THOMAS H. O'SHEA vs. GEORGE C. VAUGHN.

HAMMOND, J. There was no question that the contracts were signed on their respective dates, that the $15,000 was paid by the plaintiff to the defendant as stated in the first agreement, and that no part of it has been returned to him. The jury were instructed that the second and sixth counts were substantially for the same cause of action, and that in each of these counts the plaintiff seeks to enforce his right to recover upon the first contract. They were further instructed in substance that in order to recover under either of these counts the plaintiff must show that the machine failed to work satisfactorily after it was put in operation in Troy, and that in forming the corporation upon July 1 the defendant acted in bad faith and not for the purpose

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of carrying out the contract; and further, that the plaintiff waa bound by the second contract unless he had rescinded it for cause; that on this branch of the case he must show that he was induced to enter into this contract by reason of the material fraud of the defendant, that within a reasonable time after he became cognizant of the fraud he elected to rescind this second contract, and either by word, deed or action manifested such election to the defendant and returned to the defendant what, if anything, he had received under the contract. The evidence was conflicting upon the various matters to which these instructions were applicable, but the verdict being for the plaintiff for the full amount claimed, it is to be assumed that the jury found in his favor upon them all.

The case is before us upon exceptions taken by the defendant to the refusal of the presiding judge to give certain rulings requested. We do not think it necessary to consider them in detail. We adopt the statement made in the defendant's brief that they raise "the question whether the plaintiff was properly permitted, upon all the evidence, to recover upon the contract of June 4, 1903 [the first contract], under the second and sixth counts." And we shall discuss the question in the order in which it is discussed upon the defendant's brief.

1. It is argued by the defendant that the first contract was superseded by the second. We do not think the question whether the second contract was an entirely independent agreement, as contended by the defendant, or only a modification of the first, as contended by the plaintiff, is of any substantial importance. It is not worth while to spend time over the terms by which a situation is to be described when the nature of the situation itself is clear. The second agreement undoubtedly changes the situation of the parties as it was under the first, but it refers to the first as in some respects a possibly subsisting agreement under certain conditions; and it is manifest that the rights and obligations of the parties in certain contingencies named in the second contract cannot be fully determined without reference to the first.

It is apparent, however, that by the terms of the second contract the right which the plaintiff had under the first to the full sum of $15,000 was changed to a right to what might be a much

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smaller sum, and that the time of the payment of what, if anything, might be due to the plaintiff was postponed to October 1, 1903. Shortly stated, the main changes made by the second contract respected the amount to be paid to the plaintiff, and the time of payment. Upon this branch of the case the presiding judge, saying that the two contracts could not be enforced together, further correctly instructed the jury as follows: "The plaintiff if he recovers in this case on this contract in its original form or as modified cannot recover twice. He must recover either under the original contract the sum of $15,000 with interest, or under the modified contract, whether you call it an independent agreement or not, $15,000 less one fourth of the expenses which by the proper construction of the contract are to be taken. The plaintiff in no event can recover both of those sums. It will be a question for you gentlemen to determine upon the evidence in the case, if the plaintiff is entitled to recover at all, under which contract he is to recover, whether the original agreement, or the agreement of July 2nd, 1903, modifying the original agreement."

2. As to the right to rescind. It is urged in the first place by the defendant that the plaintiff did not attempt to show that he had suffered any damage whatever by reason of the representations of the defendant. In answer to this it is to be said that it cannot be assumed in favor of the defendant that the foreign patents upon the machine in which the defendant testified he had an interest were valueless, and upon the evidence the jury were warranted in finding that they were not, especially in the absence of any testimony by the defendant on that point.

It is next urged that the plaintiff was not in a position to rescind; and in support of this proposition it is said that he held on to the office of treasurer of the company until early in 1904, that he permitted Vaughn to go on expending money upon the machine as provided in the contract, one fourth of which expenditure was to be paid by the plaintiff; and that the plaintiff has not offered to pay any part of this. As to the office of treasurer of the company, the evidence indicated that it required no attention and the performance of no duties and carried with it no compensation, and the jury well may have found that all the plaintiff had was a mere empty title to a useless office, and

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that neither the title nor the office could have been of any benefit either to the plaintiff or the defendant. Upon such a finding the impossibility of putting the parties in statu quo in this respect would not be an insuperable bar to rescission by the plaintiff. The case on this point is clearly distinguishable from Marston v. Singapore Rattan Co. 163 Mass. 296, and Gassett v. Glazier, 165 Mass. 473, upon which the defendant relies, and other similar cases.

As to the stock which the plaintiff was to have, it was a fair question for the jury upon the evidence whether he ever had received any, and if he had, whether he had given up all right to it.

A more difficult question arises out of the provision in the contract that one fourth of the amouut "that has already or will be expended by" the defendant up to October 1, 1903, is to be taken from the $15,000 to be paid to the plaintiff. So far as this provision related to money which had been expended previous to the contract, it is immaterial. It is said, however, by the defendant that between the date of the contract and October 1, 1903, the plaintiff permitted the defendant to go on expending money thereunder in perfecting the machine. Although it did not appear what amount, if any, had been so expended, yet in view of the stipulation made between the parties at the trial that should an inquiry as to the amount be necessary it might thereafter be determined by an officer appointed by the court, we think that it must be assumed for the purposes of this discussion that some money had been thus expended. Was the situation by reason of that fact such that the plaintiff could not rescind?

It is to be noted on the one hand that no part of the sum was expended for the plaintiff. He did not own the machine, and by giving up his stock he cut off all relation to the machine, even if it was owned by the corporation. There was no difficulty therefore in restoring him to his former position. It is to be noted on the other hand that the change in the defendant's position was not caused by any act of his having no relation to the contract. He had not voluntarily and without regard to the contract changed his situation, as in a class of cases of which Harper v. Terry, 70 Ind. 264, is a type. In the case before us

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the defendant expended money in reliance upon the contract, and in the exercise of a right impliedly arising out of it. It is plain that if this contract be rescinded and the plaintiff be held to be restored to his original position, wherein he was entitled to recover the full $15,000, the defendant will lose some portion of the money expended by him under the contract. He is not restored to his original position. It is equally plain that if the plaintiff, as a condition of rescission, be compelled to deduct from the $15,000 one fourth of the sum thus expended by the defendant, then the plaintiff is not restored to his original position. What is the rule of law applicable to such a situation? Is rescission permissible at law?

Two general cardinal rules are laid down as to the exercise of the right to rescind, of which the first is that the plaintiff must return all that he received under the void contract, and the second is that both parties must be put in statu quo, or, as it is frequently phrased, must be restored to their former position. As to the first rule, one of the earliest cases is Kimball v. Cunningham, 4 Mass. 502, 505, in which Parsons, C. J., said that the defrauded party ought not to retain any part of the consideration, "for he shall not compel even the fraudulent seller to an action, to recover back the property he has parted with in the exchange." And this rule prevails generally in other jurisdictions. A good collection of the cases in England and in the various States may be found in 14 Am. & Eng. Encyc. of Law (2d ed.) 158. In our own State this rule is held with great strictness in actions at law. Conner v. Henderson, 15 Mass. 319. Morse v. Brackett, 98 Mass. 205, and 104 Mass. 494. Bassett v. Brown, 105 Mass. 551. But even this rule has its exceptions. An illustration of one is found in Head v. Tattersall, L. R. 7 Ex. 7. In that case the purchaser of a horse having the right to rescind returned to the vendor the horse. It was contended however by the vendor that there could be no rescission because when returned the horse had been injured so that he was not in the same condition as when bought. It appeared that while the horse was being driven by the purchaser's groom it became frightened and was seriously injured by running against the splinter bar of the carriage. Upon this, Bramwell, J., in giving judgment, used the following language: "It is said that the

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right to return was lost because the rule is that a buyer cannot return a specific chattel except it be in the same state as when it was bought. That is quite true as a general proposition, but in such a case as the present the rule must in my opinion be qualified thus : - The buyer must return the horse in the same condition as when he bought it, but subject to those incidents to which the horse may be liable, either from its inherent nature or in the course of the exercise by the buyer of those rights over it which the contract gave"; and it was held that the return was sufficient. There are other exceptions to this first rule. See also Benjamin on Sales, (5th Eng. ed.) 422 et seq., and cases cited.

There are likewise exceptions to the rule that the party guilty of the fraud must be restored to his former position. In many, if not most, of the cases where it is stated that the parties must both be placed in statu quo, the trouble has been that the defrauded party has not restored fully what he received, and hence the other party was not placed in statu quo. Hunt v. Silk, 5 East, 249. Bead v. Blandford, 2 Y. & J. 278. Clarke v. Dickson, El., Bl. & El. 148. Coolidge v. Brigham, 1 Met. 547, 550. Handforth v. Jackson, 150 Mass. 149. Croft v. Wilbur, 7 Allen 248. Shaeffer v. Shade, 7 Blackf. 178. Neal v. Reynolds, 38 Kans. 432. But the exception material to the case before us may be stated in this way: "When a party seeking to rescind a contract on the ground of fraud acts without unnecessary delay and restores or offers to restore that which he has received, it is no defense that the wrongdoer has by his own act made a full restoration impossible on his part or has entered into obligations to others." Hammond v. Pennock, 61 N. Y. 145. Pollock on Contracts, (3d Am. ed. from 7th Eng. ed.) 713, and cases cited in notes. One of the leading cases upon this subject is Masson v. Bovet, 1 Denio, 69. It has been cited in New York and elsewhere, and always, so far as we know, with approval. The case is instructive. The plaintiff was induced by fraud of the defendant who, as a judgment creditor, had seized on execution land of a judgment debtor, to purchase the land at a sheriffs sale, at the price of $285. It appeared that the matter was adjusted by the parties, the plaintiff handing to the defendant the note of a third party for $300

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and receiving from the defendant the defendant's own note for $15, and from the sheriff a certificate of sale, the defendant paying the sheriff the cost of the levy. Upon discovering the fraud the plaintiff offered to return to the defendant his note for $15, and to assign to him the sheriffs certificate of sale. This manifestly was not an offer to restore the defendant to his former position, for he had paid the costs of the levy, and, moreover, his original claim against the judgment debtor was less than before. Yet it was held that the plaintiff was entitled to a rescission. Beardsley, J., in giving the opinion, speaks as follows: "It was urged . . . that a contract cannot be rescinded by one of the parties alone, so as to authorize a recovery by him of what had been paid upon it, unless the other party is thereby fully restored to the condition in which he stood before the contract was made. This is certainly the general rule; but in cases of fraud, such as this was, it can only mean that the party defrauded, if he would rescind the contract, must return or offer to return everything he has received in execution of it. To retain the whole, or a part only, of what was received upon the contract is incompatible with its rescission; and hence the necessity of restoring what had been received upon it.

"This is not exacted on account of any feeling of partiality or regard for the fraudulent party. The law cares very little what his loss may be, and exacts nothing for his sake. If therefore he has so entangled himself in the meshes of his own knavish plot that the party defrauded cannot unloose him, the fault is his own; and the law only requires the injured party to restore what he has received and, as far as he can, undo what had been done in the execution of the contract. This is all that the party defrauded can do, and all that honesty and fair dealing require of him." And the same principle is applied where the defrauding party has paid out money under the terms of the contract. Soper Lumber Co. v. Halstead & Harmont Co. 73 Conn. 547, and cases cited. See also Plow Works Co. v. Rose, 74 Mo. App. 437; Chamberlin v. Fuller, 59 Vt. 247; Lee v. Simmons, 65 Wis. 523; Guckenheimer v. Angevine, 81 N. Y. 394.

The principle is applicable to the case before us. Every dollar spent by the defendant in pursuance of the contract by the terms of which the plaintiff was to pay one fourth added so

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much to the burden fraudulently imposed upon the shoulders of the latter, and he had the right by rescission to step from under that burden. As between the parties the money was spent in fraud of the plaintiff and at the risk, known to the defendant, of being finally repudiated by the plaintiff by an act of rescission. In making this expenditure the defendant must be held to have acted in pursuance of his own fraudulent schemes, and hence neither justice nor equity require that in this respect he should be restored to his former position as a prerequisite to the plaintiffs right to rescind.

It is next urged by the defendant that even if the plaintiff was in a position to rescind he never undertook to do it, and that he never gave notice to the plaintiff of his intention to rescind. Upon the question of notice the presiding judge, as above stated, instructed the jury that notice must be given. The precise language of the charge in this respect was as follows: "It is also ordinarily a condition precedent of exercising the right of rescission to manifest the intention to avoid it on the other side. In this case the jury are to say upon the evidence whether the plaintiff at any time manifested or acted in such a way . . . that the defendant had notice that he did not intend to be bound by this second agreement. If those conditions [one of which was the giving of the notice as just stated by the judge] are performed then he is entitled to avoid it and to stand upon the original agreement. If those conditions are not performed, then the contractual arrangement between the parties would be determined by the original contract and the second agreement read together. The amount which the plaintiff could recover would be only the amount provided for in the agreement of July 2nd, 1903, [the second contract] namely, the sum of $15,000 less one fourth of the expenses which by the proper construction of that agreement should be taken." These instructions were correct. Unless the plaintiff had elected to rescind the second contract and proper notice of that election had been given to the defendant, then the plaintiff could not set aside that contract and recover under the first; and if there was no sufficient evidence of such notice, then there was no rescission and the defendant's exception to the refusal of the court to give the fifth ruling requested by him would have been error.

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In discussing this question the situation of the parties must be borne in mind. Under the second contract, if the machine became a commercial success, then the defendant was to retain the whole sum of $15,000, and the plaintiff was to receive his stock, all as provided by the first contract. If, however, it was found, after experimenting, that the machine could not be made a commercial success, then the plaintiff was to have returned to him only such portion of the $15,000 as should be "in excess of one fourth of the amount that has [been] already or will be expended" by the defendant up to October 1, 1903. By the last clause of the contract the plaintiff was to have the option of "surrendering his stock . . . according to this agreement, . . . or keeping the stock as per" the first contract. In other words, the plaintiff had an option under this second contract, and that option was based upon the failure to make the machine a commercial success on or before October 1, 1903, and it was an option either to keep his stock at the price named in the first contract, in which case he was to receive back no part of the $15,000, or to surrender his stock and receive back only such portion of the $15,000 as should be in excess of one fourth of the expenditures named above. As has been said, this was an option under the contract, and it was the right and duty of the plaintiff to notify the defendant of his election between these two contractual rights.

But upon being informed of the fraud practised upon him the plaintiff had another option, based not upon the contract but upon the fraud ; and that option was either to affirm or disaffirm the contract. Bearing in mind these two options, one under the contract and one outside of it, we proceed to examine the evidence upon this branch of the case. What was the nature of the notices given?

On his examination in chief the plaintiff testified that before October 1, 1903, he said to the defendant: "I have seen this machine. I don't want anything more to do with it, and I expect an account from you the first of October of my end of it . . . . I asked him for an accounting probably three or four times"; that in February, 1904, he refused to take stock sent to him by the defendant through a messenger, and that he said to the messenger, "You take it back. I don't want it"; that

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later he asked one Holder to ask the defendant "to give me an accounting"; that on this occasion he said to Holder, "Mr. Vaughn doesn't seem to get time to have Bessie [the bookkeeper] make up an accounting. You go and ask Mr. Vaughn if he won't allow you, who are an expert accountant, to look over those books and get together and make a settlement"; that afterwards he asked Holder what the defendant said and was told that he said that he would let his bookkeeper look the matter over some time, and "shape the thing up" when she had time, but that he would not allow the plaintiff to look over his books; that he first spoke to the defendant "away back in September," 1903; that in January, 1904, he asked Vaughn if he had not "got that thing shaped up so as to make a settlement," and that the defendant said that he had not, giving as a reason that his bookkeeper was busy and that "when she gets time we will fix it up"; that he spoke to the defendant about it in August, 1904, and also "some four to six weeks" before the bringing of the suit, which was in February, 1906; that the last time he spoke to the defendant about it he asked the defendant if he did not think that he (the plaintiff) was entitled to a settlement, and that the defendant said yes, and added that he was going to give him one. On cross-examination he testified that he told the defendant in September [1903] that he "wanted a settlement," and that he did not care to be identified with the enterprise any longer; that he did not say he wanted his money back; that he said he wanted an accounting, which was "equivalent to it." That at this time he did not understand that by reason of false representations the defendant was indebted to the plaintiff for the whole $15,000; that "all I looked for was to have an accounting"; that he understood that the defendant by reason of the failure to carry out his agreement owed him the "difference between $15,000 and one-quarter of what he had put into this." He further testified that the first time he made a demand upon the defendant was "some time in September before the contract had expired"; but he further testified "that he made demands upon" the defendant " between that time and August, 1905," and that "he demanded a settlement at one time upon going on a train to Boston."

It is strongly urged by the defendant that in all this the plaintiff

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was simply asking for an accounting in accordance with the terms of the second contract, and not an accounting based upon the right to avoid the second contract for fraud. There is much to be said in favor of this view, and so far as respects demands made before the plaintiff had knowledge of the fraud practised upon him it would seem correct. But the plaintiff testified that the demands continued up to nearly the time of the bringing of the action. They were verbal, and many of them were made after the plaintiff was aware of the fraud, if any, which had been practised upon him. The defendant denied that any demand whatever had been made upon him. He admitted however that just before the entering of the action he had heard that the plaintiff "was making a claim" upon him "for his $15,000." Upon being pressed upon this matter he said he heard this "simply from gossip," and that he did not know who told him. The question before us is not as to the weight of the evidence ; - that was for the jury. There are indications upon the record that the defendant in his testimony on the matter of demand and as to the manner in which he found out before the action that the plaintiff was making a claim upon him for the whole $15,000 did not appear in a very favorable light. The verdict shows that the jury did not believe his statement that the plaintiff never had made any demand upon him; and they may have thought that upon all the evidence the most reasonable explanation of the defendant's knowledge that the plaintiff was asking for the whole $15,000 was obtained, not "from gossip," but from the demands made by the plaintiff, and that, whatever was the precise language in which the demands were made, the defendant finally understood they were for the whole sum and that the plaintiff intended so to be understood. We cannot say as matter of law that such would have been an unwarrantable view of the evidence.

The jury were warranted in finding that the second contract was rescinded for fraud. The ruling that in case of such rescission the plaintiff could resort to his rights under the first contract was correct. Baker v. Corey, 19 Pick. 496.

Exceptions overruled.