Carleton v. Lombard, Ayres & Co.

The plaintiffs sought to recover damages in this action for the breach of an executory contract for the sale of goods. The defendant is a domestic corporation, engaged in refining crude petroleum for sale and export, and both parties to the action were members of the Eew York Produce Exchange. On the 10th of January, 1881, the parties entered into a contract in writing, which, by its terms, was made subject to the rules of the exchange, whereby, the defendant agreed to sell and deliver to the plaintiffs a large quantity of refined petroleum. The following is the material part of the contract in which the kind, quantity and price of

“ Fifty-five thousand cases, ten per cent more or less, each case packed with two of their patent cans, with low screw tops or nozzles and brass labels, containing five gallons each of refined petroleum of- their Stella brand, color standard white or bet-ter, fire test 76 degrees Abel or upwards, at eight and one-half cents per gallon, cash on delivery. To be delivered in yard free of expense to vessel, to be ready not earlier than, the twenty-fifth January, 1887, not later than the tenth of February, 1887, with twenty-five days to load. Brass labels one-half of one cent each.”

It appears that before closing this contract the plaintiffs had received from the firm of Graham & Co., merchants at Calcutta, British India, an offer to purchase a like amount of refined petroleum of the same brand, color, test and packing, to be shipped at the port of Sew York, not later than March 15, 1887, for their account and risk, on board the British ship Corby, bound for Calcutta. This offer the plaintiffs accepted on the same day that they entered into the contract with the defendant, and immediately after closing it. On or before March 1, 1887, the defendant delivered the oil, packed in the manner specified .in the contract, to the plaintiffs, alongside the. Corby at its factory at Bayonne. The delivery by the defendant to the plaintiffs, and by the plaintiffs to their vendees in Calcutta, was thus accomplished by substantially the same act. The rules of the Produce Exchange, which were made part of the contract between the plaintiffs and the defendant, so far as material to the questions involved, were these: (1) The committee on petroleum were authorized and required to license duly qualified inspectors, members of the exchange, for the various branches of that business. (2) Buyers should have the right of naming the inspector, but must do so at least five days before the maturity of the contract. Failing in this, the seller might employ any regular inspector at the buyer’s expense, and his certificate that the oil is in conformity with the contract shall be accepted. (3)

The plaintiffs under the rule named the inspector, who on March 1,1884, after the cargo was loaded on board the Corby, made and delivered to them a certificate in writing which certified that he had inspected the oil shipped on board the Corby, and stated therein the brand, color, test and gravity of the same which corresponded with the contract. The vessel started upon her voyage, the plaintiffs paid the defendant the purchase price of the oil and then drew upon the parties in Calcutta to whom they had sold, for the price as between them, and their draft was paid. The vessel did not arrive at Calcutta till some time in June, and when she began to discharge the cargo it was found that the cans had become corroded from the inside by some foreign substance in the oil, and so perforated that they did not retain tlieir contents. A large part of the oil was lost by leakage, and the whole cargo was pronounced unmerchantable and finally sold at Calcutta for a small sum, for account of whom it might concern. When the condition of the goods was discovered by the consignees during the discharge of the cargo from the ship, the plaintiffs were notified by cable of the situation and the condition of the oil. They laid these dispatches before the defendant and a long correspondence by cable followed in which the defendant participated and of all of which it had knowledge. The purpose of it was to ascertain the defect, if any, in the oil and to reach some amicable arrangement. In the end all parties seem to have become satisfied that a large loss had been sustained, and the parties in Calcutta who had paid the plaintiffs for the property called upon them to make good their contract. The plaintiffs in turn called upon the defendant to indemnify them from loss, and it then took the ground that it had in all respects performed its contract and was not liable for the result.

In July, 1888, Graham & Co., in Calcutta, brought suit in

The complaint alleges, as did that in the prior suit, substantially that the oil delivered by the defendant alongside the Corby at Bayonne was not in fact refined merchantable petroleum, but, on the contrary, the cans contained a large proportion of oil imperfectly refined and containing foreign substances, which would in the course of transportation corrode the cans, and which should have been eliminated by proper refinement, the presence of which rendered the goods unmerchantable and unfit for transportation. That in consequence of this defect the cans, with few exceptions, had become corroded and perforated by the action of the contents,

The property which was the subject-matter of the contract between the parties was not in existence at the time it was made, but was thereafter to be produced by refinement of the crude material through a manufacturing process by the defendant. It was, therefore, a contract by a dealer with a manufacturer, and is subject to the rules and principles that apply to executory contracts for the sale and delivery of goods when the parties occupy these relations to each other. It is a conceded fact in, the case that the oil delivered by the defendant to the plaintiffs alongside the Corby was of the kind and quality described in the written contract. In quantity, brand, color and fire test it corresponded with the terms of the contract; but it is claimed that while all this is true, yet there was a latent or hidden defect in the article so delivered, the result of improper refinement or manufacture, not discernible upon inspection, which rendered the oil unmer

The leading case in this state is Hoe v. Sanborn ( 21 N. Y. 552 ). The learned judge who framed the opinion in that case, after stating the rule, proceeds to show the grounds upon which it rests. In his view, while this peculiar obligation is called a warranty for convenience, it does not rest upon any supposed intention of the parties or agreement in fact, but is one which the law raises upon principles foreign to the contract in the interest of commercial honesty and fair dealing, and analogous to those upon which vendors are held liable for fraud. It is quite difficult to . reconcile the- authorities upon the question, but it may be observed that- they recognize the principle that in such cases the seller and buyer do not deal" with each other quite at arm’s length; that the seller possesses superior knowledge on the subject upon which the buyer is presumed to repose some degree of confidence, and that commercial honesty and fair dealing requires that in such cases the seller be held bound to deliver the article free from secret

The principle was applied, in a later case in this court, to a contract for the sale of seeds of a particular description by the grower. It was there said that as the grower of seeds must be presumed to be cognizant of any omission or negligence in cultivation, whereby they were rendered unfit for use, there was the same reason for implying a warranty that they were not defective from improper cultivation, as in the case of a sale of an article by a manufacturer that it is free from latent defects. (White v. Miller, 71 N. Y. 118 .)

The latest case that I have been able to find upon the question is Kellogg Bridge Company v. Hamilton ( 110 U. S. 108 ). The leading cases bearing upon the point, both in this country and England, are there reviewed, and the court stated the principle in these words: “ When the seller is the maker or manufacturer of the thing sold, the fair presumption is that he understood the process of its manufacture, and was cognizant of any latent defect caused by such process, and against which reasonable diligence might have guarded. This presumption is justified, in part, by the fact that the manufacturer or maker by his occupation holds himself out as competent to make articles reasonably adapted to the purpose for which Such or similar articles are designed.

“ When, therefore, the buyer has no opportunity to inspect the article, or when, from the situation, inspection is impracticable or useless, it is unreasonable to suppose that he bought on his own judgment, or that he did not rely on the judgment of the seller as to latent defects of which the latter, if he used due care, must have been informed during the process of manufacture. If the buyer relied, and under the circumstances had reason to rely on the judgment of the“seller, who was the manufacturer and maker of the article, the law implies a warranty that it is reasonably fit for the use for which it was designed, the seller at the time being informed of the purpose to devote it to that use.”

The proposition upon which the case turned in the court below, and upon which the judgment is defended here, was thus stated by the learned judge in the opinion at General Term: 11 It is well settled that when an article is sold under a contract which specifies the qualities which it shall possess —no matter whether the language be a condition or a warranty— that the law will not, except in special cases, imply a warranty or condition that the article has other qualities. A

When an article is sold by the owner or maker by the particular description by which it is known in the trade it is a condition precedent to his right of action that the thing which he has delivered, or offers to deliver, should answer this description. But in many cases in modern times the sale of a particular thing by terms of description has been treated as a warranty, and the breach of such a contract a breach of warranty, whereas it would be more correct to say that it was a failure to comply with the contract of sale which the party had engaged to perform. (Chanter v. Hopkins, 4 M. & W. 404; Benjamin on Sales, § 600.) There are many cases in which such words of description are not considered as warranties at all, but conditions precedent to any obligation on the

It is not now important to inquire how far, or under what circumstances, the principle stated by the learned judge applies to contracts of sale of goods in esse between dealers in which there is an express warranty. It is not, we think, applicable to the obligation of a manufacturer who contracts, as in this case, for a sale of his own product, the condition of which he is presumed to know. It is plain that in the case at bar the plaintiffs intended tp buy and the defendant to sell an article of refined petroleum, which should not only correspond to the description in the contract, but should be free from latent defects arising from the process of manufacture, so as to constitute a thing which, in the commercial sense, would be of some use or value.

It is quite conceivable that the oil might correspond with all the descriptions of the contract, and yet be a useless and unmerchantable thing, in consequence of defects arising from the process of manufacture, in which case the buyer would have the shadow of the thing bought without the substance. The defendant’s obligation rests not only upon the terms of the contract, but upon its superior knowledge and the confidence which the buyer placed in its ability to produce a proper article, and hence the relations of the parties are quite different from that of dealers in the article in the market, each possessing equal means of information and opportunity

The plaintiffs were entitled to something more than the mere semblance or shadow of the thing designated in the contract. They were entitled to the thing itself with all the essential qualities that rendered it valuable as an article of commerce and free from such latent defects as would render it unmerchantable. (Mody v. Gregson, L. R. [4 Ex.] 49.) If the goods in question were in fact unmerchantable in consequence of latent defects arising from the process of manufacture and which the defendant could have guarded against by the exercise of reasonable care, it would be quite unreasonable to hold that the defendant has, nevertheless, performed the contract because it has delivered oil of the same brand, color and test specified. It is quite clear that the words of the written contract do not exclude a liability on the part of the defendant for fraud in the performance, and it is difficult to see how it can affect an obligation of the seller who is also a manufacturer, which is based upon his actual or presumed knowledge of latent defects in the oil, arising from the process of refinement.

In the construction of commercial contracts for the sale and delivery of goods, the courts are not always bound by the literal meaning of words, descriptive of the article, contained in the contract. It frequently happens in large transactions that the article which is the subject of the contract is described by some vague generic word which, taken strictly and literally, may be satisfied by a worthless or defective article. In such cases the words may mean more than their bare definition or literal meaning would imply and impose upon the seller an obligation to furnish not only the thing

If it be true that the defendant in this case delivered alongside the vessel an article which was unmerchantable and unfit for transportation, in consequence of hidden or latent defects arising from the process of manufacture and of which it had or should have had knowledge, in the exercise of reasonable care, it has not, in any just or substantial sense, performed its contract, although the article so delivered was of the brand, color, test and specific gravity called for by the writing. The plaintiffs were not only entitled to the thing described, but to that thing in such condition and so free from hidden defects as to make it available to them as an article of commerce and fit for transportation.

Whether this liability survived the delivery and inspection of the goods remains to be considered. When the rules of the exchange are read into the contract it is provided that the acceptance of the petroleum by the buyer’s inspector shall be an acknowledgment that the goods are in accordance with the contract and, as we have seen, the inspector so certified. The inspector was not the agent of either party, but an umpire selected to determine whether the article delivered alongside the Corby corresponded with the contract. The parties, in effect, submitted a certain question to the decision of the inspector, and that was whether the oil corresponded in brand, color and fire test with the contract. He was not authorized to determine whether there was or was not any hidden or latent defects in the article at the time and place of the delivery which would render it unmerchantable. That question was not within the fair scope or purpose of the inspection, and the certificate on this point does not conclude the parties. If, however, the defects which the plaintiffs now claim existed at the time of delivery and which they claim to have produced the damages, were discernible upon the inspection contemplated by the contract, they were not hidden or latent defects within the meaning of the rule, and in that ease the certificate would conclude the parties. If. in

• If I am right in these several propositions, it must follow that the plaintiffs were entitled to prove upon the trial, if they could, that the refined petroleum delivered by the defendant alongside the Corby, though corresponding with the description of the article in the contract, had in it some hidden or latent defect, not discernible by the inspection provided for, which then and there rendered it unmerchantable.

At the trial the plaintiffs’ counsel offered in evidence the judgment roll in the action against them by Graham & Co., already referred to, as proof upon some of the issues in the case. He also offered to prove what actually took place at that trial and what questions were actually litigated and submitted to the jury. The evidence was objected to by the counsel for the defendant, excluded by the court, and the plaintiffs’ counsel excepted.

We have seen that the defendant had knowledge of all the correspondence by cable between the plaintiffs and the parties in Calcutta; that it was notified of the commencement of the action, and that it participated in the trial. In so far as the issues actually litigated in that case are identical with the issues involved in this, the judgment is binding upon the defendant in the same way as if it had been a party upon the record. (O. T. N. Co. v. C. T. E., 144 N. Y. 665 ; Village Port Jervis v. First National Bank, 96 N. Y. 550 ; City of Rochester v. Montgomery, 72 N. Y. 65 ; Albany City Savings Inst. v. Burdick, 87 N. Y. 40 , 45 ; Andrews v. Gillespie, 47 N. Y. 487 ; Heiser v. Hatch, 86 N. Y. 614 ; Chicago v. Robbins, 2 Black, 418 .) What the plaintiffs sought to prove by this record was that at the time of delivery of the petroleum by the defendant alongside the Corby it was not properly refined, but contained water, acid and other foreign substances

The plaintiffs offered some proof at the trial tending to show that the defendant, from the manner in which the goods were packed as well as.from other sources, knew the destination of

One of the qualities which the oil in question should possess was forty-four degrees Beaume, specific gravity. This was introduced into the contract by the adoption of the rules of the exchange. It is quite possible that an article of commerce, such as petroleum, possessing all the qualities and sustaining all the tests specified in this contract, may be a mer.chantable commodity according to the custom of the trade, irrespective of any other consideration or of any latent defect. But that proposition is one of fact rather than law, and, if true, it is difficult to see how a recovery could have been had, upon the grounds stated, by the parties in Calcutta. The defendant having had an opportunity to litigate that question once may be bound by the result, hut, in any event, it cannot be affirmed as matter of law, upon the evidence in the record, that the article delivered was merchantable.

Our conclusions with respect to the questions in the case may be briefly summarized.

1. The defendant was bound to deliver an article of refined petroleum that was free from latent or hidden defects that rendered it unmerchantable at the time and place of delivery and that could have been avoided or guarded against in the process of refinement or in the selection of the raw material by reasonable care and skill.

2. This obligation survived the acceptance if the latent defects were such as would not appear upon an inspection to ascertain whether the oil delivered corresponded with that described in the contract.

3. The judgment roll in the former action was admissible

4. The plaintiffs,were entitled.to show that the defendant knew the destination of the cargo of oil designated in the contract.

The judgment must, therefore, be .reversed and a new trial granted, costs to abide the event.

All concur.

Judgment reversed.