Unit 5: Mistakes, Frauds & Frustration

Unit 5: Mistakes, Frauds & Frustration

“Mistakes … Frauds … Frustration”
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  • Unit 5: Part 1 - Mistakes > Meeting of the Minds: Raffles v. Wichelhaus > Intro and Raffles v. Wichelhaus: Part 1
  • Unit 5: Part 1 - Mistakes > Meeting of the Minds: Raffles v. Wichelhaus > Raffles v. Wichelhaus: Part 2
  • Unit 5: Part 1 - Mistakes > Mutual v. Unilateral Mistakes > Gambling & A Rare Coin
  • Unit 5: Part 1 - Mistakes > Mutual v. Unilateral Mistakes > Homeowners' Insurance
  • Unit 5: Part 2 - Fraud > Duty to Inform: Laidlaw v. Organ > Laidlaw v. Organ
  • Unit 5: Part 3 - Frustration > Taxi Hypothetical > Taxi Hypothetical
  • Unit 5: Part 3 - Frustration > Shipping Companies > Shipping Companies

Unit 5: Part 1 – Mistakes > Meeting of the Minds: Raffles v. Wichelhaus > Intro and Raffles v. Wichelhaus: Part 1

  • With the coming of the Civil War and the Union Blockade of Southern Ports, the supply of southern cotton to the markets became unstable- and so did the prices.
  • One kind of arrangement would allow a buyer, simply to make an offer to whoever had supplies of cotton in his warehouse in England.
  • So a cotton manufacturer could simply go to the market, see you had the cotton it needed in its warehouse, and buy it and get it then and there.
  • Some people worried that the war would go on, the blockade would continue, and the supply of cotton would be unsure for a long time.
  • So those who needed cotton for their operations did what users of fluctuating commodities have always done and do now.
  • Buyers would buy, and sellers would sell, cotton that was not yet in hand- in much the same way as a large flour mill might buy quantities of flour before it is harvested at a given price, hedging against the possibility that the price might go up because of a drought or a sudden surge in demand while realizing that a glut on the market might cause prices to go down.
  • So they hedge and buy goods that do not yet exist at a price that they know they can afford and rely on, even if it is a little higher than what the price might actually turn out to be.
  • Raffles was a seller of cotton who imported it from India, and Wichelhaus was a buyer.
  • Now the ships that transported cotton from India took about four or five months to arrive in Liverpool.
  • The contract he made with Raffles was that he would pay 17 and 1/4 pennies- actually pence, but let’s say pennies- per pound for some 50,000 pounds of cotton from a certain ship leaving Bombay- a ship called the Peerless.
  • The seller, Raffles, notified the buyer, Wichelhaus, that his cotton was there and he should arrange to pay for it and pick it up.
  • The cotton I bought was from a ship called Peerless that sailed in October from Bombay and arrived months ago in February.
  • What wasn’t fine is that, between February and April, the price of cotton had gone down.
  • The price of cotton in April- on what we would call, the spot market- if you just went into a warehouse somewhere in Liverpool and tried to buy it, was well below 17 and 1/4 cents per pound.
  • The seller had cotton on the later Peerless, the one that sailed in December and arrived in April.
  • The buyer wanted- or at least said he wanted- cotton from the October Peerless, which had arrived earlier in February.
  • The cotton, as I said, was the same quantity and quality, and the only identification of it was that it was from the ship, Peerless.
  • The only problem was that the buyer thought- or at least said he thought- that he was contracting and assuming the risk of price fluctuations of cotton shipped from India in October, and the seller thought he was contracting about, and hedging, the price of cotton sailing from India in December.

Unit 5: Part 1 – Mistakes > Meeting of the Minds: Raffles v. Wichelhaus > Raffles v. Wichelhaus: Part 2

  • CHARLES FRIED: It sad, in effect, that you, the buyer and the seller, thought you had a deal.
  • So what looked like a perfectly clear and complete deal, was not.
  • Needless to say in February, the price of cotton was also below the contracted price of seventeen and a quarter pennies.
  • Or at least the court didn’t feel in a position to question that fact, and the seller, Raffles, was surely telling the truth.
  • He didn’t have any deal with the earlier ship, and that’s why he hadn’t said anything when, in February, the earlier October Peerless arrived in Liverpool.
  • Now remember what happens when there’s a storm at sea, and goods are thrown overboard to lighten the ship, like Jonah, remember? Everybody shares the loss.
  • You might say Raffles and Wichelhaus are equally innocent.
  • There were a lot of people connected, indirectly, to the deal.
  • Maybe Raffles’ son was counting on the deal, so dad would pay for his wedding.
  • It looked like a deal, but it turned out it wasn’t a deal.
  • Raffles and Wichelhaus made the mistake of thinking they were contracting about the same thing, about cotton from the same ship, and they were wrong.
  • As the saying goes, the loss lay where it fell, and it fell right on Raffles.

Unit 5: Part 1 – Mistakes > Mutual v. Unilateral Mistakes > Gambling & A Rare Coin

  • Suppose I’m a gambler on the horses and I’ve got a horse right here, his name is Paul Revere, and a guy has told me if the weather is clear, can do.
  • Obviously, I can’t go back to the window and say, hey, I made a mistake can I get my money back? No. I was just wrong.
  • The buyer is a collector of rare coins, and the seller is a coin dealer.
  • The buyer sees in the seller’s stock a coin that claims to be a 1916 dime minted in Denver.
  • It’s worth $500. In fact, the dealer sometime before had bought it for $450. The buyer looks at the coin very carefully, takes out his magnifying glass, really checks it out, and the seller says, “I’m going to charge you $500 for it.
  • ” He buys it for $500. Not long after that, another coin collector learns that the buyer had this rare 1916 Denver dime, and he says, “I want that.
  • He does, and it turns out that the coin is a very clever fake.
  • One lower court said that the buyer of the coin, the guy who paid $500, was out of luck.
  • This kind of thing is not like buying a standard grain of the wheat by the carload and finding that you’ve been sold some other grade, or that some of the wheat has spoiled or sprouted.
  • Buying and selling antiques is always something of a gamble.
  • The appellate court said that they were both equally innocent, both equally persuaded, neither of them thought they were gambling, and therefore, since they were both mistaken, it was like the two ships Peerless or Rose of Avalon, a mutual mistake.

Unit 5: Part 1 – Mistakes > Mutual v. Unilateral Mistakes > Homeowners’ Insurance

  • Suppose I own a house on the Jersey Shore and around January I remember that last year was a really terrible hurricane season and a lot of my neighbors suffered great damage.
  • Now what is hurricane insurance? I’m paying money to cover the risk that there will be a hurricane that will damage my house.
  • If the hurricane were a certainty, no insurance company would sell me that insurance.
  • It turns out to be a relatively quiet season, a few tropical storms, but no major hurricane and my house makes it through to the late fall without any damage.
  • What do you suppose any court in the world would say if I tried to sue the insurance company to get my premium back? Any court would say, no way.
  • Now how could I make the argument to get my money back? Could I say, well, I bought the insurance because I thought there might be a hurricane.
  • The insurance company did a great deal for my money.

Unit 5: Part 2 – Fraud > Duty to Inform: Laidlaw v. Organ > Laidlaw v. Organ

  • In February of 1815, a man named Organ bought a large quantity of tobacco for export from the Laidlaw and Company, a tobacco dealership in New Orleans.
  • New Orleans was a major emporium for tobacco coming from the southern states- coming down the Mississippi and so on.
  • Organ bought 120,000 pounds of tobacco from Laidlaw.
  • Except that just a couple of hours before he offered Laidlaw the $7,500 for the tobacco, Organ had somehow got news from the British fleet that the British and the Americans had signed the Treaty of Ghent ending the War of 1812.
  • This had been published in the newspapers in London and somehow that word had gotten to the British fleet, but it was not yet generally known in New Orleans.
  • This was a large purchase of tobacco and Laidlaw the seller in the words of Chief Justice Marshall asked Organ if there was any news which was calculated to enhance the price or value of the article about to be purchased.
  • Once the word got out, which was soon enough, the price of tobacco immediately increased 30 to 50%. A very, very good bargain, because of course once the war is over the blockade is lifted and whatever is in the port of New Orleans can be safely shipped out.

Unit 5: Part 3 – Frustration > Taxi Hypothetical > Taxi Hypothetical

  • Suppose I order a taxi to take me to the airport to catch a plane cross country.
  • Should I be able to tell the taxi driver, sorry, the reason I wanted to go to the airport was to take my flight.
  • What’s more, I’m perfectly willing to take public transportation back home now that I’m not in any hurry.
  • Common sense tells you that you’ve got to pay the taxi driver.

Unit 5: Part 3 – Frustration > Shipping Companies > Shipping Companies

  • Shipping lines, shipping companies, often charged people who want to send cargo somewhere by the destination and the amount and kind of cargo.
  • That’s what the owner of the cargo and the shipping company agreed on.
  • The usual way to get from the Gulf Coast to India is across the Atlantic, through the Mediterranean, through the Suez Canal, and down on to India.
  • After the ship left port, but before it got to the Suez Canal, the 1967 Arab-Israeli war broke out, and the Suez Canal was closed.
  • So the ship had to change course and travel to Bombay via the Cape of Good Hope, a journey that took some 30 days more and was some 8,000 miles longer.
  • The shipping company sued the owner of the cargo for the additional time and expense of the longer trip.
  • The price was set, and that’s all that the shipping company was entitled to.
  • The court said this was a contract to get from point A to point B. And if the trip was shorter and quicker than the shipping company expected, well, so much the better for them.
  • What if there had been submarines waiting to torpedo the cargo? What if the journey through the Atlantic would have been dangerous for other reasons- hurricanes, tornadoes, tsunamis, and so on? Could the owner of the cargo say, hey, not my problem, put this aboard airplanes and fly it to Bombay- just get it there? That might have multiplied the cost by a factor of 10, and that far the court would not go.
  • There were quite a few of what were called the Suez Canal cases, and they all came out pretty much the same way.
  • Next time, put in a clause, put in a clause which says, this is the price through the Suez Canal, but if it isn’t open, we go around the Cape, and that will cost more.

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