Arnold v. National Aniline & Chemical Co., 20 F.2d 364 (2d Cir. 1927)

*365 *366 *367 *368 Evarts, Choate, Sherman & Leon, of New York City (Joseph H. Choate, Jr., Herbert J. Bickford, and Max D. Steuer, all of New York City, of counsel), for plaintiffs in error.

Francis H. McAdoo, of New York City (Isidor J. Kresel and Bernard Hershkopf, both of New York City, of counsel), for defendant in error.

Before MANTON and L. HAND, Circuit Judges, and AUGUSTUS N. HAND, District Judge.

AUGUSTUS N. HAND, District Judge (after stating the facts as above).

The assumption of the court that the representations were false makes it impossible to determine how material was the falsity of the representations, or what loss the defendants incurred by taking over sales contracts which may not have been anything like what on their face they seemed. It may be that the situation, if it had been properly developed, was such that no question of fraud could have been properly submitted to a jury. But the court assumed that the representations said to have been made as an inducement to the execution of the contract were false. If false to a substantial extent, there might arise the inference that they were made with the intention to deceive. The defendants were cut off from proving all that had or might have occurred, upon the theory that they were precluded from so doing by the provisions in the second article of the contract that the unfilled contracts were assigned "without any guaranty as to said contracts or sales" in the fifth article, that all sales contracts were delivered "without prejudice," and by the eighth article that "this memorandum contains all the terms of the sale herein involved and * * * there is no warranty, expressed or implied, incident to the sale or other conditions not herein specifically stipulated."

In the proposal of December 29, 1919, the defendants said that the stated amounts of the sales contracts, though approximate, represented "fairly accurately the amounts you have sold and have still to deliver," and also that, though the plaintiff assumed no responsibility for the fulfillment of the sales contracts, yet it assured the defendants "that the concerns whose names appear in these contracts are all firms of good repute and satisfactory standing." These provisions were omitted in the final contract, and the careful provisions guaranteeing nothing were substituted. But the evidence leaves the case in a position, not only where there is proof, or offer of proof, of cancellation of some of the sales contracts before the main contract was executed, and of a provision for price reduction in another. There is also an indefinite field for proof that the sales contracts were with concerns of weak credit.

The court, by declining to hear evidence as to whether the representations testified to by Reilly were false, assumed (as the judge said) that they were so. Consequently no limit can be set to how bad was the financial standing or condition of concerns with which the plaintiff had sales contracts. If in fact a great proportion of the sales contracts were with concerns of bad financial rating, and the *369 plaintiff had represented that their rating was excellent and their credit good, then the question would arise whether these representations were not made to deceive, and were not an inducement to the making of the contract between the parties.

All the evidence bearing on the truth and extent of the misrepresentations should have been before the court, unless the question of fraud could not legally be considered by reason of the terms of the contract. Our consideration, therefore, reduces itself to whether, irrespective of fraudulent inducement, the provisions of the contract are controlling.

Now there are decisions which hold that, where one declares in his contract that every representation to which he will undertake to hold the opposite party is embodied in the agreement, no fraud which does not enter into the execution of the contract can avail either as a defense or as ground for an independent action. This seems to be the doctrine of the Massachusetts courts. Colonial Corporation v. Bragdon, 219 Mass. 170, 106 N.E. 633; O'Meara v. Smyth, 243 Mass. 188, 137 N.E. 294; J. I. Case Threshing Machine Co. v. Broach, 137 Ga. 602, 73 S.E. 1063. But even the Massachusetts courts have held that a provision in an insurance policy that it shall be incontestable from any cause is invalid as against public policy, where the inducement is fraudulent. Reagan v. Union Mutual Insurance Co., 189 Mass. 555, 76 N.E. 217, 2 L. R. A. (N. S.) 821, 109 Am. St. Rep. 659, 4 Ann. Cas. 362. They also hold that fraud as to the subject-matter of the contract will vitiate it, and if the subject-matter sold is not the piece of property exhibited prior to the execution of the contract a recital that the statements inducing its execution are all included in the writing afford no protection. Butler v. Prussian, 252 Mass. 265, 147 N.E. 892.

But while the Massachusetts doctrine observes exactly the agreement of the parties, decisions of the courts of the state of New York and of England, as well as the weighty authority of Williston and Wigmore, seem to hold that no form of contract can stand, if induced by fraud, whether the fraud shall have gone to the factum or shall have been antecedent to the agreement. Haight v. Hayt, 19 N.Y. 464; Bridger v. Goldsmith, 143 N.Y. 424, 38 N.E. 458; Universal Fashion Co. v. Skinner, 64 Hun, 293, 19 N.Y.S. 62; S. Pearson & Son, Ltd., v. Lord Mayor, etc., of Dublin [1907], A. C. 351; Williston on Contracts, § 811; Wigmore on Evidence (2d Ed.) § 2439. See, also, Barnes v. Union Pacific Ry. Co. (C. C. A.) 54 F. 87.

The divergent authorities referred to are based on conflicting ideas of public policy. 25 Columbia Law Review, 231. The Massachusetts cases emphasize the desirability of certainty in the contractual relations of those who have made a definite agreement, and if they say that they contract without regard to prior representations and that prior utterances have not been an inducement to their consent, any occasional damage to the individual caused by antecedent fraud is thought to be outweighed by the advantage of certainty and freedom from attacks, which would in the majority of cases be unfounded where such provisions were in the agreement.

The contrary decisions are based upon a greater consideration for the individual who may suffer wrong through deliberate fraud. It is worth remembering that the ingenuity of draftsmen is sure to keep pace with the demands of wrongdoers, and if a deliberate fraud may be shielded by a clause in a contract that the writing contains every representation made by way of inducement, or that utterances shown to be untrue were not an inducement to the agreement, sellers of bogus securities may defraud the public with impunity, through the simple expedient of placing such a clause in the prospectus which they put out, or in the contracts which their dupes are asked to sign. See Industrial, etc., Trust v. Tod, 180 N.Y. 215, 73 N.E. 7.

But, whether or not fraudulent representations antecedent to the execution of a contract can be properly cured by a clause that they were not an inducement to the making, the provisions in the contract in suit do not afford such protection. The provisions of the second article that the unfilled sales contracts were assigned "without any guaranty as to said contracts or sales," of the fifth article that all sales contracts were delivered "without prejudice," and of the eighth article that "this memorandum contains all the terms of the sale herein involved and * * * there is no warranty express or implied incident to the sale or other conditions not herein specifically stipulated," are none of them equivalent to a statement that the prior representations (assumed at the trial to have been untrue) were not an inducement to the making of the contract. The statement that the written contract contains all the terms and that there is no warranty not specifically set forth in it does not purport to exclude causes of action for fraud, if there was any.

*370 It is perfectly true that the vendor did not agree to be responsible for anything not set forth in the writing and guaranteed nothing not specifically provided. But had the vendor agreed to other things or warranted other facts, that would only have meant that the vendee might have recovered damages for the breach or might have rescinded the contract upon the failure of the vendor to fulfill its promises. When the vendor says it does not warrant, it merely means that it asserts nothing to be true for which it will be responsible in these ways. The writing constitutes the agreement of the parties, and the vendee has no rights under it other than those given by its terms. It may have been induced to go into it by antecedent statements which have turned out to be incorrect, but if the promisor has agreed to nothing not covered by the instrument the vendee can have no remedy under the contract merely because some prior representations were wrong. If, however, it can prove that the vendor has knowingly deceived it, that the deceit was an inducement to the contract, and that it relied upon it to its damage, the situation is quite different.

The parol evidence rule has nothing to do with such a case. Preeman v. United States (C. C. A.) 244 F. at page 12; Callanan v. Keessville, etc., R. R. Co., 199 N. Y. at page 286, 92 N.E. 747; Adams v. Gillig, 199 N. Y. at page 319, 92 N.E. 670, 32 L. R. A. (N. S.) 127, 20 Ann. Cas. 910; Professor Wigmore's explanation of the inapplicability of the parol evidence rule is that: "It is impossible to suppose that the subject of fraud was intended * * * to be covered, since by hypothesis the party upon whom the fraud is practiced does not know of it and therefore could not have had such an intent." Wigmore on Evidence (2d Ed.) § 2439.

Whether this is the explanation, or perhaps the more simple one, that the law will not allow a man to profit by his own wrong, is unnecessary to determine; but it seems clear that such clauses as are contained in the contract under consideration do not preclude a defense of fraud. As the fraud was assumed by the court, the defendant was not entitled to a direction of a verdict. The whole evidence bearing upon the question should have been taken, so that the court, with everything before it, could decide whether or not there was a question for the jury.

Because of the failure to do this, the judgment should be reversed, and a new trial granted.

MANTON, Circuit Judge, dissents.