Local Voice: Mutual-mistake defense has torturous history

By Otto Stockmeyer

"We are a nation of laws."

When people hear that statement, most think of legislators passing legislation, or high court judges expounding the common law.

But there is another, much larger group of lawmakers: all of us. Whenever we enter into a contract, we are making a "private law" to govern our relationship; a law that the courts will enforce, if necessary.

Contracts are everywhere: agreements to buy, sell, or lease land or goods are contracts. Mortgages, loans, and credit-card agreements are contracts. So, too, are insurance policies and storage-facility leases.

Imagine a world where courts stopped enforcing contracts. There would be a complete breakdown in commerce. Americans would be unable to buy, finance, insure, or store their possessions with an assurance that their rights would be protected.

What if a contract was the product of a mistake? Neither party is guilty of any wrongdoing, yet the contract was not what the parties supposed. Should a court enforce it?

That is where the case of Sherwood v. Walker, 66 Mich 568 (1887) fits into the body of our law. It "wrote the book" on the law of mistake. In 1985, American Heritage magazine picked it as one of "Five Classic Cases" that every law student must know. In Plymouth, Michigan, the home of one of the parties to the lawsuit, the State Bar of Michigan in 1993 erected a Legal Milestone plaque commemorating the case as "one of the most celebrated contracts cases in American history." Harvard law professor John P. Dawson called it "the single most beloved law case at Harvard."

Furthermore, the Michigan Supreme Court Historical Society in 2003 included Sherwood v. Walker in its listing of the court's 20 most significant cases. In "Sherwood v Walker: Cows and Contracts" (Michigan Bar Journal, January 2009 supp.), Hillsdale professor Paul Moreno noted, however, that over the years the Michigan Supreme Court has exhibited profound ambivalence toward what may be its most famous decision. Twice the high court stripped the case of its legal authority, only to later embrace it again as well-settled precedent.

Sherwood v. Walker

First, the Sherwood case itself. In May of 1886, Theodore Sherwood of Plymouth entered into a contract to purchase a cow with the fancy name of "Rose 2d of Aberlone" from Hiram Walker of Detroit. Because they believed that Rose was barren, she was sold as beef for 5 cents a pound. The price amounted to $80. Later, when Walker, the seller, learned that the cow was expecting a calf (and as such worth as much as $1,000), he tried to back out of the deal. Sherwood, the buyer, sued him to enforce the contract and lost.

The elements of the mutual-mistake defense, as seen by Justice Allen B. Morse, writer of the majority opinion, were essentially these: there must have been a mistake (generally defined as an erroneous belief), it must be mutual (shared by both parties), and it must go to the substance of the transaction (and not merely some collateral matter). To Justice Morse, "a barren cow is substantially a different creature than a breeding one."

Justice Thomas R. Sherwood (no relation to the buyer) wrote a strong dissent. Significantly, he "entirely agreed" with the rule that a mutual mistake, going to the substance of a contract, confers a right to rescind. But he disagreed with the majority's application of the rule. He denied that there was any mistake as to the substance of the cow, and he challenged the majority's conclusion that the buyer believed that the cow was barren. Justice Sherwood believed that the parties were equally ignorant as to the cow's capacity to breed, "and as to this each party took his chances."

Justice Morse was not deciding whose version of the facts made better sense. Rather, he decreed that because the trial judge had failed to instruct the jury on the law of mistake, a new trial must be had.

Thanks to research by Terrence Ayala, cited in Professor Moreno's article, we now know that in the second trial the jury found in favor of the buyer. Rose ended up with Theodore Sherwood, for whom she eventually produced five more calves. If the wise jurists on the Michigan Supreme Court could not agree on whom to believe, surely that is grounds enough to leave the fact-finding to a jury.

Justice Sherwood's revenge

Less than a year after Justice Sherwood failed to prevail in Rose's case, he got his way in Nester v. Michigan Land & Iron Co., 69 Mich 290 (1888). Mr. Nestor bought a tract of pine timberland for $27,000. Upon harvesting, he found a large portion of the logs to be unsound, and they yielded only about half the quantity of lumber that had been estimated by parties' agents. The buyer refused to pay more than one-half the purchase price, on the ground that both parties were mistaken as to the quality of the timber. The trial judge agreed and ruled for the buyer. The Michigan Supreme Court reversed.

Writing for the Supreme Court, with Justice Morse not sitting, Justice Sherwood not only rejected application of Sherwood v. Walker, but also held that the Sherwood case should be limited to its facts.

Aside from a desire to take a second shot at the majority opinion in Sherwood v. Walker with its author sidelined, there was no justifiable reason to attack the decision. Although both parties in Nester had estimates made by their agents, they knew that such estimates could not be made with any degree of certainty. Under these circumstances, the parties did not labor under a mistaken belief. Rather, they knew that there was uncertainty. In the absence of a warranty, they should be held to their bargain.

Rose's exoneration

Justice Sherwood's revenge was short lived. Less than three years later, McKay v. Coleman, 85 Mich 60 (1891) came before the court. There the high bidder at an estate auction paid a non-refundable $100 deposit on a plot of land. Later, when the deed was tendered, the buyer refused to proceed. The building on the property, believed by all parties at the time of sale to be entirely on the land sold, was in fact partly on other land. This greatly affected the value of the property. The buyer sued to recover his $100, but the trial court gave judgment for the seller.

In an opinion by Justice Claudius Grant, who had succeeded Justice Sherwood in 1890, the Supreme Court ruled unanimously for the buyer, saying: "This case is ruled by the principles laid down in Sherwood v. Walker [citation omitted]. There was a mutual mistake of fact as to the condition of the property." Instead of being limited to its facts, Sherwood v. Walker established legal principles that must be followed in future cases having nothing to do with pregnant cows. Rose had been resuscitated.

Was it perhaps significant that while Justice Morse was still on the high court, Justice Sherwood had left office? Recall that in Nestor, with Morse sidelined, Sherwood v. Walker was limited to its facts. Now, with Morse voting and Sherwood gone, Sherwood v. Walker's precedential value was restored. Rose would rule for the next 90 years.

Lenawee County Board of Health v. Messerly

Rose suffered her second blow in the case of Lenawee County Board of Health v. Messerly, 417 Mich 17 (1982). It involved the sale, for $25,000, of a three-unit apartment building situated on a 600 square-foot lot. Unknown to either the buyer or the seller, a previous owner had installed the septic tank without a permit. The lot size was too small to support a legal septic system, rendering the property uninhabitable and virtually worthless. The buyers sought to rescind their purchase based on mutual mistake.

Writing for a unanimous Supreme Court, Justice James L. Ryan agreed that the mistake was mutual, but he was troubled by the distinction in Sherwood v. Walker between a mistake that goes to the substance of the contract and one that is merely collateral. Finding the distinction "inexact and confusing," he declared that the Sherwood holding was to be limited to the facts of the case.

But hold on. The actual holding in Lenawee County was that an "as is" clause in the parties' contract placed the risk of any unknown defect on the buyer. So regardless of any mutual mistake, the buyers were not entitled to rescission. This makes the criticism of Sherwood v. Walker dicta: a gratuitous statement lacking the force of law. However, overlooking this distinction, some law-school casebook authors replaced Sherwood with Lenawee County, and one scholar pronounced Sherwood to be essentially "dead law."

Rose lives!

It took nearly a quarter century for the Michigan Supreme Court to again resuscitate Rose. The vehicle was Ford Motor Co. v. Woodhaven, 475 Mich 425 (2006). The facts of the case were far removed from a contract to sell a cow. Rather it was a property tax appeal. The Ford Motor Company sought a refund of personal property taxes paid under what it claimed was a mutual mistake of fact. Ignoring Lenawee County completely, a unanimous Michigan Supreme Court declared: "Our review of our precedents involving the law of mistake indicates that the peculiar and appropriate meaning that the term 'mutual mistake of fact' has acquired in our law has not changed since Sherwood . . . [meaning] an erroneous belief, which is shared and relied on by both parties, about a material fact that affects the substance of the transaction." (Michael F. Cavanagh, J.) Applying that definition to the facts before it, the court found that Ford had stated a valid claim to recover taxes paid under a mutual mistake of fact.

Less than a year ago, the Supreme Court again unanimously declared its allegiance to "the seminal case of Sherwood v. Walker," in Briggs Tax Service v. Detroit Public Schools, 485 Mich 69 (2010). Because these two most recent decisions were unanimous, it is unlikely that they are in any jeopardy from the recent shift in the high court's partisan majority.

In 1981, the author had the pleasure of teaching Sherwood v. Walker to a law school class that included John Engler, then a state legislator. When the State Bar of Michigan dedicated its Legal Milestone plaque commemorating Rose's case in 1993, then-Governor Engler issued a proclamation. It concluded with this statement: "The details of this case are less important than the ruling, which remains as sound today as it was over a century ago. The principals are gone, but the principle will never die."

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Otto Stockmeyer, emeritus professor, Thomas M. Cooley Law School, can be reached at www.cooley.edu/faculty/stockmeyer.html.

Published: Fri, May 6, 2011

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