Phoenix Oil Company v. Mackenzie Oil Company

• Decision Date: 22 December 1930
• Court: United States State Supreme Court of Delaware
• Parties: PHOENIX OIL COMPANY, a corporation of the State of Delaware, defendant below, plaintiff in error, v. MACKENZIE OIL COMPANY, a corporation of the State of Delaware, plaintiff below, defendant in error

154 A. 894

34 Del. 460

PHOENIX OIL COMPANY, a corporation of the State of Delaware, defendant below, plaintiff in error, v. MACKENZIE OIL COMPANY, a corporation of the State of Delaware, plaintiff below, defendant in error

Supreme Court of Delaware

December 22, 1930

[Copyrighted Material Omitted]

Supreme Court, No. 5, January Term, 1930.

In addition to the questions specifically covered by the opinion of the court, the attorneys for the plaintiff below defendant in error, made the following argument:

Originally the defendant tried its case on the theory that its liability on the notes should be determined by the value of the property purchased. At a late stage before the Referee, and then before the Superior Court, that Company changed its position and contended that its liability should be determined not by whether the property purchased and retained was worth the amount represented by the notes sued on, in addition to the cash previously paid, but whether it was entitled to damages which it could set off against the notes. The result, however, under such a theory would be the same. Under this theory, the defendant occupies the position of affirming the contract, but at the same time seeks to recover damages by way of counterclaim as if it were suing in a tort action for deceit.

In taking this position, the defendant apparently failed to realize:

1. That by the assignment of the contract by Clark to the defendant company, that company became bound by the obligatory provisions of that contract. Greenwood & Tyrrell v. Helm (Tex. Civ. App.), 264 S.W. 221; Pierce Fordyce Oil Ass'n v. Woodrum (Tex. Civ. App.), 188 S.W. 245; Cox, et al., v. Sinclair Gulf Oil Co. (Tex. Civ App.), 300 S.W. 116; Lowry v. Atlantic Coal Co., 272 Pa. 19, 115 A. 847; Washington Natural Gas Co. v. Johnson, 123 Pa. 576, 16 A. 799, 10 Am. St. Rep. 553; Stoddard v. Ill. Improvement Co. & Ballast Co., 275 Ill. 199, 113 N.E. 913, affirming 195 Ill.App. 471; 40 C. J. 1112.

2. The setting up of a counterclaim for damages necessarily means that the alleged fraud claimed by the defendant is not a ground of defense to the plaintiff's claim, such a defense being available only when the contract has been rescinded and the property returned. Exchange State Bank v. Buckley, 198 Iowa 437, 194 N.W. 949, 952; Clark on Contracts, p. 346.

3. On the contrary the setting up of a counterclaim for damages necessarily means that the defendant affirms the contract, and by such affirmance stands before the court as making no defense to the notes; and also admitting its obligation to pay everything that is unpaid under the contract, including not only the notes sued upon but also the balance of $ 168,424.40, originally payable in oil, but which, by virtue of such affirmance, and in the absence of proof by the defendant excusing its non-payment in oil, became and is now payable in cash.

The defendant's position of having kept the property purchased and affirmed the contract of sale is illustrated by the following authorities: Richardson v. Horn, 8 Houst. 26, 30, 31 A. 896, 897, where the court, in part, said:

"Although fraud practiced upon a party to induce him to enter into a contract, and contract made in virtue of such practice, will entitle the defrauded party to repudiate and rescind, or get rid of and annul, it, yet, to avail himself of this relief, he must, in a reasonable time after the discovery of such fraud, return to the vendor the property purchased, or offer to return it to him, signifying to him, in some intelligible way, that his object in so doing is to avoid the contract altogether."

See, also, Cheney v. Dickinson (C. C. A.), 172 F. 109, 110, 28 L. R. A. (N. S.) 359; Clark on Contracts, p. 346; Van Natta v. Snyder, 98 Kan. 102, 157 P. 432, L. R. A. 1918A, 102.

In Gould v. Cayuga County Nat. Bank, 99 N.Y. 333, 340, 2 N.E. 16, 19, the court illustrated the principle as follows:

"One who buys a horse under false representations may keep the animal, and so affirm the sale and recover damages. He cannot say he would not have bought at all, if he had known the truth, for he affirms the purchase."

Having done this, he must pay its value.

In Thomas v. Grise, 1 Penn. 382, 41 A. 883, 885, when the action was on a check given for the purchase price of a publication known as the "Peninsula Methodist" fraud in inducing the sale was set up by the defendant, though he still had the property sold. After stating in substance that if the contract of sale was induced by fraud it would be void and the verdict should be for the defendant, the court also said:

"Unless you believe that the property actually sold and delivered was reasonably worth more than the $ 2,000 already paid. In the latter case your verdict should be for the plaintiff, for such excess over the $ 2,000 as you may believe the property was reasonably worth to the defendant, who still retains the same, although the plaintiff refused to take it back; as the defendant may not retain and use the property without paying therefor whatever it is reasonably worth. Upon the discovery of the fraud, the injured party had the option either to keep the property, and pay whatever it was reasonably worth, or to give it up, and demand full compensation for all damages resulting from such fraud."

The defendant's liability under its affirmance of the contract is also illustrated by the following authorities: Hines v. Brode, 168 Cal. 507, 143 P. 729; Hullinger v. Big Sespe Oil Co., 50 Cal.App. 6, 194 P. 742, 743; Paolini v. Sulprizio, 201 Cal. 683, 258 P. 380; Hickman v. Johnson, 36 Cal.App. 342, 178 P. 145; Riegel v. Franzel (Sup.), 191 N.Y.S. 126; People's State Bank v. Hall, 83 Ind.App. 385, 148 N.E. 486.

The defendant's liability for the payment in cash of the $ 168,424.40 originally payable in oil is illustrated by the following authorities: Empire Gas & Fuel Co. v. Pendar (Tex. Civ. App.), 244 S.W. 184; 13 C. J. 631, 632; 6 R. C. L., § 325; Honaker v. Guffey Petroleum Corporation (Tex. Civ. App.), 294 S.W. 259; Harris v. Wheeler (Tex. Civ. App.), 255 S.W. 206; Leonard v. Prater (Tex. Civ. App.), 18 S.W.2d 681.

The defendant below, the plaintiff in error, in reply to this argument, contended:

1. That it had three remedies in case of fraud:

a. To rescind the contract;

b. To immediately sue for damages;

c. To wait until plaintiff sued, and in such proceeding defend against the enforcement of the contract and counterclaim for damages.

The third remedy having been chosen because the fraud was not discovered until after the time suit was brought.

2. In addition, it was contended that the property (the consideration for the notes) was not worth what had already been paid by Clark for it, and hence there was no consideration for the notes, and that they were entitled to counterclaim for damages; such damages being the difference between the contract price and the actual value of the property.

The stipulation of counsel not only permitted but required us to set up this counterclaim. Doubtless in a case where suit is brought to recover certain sums, which are due and owing, an affirmance of the contract by the defendant and a counterclaim for damages for fraud would admit the obligation of the defendant to pay everything that is due and owing under the contract, but here again the question is begged.

We can understand how under proper pleadings by plaintiff a plea of recoupment would open the door to an answer and proof by plaintiff of damages for breach of contract, but we utterly fail to grasp how on any principle of law a plea of recoupment entitled plaintiff to recover damages without pleading or proof.

The contention that by affirming the contract, defendant admitted its liability to pay further ignores the fact that defendant did not affirm the contract. It had nothing to do with the contract. Its liability here is as guarantor and nothing else. It is a little short of remarkable that without suing for $ 168,424.40 it can be recovered by defendant in error.

The impossibility of counsel's argument becomes apparent when one considers that they contend we are bound to pay $ 400,000 for a property which is only worth $ 250,000.

Plaintiff's contention, in effect, seems to be that if we counterclaim for damages for fraud and affirm the contract we are conclusively presumed to admit that we owe sums which are provided to be paid in the contract though only upon certain contingencies, which contingencies have never arisen, and which sums we strenuously deny to be legally due.

If we have affirmed the contract, we have affirmed it according to its tenor. Affirmance does not make a contingent debt an absolute one, nor does it turn non-liability into liability. Counsel for defendant in error very carefully avoid the very essential qualification of their contention, that the contract obligations are to be performed as affected by the fraud. Affirmance does not waive the fraud which in the last analysis is what counsel is arguing.

They are contending for a theory which has been repudiated by every case we have seen, namely, that before a defrauded vendee can recover damages he must perform the executory portions of the contract.

Referring to Hickman v. Johnson, 36 Cal.App. 342, 178 P. 145, they say:

"This case emphasizes the duty of a purchaser who has affirmed the contract to pay before any counterclaim for damages can be made effective and, also, discusses the justice of such doctrine."

The case above quoted has been distinctly and unequivocally repudiated in Hullinger v. Oil Co., 50 Cal.App. 6, 194 P. 742, 743, and in Paolini v. Sulprizio, 201 Cal. 683, 258 P. 380. This was pointed out by the court below.

The statement of counsel that fraud can only be relied upon where rescission...