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REP. 314. Kihlberg sued the United States upon a contract for the transportation of military, Indian, and government stores and supplies from points on the Kansas Pacific Railway to posts and stations in certain states and territories. The contract provided for payment for transportation “in all cases according to the distance from the place of departure to that of delivery, the distance to be ascertained and fixed by the chief quarter-master of the district of New Mexico, and in no case to exceed the distance by the usual and customary route." One of the issues in that case was as to the authority of that officer to fix, conclusively for the parties, the distances which should govern in the settlement of the contractor's accounts for transportation. There was neither allegation nor proof of fraud or bad faith upon the part of that officer in his discharge of the duty imposed upon him by the mutual assent of the parties. This court said: “In the absence of fraud, or such gross mistake as would necessarily imply bad faith, or a failure to exercise an honest judgment, his action in the premises is conclusive upon the appellant as well as upon the government." This principle was affirmed and applied in Sweeney's Case, in which he sought to recover from the United States the price of a wall built by him around a national cemetery. The contract provided that the wall should be received, and become the property of the United States, after an officer or civil engineer, to be designated by the government to inspect the work, should certify that it was in all respects such as the contractor agreed to construct. The officer designated for that purpose refused to so certify, on the ground that neither the material nor the workmanship was such as the contract required. As the officer exercised an honest judgment in making his inspections, and as there was on his part neither fraud, nor such gross mistake as implied bad faith, it was adjudged that the contractor had no cause of action on the contract against the United States. : Those decisions control the determination of the claim arising out of the contract here in suit, whereby the defendant in error, who was plaintiff below, covenanted and agreed that he would furnish all the material required, which should be sound, durable, and of good quality, and approved by the company's chief engineer,-and perform all the labor necessary to construct and finish, in every respect, in the most substantial and workman-like manner, the grading and masonry of a certain section of the Martinsburg & Potomac Railroad.
The contract provides that, to prevent al: disputes, the engineer of the company "shall, in all cases, determine” the quantity of the several kinds of work to be paid for under the contract, and the amount of compensation that the appellee should earn at the rates therein specified; that he “shall, in all cases,” decide every question which can or may arise relative to the execution of the contract, and “his estimate shall be final and conclusive;" that in order to enable the contractor to prosecute the work advantageously, the engineer “shall make an estimate from time to time, not oftener than once per month, as the work progresses, of the work done,” for which the company "will pay in current money within twenty per cent. of the amount of said estimate on presentation;" that, in calculating the quantity of masonry, walling, and excavation, the most rigid geometrical rules should be applied, any custom to the contrary notwithstanding; and that “whenever this contract shall be wholly completed on the part of the said contractor, and the said engineer shall hade certified the same, they (the company] will pay for said work” the prices in the contract named. These stipulations were emphasized by this additional provision in the agreement: “And it is further agreed that whenever the contract shall be completely performed on the part of the contractor, and the said engineer shall certify the same in writing under his hand, together with his estimate aforesaid, the said company shall, within thirty days after the receipt of said certificate, pay to the said contractor, in current notes, the sum which according to this contract shall be due.”
The plaintiff, in his declaration, which is in assumpsit, sets out the written contract in full, and counts specially upon its various provisions. The other count is the ordinary one of indebitatus assumpsit. A general demurrer by the company to the whole declaration, and to each count, was overruled. This action of the court below cannot be upheld without disregarding the express conditions of the written agreement; for it does not appear from the declaration that the engineer ever certified in writing the complete performance of the contract by the plaintiff, together with an estimate of the work, done, and the amount of compensation due him according to the prices established by the parties. Until after the expiration of 30 days from the receipt of such a certificate, the company did not, by the terms of the agreement, come under a liability to pay the plaintiff the balance, if any, due to him under the contract. Nor does the declaration state any facts entitling him to sue the company, on the contract, in the absence of such a certificate by the engineer, whose determination was made by the parties final or conclusive. And upon the supposition that the engineer made such a certificate as that provided by the contract, there is no allegation that entitled the plaintiff to go behind it; for there is no averment that the engineer had been guilty of fraud, or had made such gross mistake in his estimates as necessarily implied bad faith, or had failed to exercise an honest judgment in discharging the duty imposed upon him. The first count of the declaration was, therefore, defective for the want of proper averments showing plaintiff's right to sue on the contract, and the demurrer to that count should have been sustained.
As, for this reason, the case must be remanded for new trial, it is proper to say that if the declaration had been good on dem urrer, we should have been compelled to reverse the judgment for errors in the instructions given to the jury. Several instructions were asked by the defendant embodying the general proposition that the final estimate of the engineer was to be taken as conclusive, unless it appeared from the evidence that, in respect thereto, he was guilty of fraud or intentional misconduct. These instructions were modified by the court by adding after the words “frand or intentional misconduct” the words “or gross mistake.” This modification was well calculated to mislead the jury, for they were not informed that the mistake must have been so gross, or of such a nature, as necessarily implied bad faith upon the part of the engineer. We are to presume from the terms of the contract that both parties considered the possibility of disputes arising between them in reference to the execution of the contract. And it is to be presumed that in their minds was the possibility that the engineer might err in his determination of such matters. Consequently, to the end that the interests of neither. party should be put in peril by disputes as to any of the matters covered by *their agreement, or in reference to the quantity of the work to be done under* it, or the compensation which the plaintiff might be entitled to demand, it was expressly stipulated that the engineer's determination should be final and conclusive. Neither party reserved the right to revise that determination for mere errors or mistakes upon his part. They chose to risk his estimates, and to rely upon their right, which the law presumes they did not intend to waive, to demand that the engineer should, at all times, and in respect of every matter submitted to his determination, exercise an honest judgment, and commit no such mistakes as, under all the circumstances, would imply bad faith.
There is one other error in the instructions to which it is proper to call attention. The contract provided that for "bridge masonry" the contractors should receive $7.50 per perch of 25 cubic feet. In reference to certain pier masonry, for which plaintiff charged, in his account, $14 per perch, the court instructed the jury as follows: "The jury are instructed that in respect to the item of .pier masonry,' and the charge of $14 per perch therefor by the plaintiff, as shown in his estimate or bill of particulars, that if they find that the defendant's chief engineer ordered such masonry to be made, and saw and
inspected or examined the same after its completion, and considered the same in his final estimate, and therein treated the said · pier masonry' as • bridge masonry,' to be paid for by the defendant at the price of $7.50 per perch, under the terms of the contract, then such determination and judgment of the engineer is final and binding on the plaintiff, unless the jury find that the price and value of the masonry fixed and returned by the engineer was inadequate and unjust to the contractor, in which event the jury may presume fraud, and disregard the price fixed by the engineer in his final estimate."
This instruction, to which defendant excepted, was clearly erroneous; for, if the masonry was of the class described in the contract as bridge masonry, or if the parties by subsequent agreement, express or implied, authorized it to be put in that class,—the determination of which questions might be controlled by special circumstances not appearing on the face of the agreement, -then the estimate of the engineer, upon the basis of the contract price, was conclusive, unless impeached on the ground of fraud, or such gross mistake as necessarily implied bad faith. The test was not whether the price and value of the masonry fixed and returned by the engineer was inadequate and unjust. Much less did the jury have the right to presume fraud and disregard the engineer's estimate, merely because the price, upon which the parties originally agreed for bridge masonry, proved to be inadequate and unjust; for that would have enabled them to make for the parties a contract. which they did not themselves choose to make.
Without expressing an opinion upon other questions of a subordinate character, discussed in the brief of the defendant's counsel, and which may not arise upon another trial, the judgment is reversed, and the case remanded, with directions to set aside the verdict and grant a new trial, and for such further proceedings as may be consistent with this opinion. Reversed.
( 114 U. S. 555)
(May 4, 1885.) 1. BANKRUPTCY-DISCHARGE-FRAUD.
The rule reaffirmed that the term “fraud,” in the clause defining the debts from which a bankrupt is not relieved by a discharge under the bankrupt act, means positive fraud or fraud in fact, involving moral turpitude or intentional wrong,
not implied fraud, which may exist without bad faith. 2. SAME-CLAIM FOR DAMAGES ON ACCOUNT OF FRAUD.
A claim against a bankrupt for daniages on account of fraud or deceit practiced by him is not discharged by proceedings in bankruptcy; nor is a debt, created by his fraud, discharged, even where it was proved against his estate, and a dividend
thereon received on account. 3. SAME-FRAUDULENT REPRESENTATIONS OF PARTNER.
If, in the conduct of partnership business, and with reference thereto, one partner makes false or fraudulent misrepresentations of fact, to the injury of innocent persons dealing with him, as representing the firm, and without notice of any limitations upon his general authority as agent for the partnership, his partners cannot escape pecuniary responsibility therefor upon*the ground that the misrepresentations were made without their knowledge, especially where the firm appropriates
the fruits of the fraudulent conduct of such partner. In Error to the Supreme Court of New York.
G. H. Forster, for plaintiffs in error. Wm. F. Cogswell, for defendants in error.
HARLAN, J. On the first day of June, 1877, each of the appellants, who were defendants below, received from the district court of the United States for the Southern district of New York his discharge from all debts and demands, which, by the Revised Statutes of the United States, title “Bankruptcy,” were made provable against his estate, and which existed on the third day of July, 1875,--other than such debts as were by law excepted from
the operation of a discharge in bankruptcy. The statute excepts from the operation of a discharge any “debt created by the fraud or embezzlement of the bankrupt, or by defalcation as a public officer, or while acting in a fiduciary capacity; but the debt may be proved, and the dividend thereon shall be a payment on account of such debt.” Rev. St. § 5117. To this action, brought by appellees against appellants upon a cause of action accruing prior to July 3, 1875, the latter made defense, in part, upon the ground that their respective discharges in bankruptcy relieved them from all liability to plaintiffs. In the supreme court of New York there was a verdict and judgment in favor of the plaintiffs for the sum of $17,517.86. That judgment having been aflirmed in the court of appeals, the question to be determined upon this writ of error is whether the claim or demand of the plaintiffs is one from which they were relieved by their discharges in bankruptcy. If the debt was of that character, the judgment below must be reversed; otherwise, affirmed.
The evidence before the jury tended to establish the following facts: That for some years prior to June, 1875, the plaintiffs were doing business in the city of Rochester, New York, as partners, under the style of Lowery & Bradner, while, during the same period, the defendants were engaged in business in the city of New York, under the style of Strang & Holland Bros.; that the special business of plaintiffs was the purchase of wool, which they forwarded to the defendants, as commission merchants, to sell on account; that plaintiffs, for the accommodation of defendants, often furnished them with promissory notes, for the purpose of enabling them to carry on business; that the defendants took care of these notes, paying the same at maturity out of the proceeds of the property consigned, and with money remitted by the plaintitfs; that in the transactions between the parties the plaintiffs were credited with those notes, with the proceeds of property sold on their account, and with money remitted by them, and were charged with the amounts paid to take up the notes; that on or about March 1, 1875, the defendants requested the plaintiffs to furnish them with four promissory notes, of about $4,000 each, to enable them to raise money thereon, and to be credited to plaintiffs on their account, in accordance with the course of business existing between the parties, such notes to be of odd amounts, and made as of different dates, before the time they were transmitted to the defendants, so that they might appear to be given for real indebtedness; that, pursuant to that request, the plaintiffs made and transmitted to defendants their four promissory notes, for $4,325.50, $4,326.25, $4,327.13, and $4,327.15 each, at four months, dated, respectively, on the first, ninth, fifteenth, and twentieth days of February, 1875, and each payable to the plaintiffs at the office of the defendants, in the city of New York, and indorsed by the plaintiffs; and that, on or about April 4, 1875, Strang represented to plaintiffs that his firm had not used, nor been able to use, those notes, because they were made payable at their office, and requested plaintiffs to lend them four other notes of the same amount, payable at the Metropolitan National Bank, in New York city, to be used in the place of those dated in February.
There was also evidence tending to prove that the plaintiffs, relying upon the representation that the February notes had not been used, and that the defendants desired other notes to be used in their place, executed and delivered to the latter four other promissory notes, each at four months, for $4,850, $4,951.25, $4,860.30, and $4,970, respectively, dated thirteenth, fourteenth, sixteenth, and twentieth of March, 1875, payable four months after date to their own order at the Metropolitan National Bank, New York, and by them indorsed; that, at the time defendants requested to be furnished with the notes last described, they had, in fact, discounted and put in circulation the February notes, whereby the plaintiffs, as makers and indorsers, were compelled to pay the same to the holders; that when Strang applied for the
March notes, the defendants knew that they were insolvent, but that fact was not known to plaintiffs; that he made such representations and procured said notes with the intent to defraud the plaintiffs; and that the latter was compelled to pay such part of the March notes as amounted, principal and interest, to the sum for which they obtained judgment below. In the misrepresentations made by Strang to Lowery & Bradner there was no active participation by his partners, the Messrs. Holland. But it was proven that the proceeds of the notes last obtained from plaintiffs, as well as the proceeds of the February notes, all went into the business of Strang & Holland Bros.
The present suit, brought to recover a judgment for the amount plaintiffs were compelled to pay to bona fide holders of the March notes, proceeds upon the ground that the appellees have sustained damages by reason of the false and fraudulent representations made by Strang, on behalf of his firm, whereby the appellees were induced to execute and deliver to that firm the four notes dated in March, 1875. Is that claim for damages of the class from which the bankrupts were relieved by their respective discharges in bankruptcy?
In Neal v. Clark, 95 U.S. 709, it was held that, looking to the object of congress in enacting a general law by which the honest citizen might be relieved from the burden of hopeless insolvency, the term “fraud,” in the clause defining the debts from which a bankrupt is not relieved by a discharge under the bankrupt act, should be construed to mean positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, and not implied fraud or fraud in law, which may exist without the imputation of bad faith or immorality. This principle was affirmed in the recent case of Hennequin v. Clews, 111 U. S. 682, S. C. 4 SUP. Cr. REP. 576, where will be found a reference to the leading cases in this country and in England. Under this rule it is impossible to avoid the conclusion that the debt in question was created by positive fraud upon the part of Strang, representing his firm, if it be trueand the jury proceeded upon the ground that such was the fact—that he procured the notes, dated in March, by representing that the February notes had not been, and could not be, used by his firm, and that they desired other notes, so drawn as to be readily negotiated, to take their place, when, in fact, the February notes had been previously put into circulation by the firm, and had then become obligations upon which the appellees were liable to the holders. There is no pretense in the evidence that the course of business between Strang & Holland Bros. and the plaintiffs would have entitled the former to obtain the March notes, so long as those dated in February were outstanding obligations against the latter. Hence the necessity of deluding the plaintiffs by the false representation that the February notes had not been negotiated at the time the notes in question were obtained. • That representation-as the jury, in effect, found—was made with the intent to deceive the plaintiffs in reference to the actual state of things, and to induce them to do what defendants knew they would not otherwise have done, or been asked to do. If Strang's conduct does not constitute positive fraud, or fraud in fact, involving intentional wrong, it is difficult to conceive what circumstances would have amounted to fraud of that character.
It is contended, however, that as Strang & Holland Bros. were under a legal obligation, apart from any responsibility for the alleged fraudulent representations by Strang, to protect the plaintiffs against liability on the notes dated in March, the latter could have made a claim against the estates of the several bankrupts, for such amounts as they were compelled to pay on account of their being accommodation makers and indorsers; consequently, it is argued, the defendants are released, by their respective discharges in bankruptcy, from the present claim for damages. To this proposition there are two answers: (1) While the plaintiffs might have based their claim entirely upon the legal obligation of defendants to take up the notes at their respective maturities, they were not bound to waive their right to proceed against