herbert M. Wachtell, Wachtell, Lipton, Rosen & Katz (Proskauer Rose LLP (John H. Gross and Seth B. Schafler), and Wachtell, Lipton, Rosen & Katz (Eric M. Roth, Marc Wolinsky, Barbara Robbins, Ben M. Germana, Elaine P. Golin, Jed I. Bergman, Edward J.W. Blatnik, Ian Boczko, and Kenneth K. Lee), on the brief), New York, NY, for Defendants-Counter-Claimants-Counter-Defendants-Appellants-Cross-Appellees World Trade Center Properties, L.L.C., Silverstein Properties, Inc., Silverstein WTC Management Co., L.L.C., 1 World Trade Center, L.L.C., 2 World Trade Center, L.L.C., 4 World Trade Center, L.L.C, and 5 World Trade Center, L.L.C.

Skadden, Arps, Slate, Meagher & Flom LLP (Timothy G. Reynolds and Arthur F. Fama, Jr.) and Port Authority of New York and New Jersey (Milton H. Pachter, Megan Lee, and Timothy G. Stickelman), New York, NY, for Defendants-Counter-Claimants-Counter-Defendants-Appellants-Cross-Appellees Port Authority of New York and New Jersey.

Mayer, Brown, Rowe & Maw (Philip Allen Lacovara, Ryan P. Farley, Peter K. Rosen, and David C. Bolstad), New York, N.Y. & Los Angeles, CA, for Defendants-Counter-Claimants-Counter-Defendants-Appellants-Cross-Appellees Westfield WTC, L.L.C., Westfield Corporation, Inc., and Westfield America, Inc.

Harvey Kurzweil, Dewey Ballantine LLP (Alan R. Miller, Robins Kaplan Miller & Ciresi LLP, Boston, MA, Saul P. Morgenstern, Robert J. Morrow, Paul T. Olszowka, and Nora M. Puckett, Dewey Ballantine LLP, on the brief), New York, NY, for Counter-Defendant-Appellee Travelers Indemnity Company.

William J. Bowman, Hogan & Hartson LLP (John G. Roberts, Jr., Patrick F. Hofer, Paula P. Skalaban, and Joshua D. Weinberg, on the brief), Washington, DC, for Counter-Defendant-Appellee Hartford Fire Insurance Company.

Michael H. Barr, Sonnenschein Nath & Rosenthal (Sandra D. Hauser, Michael S. Gugig, Steven L. Brodsky, Stephen C. McDougall, on the brief), New York, NY, for Counter-Defendant-Appellee Royal Indemnity Company.

Charles Fried (Shaw Pittman LLP, Lon A. Berk, Walter J. Andrews, Michael S. Levine, Mary K. Martin, McLean, VA, on the brief), Cambridge, MA, for Counter-Defendant-Appellee-Cross-Appellant St. Paul Fire & Marine Insurance Co.

Heller Ehrman White & McAuliffe LLP (Nancy Sher Cohen, Stephen N. Goldberg, and John C. Ulin, on the brief), New York, NY, for Defendants-Counter-Claimants-Counter-Defendants-Cross-Appellees GMAC Commercial Mortgage Corporation and Wells Fargo Bank Minnesota, N.A.

Covington & Burling (Mitchell F. Dolin, Neil K. Roman, Richard A. Beckmann, on the brief), Washington, DC, for Defendants-Counter-Claimants-Counter-Defendants-Cross-Appellees UBS Warburg Real Estate Investments Inc.

Barry R. Ostrager, Simpson Thacher & Bartlett (Mary Kay Vyskocil, Michael J. Garvey, Tyler B. Robinson, and Michael C. Ledley, on the brief), New York, NY, for Plaintiff-Counter-Defendant-Intervenor SR International Business Insurance Co., Ltd.

Boies, Schiller & Flexner LLP (David Boies, Edward Normand), Armonk, NY; Ropes & Gray (Kenneth W. Erickson, Robert A. Skinner, John C. Demers; Paul B. Galvani), Boston, MA and New York, NY; Cozen O'Connor (Stephen A. Cozen, Jay M. Levin), Philadelphia, PA; Mound, Cotton, Wollan & Greengrass (Stuart Cotton), New York, NY; Robinson & Cole [158] LLP (Gregory J. Ligelis), Stamford, CT; Budd, Larner, Gross, Rosenbaum, Greenberg & Sade P.C. (Christopher S. Finazzo), Short Hills, NJ; Mendes & Mount LLP (Leo W. Fraser III), New York, NY, for Amici Curiae Certain Counterclaim Defendants in Support of Affirmance and in Support of Travelers Indemnity Company.

Eliot Spitzer, Attorney General of the State of New York (Caitlin J. Halligan, Solicitor General, Michelle Aronowitz, Deputy Solicitor General, Deon J. Nossel, Assistant Solicitor General, of counsel), New York, NY, for Amicus Curiae The Attorney General of the State of New York in Support of Appellants.

Before: WALKER, Chief Judge, CABRANES and POOLER, Circuit Judges.

JOHN M. WALKER, JR., Chief Judge.

This case arises out of the devastating tragedy that occurred at the World Trade Center ("WTC") in lower Manhattan, New York, on the morning of September 11, 2001. At issue in this case is the amount of insurance that is recoverable for the total destruction of the WTC that occurred after the buildings were struck by two fuel-laden aircraft that had been hijacked by terrorists. The appellants are numerous entities that have varying property interests in the WTC, including the Port Authority of New York and New Jersey (the "Port Authority"), which owns the property in fee simple, and Silverstein Properties, Inc. and several related entities ("Silverstein Properties"). In the spring of 2001, Silverstein Properties was the successful bidder on a 99-year lease for the property from the Port Authority. In July 2001, Silverstein Properties obtained primary and excess insurance coverage for the WTC complex from about two dozen insurers (most of which constitute the appellees and other counter-defendants in this case) in the total amount of approximately $3.5 billion "per occurrence." Because Silverstein Properties is the party that actually obtained the insurance coverage at issue in this case and was the primary insured, for ease of reference all appellants will hereafter be referred to collectively as the "Silverstein Parties."

The parties do not dispute that the destruction of the WTC resulted in a loss that greatly exceeded $3.5 billion. The broad question presented in this case is whether the events of September 11, 2001 constituted one or two "occurrences." The answer will determine whether the Silverstein Parties can recover once, up to $3.5 billion, or twice, up to $7 billion, under the insurance coverage. Complicating the resolution of this question is the fact that as of September 11, 2001, only one of the many insurers that bound coverage on the WTC had issued a final policy, necessitating an individualized inquiry to determine the terms of the insurance binders issued by each insurer.

This litigation began on October 22, 2001 when one of the WTC insurers, plaintiff-counter-defendant-intervenor SR International Business Insurance ("SR International"), filed suit against the Silverstein Parties "seek[ing] a judicial declaration of its rights and obligations to all of the insureds under the policy" and a "declaration that the damage to the World Trade Center is one insurance loss." The Silverstein Parties subsequently filed counterclaims against the other WTC insurers, seeking a declaration "that the events of September 11th constituted more than one occurrence under the coverage that the counterclaim-defendant[s] agreed to provide [159] to the Silverstein Parties."^[1] After an initial assignment to another judge, the action was assigned to District Judge John S. Martin Jr. of the United States District Court for the Southern District of New York for all purposes.

In the first of these related appeals, the Silverstein Parties appeal from three judgments, made final and appealable pursuant to Fed.R.Civ.P. 54(b), granting summary judgment in favor of appellees Hartford Fire Insurance Company ("Hartford"), Royal Indemnity Company ("Royal"),^[2] and St. Paul Fire & Marine Insurance Company ("St.Paul"), respectively, in which the district court held that (a) the binders they issued were governed by the insurance policy form circulated by Silverstein Properties' insurance broker, and (b) under the definition of "occurrence" in that form, the destruction of the WTC was one occurrence as a matter of law. In the second appeal, the Silverstein Parties appeal an interlocutory order of the district court, certified to this court pursuant to 28 U.S.C. § 1292(b), denying the Silverstein Parties' motion seeking summary judgment against appellee Travelers Indemnity Company ("Travelers") based on the argument that the events of September 11, 2001, constituted two occurrences as a matter of law under the undefined term "occurrence" contained in Travelers' insurance policy. This court issued orders granting the Silverstein Parties' petition for leave to appeal under 28 U.S.C. § 1292(b) and their motion to have the § 1292(b) and Rule 54(b) appeals heard in tandem.

For the following reasons, the judgments of the district court are affirmed.

BACKGROUND

As a condition of its 99-year lease of the WTC, Silverstein Properties was required to obtain first-party property insurance on the property. Silverstein Properties engaged Willis of New York ("Willis"), an insurance broker, to set up a multi-layered insurance program, which consisted of a primary insurance layer and 11 excess insurance layers providing a total of approximately $3.5 billion insurance on a "per occurrence" basis. In soliciting insurers for the program, Willis circulated a Property Underwriting Submission (the "Underwriting Submission") containing information regarding the proposed placement, including descriptions of the property and the insureds, desired coverage terms and conditions, estimated property values, engineering information, and a property loss history. With respect to at least the four insurers involved in these appeals, the Underwriting Submission also included a specimen copy of Willis's own "broker" form (the "WilProp form").^[3] Section VIII of the Underwriting Submission states:

[160] Policy Form and Contract between Silverstein and the [Port Authority] are attached. DRAFT WilProp for Real Estate Risks is attached. We anticipate that this form will ultimately require amendment to comply with the Contract between Silverstein Properties, Inc. and the [Port Authority]. In the meantime, we provide this document as a starting point.

Of the four insurers in these appeals, Travelers was the only insurer to submit its own specimen policy form (the "Travelers form") during the course of negotiating the terms of coverage.^[4] Whereas the Travelers form did not define the term "occurrence," the WilProp form defined occurrence as follows:

"Occurrence" shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.

SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, 222 F.Supp.2d 385, 398 (S.D.N.Y.2002).

As we will explain in greater detail, each of the appellees negotiated separately with Willis concerning its participation in the insurance program and all had bound coverage on various layers as of July 20, 2001. During the course of the next several weeks, Willis negotiated with Travelers over the terms of its final policy, but the Silverstein Parties have presented no evidence to indicate that any of the other appellees participated in or were aware of the details of those negotiations. As of September 11, 2001, none of the appellee-insurers had issued a final policy form, nor had Willis issued the WilProp form as a final policy form, although at least one other participating insurer, Allianz Insurance Company ("Allianz"), had issued a final policy. SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, No. 01 Civ. 9291(JSM), 2002 WL 1163577, at *2 & n. 3 (S.D.N.Y. June 3, 2002); see also SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, No. 01 Civ. 9291(JSM), 2003 WL 192487, at *4 (S.D.N.Y. Jan.29, 2003). On September 14, 2001, three days after the WTC was destroyed, following discussions between Willis and Travelers, Travelers issued its final policy form.

DISCUSSION

I. JURISDICTION

As a threshold matter, we address the basis for federal subject matter jurisdiction over these exclusively state law claims involving insurance coverage and contract interpretation. "An inquiry respecting [jurisdiction] is one we always have the power to undertake, and where jurisdiction is questionable we are obliged to examine it sua sponte." Petereit v. SB Thomas, Inc., 63 F.3d 1169, 1175 (2d Cir.1995). Although we are satisfied that jurisdiction exists here, we discuss the issue because of some unusual circumstances presented in this case.

The district court did not specifically address jurisdiction in its opinion denying summary judgment. It apparently was of the view, however, that the action against Travelers was separate from the SR International [161] litigation and related counterclaims, and noted that Travelers is a Connecticut company with its principal place of business in Connecticut, while the entities comprising Silverstein Properties are all either Delaware or New York companies and have their principal places of business in New York. We need not decide if there was jurisdiction over the separate action initially filed by Silverstein Properties against Travelers, however, because in March 2002, prior to the district court's decision denying summary judgment, that action was withdrawn without prejudice by stipulation of the parties and Travelers was added as a counterclaim defendant to the action brought against the Silverstein Parties by SR International. See supra n. 1. Accordingly, we address only whether there exists federal jurisdiction over the latter action.

A. Diversity Jurisdiction

According to the Silverstein Parties, federal jurisdiction exists in this case because there is complete diversity between all of the defendants and plaintiff SR International and supplemental jurisdiction applies to defendants' counterclaims against Travelers and the other insurers. A review of the parties' citizenship^[5] appears to support this assertion. Plaintiff SR International is a foreign corporation (a citizen of the United Kingdom), but this does not preclude diversity because 28 U.S.C. § 1332(a)(2) provides federal jurisdiction over actions between "citizens of a State and citizens or subjects of a foreign state."

Defendant Wells Fargo is a national bank (i.e., not incorporated in any one state) and by statute is deemed to be a citizen of every state in which it has offices. 28 U.S.C. § 1348 ("All national banking associations shall, for the purposes of all [ ] actions by or against them [other than a few enumerated in the statute], be deemed citizens of the States in which they are respectively located."); see United Republic Ins. Co., in Receivership v. Chase Manhattan Bank, 315 F.3d 168, 169 (2d Cir.2003) (per curiam) (recalling mandate, vacating prior summary order, and remanding to district court to determine whether diversity jurisdiction existed under 28 U.S.C. §§ 1332 & 1348 in light of fact that defendant banks had branch offices in plaintiff's home state); but see Lerner v. Fleet Bank, N.A., 318 F.3d 113, 124-25 (2d Cir.2003) (implicitly assuming that national bank was a citizen of New York, presumably its principal place of business, for purposes of diversity). The fact that Wells Fargo may be a citizen of several unidentified states does not affect diversity here, however, because SR International is a foreign citizen.

Defendant Port Authority presents a closer question on jurisdiction because it is a state-created body, thereby raising the possibility that it is a not a "citizen" of any state, the effect of which would be to destroy diversity. The Port Authority is

[162] a body "corporate and politic" established in 1921 pursuant to a bi-state compact between New York and New Jersey, see N.Y. Unconsol. Law § 6407 (McKinney 2000), and assented to by Congress, see 42 U.S. Stat. 174 (1921). The Port Authority's mission was, and remains, the development of public transportation, terminal, and other facilities of commerce within the statutorily defined Port Authority district, which includes the area in and around New York City harbor. See N.Y. Unconsol. Law § 6403. The Port Authority is governed by a board of commissioners, see id. §§ 6405-06, whose resolutions are essentially legislative acts of the bi-state entity that must be approved by the governors of both states. See id. §§ 7151-52.

Baron v. Port Auth., 271 F.3d 81, 83 (2d Cir.2001). We have found no case addressing the question of whether the Port Authority can be considered a "citizen" for purposes of diversity jurisdiction, and courts that have addressed this question with respect to other port authorities and similar agencies in other states have reached different conclusions based largely on the level of autonomy enjoyed by the agency. Compare Indiana Port Comm'n v. Bethlehem Steel Corp., 702 F.2d 107, 110 (7th Cir.1983) (holding that "[Indiana Port Commission] is not the `alter ego' of the state of Indiana, and is, in fact, an independent corporate entity seeking to assert its own rights in this action," and, therefore, there was diversity jurisdiction), and C.H. Leavell & Co. v. Bd. of Comm'rs of Port of New Orleans, 424 F.2d 764, 767 (5th Cir.1970) (holding that "[Louisiana] Dock Board is a sufficiently separate entity from the State of Louisiana to sustain diversity jurisdiction") with Tradigrain, Inc. v. Mississippi State Port Auth., 701 F.2d 1131, 1134 (5th Cir.1983) (finding, based on statutes and other factors, that "Mississippi State Port Authority is merely the alter ego of the State of Mississippi, and as such is not a `citizen' for purposes of diversity jurisdiction").

Although whether the Port Authority is a "citizen" of New York for diversity purposes is apparently an issue of first impression in our circuit, case law has established that it is a political subdivision of the state and, therefore, is not entitled to sovereign immunity. See Feeney v. Port Auth. Trans-Hudson Corp., 873 F.2d 628, 631 (2d Cir.1989) (holding that Eleventh Amendment immunity was inapplicable to "PATH [in part because of] the fact that the compact between New York and New Jersey describes the Port Authority as a `municipal corporate instrumentality,' N.Y. Unconsol. Laws § 6459 (McKinney 1979) and N.J. Stat. Ann. § 32:1-33 (West 1963), language consistent with its being a political subdivision"); see also Japan Airlines Co. v. Port Auth., 178 F.3d 103, 110-12 (2d Cir.1999) (holding, after extensive analysis, "that the Port Authority was not entitled to [either sovereign or] governmental immunity [for case arising out of proprietary conduct], and the district court properly instructed the jury to treat the Port Authority as it would any private corporation"). In light of these rulings, we hold that, as is the case with political subdivisions in general, the Port Authority is not so closely aligned with the two state governments that created it to foreclose its being treated as a citizen of both New York and New Jersey for diversity purposes. See Illinois v. City of Milwaukee, 406 U.S. 91, 97, 92 S.Ct. 1385, 31 L.Ed.2d 712 (1972) ("It is well settled that for the purposes of diversity of citizenship, political subdivisions are citizens of their respective States."). Accordingly, we agree with the Silverstein Parties that complete diversity exists between plaintiff SR International [163] and all of the defendants in this action.

We also agree with the Silverstein Parties that supplemental jurisdiction provides jurisdiction over the Silverstein Parties' counterclaims against the other insurers even though some of these insurers may be non-diverse. See 28 U.S.C. § 1367 (setting forth requirements for supplemental jurisdiction); Viacom Int'l, Inc. v. Kearney, 212 F.3d 721, 726-27 (2d Cir. 2000) (observing that § 1367 permits defendants to assert claims against non-diverse third parties in diversity cases); David Siegel, Practice Commentary, "The 1990 Adoption of § 1367, Codifying `Supplemental' Jurisdiction," printed in 28 U.S.C.A. § 1367 at 832-33 (West 1993) (same); see also Owen Equip. & Erection Co. v. Kroger, 437 U.S. 365, 374-77 & n. 18, 98 S.Ct. 2396, 57 L.Ed.2d 274 (1978) (holding that whereas plaintiff's claims against non-diverse parties destroyed diversity jurisdiction, ancillary (now supplemental) jurisdiction supported defendant's counterclaims and third-party claims against non-diverse parties); Herrick Co. v. SCS Communications, Inc., 251 F.3d 315, 325 n. 8 (2d Cir.2001) ("The effect of Kroger was therefore `to limit ancillary jurisdiction primarily to claims asserted by parties in a defensive posture, or who did not choose the federal forum. Therefore, at least in diversity cases, ancillary jurisdiction usually is not available for claims asserted by the plaintiff.'") (quoting 13 Charles Alan Wright, Arthur R. Miller and Edward H. Cooper, Federal Practice and Procedure: Jurisdiction § 3523) (emphasis added).

B. Statutory Jurisdiction

The Silverstein Parties also assert that there is federal jurisdiction under the Air Transportation Safety and System Stabilization Act of 2001, Pub.L. No. 107-42, § 408(b)(3), 115 Stat. 230, 241 (Sept. 22, 2001), as amended by the Aviation and Transportation Security Act of 2001, Pub.L. No. 107-71, § 201, 115 Stat. 597, 645 (Nov. 19, 2001).^[6] That Act, originally passed by Congress to limit the liability of [164] air carriers for any claims arising from the September 11th attacks, was later amended to extend its protection to, inter alia, any "person with a property interest in the World Trade Center." Id. at § 408(a)(1). The purpose of the Act is to cap the liability of various entities for damages and contribution claims to the limits of their liability insurance coverage. The Act also creates a federal cause of action for any damages claims arising out of the September 11th attacks. Id. at § 408(b)(1). In addition, the Act grants to the District Court for the Southern District of New York "original and exclusive jurisdiction over all actions brought for any claim (including any claim for loss of property, personal injury, or death) resulting from or relating to the terrorist-related aircraft crashes of September 11, 2001." Id. at § 408(b)(3).

While the other parts of § 408 apply only to liability claims brought against air carriers, World Trade Center property interest holders, and similar entities, the jurisdictional grant of § 408(b)(3) is considerably broader, and its plain language would appear to encompass the instant claims filed by the World Trade Center property interest holders against their insurers — claims that are clearly "related to" the September 11th attacks. The very breadth of this jurisdictional grant, however, raises the question of whether it exceeds the constitutional limitations on Congress's authority to grant jurisdiction to federal courts. See Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 491, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983) (noting that "Congress may not expand the jurisdiction of the federal courts beyond the bounds established by the Constitution," such as to purely state-law claims). In fact, in the only opinion in this litigation to discuss jurisdiction, the district court, while addressing a different issue, noted that there is "a serious question whether the grant of jurisdiction in the Act applies to this case," and that to avoid the constitutional question presented, it "would be inclined to construe the Act's grant of jurisdiction as not extending to these claims between the insurers and their insureds." SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, 2002 WL 1905968, at *2 (S.D.N.Y. Aug.19, 2002) (holding, after analyzing the statute, that the parties' contractual appraisal procedure for determining the amount of loss was not preempted by the Act). The district court ultimately concluded, "[h]owever, [that it] need not decide whether Congress either intended to or could vest this Court with exclusive jurisdiction over an action between the Silverstein Parties and their insurers." Id. at *3.

We recently acknowledged these same constitutional concerns in a case between foreign reinsurers involving a breach of contract claim arising out of the September 11th terrorist attack, in which we observed that to construe the statute "to encompass all claims for economic loss" relating to the September 11th attacks would raise "serious doubts as to its constitutionality." Canada Life Assurance Co. v. Converium Rückversicherung (Deutschland) AG, 335 F.3d 52, 59 (2d Cir.2003). We declined to "delineate the precise contours of Section 408(b)(3)'s jurisdictional grant," finding it clear that the case then before us, as to which there was no claim or defense that would "require adjudication of any issue of law or fact that concern[ed] the events of September 11," fell outside the statute. Id. at 57.

Because, as discussed above, this federal action is supported by diversity and supplemental jurisdiction, we need not and do not decide whether there would also be jurisdiction under the Act and thereby avoid unnecessarily addressing these constitutional concerns. Cf. Edward J. DeBartolo [165] Corp. v. Fla. Gulf Coast Bldg. & Constr. Trades Council, 485 U.S. 568, 575, 108 S.Ct. 1392, 99 L.Ed.2d 645 (1988) ("[W]here an otherwise acceptable construction of a statute would raise serious constitutional problems, the Court will construe the statute to avoid such problems unless such construction is plainly contrary to the intent of Congress."); United States v. Arrous, 320 F.3d 355, 360 (2d Cir.2003) ("[W]e avoid interpreting statutes in a way that may create constitutional problems . . . .").

C. Appellate Jurisdiction

This court has jurisdiction to hear the Silverstein Parties' appeal from the grant of summary judgment in favor of Hartford, Royal, and St. Paul, notwithstanding the lack of a final judgment disposing of all claims against all parties, because the district court entered judgment pursuant to Fed.R.Civ.P. 54(b).^[7] We also have jurisdiction over the Silverstein Parties' interlocutory appeal from the denial of their motion for summary judgment against Travelers because the district court certified its decision for interlocutory appeal under 28 U.S.C. § 1292(b).^[8] We granted the Silverstein Parties' petition for leave to appeal the denial of summary judgment against Travelers pursuant to 28 U.S.C. § 1292(b) and their motion to expedite and consolidate the appeal with the Silverstein Parties' Rule 54(b) appeal.

II. RULE 54(B) APPEAL — HARTFORD, ROYAL, AND ST. PAUL

"We review the grant or denial of summary judgment de novo." Gibbs-Alfano v. Burton, 281 F.3d 12, 18 (2d Cir.2002) (quoting Republic Nat'l Bank v. Delta Air Lines, 263 F.3d 42, 46 (2d Cir.2001)). Summary judgment is appropriate only where "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Thus, even where facts are disputed, in order to defeat summary judgment, the non-moving party must offer enough evidence to enable a reasonable jury to return a verdict in that [166] party's favor. See Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When ruling on a motion for summary judgment, a court is required to construe the evidence in the light most favorable to the non-moving party and to draw all reasonable inferences in its favor. See id. at 255; Maguire v. Citicorp Retail Servs., Inc., 147 F.3d 232, 235 (2d Cir.1998).

A. The District Court Decision

The district court granted the motions by Hartford, Royal, and St. Paul seeking partial summary judgment on the grounds that each of the insurers had issued a binder that incorporated the terms of the WilProp form and that under the WilProp form's definition of "occurrence" there was only one occurrence on September 11, 2001. See SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, 222 F.Supp.2d 385, 393-95, 398-99 (S.D.N.Y.2002) ("Hartford Dec."). The district court found that the only relevant question was what were the terms to which the parties had agreed to be bound pending issuance of a final policy, and thus deemed irrelevant evidence indicating that the parties might have agreed to ultimately issue policies tracking the Travelers policy. Id. at 389. The district court then reviewed each of the negotiating histories between Willis and Hartford, Royal, and St. Paul and analyzed the language of their binders. In part because the only policy form before the parties during these negotiations was the WilProp form furnished by Willis, the district court concluded that as a matter of law each of the three insurers had bound coverage on the basis of the WilProp form, rather than, as the Silverstein Parties contended, the Travelers form. Id. at 393-95, 398. The district court further held that, as a matter of law, under the WilProp form's definition of "occurrence" the damage caused on September 11th was the result of one occurrence, entitling the Silverstein Parties to no more than a single policy limit on each of the insurers' policies. Id. at 399.

As noted by the district court, "[a]n insurance binder is a unique type of contract." Id. at 388.

It is a common and necessary practice in the world of insurance, where speed often is of the essence, for the agent to use this quick and informal device to record the giving of protection pending the execution and delivery of a more conventionally detailed policy of insurance. Courts, recognizing that the cryptic nature of binders is born of necessity and that many policy clauses are either stereotypes or mandated by public regulation, are not loath to infer that conditions and limitations usual to the contemplated coverage were intended to be part of the parties' contract during the binder period.

Employers Commercial Union Ins. Co. v. Firemen's Fund Ins. Co., 45 N.Y.2d 608, 412 N.Y.S.2d 121, 384 N.E.2d 668, 670 (N.Y.1978) (footnote omitted) (quoted in Hartford Dec., 222 F.Supp.2d at 389). Thus, a binder is "a short method of issuing a temporary policy for the convenience of all parties, to continue until the execution of the formal one." Lipman v. Niagara Fire Ins. Co., 121 N.Y. 454, 24 N.E. 699, 700 (1890) (quoted in Hartford Dec., 222 F.Supp.2d at 388). As the New York Court of Appeals has explained,

[i]t has long been settled in this State that an insurance binder is a temporary or interim policy until a formal policy is issued. A binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused.

Springer v. Allstate Life Ins. Co., 94 N.Y.2d 645, 710 N.Y.S.2d 298, 731 N.E.2d [167] 1106, 1108 (2000) (internal citations omitted). While not all of the terms of the insurance contract will be set forth in the binder, a binder is nevertheless a fully enforceable "present contract of insurance." Ell Dee Clothing Co. v. Marsh, 247 N.Y. 392, 160 N.E. 651, 652 (1928).

On appeal, the Silverstein Parties argue that in construing the binders issued by the appellee insurers, the district court erred in rejecting evidence of the insurers' agreement to "follow the [Travelers] form" and that this evidence creates material factual issues in dispute as to whether the WilProp definition of "occurrence" applies to these insurers. The Silverstein Parties explain the practice of "following the form" as follows:

Whether or not the broker includes a sample policy form with the submission, the industry practice in layered placements is for a lead insurer to act as the negotiator of policy terms on behalf of the participating insurers. In an effort to achieve concurrency (uniformity in coverage terms provided by the participating insurers), the other participating primary and excess insurers customarily agree to "follow the form" of the lead insurer, i.e., to accept the terms and conditions of the program policy. The lead insurer typically emerges from among the carriers on the primary coverage layer; insurers participating solely in excess layers generally do not negotiate the program policy wording.

Appellants' Br., Dkt. No. 02-9279 ("Appellant's Rule 54(b) Br."), at 20 (internal citations omitted).^[9]

According to the Silverstein Parties' theory of the case, appellees Hartford, St. Paul, and Royal agreed to "follow the [Travelers] form" and, therefore, are bound by the terms of the policy that Travelers issued on September 14, 2001, three days after the World Trade Center was destroyed. In support of this theory, the Silverstein Parties submitted a substantial amount of custom and usage evidence from both expert and fact witnesses concerning the practice of "following the form." The Silverstein Parties further assert that there is evidence demonstrating that each of the three appellees knew the WilProp form was only a starting point for negotiations and that they learned before binding that the Travelers form would be the lead policy. Accordingly, they maintain, appellees' obligations are to be determined under the final policy issued by Travelers on September 14, 2001 (the "September 14 Travelers Policy").

Contrary to the arguments so vigorously pressed by the Silverstein Parties, however, the question in this case is not whether appellees are bound by the September 14 Travelers policy rather than the WilProp policy circulated by Willis in its Underwriting Submission. As of September 11, 2001, none of the insurers could be bound by either policy because neither one had been issued as the final policy by that [168] date.^[10]See, e.g., Springer, 710 N.Y.S.2d 298, 731 N.E.2d at 1108 (noting that binder and final policy are "two distinct agreements"); Rosenblatt v. Washington County Coop. Ins. Co., 191 A.D.2d 883, 594 N.Y.S.2d 456, 459 (3rd. Dept. 1993) (holding in case where loss occurred prior to the issuance of final policy that "the dispositive issue . . . concerns the risks covered under the binder agreement . . . and this is unaffected by any changes regarding insurance policies issued subsequent to the loss"); Del Bello v. Gen. Accident Ins. Co., 185 A.D.2d 691, 585 N.Y.S.2d 918, 918-19 (4th Dept. 1992) (holding that because binder identified plaintiff as an insured, plaintiff was covered for fire damage even though not so listed in final policy issued post-loss); see also Cardinal v. Mercury Ins. Co., 242 A.D. 98, 273 N.Y.S. 487, 490-91 (3rd.Dept. 1934) (reforming policy to reflect terms of original oral binder for purposes of pre-policy loss), rev'd on other grounds, 266 N.Y. 448, 195 N.E. 148 (1934).

While the Silverstein Parties may well be correct that in many instances an excess insurer will voluntarily bind itself to another insurer's policy form that has been issued but that it has chosen not to look at despite the opportunity to do so, and that courts will presume the insurer knows and assents to the terms of the unseen document, see, e.g., Progressive Cas. Ins. Co. v. C.A. Reaseguradora Nacional De Venezuela, 991 F.2d 42, 45-47 (2d Cir.1993), it is an entirely different matter for a court of law to impose liability on the basis of another insurer's policy form that has not been issued and, therefore, that the excess insurer has never had the opportunity to review. See, e.g., Designcraft Jewel Indus., Inc. v. Rampart Brokerage Corp., 63 A.D.2d 926, 406 N.Y.S.2d 97, 98 (1st.Dept. 1978) (refusing to reform excess policy or hold excess insurer liable for excess loss arising from primary policy's disaggregation of building's primary insurance limits on per-floor basis where excess insurer was neither informed about disaggregation term nor shown underlying primary policy prior to issuance of binder), aff'd by, 46 N.Y.2d 981, 415 N.Y.S.2d 991, 389 N.E.2d 472 (N.Y.1979). The Silverstein Parties acknowledge as much when they state in their brief:

Once the final primary policy is issued, it is customarily sent to all participating insurers for their review. Unless it has waived its agreement to policy language, if an insurer that has agreed to "follow the form" has good-faith objections to the form that has emerged from that negotiation and those objections cannot be resolved consensually, industry custom allows such an insurer to cancel its coverage prospectively after reasonable prior notification to the insured so that the insured — if it is unwilling to acquiesce in the change — can arrange for a replacement insurer. The participating insurer may not, however, cancel retroactively if a loss occurs before the final policy form is issued and presented for its approval.

Appellant's Rule 54(b) Br. at 26-27 (internal citations and footnote omitted). This passage makes manifest the counterintuitive nature of the Silverstein Parties' position that an insurer who agrees in a binder to "follow form" is thereby bound sight unseen to a policy that has not been finalized and issued, but only until the insurer is actually given an opportunity to see the [169] policy and review it, at which point it can cancel its coverage and no longer be bound. The Silverstein Parties' further observation that the insurer cannot cancel retroactively, although offered as support for their claim that the insurer is bound by the final policy form with respect to any losses that occurred before the final policy issued, is gratuitous because it is well settled that the insurer is bound retrospectively not by the final policy form, but by the binder, a distinct agreement the terms of which the insurer negotiated for itself. Despite the Silverstein Parties' arguments to the contrary, therefore, we conclude that the September 14 Travelers policy, issued three days after the loss at issue here, has no bearing on the Rule 54(b) appeal.

The only question we must decide is what the term "occurrence" means under the specific binders that appellees issued and that were in force when the planes destroyed the WTC on September 11, 2001. Should we infer that the parties to the binder intended to: (1) incorporate the specific definition of "occurrence" contained in the WilProp policy; (2) forgo a specific definition (as is the case in the customary Travelers form); or (3) treat "occurrence" in some other fashion? The evidence offered by the Silverstein Parties to demonstrate that the appellees agreed that they would "follow the [Travelers] form" at such time as it might issue is relevant only if, and to the extent that, the facts of the parties' pre-binder negotiations can support a finding that the parties intended the insurer's binder, the policy that was to be in effect until the Travelers form was issued, to incorporate the terms, not of the September 14 Travelers policy ultimately issued, but of Travelers' customary or specimen form (the "Travelers form").

As we have explained, a binder, while an enforceable contract in its own right, is necessarily incomplete in some respect (otherwise a subsequent formal policy would be unnecessary). Thus, as the New York courts have long recognized, terms must often be implied to determine the obligations to which the parties intended to be bound. Hicks v. British Am. Assurance Co., 162 N.Y. 284, 56 N.E. 743, 744 (1900) ("The law reads into the contract the standard policy, whether it be referred to in terms or not."); Lipman, 24 N.E. at 700 (construing binder as necessarily incorporating terms of a standard policy). "To determine the contents of a binder, New York courts generally look to (1) the specific terms contained in the binder or incorporated by reference, and (2) to the extent necessary as gap-fillers, the terms included in the usual policy currently in use by the insurance company" or those required by statute. Lapenta v. Gen. Acc. Fire & Life Assurance Corp., 62 A.D.2d 1145, 404 N.Y.S.2d 182, 184 (4th Dept. 1978); see Sherri v. Nat'l Sur. Co., 243 N.Y. 266, 153 N.E. 70, 71 (1926) (noting that a binder incorporates all the obligations "according to the terms of the policy in ordinary use by the [issuing] company") (internal quotation marks omitted); see also Ell Dee Clothing, 160 N.E. at 653 ("[W]hether the binder is to be interpreted by itself or with the addition of implied conditions, the minds of the parties meet. And in the absence of state regulations, it is for the assurer to show that conditions are implied and what they are."). We agree, therefore, with the district court's observation that "[t]he terms of a binder are not left to future negotiation. . . . The law of New York with respect to binders does not look to the negotiations of the parties to see what terms might ultimately have been incorporated into a formal policy." Hartford Dec., 222 F.Supp.2d at 388-89. Rather, the negotiations are examined to determine what terms the parties intended to incorporate into the binder.

[170] In deciding which terms are to be implied in a binder, reliance may be placed on the extrinsic evidence of the parties' pre-binder negotiations. In particular, we believe that any policy form that was exchanged in the process of negotiating the binder, together with any express modifications to that form, is likely the most reliable manifestation of the terms by which the parties intended to be bound while the binder was in effect. In the absence of such a policy form underlying the negotiations or sufficient extrinsic evidence of the negotiations to determine the parties' intentions, the terms to be implied would likely be the customary terms of the insurer's own form, see Sherri, 153 N.E. at 71; Hicks, 56 N.E. at 744; Lipman, 24 N.E. at 700, unless there is evidence indicating that an understanding existed between the parties that a different policy form would apply to the binder and that the insurer was aware of its terms.

Therefore, with regard to the case at hand, whether an insurer in the WTC program agreed to "follow the [Travelers] form" is largely irrelevant to the inquiry of what terms should be implied in that insurer's binder unless it can be shown that the insurer was provided with a Travelers form (or some other form omitting a definition for occurrence) prior to issuing its binder. In the absence of such evidence, we believe that the fact that an insurer agreed to follow the lead of Travelers and demonstrated an intention to be bound by the final policy form as ultimately negotiated by Travelers would be relevant only to the parties' post-binder relationship, which is of no import to this case. Such an agreement or understanding, whether explicit or derived from custom and usage, would not provide a basis for incorporating into the binder the terms contained in the Travelers form.

Applying this analytical framework to the evidence presented on summary judgment, we agree with the district court that there can be no genuine dispute here that the binders issued by Hartford, Royal, and St. Paul were issued on the basis of negotiations involving the WilProp form, a copy of which had been provided to each insurer by Silverstein Properties' insurance broker, Willis, and that the parties intended and understood the binders to incorporate the terms of the WilProp form except as expressly modified.

Our conclusion is supported by the fact that until the total destruction of the WTC on September 11th, it was in Silverstein Properties' interest to incorporate into their insurance coverage a definition of "occurrence" that would minimize the number of "occurrences" in order to minimize the number of deductibles that would apply in the event of a loss or series of losses. This goal was accomplished by the WilProp form's inclusive definition of "occurrence." When Travelers held out for using its own form in its negotiations with Willis in August 2001, Timothy Boyd, a vice president of Willis, reported that fact to a co-broker, stating, "Although other players have signed binders based on WilProp, Travelers is insisting we use their form and this is under review." Apart from its potential as a party admission, the statement that "players [other than Travelers] have signed binders based on WilProp," made by the Silverstein Parties' agent on August 3, 2001 — after the binders were in place and before the WTC was destroyed — is consistent with our review of the binder negotiations, to which we now turn.

1. Hartford Fire Insurance

On June 7, 2001, Boyd of Willis sent John Gemma of Hartford an Underwriting Submission that included the WilProp [171] form. Gemma acknowledged at his deposition that when he received these materials, he understood the WilProp form was only a draft and would ultimately require amendment. Gemma responded to Boyd with a proposal in which he offered to provide insurance with a limit of $50 million in excess of $75 million per occurrence. With respect to the applicable form, Gemma specified, "Manuscript Forms Submitted With Attached Amendments," enclosed several pages of amendments to the WilProp form and additional exclusions, and specifically noted that the policy was subject to additional exclusionary endorsements. Gemma made no change to the WilProp definition of occurrence. Boyd stated at his deposition that he understood that Gemma's reference to the manuscript form was to the WilProp form.

Boyd later asked Gemma to participate in a different layer of excess insurance. On July 9, Gemma sent Boyd a revised quote in identical form to the first for $50 million in excess of $50 million. On July 12, however, Gemma e-mailed Boyd that Hartford's participation would be limited to $25 million. At his deposition, Boyd testified that when he called to complain about the decrease in coverage, he informed Gemma that Travelers was insisting on the use of their policy form. According to Boyd, Gemma did not object when Boyd mentioned Travelers; he simply asked for a copy of the Travelers form once it was finalized. Gemma testified that Boyd never told him that the Travelers form was going to be the operative form. In response to Boyd's complaint about the decreased coverage, Gemma obtained approval from his superiors to raise the Hartford limit to $32 million. The e-mail from Gemma confirming the increased limit contained no other terms. Boyd e-mailed back that Willis was pleased to bind participation at $32 million, adding that "[w]e will issue formal documentation soonest." No specific terms other than premiums and the extent of coverage were included in the e-mail.

On July 19, 2001, Gemma sent Boyd a form he referred to as the "outline of our property BINDER." The binder outline specified that the policy form would be the "Manuscript Forms Submitted With Attached Amendments." Except for the coverage limits and certain other changes not relevant here, Boyd understood that Gemma was making the same offer he had made before. On July 20, 2001, Boyd sent Gemma an e-mail attaching a binder. The e-mail said, "We are working diligently with primary carriers to refine policy form. Attached is binder per specs." In a section denominated "Property and Time Element Covered," the binder stated, "And as incorporated into the manuscript form, in conjunction with the contract between the Port Authority of New York and New Jersey as ultimately agreed." Gemma made changes to the binder, initialed and signed it, and returned it to Boyd. He did not change the language in the "Property and Time Element Covered" section, but did change a portion of the exclusions section from "Per Policy Form as to be advised," to "Per Policy Form as quoted." Gemma acknowledged that by failing to strike out the language in the "Property and Time Element Covered" section, he agreed to that language, but he did not state that he understood the phrase to be referring to the Travelers form.

Hartford's New York underwriting office, which was located in the WTC, was destroyed on September 11th. Following the attack, Gemma asked Boyd to provide him with copies of all the documents and e-mails that he had sent to Boyd during the course of negotiations so that Hartford's files could be reconstructed. Gemma stated at deposition that he specifically asked [172] Boyd to send him a copy of the marked-up WilProp form upon which he had based his quote and that Boyd did not question the relevance of the WilProp form to Hartford's coverage. Boyd testified, however, that he again mentioned he was working with the Travelers form and that Gemma asked for a copy as soon as possible. On October 1, 2001, Willis forwarded a number of e-mails to Gemma and his supervisor including an e-mail that attached the original June 7, 2001, Willis submission, including the WilProp form. Willis did not, however, send Gemma's marked-up copy. On the same date, a Willis representative sent Hartford another e-mail that contained as an attachment a document identified in the e-mail as the "underlying policy," which may have been a copy of the Traveler's policy; the e-mail further stated that "[t]he excess following form will be out very shortly."

On October 9, 2001, Boyd sent Gemma a fax, which read:

Attached is your original authorization culled from our files. As you know, we evolved from there, both on a participation level and on a forms level.

Ultimately your participation was amended and when we discussed forms, I informed you that the form we would use would be Travelers.

Accordingly, these forms [have been] sent under separate cover through claims channels. I have sent you the participant list and the agreed form via electronic mail. . . .

Boyd testified that he never received a response to this fax from Gemma.

Despite the fact that each of the documents generated during Willis' negotiations with Hartford prior to the issuance of a binder referenced a particular form that was understood by the participants at the time to be the WilProp form together with Gemma's amendments, the Silverstein Parties argue that a reasonable jury could find that Hartford bound coverage on the basis of the Travelers form in light of: (1) expert testimony that it was insurance industry practice for excess carriers bidding in a layered program to agree to "follow the form" and that the insurer must specify in the binder if it does not want to "follow the form"; (2) expert testimony that an agreement to follow form is typically evidenced by words in the binder such as "wording to be agreed," "as ultimately agreed," "to be advised," or "subject to review and acceptance [of a primary policy]"; (3) Boyd's testimony that he informed Gemma that Travelers was insisting on the use of its form and that Gemma did not object, and instead simply asked for a copy of the Travelers form; (4) the presence in the Hartford binder of the words, "[a]nd as incorporated into the manuscript form, in conjunction with the contract between the [Port Authority] as ultimately agreed"; and (5) Gemma's failure to object when Boyd said to him after September 11th that he had previously informed him that Travelers was the governing policy.

None of these arguments has merit. Boyd's testimony that he informed Gemma on July 12 that Travelers was insisting on the use of its own policy, while perhaps interesting news, is legally irrelevant because Gemma reiterated in his binder outline on July 19, 2001 that he would be bound by the manuscript form submitted, i.e., the WilProp form. Therefore, at least for purposes of the binder, Gemma plainly rejected any proposal to switch from the WilProp form to the Travelers form. Boyd's similar claim concerning his post-September 11th conversation with Gemma is also irrelevant because any such conversation could not alter the terms of the binder that was in force on September 11th. That Gemma failed to respond to [173] Boyd's October 2001 fax is irrelevant for the same reason. Moreover, it is a well settled rule that assent cannot be read into a party's silence in response to another party's assertion unless silence would have a tendency to mislead. See, e.g., Albrecht Chem. Co. v. Anderson Trading Corp., 298 N.Y. 437, 84 N.E.2d 625, 626 (1949); see also Hellenic Lines Ltd. v. Gulf Oil Corp., 340 F.2d 398, 401 (2d Cir.1965). By the time Boyd sent his fax in October 2001, the WTC buildings had long since collapsed and the coverage was what it was. Boyd obviously could not have been misled prior to September 11th by Gemma's silence in October.

The Silverstein Parties urge that the Hartford binder's language, "And as incorporated into the manuscript form, in conjunction with the contract between the Port Authority of New York and New Jersey as ultimately agreed," creates a disputed issue of fact that defeats summary judgment because it reasonably can be interpreted as referring to, and hence incorporating by reference, the as-yet-to-be-agreed Travelers form. The district court construed this language, which appeared in the Hartford binder under the heading "Property and Time Element Covered," as "indicat[ing] only that the parties were agreeing that the property to be insured would include all the property covered in the Silverstein Parties' contract with the Port Authority as that contract might be amended in their negotiations." Hartford Dec., 222 F.Supp.2d at 392.

We agree with the district court's interpretation, particularly given that the binder language, which was drafted by Willis, appears to have been culled from the section in the Willis Underwriting Submission, also entitled "Property and Time Element Covered," that described in detail the specific types of property and time-related interests for which coverage was sought, and that concluded with the statement "And as incorporated into the manuscript form, in conjunction with the contract between the Port Authority of New York and New Jersey as attached." The only difference was the change in the binder from "as attached" to "as ultimately agreed." This difference does nothing to undermine the district court's interpretation because the "as ultimately agreed" language can reasonably be read to refer to the scope of property subject to coverage (which would seem to be the only reason to refer to the lease), and not to any final form of insurance policy. From all these references to the ultimate agreement between the Port Authority and Silverstein Properties, the most that can be gleaned is that the precise parameters of the property covered by the insurance would have to await the finalization of that contract. No factfinder could reasonably find that these references related to following the form of Travelers as the lead insurer.

Indeed, the district court's interpretation of the language is echoed in Section VIII of the Underwriting Submission, which states,

Policy Form and Contract between Silverstein and the [Port Authority] are attached. DRAFT WilProp for Real Estate Risks is attached. We anticipate that this form will ultimately require amendment to comply with the Contract between Silverstein Properties, Inc. and the [Port Authority]. In the meantime, we provide this document as a starting point.

Further support for the district court's interpretation is found in the June 14, 2001 e-mail sent by Boyd to Royal Indemnity to solicit its participation in the WTC insurance program. In the e-mail, Boyd explained, "We have included [the WilProp form] as a guideline form [in the attached Underwriting Submission], although ultimate [174] form must meet property definitions as contained in the contract with PA and Silverstein" (emphasis added).

Finally, the Silverstein Parties make much of the fact that at deposition, Gemma, when asked to review the original language contained in the Underwriting Submission, stated that he understood the phrase "manuscript form . . . as attached" to refer to the WilProp form that had been attached to the Underwriting Submission. But Gemma's statement does not equate to an acknowledgment that the revised phrase contained in the Hartford binder referred to the as-yet-to-be-agreed-upon Travelers form. And even interpreting the language in the light most favorable to the Silverstein Properties for purposes of summary judgment, this language does not create a genuine dispute because, as we have explained, even if this language meant that Hartford agreed to "follow form," and specifically, the Travelers form, "as ultimately agreed," it simply does not follow that Hartford thereby incorporated into its binder the terms of the as-yet-to-be-agreed Travelers form.

In short, we find nothing in the Hartford binder language — including the change of the Underwriting Submission language "as attached" to "as ultimately agreed" — to support the Silverstein Parties' claim that the parties intended to alter Hartford's repeated reservation of its right to use the WilProp form as amended by Hartford as the basis upon which its binder was issued. Indeed, the opposite is apparent in the July 19, 2001 e-mail Boyd sent to Gemma together with the draft binder, in which he stated, "We are working diligently with primary carriers to refine policy form. Attached is binder per specs." The first sentence in this e-mail suggests that no policy form (or "lead insurer" for that matter) had been agreed to by anyone as of July 19, 2001. The second sentence supports the view that the binder Boyd sent to Gemma did not alter any of the terms contained in Gemma's quote, including Gemma's insistence that the binder issue on the basis of the specifications and the WilProp form submitted with the Underwriting Submission together with Gemma's amendments.

Accordingly, we agree with the district court's conclusion that there can be no genuine dispute that Hartford bound coverage on the basis of the WilProp form.

2. Royal Indemnity

On June 14, 2001, Boyd sent an e-mail to Mike Koenig of Royal containing the Underwriting Submission and the WilProp form as attachments. Koenig forwarded the Underwriting Submission to another Royal underwriter, Larry Stapp, who advised Koenig by e-mail on July 9, 2001, that

[b]ased on our conversation of today and review go ahead and offer [Willis] maximum of $100MM participation excess of $500MM at the $100K pricing we talked about. Make the participation contingent on receiving and reviewing the primary policy wording. You can use the Willis Form Review I sent you when you get the policy and just pick out the key items. Being excess of $500MM we will probably not want many form limitations.

The "Willis Form Review" referred to in the e-mail was a detailed review of a Willis policy form that pre-dated the WilProp form and did not include a definition of occurrence.^[11]

[175] Koenig submitted an underwriting proposal on behalf of Royal to Willis on July 9, 2001. In an accompanying fax, he stated:

Attached please find our authorization for the above risk. As discussed, Royal Indemnity Co. can offer $100MM (20%) part of $500MM xs $500MM at a layer price of $500,000 net. I have included some form changes that we would be looking for; however, this authorization would be subject to review and acceptance of the finalized manuscript form.

Under the heading "Policy Form," the Royal authorization specified, "Willis manuscript policy form as submitted except for the changes noted in the addendum to this quote. Final policy form wording is to be determined subject to review and acceptance of the final primary policy form wording." (The only Willis manuscript policy form that was submitted was the WilProp form.) Similarly, under the heading "Covered Perils," the authorization qualified the perils covered with the condition, "as per the Willis manuscript policy form with the changes described below. Subject to review and acceptance of the primary manuscript policy form," and, under the heading "Additional Conditions," stated, "This authorization is subject to review and acceptance of the finalized form being used by the primary insurers." In an addendum to the authorization, Royal specified certain revisions to the "manuscript form," which clearly pertained to the WilProp form. One such revision required the deletion of a paragraph in a section of the WilProp form entitled "Participation." The deleted paragraph provided a space for the designation of a lead underwriter and would have required Royal to "abide by and accept decisions of the Lead Underwriter with respect to underwriting, policy administration, and claims settlement."

While the language of the authorization demonstrates that Royal contemplated that the wording of the final policy form was tentative, it is clear from the evidence that prior to issuing its authorization, Royal anticipated that the final policy form would be based on the WilProp form. An internal Royal memorandum analyzing the WTC program that was written before Royal issued its authorization states:

Willis property form is very broad and would need substantial revisions. However based on our high attachment point, we would have little opportunity to dictate form changes. We should insist on a Y2K exclusion and delete all computer virus coverage. We should also try to limit the ingress/egress and civil authority coverages. Underlying deductibles will be [ ] $500,000 or $1,000,000 our attachment point is truly exposed only to catastrophic losses.

Elsewhere in the memorandum, it is stated that the "coverage form" will be "Willis manuscript."

On July 12, 2001, Koenig informed Boyd that Royal had altered some of the financial terms of its authorization. In an e-mail confirming the change, Koenig stated that "[a]ll other terms and conditions [176] would remain as per [Royal's] original authorization." On July 17, 2001, Boyd e-mailed Koenig, telling him that Willis had been unable to assign to Royal the full amount of coverage that had been authorized. Koenig responded on July 19, providing Boyd with a policy number and requesting that Boyd "forward a copy of the finalized version of the manuscript form at [his] earliest convenience." On July 20, Boyd sent Koenig a binder containing largely the same language as the binder he had sent to Hartford's Gemma. The cover note stated, "Attached is a copy of the binder. We are working diligently to refine policy with primary carriers." Boyd stated in his deposition that sometime "during the middle weeks of July" he had a conversation with Koenig in which he informed Koenig "that the program would be based upon the Travelers form." Koenig memorialized that conversation in a handwritten note dated July 20 as follows:

Per discussion with Tim Boyd of Willis, terms and conditions of policy are likely to change, becoming more restrictive as form continues to be negotiated with the primary carriers. End result will most likely be a modified version of the Travelers policy form. I told Tim that we would bind subject to the policy form changes and coverage terms per our authorization (with the exception of the revised layer). Tim agreed and told me that this binder was a formality, and it will be revised in our favor once the primary policy form is finished.

On that same day, Koenig faxed Boyd the signed Royal binder after making several changes to the form he had received from Boyd. The fax cover sheet explained that Koenig "made some corrections to the binder in order to make it in accordance with the terms [Royal] authorized." Among the handwritten changes to the binder, Koenig added at the end of the binder the qualification, "Bound as amended and per our authorization." In addition, next to the statement in the "Property and Time Element" section, "And as incorporated into the manuscript form, in conjunction with the contract between the [Port Authority] as ultimately agreed," Koenig wrote, "Subject to Form revisions as described in our authorization." Willis did not qualify its acceptance of Royal's binder. According to Boyd's deposition, he told Koenig at some point in August, after Royal issued its binder, that he was "working very diligently to try and finalize the Travelers form." Koenig asked for a copy of the form but expressed no objection to its use in either the July or the later conversation.

We reject as frivolous the Silverstein Parties' arguments that Royal's authorization and binder contain ambiguities that create material issues of fact precluding summary judgment. As the district court noted in its decision granting summary judgment to Royal, "[i]t is hard to imagine a case in which it could be more certain that an insurer's binder was based on the WilProp form than that of [Royal]." Hartford Dec., 222 F.Supp.2d at 395. The Silverstein Parties nevertheless contend that the fact that Koenig did not eliminate the words "as ultimately agreed" from the phrase referencing the manuscript form in the "Property and Time Element" section and, instead, only added the phrase "Subject to form revisions as described in our authorization" demonstrates that Royal understood the phrase to refer to the final policy form that would be negotiated between Willis and the lead underwriter rather than to the agreement between the Port Authority and Silverstein Properties. Even if the Silverstein Parties' strained interpretation is accurate, the phrase simply sets forth the conditions under which Royal agreed to be bound by the final [177] policy form when it issued in the future; it does not support a finding that the terms upon which Royal issued its presently enforceable binder were anything other than the WilProp form as amended by Royal in its authorization.

The Silverstein Parties also claim that even though the binder expressly binds "as previously authorized," the prior authorization itself is ambiguous because it stated, "Final policy form wording is to be determined subject to review and acceptance of the final primary policy form wording," and "[t]he insurance provided by Royal & SunAlliance will not be broader than the terms and conditions provided by any other participating insurer." This argument too, misses the mark, because the assertedly ambiguous statements refer to Royal's reservation of its right to review the wording of the final policy form before being bound by it, and therefore has no bearing on the terms that were intended to be incorporated into the binder that would govern Royal's coverage until that time. The Silverstein Parties' reliance on the phrase "subject to review and acceptance of the final primary policy form wording" once again ignores the basic tenet that the binder and the policy to be issued are two separate contracts of insurance, containing two separate sets of terms. See Springer, 710 N.Y.S.2d 298, 731 N.E.2d at 1108 (noting that binder and final policy are "two distinct agreements"); Rosenblatt, 594 N.Y.S.2d at 459 (noting that "the dispositive issue here concerns the risks covered under the binder agreement . . ., and this is unaffected by any changes regarding insurance policies issued subsequent to the loss").

The Silverstein Parties argue that there is another ambiguity, this one in the binder's section on exclusions, in which Koenig wrote that a Y2K exclusion was to be included, but otherwise left unchanged the binder's statement that exclusions were "Per Policy Form as to be advised." At most, however, this phrase creates an ambiguity only with respect to the binder's terms concerning exclusions. Because no other part of the binder contains similar language, the applicability of the amended WilProp form would remain intact, including its definition of occurrence.

Finally, the Silverstein Parties argue that Royal's conduct after September 11th demonstrates that it understood that the Travelers form applied to Royal's coverage. Specifically, the Silverstein Parties point out that on September 20, 2001, RSUI, the other Royal division that issued coverage in the WTC program, issued a Travelers form with an RSUI declarations page attached as its primary policy. According to Boyd's deposition, sometime in the fall, after RSUI issued its policy, he asked Koenig if Royal "would follow the same procedure" as RSUI and issue an excess policy based on the Travelers form, and Koenig indicated to him that what he would "like to do is sign and return the [Travelers] form and if you have to make some changes to it we do it by endorsement." Although this evidence may demonstrate equivocation on the part of Royal as to whether it should issue a final policy based on the Travelers form, it sheds no light on the only question before us, which is whether the July 20 binder issued by Royal was based on the WilProp or Travelers form. Moreover, other actions by Royal occurring after September 11th only confirm the district court's conclusion that the Royal binder was issued on the basis of the WilProp form. For example, on October 3, 2001, Koenig sent Brian Doyle, a Royal property executive, an e-mail attaching a copy of his "initial authorization, the signed binder and the Willis manuscript form that our quote was based on." Koenig added, "[o]ur quote was based on the Willis form and was subject to Best [178] Terms. I also stated that our authorization would be subject to review and acceptance of the final primary policy wording." On October 15, 2001, Boyd e-mailed to Koenig an excess policy form drafted on the basis of the Travelers primary policy. On October 19, Koenig forwarded that e-mail to his superiors, stating:

I received this email from Willis regarding the excess form. The excess form still has not been finalized. I did express to the broker my discomfort of having the insured involved in drafting the form after the loss (and I reminded him that we quoted and bound coverage based on the Willis form). I have not issued anything yet or responded in writing to this email, and per my discussion with Bob Medeiros today, I wanted to get your input and guidance before I issued the policy.

On October 26, 2001, Doyle responded to Koenig's e-mail, stating, "Assume that we won't be signing on to this form since our authorization was based around the Willis manuscript policy and we were only presented with the Traveler's form post 9/11. I also see here that the policy issuance date is listed as 9/14."

Viewing this evidence together with the language of the Royal authorization and binder and the parties' pre-binder negotiations, we agree with the district court that there can be no reasonable dispute that the Royal binder was issued on the basis of the WilProp form.

3. St. Paul Fire & Marine Insurance

On July 3, 2001, Harry Tucker of Stewart Smith, Willis's wholesale brokerage affiliate, e-mailed Carol Springett-King of St. Paul an abbreviated version of the Underwriting Submission. Although the submission referred to the "manuscript form," it did not annex or reference by name the WilProp or Travelers forms. Tucker, however, provided Springett-King with a copy of the WilProp form on July 9, 2001. The form was accompanied by a message stating that the policy was the "World Trade Center draft policy wording." At his deposition, Tucker could not identify any writing notifying Springett-King prior to September 11th that the Travelers form or any form other than the WilProp form was to be used for the final policy.

Springett-King testified at deposition that she did not do a form review of the WilProp form

[b]ecause it wasn't the final form. . . . Meaning that they were working on the language [in the WilProp form], and it had not been finalized. And they needed to bind coverage fairly quickly, so the understanding was that we would negotiate the form language, and we would get a copy of the final approved form, and we would be able to review it then.

Springett-King also testified that it was her understanding that she would be following Willis's broker's manuscript form as the primary form, but that she would be allowed to review it and make changes by endorsement when she received a final form.

On July 11, 2001, Springett-King called Tucker and quoted a rate of $1500 per million for $30 million of coverage in the layer excess of $250 million. On July 18, Tucker sent Springett-King an e-mail memorializing her quote and asking Springett-King to "confirm coverage bound with an assigned policy number by return e-mail." Springett-King sent the policy number and acknowledged at deposition that by doing so she bound coverage. In her e-mail to Tucker she stated that she would "send a formal binder shortly," but she never did so. On July 23, 2001, Stewart Smith sent Springett-King a Confirmation of Insurance, which, under the heading "Policy Form," stated "Manuscript [179] Form to be agreed." In the accompanying cover letter, Michele Smith of Stewart Smith asked Springett-King to review the form carefully and to advise her if the confirmation did not accord with her records. Smith added, "We look forward to receiving the policy in due course." Tucker testified that he drafted the Confirmation of Insurance, and that his reference to "Manuscript Form to be agreed" meant that negotiations were ongoing with St. Paul as well as with all the other insurers concerning what the final form would be. He further testified that, as of July 23, he did not know what form or whose form that would be.

St. Paul's situation differs from Hartford's and Royal's in two significant respects. First, Springett-King's binder, which was merely a policy number furnished after receiving a bare-bones request from Tucker for coverage, did not indicate that she was binding based on the WilProp form. Second, as noted by the district court, "[t]here is no evidence that St. Paul was informed of Travelers' participation in the World Trade Center insurance program at any time prior to September 11th." Hartford Dec., 222 F.Supp.2d at 396.^[12]

In granting summary judgment in favor of St. Paul, the district court held that, although it might be inclined to deny summary judgment on the ground that Springett-King had not even read the WilProp form before binding coverage, it was not "empowered to impose its own conception of what the parties should or might have undertaken." Hartford Dec., 222 F.Supp.2d at 397 (internal quotation marks omitted). Recognizing the well settled principle that a party is bound to a contract it signs even if it has not read it, see, e.g., Caloric Stove Corp. v. Chemical Bank & Trust Co., 205 F.2d 492, 495 (2d Cir. 1953) (L.Hand, J.) (noting that "the law of New York in this regard is the same as the general law of contracts: i.e., if a party to a written contract signs it, he is bound by its terms, whatever these may be," even if he has not read it) (citing Pimpinello v. Swift & Co., 253 N.Y. 159, 170 N.E. 530, 531 (N.Y.1930)); see also Pimpinello, 170 N.E. at 531 ("If the signer could read the instrument, not to have read it was gross negligence; if he could not read it, not to procure it to be read was equally negligent; in either case the writing binds him."), the district court found that St. Paul bound coverage on the basis of the WilProp form because it was a part of the WTC program solicitation, the terms of which Springett-King accepted in issuing the St. Paul binder. Hartford Dec., 222 F.Supp.2d at 397.

The district court also rejected the Silverstein Parties' argument that the Confirmation of Insurance's statement, "Manuscript Form to be agreed," evidenced Springett-King's agreement to follow form, reasoning that an agreement to follow form without knowing which form or who would be drafting it would be an unenforceable agreement to agree. Id. at 398. While we are inclined to agree with the Silverstein Parties that an insurer's [180] agreement to follow form without knowing which form would ultimately be adopted does not render the insurance binder it issues an unenforceable "agreement to agree," the issue here is not whether St. Paul would have been bound to follow the Travelers final policy form when it issued. Rather, it is which policy St. Paul understood to be the policy form upon which it based its binder. Here the testimony of both Tucker and Springett-King makes plain that Springett-King had no reason to think that the policy form would be anything other than a modified version of the WilProp form. Accordingly, we agree with the district court's sound reasoning that because the only policy form presented to Springett-King was the WilProp form and because she was not informed about Travelers' participation in the WTC program, there can be no genuine dispute that the binder she issued on behalf of St. Paul incorporated the terms of the WilProp form.

B. Application of the WilProp Definition

Our conclusion that each of the three appellees in the Rule 54(b) appeal bound coverage on the basis of the WilProp form leaves only the Silverstein Parties' claim that there are issues of fact as to whether there were one or two occurrences on September 11th under the WilProp form's definition. As noted earlier, the WilProp form contains the following definition:

"Occurrence" shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.

Hartford Dec., 222 F.Supp.2d at 398. Although the Silverstein Parties attempt to argue that this definition is ambiguous, we agree with the district court that no finder of fact could reasonably fail to find that the intentional crashes into the WTC of two hijacked airplanes sixteen minutes apart as a result of a single, coordinated plan of attack was, at the least, a "series of similar causes." Accordingly, we agree with the district court that under the WilProp definition, the events of September 11th constitute a single occurrence as a matter of law.

III. SECTION 1292(B) APPEAL — TRAVELERS

The Silverstein Parties' appeal from the denial of their motion for summary judgment against Travelers raises a different set of issues from those just discussed. This motion was based chiefly on the argument that where an insurance policy uses the term "occurrence" without defining the term, then, as a matter of law, the term's meaning is not ambiguous and must be decided by reference to well established New York legal precedent. The Silverstein Parties further argue that under the definition of "occurrence" established by New York law, the events of September 11th constituted two occurrences as a matter of law.

As was the case with the Rule 54(b) appeal, we review the district court's denial of the Silverstein Parties' motion for summary judgment against Travelers de novo. See Gibbs-Alfano, 281 F.3d at 18 ("We review the . . . denial of summary judgment de novo.") (internal quotation marks omitted). However, whereas in the Rule 54(b) appeal, we construed the evidence in the light most favorable to the Silverstein Parties, in this § 1292(b) appeal, we must construe the evidence in the light most favorable to non-movant Travelers. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505; Maguire, 147 F.3d at 235. Before turning to the Silverstein Parties' [181] arguments, we briefly review the history of the Travelers binder and its treatment by the district court.

A. Willis' Negotiations With Travelers

On June 7, 2001, Boyd sent an e-mail to James B. Coyle, III, an underwriter at Travelers, that included both the Underwriting Submission for the WTC and the WilProp form. In an affidavit submitted in opposition to the Silverstein Parties' motion, Coyle attested that he responded to Boyd's offer by stating that if Travelers were to participate in the primary layer, it would insist on using its own form, but that Travelers would agree to the use of the WilProp form if Travelers participated only in the excess layers. At deposition, Boyd testified that he told Coyle that if Travelers would permit changes to its form to meet the Silverstein Properties' needs, Silverstein Properties would accept the Travelers form. On July 9, Coyle e-mailed to Boyd an authorization for coverage, to which he attached Travelers' specimen excess policy. Two days later, on July 11, Coyle e-mailed Boyd again setting forth a revised authorization for coverage and attaching Travelers' specimen primary policy. On July 17, Boyd e-mailed Coyle, stating that Willis was "pleased to bind [Travelers'] participation." Coyle's colleague Robert Malm confirmed Travelers' coverage by e-mail on July 18. On July 20, Boyd e-mailed to Travelers a binder similar to the one he had sent to Hartford and Royal, stating, "Attached is Binder to be used with Marketplace. We are aware of use of Travelers Form requirement and are reviewing same to make sure we and you agree where we can amend if need be. In the meantime, went out with specs as binder." Although Travelers never returned a signed copy of the binder, the parties agree that Travelers had bound coverage as of July 18.

After July 18, Boyd and Fenn Harvey, also of Willis, reviewed the WilProp and Travelers forms to identify the areas of difference between the two forms. Boyd then submitted a list of more than 76 differences to Travelers as a starting point for negotiating the terms of the final policy form. The list did not identify the presence or absence of a definition of "occurrence" as a point of difference between the two. During the next several weeks, the parties met to negotiate policy terms and exchanged drafts of the policy. By September 11th, however, the parties had not agreed to a final policy form. Following the destruction of the WTC, on either September 12 or 13, Boyd asked Coyle for a copy of the policy incorporating the changes that had been agreed to as of September 10, 2001. Boyd stated at deposition that he and Coyle agreed to freeze the draft as of that date. On September 14, 2001, Coyle issued the Travelers Policy for final review and approval by Silverstein Properties.

B. The District Court Decision

On June 3, 2002, the district court denied the Silverstein Parties' motion for summary judgment against Travelers. See SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, 2002 WL 1163577 (S.D.N.Y. June 3, 2002) ("Travelers Dec."). In construing Travelers' binder, which incorporated by reference the Travelers form, the district court found

that the dispositive issue on this motion is whether the term "occurrence" has such a clear and unambiguous meaning that the trier of fact should be barred from considering the available extrinsic evidence concerning the meaning that the parties gave to that term when they were negotiating the insurance coverage for the World Trade Center.

[182] Id. at *3. The district court then cited to Curry Road Ltd. v. K Mart Corp., 893 F.2d 509 (2d Cir.1990), for its enunciation of the standard for determining whether a contract term is ambiguous:

A term is ambiguous when it is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.

Travelers Dec., 2002 WL 1163577, at *4 (quoting Curry Road, 893 F.2d at 511) (internal quotation marks omitted). Applying the Curry Road test, the district court found that the meaning of "occurrence" to be incorporated into the Travelers binder was ambiguous given the history of litigation over the term, the fact that the term has been variously defined in different insurance policies, and the varying treatment of the term in different cases. Id. at *5-*6. The district court rejected the Silverstein Parties' argument that there is a single generally accepted meaning of "occurrence" under New York law. Id. The district court also found that the fact that Willis had circulated a policy that defined "occurrence" lent further support for a finding that the term as used in the Travelers binder was ambiguous. Id. at *5.

Accordingly, the court held that summary judgment had to be denied and that what the parties intended to be the meaning of "occurrence" would have to be determined by reference to extrinsic evidence, including

the specific definition of the term occurrence circulated by the insurance agent for the [insureds], testimony and documents relating to the negotiations prior to September 11th and the overall structure of the insurance program from the World Trade Center, and testimony and documentary evidence concerning statements made after September 11th by those who had been involved in negotiating the insurance contracts, in which they expressed their views on the question of whether there had been one or two occurrences.

Id. at *6.

On October 22, 2002, the district court amended the Opinion and Order to include a certification pursuant to 28 U.S.C. § 1292(b), thereby permitting the Silverstein Parties to seek leave to immediately appeal the denial of the summary judgment motion against Travelers together with the Rule 54(b) grants of summary judgment in favor of Hartford, St. Paul, and Royal.

C. Source of Travelers Obligations

As an initial matter, the parties dispute which contract governs the present dispute. The Silverstein Parties argue that the final Travelers policy issued on September 14th governs Travelers' obligations for the events of September 11th. They premise this claim on the fact that the Travelers policy that issued on September 14 specified an effective period of July 19, 2001 to July 18, 2002, and on the legal contention that under New York law, the terms of the insurance policy that is ultimately issued govern coverage during the binder period.

However, the case that the Silverstein Parties assert establishes this rule, Employers Commercial Union, 45 N.Y.2d 608, 412 N.Y.S.2d 121, 384 N.E.2d 668, is inapposite. There, the court sought to determine whether there was insurance coverage at the time a loss occurred, which was after a binder had been given but before the final policy was issued. In response to plaintiff's argument that "its ... coverage [183] was not in place" at the time of the loss, the court stated, "[W]e reject any notion that the [insurer's] policy was not in force" at the time of loss. Id. at 669-70. The Silverstein Parties seize on this language as support for the proposition that the later-issued policy was the instrument governing the insurer's obligations. The language is taken out of context, however. As the rest of the opinion makes plain, the court's use of the word "policy" here is a reference to "insurance coverage" generally, and not to the later-issued formal policy. See id.; see also id. at 671 (stating in consecutive sentences, "[the Insurer's] insurance was in effect" and "[the Insurer's] policy was in effect"). The court's conclusion that insurance coverage was in place at the time of the loss rested in part on the fact that the final policy, although issued after the loss had occurred, specified coverage during the period in question. Id. at 669-70. But the relevance of this fact to the court's reasoning was not that the final policy terms therefore governed coverage, but simply that they demonstrated that the insurer had done "nothing to repudiate its coverage" after the loss occurred. Indeed, the court rejected the insurer's claim that the binder had not created an enforceable contract, observing that

[d]aily, important affairs and rights in our society are made to depend upon [binders]. It is a common and necessary practice in the world of insurance, where speed often is of the essence, for the agent to use this quick and informal device to record the giving of protection pending the execution and delivery of a more conventionally detailed policy of insurance. Courts, recognizing that the cryptic nature of binders is born of necessity and that many policy clauses are either stereotypes or mandated by public regulations, are not loath to infer that conditions and limitations usual to the contemplated coverage were intended to be part of the parties' contract during the binder period.

Id. at 670.

We do not read Employers Commercial Union to stand for the proposition that a final policy that is issued after a loss is the relevant contract governing the loss. In fact, as we have explained earlier in this opinion, New York law is quite to the contrary. See, e.g., Springer, 710 N.Y.S.2d 298, 731 N.E.2d at 1108 (noting that binder and final policy are "two distinct agreements"); Rosenblatt, 594 N.Y.S.2d at 459 (holding in case where loss occurred prior to the issuance of final policy, that "the dispositive issue ... concerns the risks covered under the binder agreement ..., and this is unaffected by any changes regarding insurance policies issued subsequent to the loss"); Del Bello, 585 N.Y.S.2d at 918-19 (holding that because binder identified plaintiff as an insured, it was covered for fire damage even though plaintiff was not so listed in policy that issued post-loss). Thus, as we held in connection with the Rule 54(b) appeal, it is the Travelers binder, not the September 14 Travelers policy that applies to determine Travelers' obligations.

D. Is the Binder Ambiguous?

The Silverstein Parties argue that the meaning of "occurrence" as used in the Travelers insurance coverage is not ambiguous and, therefore, that resort to extrinsic evidence to construe it is both unnecessary and improper. Because nothing in the documents that constitute the Travelers binder defined "occurrence," we must decide whether the undefined term "occurrence" when used in a first-party property damage contract is ambiguous.

Applying New York law, we have held that

[184] [t]he cardinal principle for the construction and interpretation of insurance contracts — as with all contracts — is that the intentions of the parties should control. Unless otherwise indicated, words should be given the meanings ordinarily ascribed to them and absurd results should be avoided. As we have stated before, the meaning of particular language found in insurance policies should be examined "in light of the business purposes sought to be achieved by the parties and the plain meaning of the words chosen by them to effect those purposes."

Newmont Mines Ltd. v. Hanover Ins. Co., 784 F.2d 127, 135 (2d Cir.1986) (internal citations omitted).

Whether a contract is ambiguous is a question of law for a court to determine as a threshold matter. As noted by the district court, an ambiguity exists where a contract term "could suggest `more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.'" Morgan Stanley Group Inc. v. New England Ins. Co., 225 F.3d 270, 275 (2d Cir.2000) (internal quotation marks omitted). Moreover, "a contract may be ambiguous when applied to one set of facts but not another. Therefore, ambiguity is detected claim by claim." Id. at 278.

Once a court finds that a contract is ambiguous, it may look to extrinsic evidence to determine the parties' intended meaning. See id. at 275-76. If factfinding is necessary to determine the parties' intent, however, the matter must be submitted to the finder of fact. See id. at 279.

1. Applicability of Extrinsic Evidence

The first argument made by the Silverstein Parties invokes the doctrine that "whether an ambiguity exists must be ascertained from the face of an agreement without regard to extrinsic evidence," Reiss v. Fin. Performance Corp., 97 N.Y.2d 195, 738 N.Y.S.2d 658, 764 N.E.2d 958, 961 (2001) (internal quotation marks); see also Md. Cas. Co. v. W.R. Grace & Co., 23 F.3d 617, 625 (2d Cir.1993) ("Interpretation of unambiguous contract language does not bring extrinsic evidence into play."). This argument fails because it is based on the faulty premise that the September 14 Travelers policy rather than the Travelers binder governs the parties' obligations. While New York law is clear that extrinsic evidence may not be used to contradict clearly unambiguous language contained in an insurance binder, see Am. Sur. Co. v. Patriotic Assurance Co., 242 N.Y. 54, 150 N.E. 599, 601 (1926) (holding that it was error to admit extrinsic evidence to contradict unambiguous description of location in insurance binder), it is just as well settled in New York that extrinsic evidence is admissible to determine the parties' intentions with respect to the incomplete and unintegrated terms of a binder. See, e.g., Underwood v. Greenwich Ins. Co., 161 N.Y. 413, 55 N.E. 936, 938-39 (1900) (holding that because binder was not "in and of itself, ... such a complete and perfect instrument that it embodie[d] all the mutual stipulations of the parties ... [it] was open to explanation by parol proof as to the intention of the parties, and the established custom of the business"); see also Thomas v. Scutt, 127 N.Y. 133, 27 N.E. 961, 962-63 (1891) (noting that exception to general rule that parol evidence is inadmissible to contradict a written contract is where "the written instrument, [though] existing and valid, ... [is] incomplete, either obviously, or at least possibly, and ... parol evidence [is [185] admitted], not to contradict or vary, but to complete, the entire agreement, of which the writing is only a part"). Indeed, the Silverstein Parties have relied on this exception to the parol evidence rule in the context of their disputes with other insurers. See, e.g., SR Int'l Bus. Ins. Co. v. World Trade Ctr. Props. LLC, 2003 WL 289600, at *1 (S.D.N.Y. Feb 11, 2003) (agreeing with the Silverstein Parties that question of whether defendant-insurer Zurich's binder "provid[ed] coverage on a `per occurrence' basis [could] not be resolved without resort to extrinsic evidence"); Appellants' Rule 54(b) Br. at 2-3 (arguing that due to the fact that "binders are a species of temporary, unintegrated contracts," a court must resort to extrinsic evidence of industry usage and custom to discern the expectations of the parties, particularly where, as here, the binders are "not remotely unambiguous"). In fact, in their brief appealing the district court's grants of summary judgment in the Rule 54(b) appeal, the Silverstein Parties take the clear position that

the parol evidence rule does not come into play at all when dealing with un integrated contracts, such as appellees' binders. Rather, extrinsic evidence is "admissible to supply the terms that the parties intended to incorporate into their agreement." Saxon Capital v. Wilvin Assocs., 195 A.D.2d 429, 600 N.Y.S.2d 708, 709 (1st Dep't 1993); see also Bourne v. Walt Disney, 68 F.3d 621, 627-28 (2d Cir.1995). And, in such circumstances, "summary judgment does not lie" unless the extrinsic evidence itself is so one-sided as to negate the existence of a triable issue of fact. Lowell v. Twin Disc, 527 F.2d 767, 770 (2d Cir.1975); see also Saxon Capital, 600 N.Y.S.2d at 709.

Appellants' Rule 54(b) Br. at 77. We agree with this statement of the law, which fully applies to the Travelers binder.

2. Custom and Usage

The Silverstein Parties' next contention, that the undefined term "occurrence" is not ambiguous because it is typical for insurance policies not to define "occurrence" and, further, that the WilProp definition is "atypically broad," is undercut by the policy forms of the two other WTC insurers who provided their own forms for coverage, each of which defined occurrence. IRI issued a binder expressly incorporating its own policy form, which defines "loss arising out of one Occurrence" as "the sum total of all loss or damage insured against arising out of or caused by one event." Allianz, in the only final policy to issue before September 11, 2001, defined occurrence in language similar to the WilProp definition: "any one loss, disaster or casualty, or series of losses, disasters or casualties arising out of one event."

In addition, in order to demonstrate the ambiguity of the undefined term "occurrence," Travelers has proffered evidence of industry custom and usage concerning the meaning of occurrence that differs from the definition asserted by the Silverstein Parties. For example, a Willis forms specialist testified that she did not believe that the WilProp form definition of an occurrence as, inter alia, losses attributable to "one series of similar causes" deviated from the commonly understood meaning of "occurrence." Similarly, Daniel McCrudden, an underwriter at Travelers, testified that "it's recognized that multiple causes of loss can be involved in a single occurrence, and it's recognized that all loss arising out of an overriding cause or group of causes is considered a single occurrence. It's never been a question."

Although the Silverstein Parties argue that it was improper for the district court to consider such evidence of custom and usage in deciding whether the policy is [186] ambiguous, we have specifically instructed courts to consider the "customs, practices, usages and terminology as generally understood in the particular trade or business" in identifying ambiguity within a contract. Int'l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir.2002) (quoting Morgan Stanley Group, 225 F.3d at 275). And New York courts have long held that such evidence is admissible for purposes of construing an insurance binder. See, e.g., Underwood, 55 N.E. at 937 (holding that binder "was open to explanation by parol proof as to ... the established custom of the business").

3. Meaning of Occurrence under New York Law

Finally, the Silverstein Parties assert that the mere fact that the word "occurrence" was not defined in the binder is not enough to render it ambiguous. They contend that in the absence of a definition in the binder, a court seeking to construe the meaning of "occurrence" must first turn to well established New York precedent. If there is a clear and uniform meaning of the term under the law, they argue, then a court must reject a claim of ambiguity and apply that definition. This argument fails because its underlying premise — that there is a uniform meaning of "occurrence" under New York law — is erroneous.

The Silverstein Parties maintain that under New York law, there is but one meaning of "occurrence," which is the direct, physical cause of a loss and not more remote causes. This definition is so accepted and well settled, they contend, that it must be implied into the Travelers binder as a matter of law. Applying this definition to the facts of this case, it follows that because the destruction of the WTC was the result of two physical impacts from two separate planes, there were two occurrences as a matter of law.

To support their argument, the Silverstein Parties rely on a string of authorities beginning with Arthur A. Johnson Corp. v. Indem. Ins. Co., 7 N.Y.2d 222, 196 N.Y.S.2d 678, 164 N.E.2d 704 (1959). In Arthur A. Johnson, the court considered whether there was one or two accidents within the meaning of a third-party liability insurance policy where two separate walls constructed by the same insured contractors in two adjacent buildings collapsed 50 minutes apart during the course of an unusually heavy rainfall and caused flooding within the buildings. The insurer argued that there was only one occurrence because all the damage was ultimately caused by the heavy rainfall. In rejecting this argument, the court started from the premise that in determining the number of accidents, it must consider "the `reasonable expectation and purpose of the ordinary business man when making an ordinary business contract.'" Id. at 706 (quoting Bird v. St. Paul Fire & Marine Ins. Co., 224 N.Y. 47, 120 N.E. 86, 87 (1918)). The court then held that "the term [accident] is to be used in its common sense of an event of an unfortunate character that takes place without one's foresight or expectation ... [t]hat is, an unexpected, unfortunate occurrence." Id. at 707 (internal quotation marks and emphasis omitted). Reviewing the facts before it, the court concluded that there had been two separate accidents on the rationale that the walls that collapsed belonged to separate buildings, there was no indication that the flooding in the first building would have caused the flooding in the second building in the absence of a second defective wall, and the two walls collapsed almost an hour apart. Id. at 708.

Because Arthur A. Johnson and nearly all of the other cases relied on by the [187] Silverstein Parties to provide the definition of "occurrence" are third-party liability insurance cases, however, they involve different interests, both public and private, than first-party property insurance cases such as the instant case. See generally Great N. Ins. Co. v. Mount Vernon Fire Ins. Co., 92 N.Y.2d 682, 685 N.Y.S.2d 411, 708 N.E.2d 167, 170 (1999) ("[W]holly different interests are protected by first-party coverage and third-party coverage."); see also Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226, 233 (3d Cir. 2002) (finding third-party definitions of contract terms unhelpful in first-party context because of "[t]he fundamental differences between liability policies and first-party contracts"). For example, for third-party liability policies, there is no reason to look any further back in the chain of causation than to the insured's acts of negligence, because it is the insured's negligence that triggers liability. See, e.g., In re Prudential Lines Inc., 158 F.3d 65, 80-81 (2d Cir.1998) (holding, in third-party liability context, that "courts should look to the event for which the insured is held liable," regardless of whether it is the physical impact closest in time) (internal quotation marks and emphasis omitted); Stonewall Ins. Co. v. Asbestos Claims Mgmt. Corp., 73 F.3d 1178, 1213-14 (2d Cir.1995) (same), modified on other grounds, 85 F.3d 49 (2d Cir.1996). Thus, the approach taken by courts reviewing the number of occurrences in the context of third-party liability — such as the court's focus in Arthur A. Johnson on the separate wall collapses rather than the rain — makes sense for such policies because the insured is held liable only for its own negligence and not for the act of nature that may have been the initiating cause. See Arthur A. Johnson, 196 N.Y.S.2d 678, 164 N.E.2d at 708 ("Here the proximate cause cannot be said to be the heavy rainfall but separate negligent acts of preparing and constructing separate walls which, for all we know, may have been built at separate times by separate groups of workmen.").

In addition, construction of the term "occurrence" in a liability insurance context is influenced by the public policy concern of ensuring adequate compensation for injured third-parties who are not parties to the insurance contract, and, perforce, played no role in negotiating its terms. See Affiliated FM Ins. Co., 311 F.3d at 233. It is no surprise, therefore, that a salient characteristic of the third-party liability cases relied on by the Silverstein Parties is that each one involved multiple liability claims filed against the insured by multiple parties. See, e.g., In re Prudential Lines, 158 F.3d at 68 (liability on multiple asbestos claims); Stonewall Ins., 73 F.3d at 1187 (liability on thousands of asbestos claims); Travelers Cas. & Sur. Co. v. Certain Underwriters at Lloyd's of London, 96 N.Y.2d 583, 734 N.Y.S.2d 531, 760 N.E.2d 319, 322 (2001) (liability claims involving decades of commercial activities at numerous industrial and waste disposal sites); Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 350 N.Y.S.2d 895, 305 N.E.2d 907, 908 (N.Y.1973) (car liability insurance where insured struck two different cars); Arthur A. Johnson, 196 N.Y.S.2d 678, 164 N.E.2d at 704 (liability for destruction of retaining walls of two buildings owned by different owners). And the "test" that the Silverstein Parties argues is universally applicable in all insurance contexts was described by the Arthur A. Johnson court as applying "in a given set of circumstances when the damage is to several persons." Arthur A. Johnson, 196 N.Y.S.2d 678, 164 N.E.2d at 706 (emphasis added). In such cases, of course, a finding of a separate occurrence as to each claimant ensures compensation [188] for the injured third parties. See Affiliated FM Ins. Co., 311 F.3d at 233.

In a first-party property case, by contrast, the insured's negligence is not at issue; rather, the policy insures against external perils such as fires, floods, and intentional acts that cause damage to the insured's property, and against which a property interest holder can take adequate measures to protect his investment in advance of any loss. See Newmont Mines, 784 F.2d at 136 ("The goal of such a [first-party] policy, simply stated, is to provide financial protection against damage to property."). As a result of these differences, a court's construction of the undefined term "occurrence," or the synonymous term "accident," as intended by the parties for use in the third-party context is not necessarily applicable in the context of first-party property insurance.

We also find it noteworthy that while the Silverstein Parties assert that Arthur A. Johnson "provides the applicable legal test for determining number of occurrences," they do not try to apply that case's definition to the facts of this case. Instead, they assert that "the governing test under `well-established precedent' under New York law is to look to the immediate, efficient, physical cause of the loss, and not to some indirect or remote cause of causes." The Silverstein Parties' source for this rule appears to be some New York cases that have applied a similar rule to determine causation in the context of whether an exclusionary clause applies to a loss. See, e.g., Album Realty Corp. v. Am. Home Assurance Co., 80 N.Y.2d 1008, 592 N.Y.S.2d 657, 607 N.E.2d 804, 805 (1992) (applying "proximate, efficient and dominant cause" test to hold that covered risk of water damage, which was caused by frozen pipes, rather than excluded risk of freezing, was cause of loss); but see Tonkin v. Cal. Ins. Co., 294 N.Y. 326, 62 N.E.2d 215, 216-17 (1945) (applying proximate cause test to hold that covered risk of fire, rather than excluded risk of collision was cause of loss, where blinding smoke from fire caused driver to collide with another car). But no New York case of which we are aware has set forth such a test for purposes of determining the number of occurrences that comprise a loss.

The test actually enunciated by Johnson and its progeny in the third-party liability context is considerably more nuanced:

We have expressed the rule of these cases as follows: "In determining the number of occurrences for deductible purposes, New York inquires whether multiple claims result from `an event of an unfortunate character that takes place without one's foresight or expectation.'... [A]lthough a single `occurrence' may give rise to multiple claims, courts should look to the event for which the insured is held liable, not some point further back in the causal chain."

In re Prudential Lines, 158 F.3d at 80 (quoting Stonewall Ins., 73 F.3d at 1213). Even if we were to accept the Silverstein Parties' contention that this statement sets forth the uniform and well settled definition of "occurrence" under New York law, its application to the facts before us would not establish as a matter of law whether the events of September 11th were one or two occurrences. For example, what, precisely, is the "event" here for which insurance coverage is being sought? In the context of third-party liability insurance — the type of insurance at issue in Arthur A. Johnson — the "event" is the insured's negligence. According to the Silverstein Parties, under the insurance with Travelers, "the `event' that triggers coverage ... is `direct physical loss or damage' to property." This wording traces the language contained in the Travelers form upon [189] which the Travelers binder was issued, which provides that

[t]he Company will pay for direct physical loss or damage to Covered Property at premises ..., caused by or resulting from a Covered Cause of Loss. Covered Cause of Loss means risks of direct physical loss unless the loss is excluded in Section D., Exclusions; limited in Section E., Limitations; or excluded or limited in the Supplemental Coverage Declarations or by endorsements.

A jury construing this language, however, could reasonably conclude that the "event" that triggers coverage is the Covered Cause of Loss, rather than the damage itself. It also could find that the cause of the destruction of the WTC was either the individual impacts caused by each plane or a single coordinated terrorist attack. The latter cause, Travelers argues in its opposition to summary judgment, was a Covered Cause of Loss expressly specified in the Underwriting Submission and, thus, intended by the parties to be covered by the policy. In fact, a jury could find that the words "direct physical loss or damage" does not refer to the "event" that triggers coverage at all, but rather sets forth the scope of the damage resulting from the "event" that the insurer will pay for, namely, direct physical damage as distinct from remote or incidental damage.

In any event, we are not called upon here to decide whether there was one occurrence or two in this case, only whether the district court properly concluded that because there is no well settled definition of the term "occurrence" under New York law, the Travelers binder was sufficiently ambiguous to preclude summary judgment and to permit the factfinder to consider extrinsic evidence of the parties' intent.

We think the case most directly on point is our decision in Newmont Mines, the only first-party property insurance case cited by the Silverstein Parties that addresses the meaning of "occurrence." 784 F.2d at 135-37. In that case, we were "not persuaded ... [by defendants] that the term `occurrence' has obtained any ... specialized or singular meaning in the context of property insurance," and we interpreted both Arthur A. Johnson and Wesolowski as "rejecting any single definition of occurrence." Id. at 136. Our conclusion, at bottom, was that "the meaning of `occurrence' must be interpreted in the context of the specific policy and facts of th[e] case." Id. at 136 n. 9.

In Newmont Mines, a heavy accumulation of snow caused two separate parts of a roof to collapse several days apart, requiring two independent repairs. Id. at 129-31. We held that there was sufficient evidence to support the jury's verdict that the two partial losses constituted two occurrences under the policies. Id. at 137. We also upheld the instruction given to the jury on the meaning of occurrence:

it is for you to decide whether or not the losses which are alleged to have occurred or the loss that's alleged to have occurred in this case was the result of a single, continuous event or incident, or whether or not it was the result of two separate incidents. If you find that the collapse of the two sections of the roof was a single, continuous event or incident, then the collapse constituted a single occurrence — and there would be only one loss. If, on the other hand, you find that the collapse of the two sections of the roof constituted separate events or incidents that were not causally related, then of course you would have two separate losses.

Id. at 134. We held that the instruction was proper on the rationale that given the goals of first-party property insurance, "the parties ... must have intended to provide coverage for property damage [190] each time it occurred unexpectedly and without design, unless the damage occurring at one point in time was merely part of a single, continuous event that already had caused other damage." Id. at 136.

Notwithstanding the express statements to the contrary in our decision, see id. at 135-36 & n. 8. (rejecting any one definition of "occurrence" and stating that "the meaning of `occurrence' must be interpreted in the context of the specific policy and facts of th[e] case"), the Silverstein Parties contend that Newmont Mines sets forth "the rule of law" with respect to the meaning of "occurrence" in the context of first-party property insurance, and that this rule favors them. However, even if we were to agree with the Silverstein Parties that the approved jury instruction and our separate definition of "occurrence" are applicable to this case (a question we need not and do not reach), the one thing Newmont Mines makes certain is that the question of how many occurrences the events of September 11th constituted is a question properly left to the fact-finder. To be sure, a jury could find two occurrences in this case, as it did in Newmont Mines, or it could find that the terrorist attack, although manifested in two separate airplane crashes, was a single, continuous, planned event causing a continuum of damage that resulted in the total destruction of the WTC, and, thus, was a single occurrence. Instead of supporting the Silverstein Parties' argument that New York law mandates a finding of two occurrences under the Travelers binder as a matter of law, Newmont Mines confirms our belief that in a first-party property insurance case, the meaning of the undefined term "occurrence" is an open question as to which reasonable finders of fact could reach different conclusions.

Accordingly, we conclude that given the significant distinction between first-party and third-party insurance policies, the fact-specific nature of the inquiry, and the fact that it is the parties' intent that controls, the district court properly concluded that the meaning of "occurrence" in the Travelers binder is sufficiently ambiguous under New York law to preclude summary judgment and to warrant consideration by the fact finder of extrinsic evidence to determine the parties' intentions. We therefore affirm the denial of summary judgment against Travelers.

CONCLUSION

For the foregoing reasons, we affirm the judgments of the district court.

[1] On November 5, 2001, Silverstein Properties and its related entities filed a separate action against two of the WTC insurers, ACE Bermuda Insurance Ltd. and XL Insurance Ltd., Docket No. 01-cv-9731(JSM). That action was voluntarily dismissed with prejudice on March 25, 2002. On December 28, 2001, Silverstein Properties and its related entities filed another separate action against Travelers Indemnity Company, Docket No. 01-cv-12738(JSM). That action was dismissed without prejudice on March 25, 2002, based on the parties' stipulation that Travelers would be added as a counterclaim-defendant to the action filed by SR International.

[2] Two divisions of appellee Royal Indemnity Company, Royal & SunAlliance's Risk Management & Global Division and Royal Specialty Underwriting, Inc. ("RSUI"), issued separate binders in the WTC insurance program. The only binder at issue in this appeal is the one issued by Royal & SunAlliance's Risk Management & Global Division.

[3] The parties have indicated that some insurers did not receive a specimen copy of the WilProp form. We do not address the possible consequences that failure to receive the form may have for those insurers because any such consequences are not relevant to the present appeal.

[4] We note, however, that Industrial Risk Insurers ("IRI") issued a binder that expressly bound on the basis of its own policy form, "Standard Fire Policy and Comprehensive All Risk Form C-AR."

[5]The district court's opinion recited the citizenship only of the entities comprised by Silverstein Properties (Delaware or New York/New York), which are only the first seven named defendants-appellants. The record indicates that the citizenship (state of incorporation/principal place of business) of the plaintiff and the rest of the defendants is as follows:

Plaintiff SR International Business Ins. Co. (United Kingdom).

Defendants Westfield WTC, L.L.C. (Delaware/New York); Westfield Corporation, Inc. (Delaware/California); Westfield America, Inc. (Missouri/California); The Port Authority of New York and New Jersey (compact between New York and New Jersey/principal place is New York); UBS Warburg Real Estate Inv., Inc. (Delaware/New York); Wells Fargo Bank Minnesota, N.A. (National/Minnesota); GMAC Commercial Mortgage Corp. (California/New York).

[6]The Act provides, in relevant part,

Sec. 408. Limitation on liability.

(a) In general. —

(1) Liability limited to insurance coverage. — Notwithstanding any other provision of law, liability for all claims, whether for compensatory or punitive damages or for contribution or indemnity, arising from the terrorist-related aircraft crashes of September 11, 2001, against an air carrier, aircraft manufacturer, airport sponsor, or person with a property interest in the World Trade Center, on September 11, 2001, whether fee simple, leasehold or easement, direct or indirect, or their directors, officers, employees, or agents, shall not be in an amount greater than the limits of liability insurance coverage maintained by that air carrier, aircraft manufacturer, airport sponsor, or person.

* * * * * *

(b) Federal cause of action. —

(1) Availability of action. — There shall exist a Federal cause of action for damages arising out of the hijacking and subsequent crashes of American Airlines flights 11 and 77, and United Airlines flights 93 and 175, on September 11, 2001. Notwithstanding section 40120(c) of title 49, United States Code [49 U.S.C.A. § 40120(c)], this cause of action shall be the exclusive remedy for damages arising out of the hijacking and subsequent crashes of such flights.

* * * * * *

(3) Jurisdiction. — The United States District Court for the Southern District of New York shall have original and exclusive jurisdiction over all actions brought for any claim (including any claim for loss of property, personal injury, or death) resulting from or relating to the terrorist-related aircraft crashes of September 11, 2001.

Pub.L. No. 107-42, § 408(b)(3), 115 Stat. 230, 241 (Sept. 22, 2001), as amended by Pub.L. No. 107-71, § 201, 115 Stat. 597, 645 (Nov. 19, 2001).

[7]Federal Rule of Civil Procedure 54(b) provides:

Judgment Upon Multiple Claims or Involving Multiple Parties. When more than one claim for relief is presented in an action, whether as a claim, counterclaim, crossclaim, or third-party claim, or when multiple parties are involved, the court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment. In the absence of such determination and direction, any order or other form of decision, however designated, which adjudicates fewer than all the claims or the rights and liabilities of fewer than all the parties shall not terminate the action as to any of the claims or parties, and the order or other form of decision is subject to revision at any time before the entry of judgment adjudicating all the claims and the rights and liabilities of all the parties.

[8]28 U.S.C. § 1292(b) provides:

When a district judge, in making in a civil action an order not otherwise appealable under this section, shall be of the opinion that such order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation, he shall so state in writing in such order. The Court of Appeals which would have jurisdiction of an appeal of such action may thereupon, in its discretion, permit an appeal to be taken from such order, if application is made to it within ten days after the entry of the order: Provided, however. That application for an appeal hereunder shall not stay proceedings in the district court unless the district judge or the Court of Appeals or a judge thereof shall so order.

[9]We note that even assuming this passage accurately explains the practice of "following the form," it does not come close to establishing that the "form" that was to be followed here was, of necessity, the Travelers form. Indeed, as the Silverstein Parties concede,

[t]he initial [underwriting] submission may or may not include a sample policy form. If a form is included and a lead insurer has not already emerged, the sample form is intended merely as a starting point for policy negotiations. The initial form will be modified or replaced by another form before the final policy is completed.

Appellant's Rule 54(b) Br., at 20 (emphasis added). Thus, to the extent the Silverstein Parties' evidence establishes a custom and practice of "following the form," it appears that the form to be followed can as easily be the broker's policy form submitted with an underwriting submission as the form of one of the primary-layer insurers.

[10] We note that at least one insurer, Allianz, issued a final policy prior to September 11th. No party, however, argues that any insurer other than Allianz was subject to the terms of that policy, and the Silverstein Parties, it appears, dispute that even Allianz was subject to the policy.

[11]Interestingly, however, the earlier Willis policy form, in a section permitting the designation of a "lead" insurer, provides the following description of the practice:

When more than one carrier is participating in a program, it is preferable to designate the insurer with the largest quota-share as the "lead" especially if that carrier is whose underwriting and claims settling decisions will be followed by others participating in the coverage.

Swiss Reinsurance Company, with a 22% quota share, or approximately $780 million, was the insurer with the largest quota share in the WTC program. Lexington Insurance Company, with a 50% share of the primary layer, was the largest participant in that layer. Travelers, by comparison, had an overall share in the program of approximately 5.9% and an 8% share of the primary layer.

[12] On September 17, 2001, Tucker e-mailed Springett-King that "[t]he lead as far as the policy form is concerned is Travelers" and that he would send her the excess form and a copy of the primary shortly. Springett-King forwarded this message to the claims adjustor, Mr. Loud, without comment. Loud's computer journal reflects that "Travelers is the lead and will issue a policy this week from what [Springett-King] understands." A report from Loud states: "We have yet to receive a copy of the policy. The form is going to be issued from Travelers Insurance Company and they have yet to agree with the insured on the form. The form is going to be sent to all the insurance companies by the end of next week." Neither St. Paul nor Stewart Smith issued a policy form.