Utley v. Donaldson

Supreme Court of the United States · 1876 · Contracts

ContractsSalesContract modificationMutual assentWarranty of genuinenessmutual assentad idemcontract modification

Facts

The defendants agreed by telegraph on May 25 to sell the plaintiffs fifteen Central Pacific first mortgage bonds, thereby forming a complete contract of sale. After sending the bonds and draft, the defendants mailed a letter stating they had bought the bonds from a strange party, wished to sell without recourse as to genuineness, and asked the plaintiffs to examine the bonds and telegraph if they were correct. The plaintiffs received the letter shortly before the draft and bonds were presented, examined the bonds under severe time pressure through their own vendees, paid the draft, and telegraphed that the bonds were all correct. The bonds later proved counterfeit, and after reimbursing their own vendees, the plaintiffs sought indemnity from the defendants.

Issue

Did the defendants' letter alter the preexisting contract so that the plaintiffs waived any condition or implied warranty that the bonds were genuine? If not, were the parties' rights governed by the original contract of sale?

Rule

A contract cannot be modified without mutual assent, and the same mutual assent is required to modify an existing contract as to make one originally. The parties must consent to the same subject matter in the same sense; if there is a material misunderstanding, no modifying contract exists. A waiver or abandonment of contractual rights must be intentional and mutual, and a proposed modification is not effectual unless it clearly appears the original contract was to be abandoned if the modification was not accepted.

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Lena Ortiz, a broker in Chicago, agreed by email to buy ten municipal bearer notes from Mason Reed in Denver. After the deal was complete but before delivery, Mason sent a message stating, "We will ship only if you accept that authenticity is entirely at your risk; if you do not agree, we will cancel this shipment," and Lena replied, "Agreed," before paying and taking the notes.

If the notes later prove counterfeit, who is most likely to bear the loss under the governing rule?

Explanation. A completed contract may be modified, but only through mutual assent to the same terms in the same sense. Here, unlike an ambiguous preference or precautionary request, Mason clearly made assumption of the authenticity risk a condition of delivery, and Lena expressly agreed. That creates the aggregatio mentium the majority found lacking in the case. The loss therefore falls on Lena under the modified agreement. (Derived from Utley v. Donaldson (n.d.).)