Swan v. Great Northern Railway Co.

168 N.W. 657, 40 N.D. 258, 1918 N.D. LEXIS 78

• Court: North Dakota Supreme Court
• Decided: June 10, 1918
• Status: Published

Opinions

Christianson, J.

The plaintiff was employed by the defendant as a section laborer. On or about October 5, 1915, while in such employ, he was injured by being thrown from a motor car. This action was brought by plaintiff to recover damages in the sum of $2,975, alleged to have been sustained by him by reason of the injury then received. The defendant, by answer, alleged affirmatively that plaintiff, for a valuable consideration paid to him by the defendant, settled and adjusted all claims and demands against the defendant on account of the alleged cause of action set forth in the complaint, and fully released and discharged the defendant from all liability thereon.

The evidence shows that some time after the accident the defendant’s claim agent, one Mulcahy, entered into negotiations with the plaintiff with the result that plaintiff executed the following written release:

Know all men by these presents, that, In consideration of the sum of three hundred seventy-five and no/100 dollars, to me in hand paid by the Great Northern Railway Company, the receipt whereof is hereby acknowledged, have released, acquitted, and discharged, and do, by these presents, release, acquit, and discharge said railway company, its successors, and assigns of and from any and all liability, causes of action, costs, charges, claims, or demands of every name and nature, in any manner arising or growing out of, or to arise or grow out of, personal injuries received by me, at or near New Rockford, in the state of North Dakota, on or. about the 5th day of November, 1915, while acting as a section laborer,.! met with an accident and sustained personal injuries, or arising or to arise, out of any and all personal injuries sustained by me at any time or place while in the employ of said railway company prior to the date of these presents.

No promise of further employment has been made to me by said railway company as part consideration of this settlement and release, or otherwise.

In witness whereof, I have hereunto set my hand and seal this 27th day of December, a. d. 1915.

In presence of Mike Swan.

E. M. Watson,

E. F. Mulcahy.

At the time of the execution of the release, the claim agent delivered to plaintiff a draft for $375, on the treasurer of the railway company. The plaintiff indorsed and cashed the draft at one of the local banks and received $375 in-cash. The draft was duly paid by the defendant in regular course of business. The plaintiff retained the money received, and has never returned or offered to return it to the defendant.

The witnesses all agree that during the negotiations between the plaintiff and the claim agent something was said with respect to plaintiff being continued in defendant’s employ, but they differ as to what was said. They agree that plaintiff stated that he wanted employment, and objected to the clause in the release, which stated that no promise of future employment had been made to him by the railway company. They also agree that the claim agent stated that he could not permit this clause to be stricken out, as the company would not accept the release unless it contained this clause. The plaintiff, however, claims that the claim agent promised that notwithstanding such clause the defendant would give plaintiff a steady, light job as long as he could work; that it was by reason of and in reliance upon this promise and representation that he signed the release, and that he would not have signed it unless such representation had been- made. The claim agent, on the other hand, contends that he made no promise that defendant would retain plaintiff in its employ, but merely stated that he (the claim agent) -would use his personal influence to procure such job for the plaintiff.

The court submitted to the jury, among others, the question whether the defendant, with intent to deceive the plaintiff, induced him to execute the release by (1) a promise made without any intention of performing it; or (2) any other act fitted to deceive. Comp. Laws 1913, § 5849. The jury returned a verdict in favor of tho plaintiff for $1,284. Judgment was entered pursuant to the verdict, and defendant appeals.

• The record shows that the defendant at the close of the testimony moved for a directed verdict of dismissal, on the ground, among others, that plaintiff had failed to return or tender a return of the consideration received, and consequently could not maintain tho action. Error is predicated upon the denial of this motion. Defendant contends that plaintiff cannot maintain the present action without first having restored or tendered to the defendant the moneys received from the defendant as consideration for the execution of the release.

In our opinion defendant’s contention is correct, and must be sustained. It is elementary that parties not under any disability to contract may enter into a valid agreement for the settlement of a controversy between them. The right to compromise controversies is recognized by the laws of this state. The only restriction placed on such right is that certain public offenses cannot be compromised. Comp. Laws 1913, § 11,077. A compromise and settlement when full and complete and fairly made operates as a merger of, and bars all right to recovery on, the claim or cause of action included therein. 8 Cyc. 516. In other words the compromise agreement is substituted for the pre-existing claim or right. The rights of the parties are measured and limited by the agreement. A compromise stands upon the same footing as other contracts. Either party may maintain suit to enforce it. And if procured by fraud the defrauded party may rescind it, if he elects to do so.

Under the laws of this state a party to a contract may extinguish the same by rescission in the following cases only: “1. If the consent of the party rescinding, or of any party jointly contracting with him was given by mistake or obtained through duress, menace, fraud, or undue influence exercised by or with the connivance of the party as to whom ho rescinds or of any other party to the contract jointly interested with' such party. 2. If through the fault of the party as to whom he rescinds the consideration for his obligation fails in whole or in part. 3. If such consideration becomes entirely void from any cause. 4. If such consideration before it is rendered to him fails in a material respect from any cause; or 5. By consent of all of the other parties.” Comp. Laws 1913, § 5934. But “rescission when not affected by consent can be accomplished only by the use, on the part of the party rescinding, of reasonable diligence to comply with the following rules: 1. He must rescind promptly upon discovering the facts which entitle him to rescind, if he is free from duress, menace, undue influence or disability and is aware of his right to rescind; and, 2. He must restore to the other party everything of value which he has received from him under the contract; or must offer to restore the same upon condition that such party shall do likewise, unless the latter is unable or positively refuses to do so.” Comp. Laws 1913, § 5936.

These statutory provisions seem to be decisive of this ease. The rules announced are plain and specific. They apply to all contracts. They permit a person who has been defrauded to rescind the contract to which his consent was obtained by fraud, but in order to rescind he must restore, or offer to restore, the consideration received on the condition that the other party shall do likewise, unless the latter is unable or positively refuses to do so. These rules are largely codifications of the common-law rules, and are founded upon elementary principles of justice. “One who has been led into a contract- ripen which he has received something of value cannot ignore the contract, however induced, and proceed in a court of law as if the relations of the parties were wholly unaffected thereby. He cannot, while retaining its benefits, and thus affirming the contract, treat it as though it did not exist. 'He cannot treat it as good in part and void in part, but must affirm or avoid it as a whole.’ ” Home Ins. Co. v. Howard, 111 Ind. 544, 547, 13 N. E. 103, 104. A contract induced by fraud is voidable at the option of the defrauded party. He has, upon discovery of the deceit, the option of either rescinding or affirming the transaction. He must do one or the other. He cannot do both. He cannot rescind in part and affirm the remainder. Guild v. More, 32 N. D. 432, 455, 155 N. W. 44. He cannot at the same time be permitted to abrogate the contract and retain the benefits he has received under it. Beare v. Wright, 14 N. D. 26, 31, 69 L.R.A. 409, 103 N. W. 632, 8 Ann. Cas. 1057; Black, Rescission & Cancellation, §§ 561 et seq. If he desires to rescind he must comply with the provisions of the statute, and restore or tender what he has received as consideration for the contract, on tire condition that the other party shall do likewise, unless the latter is unable or positively refuses to do so. To rescind is to abrogate, annul, avoid or cancel — in other words to undo — a contract. “The term rescission,’ ” says Bishop (Bishop, Contr. § 679), “denotes the avoiding of a voidable contract.” The word “rescission” has a well-defined meaning in law, and includes the idea of restoration of both parties to their status quo, and return by each to the other of the consideration given and received (4 Words & Phrases, 2d Series, 328). As was said by this court in Raymond v. Edelbrock, 15 N. D. 231, 107 N. W. 194: “Rescission of a contract is the act of canceling it by restoring the conditions existing immediately before it was made. Bescission is effected by each party returning to the other what has been received pursuant to the contract or its equivalent.” Not only is the party who seeks to bo relieved from a contract voidable for fraud required to put the other party back in his original position, but ordinarily, “the contract can only be rescinded where it is possible to put the parties back in their original position and with their original rights.” 9 Cyc. 437, 438. “A contract induced by fraud is voidable not because of any supposed pecuniary damage done to the defrauded party, but because the consent of the latter was not free.” Beare v. Wright, 14 N. D. 26, 69 L.R.A. 409, 103 N. W. 632, 8 Ann. Cas. 1057; Crane & O. Co. v. Sykeston School Dist. 36 N. D. 254, 259, 162. N. W. 413. And such voidable contract does not become binding upon the defrauded party unless, with knowledge of the fraud, he ratifies or affirms it. In case of rescission, “the contract ceases to exist for any purpose, and the parties stand in the same position as though it had never been made, and hence, it is necessary that they be placed in the same position in which they were before the transaction took place. Therefore the party defrauded, in such case, is entitled to recover back whatever consideration he parted with, but he must also return or offer to return to the other party whatever he received. In case of affirmance, he retains what he received, and is entitled to bo compensated for the damages he sustained by reason of the false representation. That is, the wrongdoer will be compelled to pay damages equal to the difference in value between what he gave and what he represented he would give. . . . The transaction may be affirmed either expressly or by implication. And a person who retains as his own the property which he received in the transaction will necessarily be deemed the owner thereof. And, having elected to assume the position of owner, will be compelled to abide by the selection made, and to be not only invested with the rights and prerogatives, but also burdened with the duties and liabilities, incident to. such ownership. Hence, in such case the measure of damages for the fraud and deceit practised upon him is very properly predicated upon the basis that the defrauded party is the owner of the property, and therefore his damage is equal to the difference in value between the property he received and what he would have received if the representations had been true.” Guild v. More, 32 N. D. 432, 454, 455, 155 N. W. 44.

“It is well settled by repeated decisions of this court,” said the Supreme Court of the United States (Shappirio v. Goldberg, 192 U. S. 232, 48 L. ed. 419, 24 Sup. Ct. Rep. 259), “that where a party desires to rescind upon the ground of misrepresentation or fraud, he must upon the discovery of the fraud announce his purpose and adhere to it. If he continues to treat the property as his own the right of rescission is gone, and the party will be held bound by the contract. Grymes v. Sanders, 93 U. S. 55, 23 L. ed. 798; McLean v. Clapp, 141 U. S. 429, 35 L. ed. 804, 12 Sup. Ct. Rep. 29. In other words, when a party discovers that he has been deceived in a transaction of this character he may resort to an action at law to recover damages, or he may have the transaction set aside in which he has been wronged by the rescission of the contract. If he choose the latter remedy, he must act promptly, ‘announce his purpose and adhere to it,’ and not by acts of ownership continue to assert right and title over the prop-•erty as though it belonged to him.” We are aware of no rule or reason which would justify us in refusing to apply these rules in dealing with compromises and releases. We believe that they are fully as applicable to those as to other contracts. See Urtz v. New York C. & H. R. R. Co. 137 App. Div. 404, 121 N. Y. Supp. 879; Duquette v. New York C. & H. R. R. Co. 137 App. Div. 412, 121 N. Y. Supp. 876; Strong v. Strong, 102 N. Y. 69, 5 N. E. 799; Home Ins. Co. v. Howard, 111 Ind. 544, 13 N, E. 103.

Eespondent has cited several cases in support of the general proposition that it is unnecessary to return or tender the consideration received for a release obtained by fraud, as a condition precedent to the maintenance of a suit for damages, but that the amount received may be deducted from the verdict, if one is obtained against the defendant. The decisions cited by the respondent are by no means the only judicial expressions upon the subject. On the contrary, there is a square conflict in the decisions. A large, and probably the larger, number of modern decisions announce a doctrine contrary to that contended for by respondent, and support a rule in harmony with the conclusions we have reached in applying the provisions of our statute. See 34 Cyc. 1071; Charron v. Northwestern Fuel Co. 149 Wis. 240, 49 L.R.A.(N.S.) 162, 134 N. W. 1048, Ann. Cas. 1913C, 939; Burns v. Reading, 188 Mich. 591, 155 N. W. 479.

As already stated a release is a contract, and where a person with full understanding of the character and nature of the instrument executes a release, and receives a consideration therefor, there is no more reason why he should be excused from returning or tendering" a return of the considei*ation received than in other cases where a rescission is sought.

“It is elementary,” said Corliss, J. (McGlynn v. Scott, 4 N. D. 18, 21, 58 N. W. 460), “that the courts look with the highest favor upon every honest adjustment of private differences.” For compromises and settlements tend to diminish litigation and promote the repose of society. And “the law loves peace, and hates dissensions and turmoils, and its policy and maxims are against their being revived or unnecessarily prolonged.” Kercheval v. Doty, 31 Wis. 476, 484.

The doctrine, announced by some of the courts, and for which respondent contends, would distinctly tend to discourage and prevent the compromise of controversies, and to increase litigation. Under the rule contended for, a party who has compromised a disputed, unliquidated claim may retain the money received under the compromise agreement and prosecute an action upon the claim which formed the subject of the compromise agreement. In fact he may use the very moneys which he received as a consideration for the compromise to prosecute the subsequent action. He is permitted to deny the validity of a contract and at the same time retain the benefits which he has received under it. The rule contended for seems illogical and unsound.

As was well said by the supreme court of Kentucky in Louisville & N. R. Co. v. McElroy, 100 Ky. 153, 37 S. W. 844: “Either the company paid the money to avoid the risk of a greater damage being awarded against it in the event of litigation, or it paid the money in the belief that the expense of the litigation, though it defeated a recovery, woirld amount to as much or more than the sum paid. It sought to buy its immunity from damages and expense of having the question of its liability determined. It is not reasonable to suppose that the company would have paid the money if the right of the plaintiff still existed to maintain his action upon the original cause of action. There is no pretense that the company paid its money as a credit on its supposed liability. It paid it to extinguish its liability, if such existed. If, upon the trial of the case, the verdict had been for the company, because the injury was not the result of the gross negligence of the foreman or the party operating the engine, then the plaintiff would have the money and the company the expense of the litigation which it sought to avoid, and the court powerless to enforce a return of the money. This statement illustrates the correctness of the well-recognized rule which requires a repayment or a tender of the money before bringing the action.” Some courts, while recognizing the correctness of the general rule that in order to effect rescission, the rescinding party must place the other party in statu quo by returning or tendering a return of whatever consideration he has received under the agreement, and the applicability of this rule to compromises and releases, have also recognized certain exceptions to the rule.

Thus, it has been held that the consideration need not be returned in order to effect a rescission and entitle the defrauded party to maintain an action upon the original claim: (1) Where a tender would have been useless, or where the thing is utterly worthless; (2) where there may be a severance of one part of the contract, in which event a partial rescission is sometimes allowed in the interests of justice; (3) where the plaintiff .was entitled to receive the consideration irrespective of the assent got by its delivery to him, as where the liability of the debtor and the amount of the claim are conceded and the creditor agrees to release upon receiving payment of an amount less than what is conceded to be due; (4) where the very existence of the compromise or release is denied, and there was in fact no contract created, — as where a release is misread to the releasor, or where there is a substitution of one paper for another, or where a party is tricked into signing an instrument which he did not intend to execute.

The eases which fall within the fourth exception proceed upon the theory that the effect of fraud upon a contract and the rights and obligations arising thereunder, including the necessity of returning the consideration, depend upon the nature of the fraud. These cases divide fraud into classes:

(1) One class of fraud goes to the very existence of the contract, as where a release is misread to the releasor, or where one paper is surreptitiously substituted for another, or where a party is tricked into signing an instrument which he did not intend to execute. In such cases the minds of the parties did not meet upon, and there was no consent whatever by the defrauded party to, the ultimate propositions purported to be covered by the contract, and the consideration received by the defrauded party was not received for consenting to the terms of the alleged contract, but for his consent to entirely different propositions. In such cases it is not a question of a contract voidable because the consent to its terms was not free and mutual, but there was no consent whatever. In other words, it is held that it is not a question of a contract voidable for fraud, but a question of no contract at all.

(2) Another species of fraud goes to the representations, or means, used to induce a party to enter into the contract. In such cases the party knows the character of the instrument which he signs, and intends when he signs and delivers it that it shall have the purpose and effect which the law imputes to it. In such cases the minds of the parties have actually met upon the ultimate propositions contemplated by them and evidenced by the contract, but the contract is voidable for the reason that the consent of the defrauded party to its provisions was obtained by false and fraudulent representations, such as false statements as to the nature and value of the consideration, or as to the extent of his injuries, or other material matters. The cases referred to, which recognize and discuss this distinction between the two classes of fraud hold that with respect to the first class it is not necessary to return or offer to return the consideration before maintaining an action upon the original claim. But that in cases involving fraud of the second class, the consideration must be returned or tendered in order to maintain an action upon the original claim. One of the foremost courts in the country which has recognized this distinction is the supreme court of Massachusetts. And this distinction was pointed out by that court in the case of Mullen v. Old Colony R. Co. 127 Mass. 86, 34 Am. Rep. 349. In that case the court, after recognizing the rule that it was necessary to return the consideration received for a release before the releasor might institute an action on the original demand, says: “The principle on which these decisions rest is just; but it applies to those cases only where that which was received, and which must be returned, was the consideration of the contract or settlement which the receiver intended to make, and understood that he was making, and which he seeks to avoid by reason of fraudulent practices of the other party which led him to agree to its terms. It does not apply to cases where a party holds out that he gives the consideration for one thing, and by fraud obtains an agreement that it was given for another thing.” (The correctness of this distinction has been questioned by other courts. See Rockwell v. Capital Traction Co. 25 App. D. C. 98, 4 Ann. Cas. 648.) It is unnecessary for us in this case to either approve or disapprove of these holdings, for the instant case does not fall within any of these exceptions.

The defendant raised the question of the necessity of a tender or restoration of the consideration at the earliest opportunity upon the trial, and continued to urge it until the last. There is nothing to indicate that an offer to restore the consideration would have been refused. It cannot be said that a tender would have been useless.

In this case the compromise affected on right of action, only; there was no room for severance.

The claim involved Avas an unliquidated one. The liability of the defendant was by no means conceded. The evidence shows that during the negotiations between the claim agent and the plaintiff different offers and counter offers were made. The plaintiff demanded a larger cash consideration than was finally paid, and the claim agent offered a lesser one. They finally agreed upon the terms of the settlement. And Avhile there is a dispute as to some of the terms, there is no dispute as to the amount of cash consideration agreed upon. It is undisputed that this Avas fixed at $315, and that it Avas paid to the plaintiff, and that he has retained it ever since, and has at no time restored or offered to restore it to defendant.

It is undisputed that at the time plaintiff received the money he executed the Avritten release. “It is further undisputed that this release was carefully read over to the plaintiff before he signed it. He was not deceived as to its contents or its purpose. He knew that its purpose and effect was to release and discharge his right of action against the defendant. He signed the very instrument which he intended to sign.” If his signature to the release was obtained by means of fraud and deceit the law affords him ample remedy. However, he lias no right to retain that which he received as consideration, and repudiate the remainder of the contract.

The judgment appealed from is reversed, and the cause remanded for further proceedings in conformity with this opinion.