Commissioners of Lewes v. Breakwater Fisheries Co.

The complainant’s case is constructed on the assumption that the new lease, by reason of mutual mistake, failed to correctly state the terms of the agreement made by the parties. That the new lease Correctly stated all of the terms agreed on, except one, is admitted. That one is that it did not provide for a surrender of the thousand feet of land embraced in the terms of the old lease.

In Cannon v. Collins, 3 Del. Ch. 132 , 152, Chancellor Bates', in speaking of the powers of a court of equity, says:

“One of its most important powers is to reform contracts, where the parties, by mistake, have failed to stipulate in terms according to their real intentions.”

Chancery will not, however, as a general proposition, relieve against mere mistakes of law. Where the written document accurately expresses the contract which the parties intended to make, the fact that they were mistaken as to the legal effect of their contract will not justify a court of equity, in the absence of any other circumstances, in interposing its remedies against it. In such case, the mistake is purely one of law and not remediable in equity. It was so held in the leading case of Hunt v. Rhodes, 1 Pet. 13 , 7 L. Ed. 27 .

Where the mistake, however, consists not in an erroneous understanding of the legal effect of the contract agreed upon, but in an erroneous, understanding of the import of the words selected

The distinction which these two cases in the Supreme Court of the "United States would seem to draw is between a mistake of law, which underlies the making of the contract, and a mistake concerning the legal import of words, which underlies the manner of ¿xpressing the contract. The latter is remediable; the former is not.

In Minot v. Tilton, 64 N. H. 371 , 10 Atl. 682 , the court approvingly quotes the following from 2 Pomeroy’s Equity Jurisprudence, § 845:

“If a.written instrument fails to express the intention which the parties had in making the contract which it purports to contain, equity will grant its relief, affirmative or defensive, although the failure may have resulted from a mistake as to the legal meaning and operation of the terms or language employed in the writing.”

Numerous authorities may be cited in support of this proposition. I have been at some pains to examine a great many of them, and the principle embodied in the proposition is overwhelmingly established. The case of Cannon v. Collins, supra, in our own state, is in harmony with it. Indeed, I do not understand the defendants to seriously combat the principle thus laid down in general terms. They contend, however, that the pending case has features which render improper its application. These features will now be discussed.

It is contended that, though a written agreement may be reformed because of a mistake in the manner of its wording, yet such reformation may not be had on paroi evidence where the subject-matter of the agreement is within the statute of frauds. The primary agreement alleged to have been made between the lessor and lessee in this case rested in paroi. The particular in which the written lease is said not to properly embody the prior oral agreement is in this — that it did not provide for the surrender of the old lease. It has been held in this state that an agreement to accept a surrender of a lease is within the statute of frauds and must be in writing. Logan v. Barr, 4 Har. 546. Likewise the con

Inasmuch as the alleged original agreement which provided for a new lease and a surrender of the old lease is not evidenced by a writing, it is contended that under the statute of frauds no relief can be afforded. The authorities pertinent to the question thus raised are not uniform.

Against the contention of the defendants, the weight of the opinion of so great an equity judge as Chancellor Kent is found reported in Gillespie v. Moon, 2 Johns. Ch. 585 . That was a case in which a bill was filed to reform a deed which it was charged mistakingly conveyed two hundred and fifty acres of land, whereas it was meant to convey only two hundred acres of land. The agreement which preceded the execution of the deed rested in paroi. The Chancellor decreed that the deed should be reformed and to that end ordered that the defendant release and convey to the complainants the fifty acres of land which, by reason of mis-take, had been included in the deed. In the course of his opinion he said:

“I have looked into most, if not all, of the cases on this branch of equity jurisdiction, and it appears to me to be established, and on great and essential grounds of justice, that relief can be had against any deed or contract, in writing, founded in mistake or fraud. The mistake may be shown by paroi proof, and the relief granted to the injured party, whether he sets up the mistake affirmatively, by bill, or as a defense.”

Glass v. Hulbert, 102 Mass. 28 , 3 Am. Rep. 418 , is a leading case'which takes a view somewhat contrary to that of Chancellor Kent in Gillespie v. Moon, supra. In the Massachusetts case the bill sought to reform a deed by making it embrace more land than the description called for, instead of less than the deed called for as in Gillespie v. Moon. In this particular, the Massachusetts court differentiated the case then before it from Gillespie v. Moon, and recognized Chancellor Kent’s opinion to be the rule only when applied to a case such as was before him, namely, to a case where the bill sought to restrict the operation of the deed to a less quantity

Whether the distinction thus drawn in Glass v. Hulbert, supra, between bills seeking on the one hand to restrict and on the other to enlarge the subject-matter of the instrument, has any application in the instant case may perhaps be a debatable question. I incline to the view that, under the facts before me, the situation is rather one where it is sought by the bill to enlarge rather than to restrict the operation of the written lease, and, this being so, the case in its facts resembles the situation in Glass v. Hulbert, supra. I shall not pause, however, to discuss this aspect of the case, but shall make the assumption most favorable to the defendants, viz., that the view to which I have just said I incline is the correct view.

Making this assumption, I decline to accept Glass v. Hulbert as controlling on the point now being considered. Notwithstanding the eminence of the tribunal which decided Glass v. Hulbert, I am impelled to disagree with its conclusions. I shall not enter upon a discussion of that case and its reasoning. Mr. Pomeroy in an elaborate note to Section 867, p. 1778, of Volume 2 of the third edition of his noted work on Equity Jurisprudence, analyses and discusses that case very thoroughly. His comment, announced in the text .of Section 867 of his work, is, as follows:

“The principles which underlie the theory advocated by the Massachusetts court, if carried out to their legitimate results, would work a virtual revolution in equity jurisprudence, would confine its most salutary remedial functions within very narrow limits, and would overturn doctrines which have been regarded as settled since the earliest periods of jurisdiction. * * * The statute of frauds is no real obstacle in the way of administering equitable remedies so as to promote justice and prevent wrong. Equity does not deny nor overrule the statute; but it declares fraud or mistake creates obligations, and confers remedial rights which are not within the statutory prohibition; in respect of them the statute is uplifted.”

Authorities which are not in harmony with Glass v. Hulbert, supra, but on the other hand are in accord with the language of Chancellor Kent in its broad application, are the following;

The defendants cite cases from other states which are in conflict with the foregoing. But the weight of authority appears clearly to be in favor of granting relief notwithstanding the statute of frauds and without regard to whether the relief sought is affirmative or defensive, or whether the proposed reformation will either restrict or enlarge the subject-matter of the contract.

Some courts draw a distinction between contracts that are executed and those that are executory, holding that, while the former may be reformed so as to enlarge the subject-matter of the contract, the latter may not be. Such appears to be the rule in North Carolina (Davis v. Ely, 104 N. C. 16 , 10 S. E. 138 , 5 L. R. A. 810 , 17 Am. St. Rep. 667 ), and in Rhode Island (Macomber v. Peckham, 16 R. I. 485 , 17 Atl. 910 ). These two cases are cited by the defendants. Safe Deposit & Trust Co. v. Diamond Coal & Coke Co., 234 Pa. 100 , 83 Atl. 54 , L. R. A. 1917A, 596, also cited by the defendants, when read in the light of the earlier Pennsylvania case of Workman v. Guthrie, supra., to which it refers without disapproval, seems likewise to lay down the rule in that jurisdiction that a distinction is to be drawn between cases involving executed contracts on the one hand and those involving executory contracts on the other.

In the instant case, the agreement of lease is executed. It is not executory. This being so, the authorities just referred to as cited by the defendants cannot be regarded as adverse to the bill in the pending cause. I may observe that the cases of Osborn v.

Glass v. Hulbert, supra, stands almost alone among the American authorities in deciding that, where the facts show the contract to be executed, equity will not permit paroi evidence to be received in behalf of the complainant to correct a mistake in the written instrument for the purpose of enlarging its operation, the contract being within the statute of frauds.

In declining to accept the decision in that case as expressive of the correct rule of law, I wish to be understood as deciding nothing more than what the facts of the instant case call for, and that is that, the lease being executed, Chancery may, if by reason of mutual mistake its language fails to accurately embody the terms actually agreed upon, reform it in accordance with the true understanding of the parties, notwithstanding the contract is within the statute of frauds and notwithstanding also the fact that the proposed reformation will enlarge rather than restrict its operation. Whether in cases where the contract is executory the court may on the ground of mistake reform the instrument and decree its specific performance in its reformed condition, there being no elements of special equities such as part performance, and "the statute of frauds being applicable and relied upon, is a question which does not call for decision in this case. I, therefore, leave it as an open one in this jurisdiction.

I could rest this branch «of the case on what I have heretofore said, satisfied as I am that the authorities fully sustain the jurisdiction of the court to reform the lease on the ground of mutual mistake. But another consideration appears here which, under all the authorities, clearly sustains the propriety of affording the relief asked. I refer to the circumstance that the facts show a performance of the paroi agreement by the complainant, the lessor. Where such is the case, even Glass v. Hulbert, supra,

Now, what was the consideration which the town of Lewes was to pay? It was the acceptance of less rent than it had the right theretofore to demand. The new lease specified the smaller rental; the town collected only that sum. The town never demanded more, nor did it charge more on its books. The lessee paid only the smaller sum and never offered to pay more. It is true that the answer states a willingness to pay more. But this is a belated offer, coming after the bill was filed. It is true also that the witness Anderton, one of the defendants, testified to tendering money to the town and the town’s refusal to accept it. His testimony is, however, very unsatisfactory, because he recalled neither the amount of the tender, nor what it was for,' nor when it was made, except that it was made after the filing of the bill 'in this cause.

The thousand feet of land in dispute was, generally speaking, vacant land. The town undertook to lease it to others. In no other way could it as a practical proposition assert the right of possession. While the testimony shows that the lessees did use part of the land after the making of the new lease, yet it fails to convince me that such user was inconsistent with the right of possession in the town. In fact, it appears that thé president of the Breakwater Fisheries Coftipany, when the town was seeking to rent the land to persons outside of Lewes, protested to the town authorities, stating that if they, meaning the Fisheries Company, had known the town was going to lease the land to outsiders they never would have surrendered it.

So that it would appear not only that the town performed all

If these facts show performance, or part performance, on the part of the town, and I think they do, then in this jurisdiction the statute of frauds presents no difficulty in the case. Cannon v. Collins, supra.

I have thus far discussed the case on the assumption that the oral agreement to surrender part of the land embraced in the old lease in return for a reduction of rental was, as a matter of fact, entered into as alleged by the bill. The defendants do not admit this. It is, therefore, necessary for me to examine that question and make a finding thereon.

The existence of the oral agreement is to be traced, if at all, to certain negotiations which three gentlemen, namely, Messrs. Horsey, Virden and Vessels, assumed to conduct with the town commissioners in September, 1917. At that time the old lease embracing the disputed land was held by the seven men who, through Mr. Robinson, had bought it from the Delaware Fish Oil Company, the original lessee. The three gentlemen assumed to speak for their associates, who seem to have taken the nahae of Breakwater Fisheries Company, which was not then, however, incorporated.. As a result of these negotiations, the evidence clearly shows that the town agreed to reduce the rental on condition of the surrender of a portion of the land. Shortly thereafter the town commissioners went down to the bay front and there met Edgar W. Ingram, another one of the group of the men who were then the owners of the old lease. In his presence, and not only without-his protest, but apparently with his co-operation, they fixed the lines between what was to be retained and what was to be surrendered. Thereafter, the Mayor of the town took the description, thus made up, to Thomas R. Ingram, an officer in a bank, and asked him to draw a new lease, telling him that the paper he handed him was a description of the land to be retained and that the rest, the east end, was to be surrendered. The new lease was then drawn containing the fourth paragraph quoted above in the statement of the case, which gives rise to the pending

From the foregoing it would, therefore, appear that the question of the existence of the paroi agreement as binding on the corporation, Breakwater Fisheries Company, presents purely a question of law, namely, whether the corporation, which was subsequently formed, is bound by all the terms of the agreement which the partnership made as an inducement to the town to execute the new lease?

When the old lease was bought by Mr. Robinson, he acted not alone for himself, but as well for six associates, to each of whom he duly transferred a one-seventh interest. The seven men who then held the old lease have been spoken of as partners. But their relation of partners was intended only to be temporary in duration, for one of them, Dr. Orr, testified that their intention was to form themselves into a corporation and conduct their affairs as such. The partnership called itself by the same name

Shall the corporation now, under such a state of facts, be heard to say that it can take a portion of the contract and reject the rest? I think not. The fact that the contract was negotiated at a time before the corporation was in existence does not, under facts such as these, relieve it from the contract’s terms in their entirety. When it. accepted the new lease and acted, solely under it, it took advantage of one-half of the bargain and, possessing full knowledge as it did, it must be held to have assumed the burden of the other half.

The defendants cite numerous cases to the effect that a corporation is not bound by contracts made in its behalf by its promoters, at a date anterior to its existence. I have examined all the cases so cited, but find none of them pertinent to facts such as appear in this case. With the correctness of the general proposition of law just stated, I take it there can be no controversy.

But that a corporation may not adopt a contract made by its promoters for its benefit, even though such contract antedates its existence, is an entirely different proposition. That it can do so, is beyond all doubt the well-established rule in this country. 1 Machen, Modern Law of Corporations, §§ 327-337; 1 Fletcher, Cyc. Corp., § 152. To hold otherwise seems to me to be highly unreasonable. The pending case is not a case where promoters not only negotiated but themselves concluded a contract, and a question is thereafter made as to whether, or not, the corporation is bound by the contract or has by acts of its own adopted such completed contract. The case here is different; for here the promoters did the negotiating and the corporation stepped in at the end and closed the transaction by undertaking itself to conclude it.

I have no doubt that when the Breakwater Fisheries Company executed the new lease as lessee, it was bound to sur

From the foregoing it follows that, as against the Breakwater Fisheries Company, the case set up by the bill is fully made out.

It is now in order to consider whether the defendants, Hayes and Anderton, have such equities as will defeat the bill as against them. These defendants claim that they are purchasers for value without notice. The facts bearing on this branch of the case are, as follows: On January 23, 1920, a contract was entered into whereby the Breakwater Fisheries Company agreed to sell to Hayes and Anderton its plant, including all leased land held by it, for ninety thousand dollars, payable fifteen thousand dollars in cash, ten thousand dollars on April 1, 1920, thirty thousand dollars July 1, 1920, and thirty-five thousand dollars August 1, 1920. ' The cash payment was made immediately. A little more than two weeks thereafter the original bill was filed in this case. The Breakwater Fisheries Company was the sole defendant. On the filing of the bill a restraining order and rule to show cause why a preliminary injunction should not issue was issued and served on the defendant February 3, 1920. The restraining order enjoined the defendant from transferring the lease pending the hearing on the rule. The restraining order was never vacated. The record fails to show what disposition was made of the rule for a preliminary injunction. On April 1, following, Hayes and Anderton paid the installment of ten thousand dollars then due, and on July 1, following, they paid the installment of thirty thousand dollars then due. On August 4, the company extended the time of payment of the balance of thirty-five thousand dollars until October 1, “pending disposition of the injunction of the Court of Chancery.” On October 20, 1920, Hayes and Anderton appear, by the minutes of the company, to have asked further extension of time for paying the final installment until the pending case was disposed of. On January 28, 1921, they paid thirty thousand

On December 1, 1921, Hayes and Anderton were made parties to the bill.

Though the contract of sale to Hayes and Anderton was made January 23, 1920, formal transfer of the assets has not yet been made. This, I take it, is due to the outstanding restraining order.

In Hall v. Livingston, 3 Del. Ch. 348 , 396, Chancellor Bates gave expression to the following:

“To be sufficient prior notice of the trust, it must be found to satisfy a rule well settled, both in the courts of England and this country, which is this: It is upon the ground of malafides, and not of mere want of caution, that the purchaser for value is affected with a prior claim, and, therefore, the notice to affect him must be more than would excite the suspicion of a cautious, and wary purchaser. It must have been so clear and undoubted, with respect to the existence of'the prior right, as to make it fraudulent in him, afterwards, to take and hold the property. It is not meant by this, that a purchaser can be affected only by some direct and positive communication from the party interested; notice may be implied from circumstances; but in such case, the circumstances relied on must be clear and unequivocal, i. e., such as can be supposed to have left on the mind of the purchaser no reasonable doubt as to the existence of the prior right."

In that case the facts relied upon to establish notice, were said by the Chancellor to have constituted only common rumor. And this rumor was repeated by only two persons, strangers to the transaction. And moreover, the Chancellor observed, the rumor was such as was fully answered by a deed held by the defendant’s grantor. The result of his finding was that there was no evidence in the case before him justifying the conclusion that the conscience of the purchaser was affected with notice of the prior equity — nothing to impute mala fides to his conduct.

In the instant case the facts are such as to point to a different conclusion. Before Hayes and Anderton ever negotiated for the purchase of the Breakwater Fisheries Company’s assets, they were aware that the Town of Lewes was asserting control over the disputed land. While they themselves deny the fact, yet the evidence shows that the town had on one occasion offered to lease to them a part at least, if not all, of the very land now in controversy. During the negotiations carried on between them and the Break

A reading of the lease, in its fourth paragraph, alone would have raised a question upon the very point now in controversy. The language there employed is by no means free from ambiguity. It is doubtful if the parties may not be said, by the language of that paragraph, to have provided for the surrender of the old lease. Solicitors on both sides, however, take the view that the language does not actually provide for such surrender. Whether they are correct in this, I shall not pause to consider. Certain it is, however, that the language is sufficiently obscure to raise a question in the mind as to just what it means. The lease was recorded. It was examined by an attorney representing Hayes and Anderton. They, of course, are presumed to have been cognizant of its contents.

Knowing the contents of the new lease; having had the town offer to lease them the land now claimed by them as purchasers from the Breakwater Fisheries Company at a time prior to its purchase; .having received notice from various sources, including their own vendor, of the adverse claim of the town; and having failed to make diligent and faithful inquiry from those best qualified to give information, I am persuaded under all the circumstances disclosed by the evidence that Hayes and. Anderton

The complainant is entitled to a decree reforming the lease so as to make it conform to the agreement actually made between its parties.

It appears that formal assignment has never been made by Breakwater Fisheries Company to Hayes and Anderton of either of the leases in question. Legal title is, therefore, still held by the Breakwater Fisheries Company. That being, so, the decree will direct the Breakwater Fisheries Company to execute to the complainant a deed of release surrendering all that portion of the land embraced within the terms of the old lease, and not embraced within the terms of the new lease. The decree, of course, will protect the defendants from being called on to pay any rental under the old lease. This would seem to be the most effectual way of carrying out the original intent of the parties. The costs will be taxed against the defendants.

Let a decree be entered accordingly.

Note. On appeal the decree entered in conformity with this opinion was affirmed. The .opinion of the Supreme Court will appear in 14 Del. Ch.