This section is from the book "Popular Law Library Vol7 Equity Jurisprudence, Trusts, Equity Pleading", by Albert H. Putney. Also available from Amazon: Popular Law-Dictionary.
When the subject matter of the contract was not in existence at the time of the making of the contract, there is a mutual mistake against which equity will relieve. This rule also applies in the case of contracts for services, where, on account of facts unknown to either party at the time of the making of the contract, the performance of the services was unnecessary or impossible. This doctrine was laid down by the Supreme Court of the United States in the case of Allen vs. Hammond,4 where a contract had been made by which Allen was to be allowed a large commission upon the allowance in favor of Hammond of a certain claim by the Portuguese government, which claim, unknown to the parties, had been allowed eight days prior to the making of the contract. The decision in this case was in part as follows:
8 5 R. I, 130.
"No one can read the contract without being struck with the large sum that Hammond is willing to pay on the contingency of recovering his claim. Allen was to receive as a compensation for his services, a sum little below the one-third of the amount recovered. This shows, in the strongest point of view, that Hammond could have entertained but a remote prospect of realizing his claim; and, indeed, it would seem, when the circumstances of the case are considered, that he could have had little or no ground to hope for success.
"His vessel and cargo had been condemned; the Portuguese Government was in an unsettled state, and its finances in the greatest confusion and embarrassment.
"In his vessel and cargo Hammond appears to have lost his entire property; and this very naturally threw him into despondence, and induced him to agree to pay nearly one-third of his demand to an agent who might, by possibility, recover it. He, no doubt, supposed that by interesting his agent so deeply in the claim, he would secure his sympathies and his utmost exertions. And the prospect was, if the claim or any part of it should be obtained, it would be the work of time, and of great effort.
4 11 Peters, 63.
"Allen is not chargeable with fraud in entering into the contract, or in using the most persevering efforts to get possession of the installment paid.
"That the contract was entered into by both parties under a mistake is unquestionable. Neither of them knew that the Portuguese Government had allowed the claim. Can a court of equity enforce such a contract? Can it refuse to cancel it? That the agreement was without consideration is clear. Services long and arduous were contemplated as probable, by both parties, at the time the contract was executed. But the object of pursuit was already attained. No services were required under the contract, and for those which Allen had rendered to Hammond prior to it regular charges seem to have been made.
"It is true the amount of services required by the agent was uncertain. He took upon himself this contingency, and had not the claim been allowed by the Portuguese Government until after the contract, he would have been entitled to his commissions, however small his agency might have been in producing the result. This, it may be supposed, was a contingency within the contemplation of the parties at the time of the contract; so that, unconnected with other circumstances, the smallness of the service rendered could have constituted no ground on which to set aside the contract.
"But no one can for a moment believe that Hammond intended to give to his agent nearly ten thousand dollars, on the contingency of his claim having been allowed at the time of the contract. And it is equally clear, that his agent, under such a circumstance, had no expectation of receiving that, or any other amount of compensation. The contract does not provide for such a case, and it could not have been within the contemplation of either party. Services were made the basis of the compensation agreed to be paid, but the allowance of the claim superseded all services in the case.
"The equity of the complainant is so obvious that it is difficult to make it more clear by illustration. No case, perhaps, has occurred, or can be supposed, where the principle on which the courts of equity give relief, is more strongly presented than in this case. The contract was entered into through the mistake of both parties; it imposes great hardship and injustice on the appellee, and it is without consideration. These grounds, either of which in ordinary cases is held sufficient for relief in equity, unite in favor of the appellee.
"Suppose a life estate in land be sold, and at the time of the sale the estate has terminated by the death of the person in whom the right vested, would not a court of equity relieve the purchaser? If the vendor knew of the death, relief would be given on the ground of fraud; if he did not know it, on the ground of mistake. In either case would it not be gross injustice to enforce the payment of the consideration?
"If a horse be sold, which is dead, though believed to be living by both parties, can the purchaser be compelled to pay the consideration?
"There are cases in which the parties enter into the contract under a material mistake as to the subject matter of it.
"In the first case the vendor intended to sell, and the vendee to purchase a subsisting title, but which, in fact, did not exist; and in the second, a horse was believed to be living but which was, in fact, dead.
"If in either of these cases the payment of the purchase money should be required, it would be the payment without the shadow of consideration, and no court of equity is believed ever to have sanctioned such a principle. And so in the case under consideration; if Hammond should be held liable to pay the demand of the appellant, it would be without consideration.
"There may be some cases of wager, respecting certain events, where one of the contingencies had happened at the time of the wager, which was unknown to both parties, and which was held not to invalidate the contract. Of this character is the case of Earl of March vs. Pigot (5 Burr., 2802). But the question in that case, arose upon the verdict of a jury on a rule to show cause, etc.; and Lord Mansfield says, 'the nature of the contract, and the manifest intention of the parties, support the verdict of the jury (to whom it was left without objection) that he who succeeded to his estate first, by the death of his father, should pay to the other without distinction, whether the event had or not, at that time, actually happened.'
"In 1 Fonblanque's Equity, 114, it is laid down that where there is an error in the thing for which an individual bargains, by the general rules of contracting, the contract is null, as in such a case the parties are supposed not to give their assent. And the same doctrine is laid down in Puffendorff's Law of Nature and Nations (Bk. 1, Ch. 3, Sec. 12).
"The law on this subject is clearly stated in the case of Hitchcock vs. Giddings (Daniel's Reports, 1), where it is said that a vendor is bound to know that he actually has that which he professes to sell. And even though the subject matter of the contract be known to both parties to be liable to a contingency which may destroy it immediately, yet if the contingency has already happened, the contract will be void.
"By the decree of the Circuit Court, on the payment of the amount, including interest, which is due from the appellee to the appellant, he is required to deliver up to be cancelled the agreement entered into on the 27th of January, 1832, which leaves the parties as they were before the contract; and as we consider the decree just and sustained by principle, it is affirmed."