Phez Co. v. Salem Fruit Union

201 P. 222, 103 Or. 514, 25 A.L.R. 1090, 1921 Ore. LEXIS 248

• Court: Oregon Supreme Court
• Decided: October 19, 1921
• Status: Published

Opinions

McBRIDE, J.

— This appeal involves three propositions: First, the correctness of the order sustaining the demurrer of the growers to plaintiff’s complaint; second the correctness of the implied finding that by its answer and counterclaim in the case of Salem Fruit Union v. Phez Company, plaintiff here was barred from prosecuting the. present suit; and third, the correctness of the finding that the contracts, exhibits “A” and “C,” were rescinded. These propositions will be considered in the order above named.

1. The ruling upon the demurrer of the growers depends upon the question as to whether there was such privity between the growers and the plaintiff as would entitle plaintiff to sue for breach of the contract as being one made for its benefit. The cases in this state have held generally that where two persons make a contract for the benefit of a third party, such third party may maintain a suit or action directly against the promisor to enforce such contract: Baker v. Elgin, 11 Or. 333 (8 Pac. 280); Strong v. Kamm, 13 Or. 172 (9 Pac. 331); Parker v. Jeffery, 26 Or. 186 (37 Pac. 712); Washburn v. Interstate Investment Co., 26 Or. 436 (36 Pac. 533, 38 Pac. 620); Feldman v. McGuire, 34 Or. 309 (55 Pac. 872); Kiernan v. Kratz, 42 Or. 474 (69 Pac. 1027, 70 Pac. 506); Oregon Mill Co. v. Kirkpatrick, 66 Or. 21 (133 Pac. 69); Davidson v. Madden, 89 Or. 209 (173 Pac. 320), in which last case all the Oregon precedents are cited. As a rule the Oregon cases arose out of the fact that the promisee owed some debt to the beneficiary which the promisor as part of the consideration agreed to discharge; but in other jurisdictions where such a promise has been held enforceable by the beneficiary no distinction appears to have been made between such a debt and any other legal duty which the promisee owed to the beneficiary, and legally this would seem to be the correct rule. Indeed, in the case of Washburn v. Interstate Investment Co., supra, the rule is impliedly as stated, with the distinction pointed out in that case that the' supposed beneficiary was not named in the contract and that there was no intimation therein that the agreement was for its benefit, which also seems to be a salutary and logical limitation. Thus, if the promisor agrees generally with the promisee that he will discharge all the promisee’s obligations, without specifying them or to whom they are owing, no cause of action or suit arises in favor of a creditor of the promisee. But if, on the other hand, he agrees as part of the consideration or substance of the contract that he will discharge a particular debt or legal duty from the promisee to a particular person, he will be liable at the suit of such person, for nonperformance.

The English authorities and many earlier American cases are no doubt in conflict with this view. The great divergence of judicial opinion may be seen by a perusal of Chapter VIII of Williston on Contracts, but it is believed that with few exceptions the later American cases may all be harmonized with the doctrine above laid down. For a learned and interesting discussion of this subject, see Seaver v. Ransom, 224 N. Y. 233 (120 N. E. 639, 2 A. L. R. 1187), and authorities cited in the exhaustive notes to the principal case in A. L. R.

Assuming, then, that the law will uphold the right of a beneficiary to sue the promisor directly whenever the contract is made for his benefit, provided that the duty or obligation to be discharged by the promisor was one originally owed to the beneficiary by the promisee, we will apply this rule to the facts pleaded by the plaintiff here.

2. By the terms of the contract, exhibit “A,” as modified by the agreement of plaintiff to pay an additional one half of one cent bonus, the Salem Fruit Union was bound to deliver to plaintiff and it was its legal duty to deliver to plaintiff the berries grown by the several defendants who executed exhibit “B” as modified by exhibit “O.” By exhibit “C” the growers signing the same bound themselves to deliver to plaintiff, not to the fruit union, all the berries grown on their respective lands, for the price of three and one half cents per pound. By so doing, the duty owed by the fruit union to the plaintiff would be discharged. As between the growers and the fruit union, the latter was merely the agent to make the contract and to see that it was executed, the conduit or hopper through which the berries were to be conveyed to the plaintiff’s possession and by which it was assured of receiving them. Clearly the plaintiff, or, to speak more accurately, the plaintiff’s predecessor in interest was the intended beneficiary of exhibit “0.” The fruit union was made the agent of the growers for the very purpose of entering into a contract binding them to deliver the fruit grown by them to the plaintiff’s predecessor. It had an agency coupled with an interest, to the extent of being permitted to deduct from the sum received for the berries a compensation for its services and expenses in marketing them, and therefore irrevocable, to make the very contract it did make with plaintiff’s predecessor. Here, then, are all the elements which go to authorize the growers signing exhibit “C,” and the fruit union, to make a valid contract for the benefit of plaintiff: Reaver v. Ransom, supra, and cases cited in notes in 2 A. L. R., p. 1193. We are of the opinion that the court erred in sustaining the demurrer of Paxton et al. to the complaint, which seems to us sufficient.

3. While it is practically impossible to compel specific performance of a contract of this nature, there is abundant authority that the court may by enjoining the contractor from selling his wares to anyone else, place him in a position where his own interests may be powerful enough to induce him to perform his contract. A leading case on this subject is Lumley v. Wagner, 1 De Gex, M. & G. 604, sometimes given in other reports as Lumley v. Gye. In this case a Mrs. Wagner, a noted singer, had engaged herself to sing exclusively at plaintiff’s theater, but broke her contract and engaged to sing at the theater of Gye, who was made a defendant with her. The suit was for an injunction forbidding her to sing in the theater of Gye or elsewhere during the season that she had engaged her services to plaintiff. In deciding the-case the Lord Chancellor said:

“It was objected that the operation of the injunction in the present case was mischievous, excluding the defendant J. Wagner from performing in any other theater while this court had no power to compel her to perform at Her Majesty’s Theater. It is true that I have not the means of compelling her to sing, but she has no cause of complaint if I compel her to abstain from the commission of an act which she has bound herself not to do, and thus possibly cause her to fulfill her engagement.”

4. The same doctrine is announced in Montague v. Floclcton, L. R. 16 Eq. 189, and is settled in this state by the case of Cort v. Lassard & Lucifer, 18 Or. 221 (22 Pac. 1054, 17 Am. St. Rep. 726, 6 L. R. A. 653). The present case is one where the invoking of this power might be peculiarly efficacious. The growing of loganberries is a new industry; their production is limited to a comparatively small area; they are perishable fruit incapable of shipment in a raw state to distant markets; and had the court below seen its way clear to enjoin the defendant growers from making delivery to any other party than this plaintiff, it seems almost inevitable that the contract would have been observed and the business which the complaint indicates the plaintiff had so assiduously and expensively labored to build up would have been saved from embarrassment and possible destruction. The fact that the remedy was not applied and that defendants by selling their products to other parties have now put it out of their power to comply, ought not to oust equity of the jurisdiction it had when this suit was instituted, but the court should retain the case, and if the allegations of the complaint and the supplemental complaint are found to be true, it should compel the defaulting parties to make good in damages the losses directly sustained by plaintiff by reason of their default. ' If plaintiff has a right to recover at all as against the growers, the jurisdiction of equity is obvious, first, because of the necessity of an accounting as between them, the fruit union and plaintiff; second, to avoid a multiplicity of' actions or suits between plaintiff and the large number of individual growers; and third, because of alleged collusion between the promisors and promisee fruit union to avoid the contract, which if true amounts to constructive or perhaps actual fraud upon plaintiff. Indeed, respectable authorities are to the effect that the appropriate remedy in this class of cases is in equity rather'than law: 1 "Williston on Contracts, Sections 358 and 359, where the author observes:

“There is no satisfactory solution of these difficulties in the procedure of a court administering legal remedies only. 'But one of the functions of equity is to provide a remedy where the common-law procedure is not sufficiently elastic, and no opportunity can be found for the exercise of this function more appropriate than the sort of case under consideration. Much of the difficulty of the situation arises from the fact that three parties are interested in the contract. Common-law procedure contemplates but two sides to a case, and cannot well deal with more. Equity can deal successfully with any number of conflicting interests in one case, since defendants in equity have no community of interest, and under the procedure of the so-called code States, the same thing is possible though separate courts of equity are abolished.

“In the case under consideration the only satisfactory relief is something in the nature of specific performance. The basis for equity jurisdiction is the same as in other cases' of specific performance. .There is a valid contract, and the remedy at law for its enforcement is inadequate. As the promisee and the beneficiary have both an interest in the performanee of the promise, either should he allowed to bring suit joining the other as codefendant with the promisor. In this way all parties have a chance to be heard. There may always be a possible question as to the respective rights of the promisee and the beneficiary, and also whether the promisor has a valid defense ■against the promisee and these questions should not be determined in any litigation in which all three interested parties are not joined. Any procedure which not only permits but requires this meets the necessities of the case.”

5. We now come to the second proposition: Is the action of Salem Fruit Union v. Phez Company, now pending, a bar to this suit? To this we must answer in the negative. It is conceded that the ruling of the learned Circuit Court was predicated upon the theory that, the growers not being proper parties and being out of the case by reason of the fact that their demurrer had been sustained, there remained nothing but a question of damages to be litigated between plaintiff and the union, and that plaintiff had its remedy at law upon the counterclaim pleaded against the union in that action. But, holding as we do that the union was in fact a proper party, the whole foundation upon which that conclusion rested is destroyed. There is a lack of that substantial identity of parties which is required in order that one action may be pleaded in abatement of the other: 2 C. J., § 99 et seq.

6, 7. We next approach defendant’s third proposition, which is that both the fruit union and the growers have been released from the performance of the contract, exhibit “A,” as modified by exhibit “C”; that the contract has been expressly rescinded by a verbal agreement between plaintiff and the officers of the fruit union. This is an affirmative defense and the burden of proof is upon the defendant to establish it by the preponderance or outweighing of testimony. As the testimony is conflicting, it will be of advantage to take a view of the situation at the time defendant claims the contract was rescinded. There is no complaint that the contract between the fruit union and the plaintiff, exhibit “A,” and the contract between the union and the growers, exhibit “B,” were not satisfactorily carried out in 1917. Both agreements were substantially performed. Late in the year 1917 the increased price of labor and other conditions incident to the war indicated that the crop for 1918 could not be produced profitably at the price of three cents per pound, and the fruit union found itself in the predicament of being absolutely bound by exhibit “A” to furnish to plaintiff 1,200 tons at that price, while its growers could relieve themselves of their obligation to deliver the berries upon which the union depended to fulfill its contract, by the payment of the trifling penalty of ten cents a crate for all berries delivered by them to other parties. While the contract with the growers, exhibit “B,” is termed a pool, it was and is in legal effect a separate and individual contract between the union and each separate grower, there being no covenant binding the growers to each other, and the breach of each individual grower could not affect in any way the contract between other growers and the union. There was also the possibility that a grower might sell his land to some other party and, such party not being bound and the land not being bound, there would remain to the union as a remedy only a personal action against the party signing the contract. It was apparent that many growers would take advantage of the ten cent forfeiture clause in their contracts with the union and sell to other parties, and the union would thereby be rendered unable to comply with its contract with plaintiff’s predecessor, and find itself liable to the latter in damages. What plaintiff desired was a sufficient supply of berries to fill its contracts and carry on its business. What the union wanted was some arrangement whereby it could secure the berries to meet its obligation to plaintiff and incidentally get rid of the inadequate penalty clause contained in its original agreement with the growers. The clause in exhibit “ C” providing that the covenants in the agreement should “run with the land,” was no doubt considered important, although it is doubtful whether it could be enforced in an action at law: Gibson v. Holden, 115 Ill. 199 (3 N. E. 282, 56 Am. Rep. 146); Hurxthal v. St. Lawrence Boom & Mfg. Co., 53 W. Va. 87 (44 S. E. 520, 97 Am. St. Rep. 954). Whether any equitable remedy would arise out of such a covenant need not here be considered. Perhaps another reason which produced in the mind of the officers of the union a desire to have the contract here designated as exhibit “A” changed, was that under its provisions the union was directly liable in damages for nondelivery of the berries, while under the terms of the modification, exhibit “C,” the ultimate responsibility for nondelivery was shared by, if not entirely shifted to the shoulders of, the individual growers, unless the union should have openly or tacitly concurred in such failure to deliver. Exhibit “C” was highly advantageous to the union, and in some respects beneficial to plaintiff’s assignor. But there is nothing in any of the correspondence prior to the final breach of the contract that indicates that plaintiff’s assignor ever intended to rescind a perfectly valid written contract for the delivery of berries at three cents a pound and substitute therefor a verbal agreement for their delivery at three and one half cents.

We do not have to depend upon oral testimony alone to ascertain the fact that a modification of exhibit “A” as to price had been discussed between the officers of the union and the officers of plaintiff’s predecessor. Among other things we have this letter:

“Dec. 14, 1917.

“Northwest Fruit Products Company,

“Salem, Oregon.

“Attention Mr. Frank T. Schmidt.

“Dear Sirs:

“After talking with you a few days ago in regard to the proposal of your company to increase the price o.f the loganberry contract we now have with you to 3% cents net to the grower, the writer took the matter up with the board of directors and they stated that they would be willing to do this, and will take immediate action to resign all of these contracts with the growers on a very much stronger basis than heretofore. We will have a copy of the new contract tomorrow sometime and will bring it down to you to look over, and we wish you would write us a letter confirming the proposal you have made to us so we can have a record for our files.

“With best wishes, we are

“Yours truly,

“Salem Fruit Union.

“By Robert C. Paulus,

“General Manager.”

From this we naturally infer that two facts had been the subject of discussion between these parties:. First, an increase of half a cent per pound in the price of berries; second, a new contract with the growers, that would make it certain or at least more probable that the growers would deliver at that price. It therefore appears probable that Frank T. Schmidt had offered an advance of half a cent a pound and that the fruit union had in contemplation a modification of its contract with the growers so as to bind them to deliver at the advanced price. The modification was for the mutual benefit of both parties. It also appears probable that plaintiff was desirous that such contract with the growers should be so arranged as to give plaintiff’s predecessor a remedy against the growers individually, instead of against the corporation practically composed of these same growers.

Attention is called in plaintiff’s reply brief to the fact that verbal agreements and proposals between these parties were almost invariably supplemented by confirmatory correspondence, while in the present instance evidence of what the defendant union claims to have been an actual rescission of contract relations between the parties rests entirely in parol. This is an important circumstance when we consider that defendant’s evidence of a rescission rests almost entirely upon the testimony of defendant’s manager and is flatly contradicted by the testimony of Frank T. Schmidt, who is said to have been the officer of plaintiff’s predecessor who made the rescission. In addition, we search the record in vain for any evidence that at any meeting of the directors with officers of plaintiff’s assignor was the subject of rescission of exhibit “A” alluded to or discussed. In fact, the excuse of a rescission of exhibit “A” was never mooted in any correspondence between the parties until the growers (who to a great extent compose the Salem Fruit Union) with the tacit consent of the Salem Fruit Union made up their minds to violate their contracts and sell their product to other parties at a greatly enhanced price.

The following letter written by the manager of the union is a distinct recognition of the existence of the original contract:

“January 18, 1918.

“Northwest Fruit Products Company,

“Salem, Oregon.

“Dear Sirs:

“We confirm conversation of the writer with your Mr. Frank Schmidt in which he stated that you wish to raise the fresh loganberry contract with you ten dollars per ton. In accordance with the above desire we have had new contracts printed for our growers and will commence signing them up immediately. We also think it will be best for us to make out the contract with you on a basis of 1200 estimated tons, the same as the one made last year, and make a new contract for whatever additional tonnage we can contract at that price.

“Tours truly,

“Salem Fruit Union.

“By Robert C. Paulus,

“General Manager.”

Here is no word in relation to the rescission which defendant now claims had been previously made, but rather “you wish to raise the fresh loganberry contract [exhibit “A”] ten dollars per ton.” Why “raise” a contract which had been rescinded, annulled and abrogated? This pretext of rescission seems to us to have been an afterthought conjured up to escape the consequences of what war conditions had rendered an unprofitable, if not a losing contract.

Up to May, 1919, there is no written evidence that the defendant fruit union was claiming the complete rescission of the original contract, and then only apparently on the theory that by agreeing to pay and paying more than it was required under the contract as originally drawn, the plaintiff’s assignor had abandoned the whole contract. In a letter of May 22, 1919, the secretary of the union says:

“The crop of 1918 as you know, was handled, not under the written contract of May 24th, 1917, but pursuant to an oral agreement with your company, fixing the price of the berries at per pound and more if conditions warranted. This later condition you met during the month of March, by directing us to pay our growers an additional per pound, which we did.

“This oral agreement also provided for a new form of general contract to be executed by our growers, requiring delivery to be made directly to your factory. This agreement was intended to operate in lieu of the old written contract, which had to be abandoned on account of war conditions.”

This seems to have been the inception of the idea that by voluntarily advancing the price paid to growers in order to meet changed conditions, plaintiff’s assignor had abandoned the original contract entirely. The communicatiou does not say to plaintiff what defendant now claims, to wit: “In January, 1918, you expressly agreed that exhibit ‘A’ should be rescinded.” On the contrary, it reads: “Pursuant to an oral agreement with your company fixing the price of berries at 3% cents per pound and more, if conditions warranted.” A voluntary agreement to advance the price did not have the effect to rescind the contract in other respects, and the testimony shows that the plaintiff kept its agreement in that particular in 1918 and was ready and willing to make further concessions later. We do not feel that defendant has made out a case of rescission. Perhaps it could have compelled the plaintiff to pay the increased price in succeeding years, although the consideration for such increased price is not apparent. But, as before remarked, that question does not arise here. We conclude that there is not sufficient evidence to justify the finding that the contract was rescinded.

8. Another contention is that the release by plaintiff and the fruit union of one Boy V. Ohmart from his contract to deliver berries dissolved the so-called pool and released all the other parties, including the union. It should be remembered that each grower made a separate contract with the fruit union authorizing it to sell for a fixed price all his berries. The price did not depend on what any other grower was to get, and the release of another grower could not in any way increase or diminish his compensation. The only parties who could be injured by the failure of any grower to observe his contract were the union and the plaintiff. While the arrangement is called a pool and has some of the attributes of that rather hazily defined association, it lacks the element of mutual interdependence between the producers. No grower either gained or lost anything by reason of the fact that the growers’ agent and the plaintiff agreed that Ohmart should be released. The objection is highly technical and has no merit. The fact that the defendant union as between it and the growers stood in the relation of principal and agent, coupled with the fact that the plaintiff’s assignor and plaintiff knew of this relation, cannot excuse it from liability in this case: 2 Mechem on Agency, § 1714 et seq. The union was to an extent a beneficiary in this transaction, in the respects heretofore mentioned. It furnished greater assurance that its growers would deliver their products, and by exhibit “C” divided the responsibility for failure to deliver. It placed upon the growers the onns of seeing that its contract that they should “deliver the goods” was faithfully carried out so that it might collect for them the amounts due them for such delivery, and incidentally collect the compensation due it for its services. Its contract with plaintiff, although in a sense a contract of an agent for known principals, was nevertheless its covenant by which it pledged its own good faith and credit that "the fruit mentioned therein should be delivered. The evidence indicates that it was entirely willing that its growers, who as stockholders practically composed the corporation, should make default. There is of course a technical distinction between the growers as growers and as stockholders, but it is in this case a distinction that has no foundation in morals and should not stand in the way of the administration of equity.

Some question is raised as to the validity of the assignment from the Northwest Fruit Products Company and allied companies to plaintiff. Such defect is not pleaded by way of abatement, and if it were so pleaded, we think the assignment sufficient, especially in equity and where it has been substantially recognized and acted upon by the parties.

9. These considerations naturally lead to a reversal of the decree of the Circuit Court and the order sustaining the demurrer of the growers. As to future procedure there are practical difficulties. We might upon the showing here render a decree against the fruit union and send the case back with directions that the issues between the growers and the plaintiff be tried, but such a course would subject the parties to many inconveniences and would leave unsettled the equities between the union and the growers. There is an account to be stated between each individual grower and the plaintiff, together with an account between these and the union. As for the damages, caused by loss of profits and expenses of advertising, these in view of the disturbed condition of trade are too largely speculative to be capable of appraisal. But taking the allegations of the complaint to be true, the growers who signed exhibit “C” should account to plaintiff for the difference in the pricé of berries sold to other parties and three and one half cents per pound, the contract price mentioned in exhibit “C.” And the fruit union should be held to a like accounting for each of the years in which there has been default. The impracticability of ascertaining the probable profits, if any, which plaintiff may have lost, and of apportioning these among the parties seems to preclude further litigation along that line.

The order will therefore be that this cause be remanded with directions to overrule the demurrer as to all the defendants who signed exhibit “C”; to permit plaintiff, if it be so advised, to file a supplemental complaint as to these defendants; to retry the case as to the growers and plaintiff, and as between the fruit union and plaintiff, so far as either shall desire to do so, leaving the testimony already taken to stand as between the union and the plaintiff; and otherwise to proceed as indicated herein.

• Reversed and Remanded.