Diamond Store Can’t Correct $4 Million Pricing Mistake
The scenario in DePrince v. Starboard Cruise Services, Inc., No. 3d16-1149, 2018 W 443153 (Fla. 3d DCA 2018), is every retailer’s nightmare.
A passenger walked into a cruise ship jewelry store and said he wanted to buy a loose, 20-carat diamond. The sales clerks said that they had nothing of that heft in the store, but seeing the opportunity to make a huge sale, they offered to obtain such a diamond. After a few calls to their main office and diamond supplier, they told the customer they could have the diamond waiting for him when the ship docked. The customer took a day before making a decision and then paid $235,000 with his American Express card, receiving a contract that promised delivery of the diamond.
But there was a problem. The store employees, inexperienced in the sale of large diamonds, had misunderstood the diamond supplier’s shorthand. The price they quoted should have been for each carat. They had just contracted to sell a $4.7 million diamond for $235,000.
After realizing their $4 million-plus mistake, the store employees quickly reversed the charge on the customer’s American Express and informed him the sale was off. “Not so fast,” the customer said. A deal is a deal, especially one backed by a contract. The customer eventually took the cruise ship operator (the owner of the store) to court, claiming breach of contract.
Dean Mead attorney Ciara C. Willis, a litigator in the firm’s Tampa office who often reviews contracts, says that while the circumstances of this case were unusual – a “comedy of errors,” an appeals court said – it is not unusual for one party to a transaction to have regrets when it is discovered that a deal is not what it was thought to be.
“The guidance offered by the court in this case is going to be important for both buyers and sellers going forward,” she says.
Can a unilateral mistake cure seller’s remorse?
A jury was left to decide under what circumstances a contract could be rescinded when one party has made a costly mistake. At trial, the cruise ship operator relied on a legal theory known as “unilateral mistake,” which allows a party to an otherwise-valid contract to rescind it under certain conditions. Under Florida law, a unilateral mistake must have been fraudulently induced by a party that seeks to benefit from the mistake, and the mistake cannot be the result of negligence. In other words, aggrieved parties don’t get do-overs on transactions just because they weren’t paying attention.
Following a five-day trial, the Florida jury found in favor of the cruise line, but in January 2018, the Third District Court of Appeal reversed the decision, ordering a new trial. The divided appeals panel criticized the trial judge’s jury instructions, saying he tilted the playing field in favor of the cruise line. But the appeals court also said this is a “confusing area of law” and offered guidance that likely will influence future cases that turn on what constitutes a unilateral mistake.
The appeals court offered these takeaways on unilateral mistakes.
One party can have knowledge that the other side is making a mistake but has no obligation to point it out. Lawyers for the cruise line hammered the diamond buyer in court, establishing that he knew he was buying a diamond that was severely underpriced. No matter, said the court. “Inducement [of an error] requires some type of action, not mere knowledge.”
Inducement can be subtle. Inducement can be any kind of encouragement to make the transaction. Apparently, the diamond buyer was careful not to say very much to the jewelry shop employees, even exhibiting some initial reluctance to make the purchase. However, if he had told the employees they stood to make a big commission, that could have constituted inducement.
Full disclosure or no disclosure. If a party to a transaction says anything about the quality of the product or outcome, then it must tell everything it knows. The court offered the example of a home seller who told buyers a house was “well built,” knowing that the foundation was settling. Such “partial representation” is fraudulent, the court said, and grounds for rescinding a contract. In the diamond transaction, however, the buyer did not make any representations, such as observations on the quality or value of the diamond.
You are stuck with mistakes that result from your own negligence. Under the four-prong test applied in the case, you can’t claim a unilateral mistake if you were sloppy or incompetent. The trial court blurred this prong by instructing the jury that “some” negligence might be OK, as long as it wasn’t “inexcusable.” The appeals court was clear: There is no halfway definition of negligence. If a party is negligent, it can’t claim a mistake was unilateral when applying the four-prong test for unilateral mistakes.
Look before you leap
“Always have a lawyer look over a contract for a transaction that significant,” advises Willis. As with all contracts – whether diamonds or real estate or anything else – it is foolish to do your own lawyering or to rush a deal without adequate review. Even with the clarity provided by this appeals court opinion, Willis says it is likely that juries and courts will continue to wrestle with interpreting the facts in cases involving claims of a unilateral mistake, such as what constitutes inducement or representations. “With so much uncertainty, you don’t want to be on either side of a unilateral mistake case if you can avoid it,” Willis says.