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Vulcan Iron Works v. Pittsburg-Eastern Co.

144 A.D. 827 Court Third Department, Decision date 1911-05-03 English

Delivered by Smith, P. J.:

Contents

Majority

p. 827
Vulcan Iron Works, Respondent, v. Pittsburg-Eastern Company, Appellant.
Third Department,
May 3, 1911.

Headnote

Pleading — demurrer to answer — sufficiency of complaint — contract— when third party may sue on promise made for his benefit — agreement to pay promissory notes — consideration — effect of seal — defenses — overpayment made to other parties to contract —when judgment against maker no waiver of right to recourse against person assuming payment — right to discount notes before maturity.
Where the plaintiff demurs to a defense the defendant may attack the sufficiency of the complaint.
In order that a person may sue upon a contract to which he is not a party it must have been entered into for his benefit, or at least such benefit must have been the direct result of performance and within the contemplation of the parties. There must also be a legal obligation on the part of the promisee to such third party so as to connect him with the contract, so that there is a Substitute for any privity with the promisor.
Where a contract is under seal a good consideration is presumed for all the promises therein contained.
The rule permitting a third party to sue upon a contract made for his benefit applies as well to contracts under seal as to simple contracts.
Where a corporation, in consideration of the release of certain claims against it held by several persons by a writing under seal agreed, among other things, to assume and pay certain specified notes made by one of the parties to the contract to the order of a person not a party thereto, so ' that the amount of the notes was part of the total payment to be made by the corporation, the payee may maintain an action on the promise as it is made for his benefit and direct performance by the promisor was within the contemplation of the parties.
It is not a partial defense to an action on said promise to allege that the defendant through a mistake of fact overpaid par-ties to the agreement other than the maker of the note, where it is not alleged that the overpayment oy any part thereof actually came into the hands of the maker.
Neither is it a defense to allege that the payee with knowledge of the overpayments made to the other parties to the contract sued the maker upon the notes and obtained a judgment if he was unable to collect, for there was no merger of the notes in the judgment or waiver of the right of recourse against the party which assumed to pay them.
The assumption of the notes and the promise to pay made the promisor primarily liable thereon, but did not in any way release the maker from his liability so that the payee, for whose benefit the promise was made, may proceed against either of the parties or against both.
p. 828
Neither was there a waiver by the payee of his right of action on the ' . promise by reason of the., fact that he discounted the notes'where the promisor’s obligation to pay was not conditioned upon their remaining in the hands of the payee until- maturity, for by assuming payment of the. notes the promisor assumed payment at maturity to any person who was then holder in due course.
Appeal by the defendant, the Pittsburg-Eastern Company, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Rensselaer oh the 13th day of October,-1910, upon the decision of the court, rendered after a trial at the Albany Special Term, sustaining the plaintiff’s demurrer to defendant’s first and partial defense and to the second and third defenses contained in its answer to the amended complaint. ■ .
Andrew P. McKean [J. K. Long of counsel], for ■ the appellant.
Thomas H. Guy [H. D. Bailey of counsel], for the respondent.

The amended complaint alleges the execution and delivery of three promissory notes by one Egan to the plaintiff in' part payment of two locomotives, that said notes were discounted with certain banks and that two of said notes were not paid at maturity and were protested for non-payment, whereby plaintiff was compelled to take up said two notes, and now sues to recover the amounts due thereon, including protest fees. The complaint further alleges a certain written contract between defendant and said Egan and others whereby defendant assumed and agreed to pay said notes, which contract is annexed to and made a part of the amended complaint. This contract, in the form of a sealed instrument and acknowledged ■ by all of the parties thereto, provides among other things for the payment of a-certain sum by the party of the first part, this defendant, to the party of the. second part for and on account of himself and. the parties of the third and fourth parts, and also for the payment of certain notes, including th,e notes in question, by said party of the first part: The parties Of the second and fourth parts and Egan, party of the third

p. 829
part, in turn severally release the party of the first part from certain claims of theirs to stock of.the defendant company. The demurrer to the defenses set up in the answer on the ground of their insufficiency require the sufficiency of the complaint itself to he examined (Baxter v. McDonnell, 154 N. Y. 432 , 436), and defendant now claims that said complaint does not state facts sufficient to constitute a cause of action.

The complaint is evidently drawn'on the theory of Lawrence v. Fox ( 20 N. Y. 268 ), which holds that an action lies at the instance of a third party upon promise made for a valid consideration for the benefit of such third party, although he is not privy, to the consideration passing between the .parties to the contract: This case has long been regarded as the foundation of the so-called “American doctrine,” now generally-adopted in this country, and especially of the law in this State. Later cases, however, have somewhat limited .the apparent scope of this decision with the result that now, to enable a third party to a contract to sue, “the contract must have been entered into for his benefit, or at least such benefit must be the direct result of performance and within the contemplation of the parties. There must also be a legal obligation [or] duty on the part of the promisee to such third party, the theory of the cases being that such an obligation so connects him with the contract as to be a substitute for any privity with the promisor.” (7 Am. & Eng. Ency. of Law [2d ed.], 107, citing Durnherr v. Rau, 135 N. Y. 219 , 222. See, also, Barlow v. Myers, 64 N. Y. 41 ; Vrooman v. Turner, 69 id. 280, 283-285; Haefelin v. McDonald, 96 App. Div. 213 , 221-224; Pond v. New Rochelle Water Co., 183 N. Y. 330 , 333-338; Rochester Dry Goods Co. v. Fahy, 111 App. Div. 748 , 751-753; affd., without opinion, 188 E. Y. 629.)

The contract in question being under seal a good consideration is presumed for all the promises therein contained. The Lawrence v. Fox doctrine applies as well to contracts under seal as to simple contracts. (Pond v. New Rochelle Water Co., supra, 334.) There was clearly in this contract a legal obligation or duty on the part of the promisee, Egan, to the third party, this plaintiff, inasmuch as he was indebted to the plain - ¡tiff on his promissory notes. The question then remains, in

p. 830
order to invoke the doctrine, as to whether the contract was entered into for the benefit of this plaintiff, in contemplation of law. As is said in the case of Fish v. First National Bank ( 150 Fed. Rep. 523 , 524): ■ “As to what contracts are, and what are not, made for the benefit of a third person, within the meaning of the rule, there is much diversity, of opinion and the decisions are no* reconcilable.” This • contract, however,, although not mentioning the name of the plaintiff, clearly identifies the notes in question which the promisor “ hereby assumes and agrees to pay, ” in addition to the payment of a large sum in money. . The amount of the notes was evidently estimated as a part of the total payment to be. made by this defendant in exchange for the releases secured by it, so that the practical effect of the arrangement was the same as if Egan owing the notes had then paid the money direct to the defendant upon its promise to satisfy the notes, which would have been the exact situation in Lawrence v. Fox, where money was paid to the promisor in consideration of his promise to pay the payor’s debt to another. The difference between actually paying over money to a person and the withholding by such person of money otherwise payable to the debtor seems negligible so far as the general intent and purpose of the parties are concerned. In each case the third party presumably has money or its equivalent in credit to be devoted to the payment of a debt owed to such creditor, and if in one instance the contract can he said to have been entered into for his benefit then the same reasoning must apply to the other situation. • The present contract had in view among other things the payment of a sum of money by defendant direct to the other parties thereto as well as the payment of the notes,. but in so far as it provided for the payment of the notes we think it can fairly he said that the third party was benefited by having in effect another name on the notes held by it' and that this.benefit was “the direct result of performance and within the contemplation of the parties.” ■ We accordingly think that this complaint is not insufficient upon its facó¡.

The question then arises as to the sufficiency of the defenses demurred to. The first, a partial defense only, alleges an overpayment by defendant, on account of a mistake in fact, to

p. 831
the parties of the second, third apd fourth parts, which overpayment defendant sets off as against the claim of any person claiming under said parties of the second, third and fourth parts or any of them. But it is not alleged that such overpayment or any part thereof actually came into the hands of Egan, the party of the thud part. Under the contract itself the moneys were to be paid to the party of the second part, Pfeil, and presumably were so paid. Egan could be held responsible in an action for moneys paid under a mistake of fact only for moneys received by himself apd not for any overpayment to his business associates upon the contract, in respect of which there is no presumption that he profited.

The second defense demurred to alleges that .plaintiff with knowledge of the overpayment obtained judgment against said Egan in the State of Pennsylvania upon said notes, and that' by reason thereof he merged said notes into the judgment and thereby waived his recourse, if any, against this defendant. The promise of defendant, however, to pay these notes would in effect amount, under the doctrine hereinbefore mentioned, to making defendant primarily liable on these notes while not' in any way releasing Egan from his own liability thereon. This being the case we think there was no such merger of the notes by judgment as to bar the present action, and consequently that the holder of the notes was entitled to proceed against either or both of the parties liable on the notes. The fact that the maker of the notes was first sued and a judgment obtained, which is still unpaid, cannot operate to release the defendant from its contractual obligation to pay the notes. The present action is brought to compel the doing of the very thing that defendant promised to do, and so long as the notes remain unpaid plaintiff has such a right of action.

The third defense similarly alleges a waiver by plaintiff of his right of action on account of having discounted said notes. But defendant’s obligation to pay these notes was not conditioned upon their remaining until maturity in the hands of the payees. As commercial paper, and possessing the usual attributes of negotiability, the defendant by undertaking the payment of the notes must be held to have assumed their payment at maturity to whomsoever the then holders in due course

p. 832
might he. At such times certain- banks owned the notes, and Were, therefore, entitled, to the benefit of' defendant’s obligation to pay, which benefit in turn would pass to plaintiff as prior indorser upon its taking up of the notes.

The interlocutory judgment should be affirmed, with costs.

All concurred.

Interlocutory judgment affirmed, with costs, with usual leave to defendant to amend upon payment of costs of demurrer and of this appeal. •'

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