Thursday, November 16, 2006

I hope I have not gone insane

My contracts class has a discussion board. It often features discussions that get, well, a little weird. To avoid being apart of that, I have basically avoided posting on it. However, I rolled the dice with maybe the most insane contracts thing I have written in a while. I am proud of it in the amount of thought I put in it, embarrassed in something that should have clear fallacies. But, if you want to see what happens if you give me a little less than an hour and a topic in contracts that interests me, you get this....

I have not posted anything on this board for a while, but I, like Ashley was inspired by something on 798 (but we are posting for different reasons so I did not just reply, though I expect an Ashley response to this). However, rather than the distinguishing Farnsworth presents, which I also do not necessarily accept, I was inspired by the Harvard Ballad at the bottom of 798. I figure if Sherwood v. Walker was worth writing a poem given seventy years of history in casebooks, it has to be worth me trying to write something given one-hundred-twenty years in casebooks.

I will put my argument as compactly as possible. I am doing this without outside reviews and class. I think that the case merits a foray into intellectual discourse by the board.

I am tempted to distinguish Wood and Sherman through inherent risk. We have often talked about how risk is beneficial in contracts. As a gambler with a remarkable tendency to lose, I ironically agree with that. I think that it rewards prospecting, taking adventures, living life to its fullest, and cheering for point spreads on otherwise blow-outs.

However, risk is not for all. Certain contracts, presumably, could be without risk (at least ideally). Say I wanted change for a dollar, and you wanted a dollar for change. That trade should ideally be risk free. If it turns out that one of the quarters traded for, even by mutual mistake, was a fake quarter. It seems fair for the short-changed party to ask for a real quarter within a reasonable time. It simply does not look like a contract where "you pays your money, you takes your chances."

But there are contracts where risk is in the deal. Stocks and prospects are the most obvious. As such, I want to say that the difference between Wood and Sherwood is how much risk the parties intended for in the contract.

In Wood, a rock exchange involves risk. It was clear this involved risk that the rock was valuable or not valuable. If the rock was just a rock, Boyton would have wasted his dollar. If the rock was a topaz, Wood would have wasted her rock. Both knew there was a risk involved. The fact that the risk materialized into something beyond exceptions is still captured by the risk that the rock was worthless or it was valuable.

In Sherwood, no one was gambling that Aberlone was pregnant. It was not a reasonable risk to be assumed. In fact, they take it a step further by not just inferring she was not pregnant, but mutually agreeing that she was not pregnant. There was no gamble here, the intent of the party was to sell an infertile cow for a certain amount of money. The fertility of the cow throws out the whole agreement because that was not apart of the risks reasonably assumed.

I normally don't like over-philosophizing, but I am having fun with this:

The trade is (Rock price) = (Price as valuable) * (Probability of that) + (Price as rock) * (Probability of that)

If it was a .0014% chance that this rock was worth $700 this was a fair deal. The probability was probably higher than that (maybe not, maybe this is like those torts cases where the fact that it happened weighs in jury's heads as proof that it was likely to happen), but that could be accountable to the desperation of Wood and the knowledge of Boyton.

However, Sherwood:
Infertile cow = $80

Much simpler math with no algebra and no chances, similar to my change analogy of $1=$1.

I am saying that the parties intended these equations. if the equations are not true, then the contract was not what either party intended. If it was not what either party intended, the contract should not be enforced.

It should be noted that I am not saying that the parties did know of the risk involved, but should have known of the risk involved. If the risk is specifically disavowed, that is clear evidence that the contract is not the intent of the parties. Keeping that in mind, here is how I see the other cases in the chapter:

Both parties agreed there was water in the land. They had every reason to believe this. Sure one party may have looked, but usually this will not come up. The intent of the parties was not to include risk, thus,

Land with plentiful quality water = $100 an acre

When it turned out that this deal was not correct, the whole thing aborts as not intentional and not an enforceable contract.

Lenawee County Bd. of Health:
Perhaps all of this is located in the Lenawee opinion, without the silly math, because the court specifically speaks of "risk of the parties' mistake because the contract contained an las is' clause." Thus I feel unoriginal suddenly (I just read this now, but I have written too much to turn back):

Price paid for building = Building "as is"

As is has built in risk as point out by the court, so really the equation is,

Price paid for building = (Buyer's value in using it for apartment buildings) * (Building's likelihood "as" habitable) + (Whatever that is worth) * (Building likelihood "as" unhabitable).

This trade included a risk calculation for the possibility of the building being habitable, or not. The proposed mistake falls into that risk, thus, it was included in the intent of the parties.

I could do the other others, but the one where I might be stretching the most is Stees:
Here I see the issue in terms that they use in the notes, being distinguished as a "performance specification" and a "design specification." I see the case somewhat iffy in that there were designs specified for the performance, thus it is sort of both at the same time. However, the controlling factor the court looks to is that, "The defendants contracted to 'erect and complete the building.'" As such, I see the court as viewing the contract as:

Price paid for the building = (Price of building the building if conditions are fine) * (Probability of that) + (Price of building the building if conditions are not fine) * (Probability of that)

Here the conditions were harder for me to write, so the likelihood of me messing it up in terminology are greater but I think that this is still correct in concept. The last postulate is a fine deal if I believe that the probability that the conditions are not fine are low. The reason that this risk is put on the builder is because he has agreed to "perform" not agreed to "try and perform." Thus, his side takes the risk, if the buyer took the risk it might look like:

(Price paid for the building) * (Likelihood that plans will work) + (Price paid for the building) * (Likelihood that plans don't work) = Price of building the building

Both of these show the intent of the parties and an a willingness to accept risk into their intent. Both of these would not allow "mutual mistake" to revoke the ruling.

In a contract that requires risk, such as art, it will be a rare case where there is not reasonable risk on one side. In those cases, "mutual mistake" should not be enforced unless both parties agree that there is simply no risk involved.

If you did not read any of the above, and rightfully so, here is my one paragraph summary:

If both parties' mutual mistake is to assume a materialized risk could not exist entirely, that mutual mistake means that neither intended the contract as stated in the four corners, thus the contract is void. If both parties' mutual mistake was that believing a materialized risk was low or nominal, then the contract still reflected their intent, thus the contract is enforceable.

Writing this out, I thought of a lot of tangential arguments against me that I passed up for the goal of trying to write something on this case (again, the poem captured the legal side of my mind), so I am not sure which ones kill my argument. I also don't know if this is all redundant to much better law review works (which I am going to check out now). So I see ample opportunity for response. Lets do Rose justice and post our thoughts on the case, even if they in no way apply to what I wrote here. Direct responses are good, but I just want to see smart NYU contracts people talking about a case worthy of poetry. Also I spell checked this and tried to have it be clear throughout (despite the algebra, that is meant just for people who think like that), bonus points for those who reply in kind.


Katie's Dad said...

The statement: "(Price paid for the building) * (Likelihood that plans will work) + (Price paid for the building) * (Likelihood that plans don't work) = Price of building the building"

is trivial (contains no information).

Likelihood that plans don't work + Likelihood that plans will work = 1

by virtue of the excluded middle.

Algebra then yields
Price paid for the building = Price of building the building

for all values of likelihood. i.e. You get what you pay for.

Other than that I don't understand anything here, which I think means you are getting the knack of this law stuff.

Matthew K Warner said...

Hi father of Katie (do I know this Katie btw?),

I realize where I messed up. Here is what I am trying to portray:

I am assuming a perfect market, so the price of building the building will be completely equal to the building itself.

Say there is a 98% chance of the specs working, and a 2% chance of the specs not working.

If the original specs do work, say it will cost $100 to build the building.

If the original specs don't work, they builder will have to use other specs, say that will cost $1,000 total.

Thus, what I meant to write was:

(Cost of building to spec) * (Likelihood that plans will work) + (Cost of building w/differents specs) * (Likelihood that plans don't work) = Contract price

So in this case it would be:

$100 * .98 + $1,000 * .02 = $118.

So if the contract price was $118, then the builder can not rescind if the 2% materializes and he has to build at $300, because 98% of the time he would be building at $100 and be the beneficiary of the risk.

Sorry that first post was not so clear, I wrote it at 10 o'clock PM with a sudden drive to write something on contracts. I think now I can explain my thoughts a bit better. Having read more, my ideas are far from novel, but I was glad my instincts were about right.

Proving that some contracts incorporate risk, and when the small risk materializes that does not ruin the contract is not original. I think my greater point is that some contracts don't include any allocation of risk, implied or express. I think that is what is going on in the cow case, and what I try to use getting change for a dollar to exemplify.

Thanks for responding by the way, cool to have someone even read that post.

Anonymous said...

Sorry to say, but it's still meaningless. Not just that, but pedantic and arrogant