decided: April 23, 1894.
APPEAL FROM THE SUPREME COURT OF THE TERRITORY OF IDAHO.
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MR. JUSTICE HARLAN, after stating the case, delivered the opinion of the court.
The general rule that a written contract cannot be contradicted or varied by evidence of an oral agreement between the parties before or at the time of such contract, has been often recognized and applied by this court, especially in cases in which it was sought to deprive bona fide holders of or parties to negotiable securities of the rights to which they were entitled according to the legal import of the terms of such instruments. Renner v. Bank of Columbia, 9 Wheat. 576, 587; Brown v. Wiley, 20 How. 442; Specht v. Howard, 16 Wall. 564; Forsythe v. Kimball, 91 U.S. 291; Brown v. Spofford, 95 U.S. 474; Martin v. Cole, 104 U.S. 30; Burnes v. Scott, 117 U.S. 582; Falk v. Moebs, 127 U.S. 597.
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Several of these cases were cited in the opinion of the court below, and have been cited here, as supporting the exclusion of the evidence which the appellant offered to introduce. 23 Pac. Rep. 915. It is supposed that Burnes v. Scott is particularly in point for the appellees. That was an action by the endorsee of a negotiable note against the maker. The defendant in that case offered to prove that the note was not intended by him or by the payee as a promissory note, but was given to and was received by the payee as a mere memorandum of the estimated value of the payee's interest in certain railroad bonds placed in the hands of the maker, and which were to be accounted for in the settlement of certain partnership affairs in which the maker and payee were interested; and that upon such settlement it would appear that the payee had received, prior to the giving of the note, more than his proper share of the partnership assets, and, therefore, was not entitled to claim anything in virtue of such memorandum. This court held the evidence inadmissible upon the ground that, by an alleged contemporaneous verbal agreement, it varied and contradicted the written contract of the parties. If that action had been brought by the original payee against the maker, and if the evidence above referred to had been excluded, a different question would have been presented. But, as we have seen, the issue in Burnes v. Scott was between the endorsee of a negotiable note and the maker. The rule is settled that a negotiable instrument, in the hands of an innocent holder for value, cannot be contradicted, to his prejudice, by evidence of an oral agreement or understanding between the original parties variant from the terms of their written contract.
The authorities cited do not determine the present case. The issue here is between the original parties to the note. And the evidence offered by the appellant, and excluded by the court, did not in any true sense contradict the terms of the writing in suit, nor vary their legal import, but tended to show that the written instrument was never, in fact, delivered as a present contract, unconditionally binding upon the obligor according to its terms from the time of such delivery, but was left in the hands of Dulaney, to become an absolute obligation
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of the maker in the event of his electing, upon examination or investigation, to take the stipulated interest in the property in question. In other words, according to the evidence offered and excluded, the written instrument, upon which this suit is based, was not -- except in a named contingency -- to become a contract, or a promissory note which the payee could at any time rightfully transfer. Evidence of such an oral agreement would show that the contingency never happened, and would not be in contradiction of the writing. It would prove that there never was any concluded, binding contract entitling the party who claimed the benefit of it to enforce its stipulations. The exclusion of parol evidence of such an agreement could be justified only upon the ground that the mere possession of a written instrument, in form a promissory note, by the person named in it as payee, is conclusive of his right to hold it as the absolute obligation of the maker. While such possession is, undoubtedly, prima facie, indeed, should be deemed strong evidence that the instrument came to the hands of the payee as an obligation of the maker, enforceable according to its legal import, it is open to the latter to prove the circumstances under which possession was acquired, and to show that there never was any complete, final delivery of the writing as the promissory note of the maker, payable at all events and according to its terms. The rule that excludes parol evidence in contradiction of a written agreement presupposes the existence in fact of such agreement at the time suit is brought. But the rule has no application if the writing was not delivered as a present contract. The authorities supporting these views are numerous, and to some of them it will be well to refer.
In Ware v. Allen, 128 U.S. 590, 595, which was an action upon a written instrument, the defence was that it was understood between the parties at the time the instrument was signed that it should not be of any effect unless in certain named contingencies, which, it was shown, never occurred. Mr. Justice Miller, speaking for this court, said: "We are of opinion that this evidence shows that the contract upon which this suit is brought never went into effect; that the condition upon which it was to become operative never occurred, and that it is not a
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question of contradicting or varying a written instrument by parol testimony, but that it is one of that class of cases, well recognized in the law, by which an instrument, whether delivered to a third person as an escrow or to the obligee in it, is made to depend, as to its going into operation, upon events to occur or to be ascertained thereafter" -- citing Pym v. Campbell, 6 El. & Bl. 370, 373; Davis v. Jones, 17 C.B. 625; Wallis v. Littell, 11 C.B. (N.S.) 369; Wilson v. Powers, 131 Mass. 539; and Pawling v. United States, 4 Cranch, 219.
Pym v. Campbell, above cited, was an action upon an alleged agreement by the defendants to purchase from the plaintiff an interest in an invention of the latter. The defendants gave in evidence that, in the course of negotiations with the plaintiff, they got so far as to agree upon the price at which the invention should be purchased, if bought at all, and had appointed a meeting at which the plaintiff was to explain his invention to two engineers, when, if they approved, the machine would be purchased. At the appointed time the defendants and the two engineers attended, but the plaintiff did not come, and the engineers went away. Shortly after they were gone the plaintiff arrived. One of the engineers was found, and expressed a favorable opinion. The other could not then be found. It was then proposed that, as the parties were together and might find it troublesome to meet again, a writing should be then drawn up and signed, which, if the absent engineer approved the invention, should be the agreement; but if he did not approve it, should not be one. The absent engineer did not approve of the invention when he saw it, and the defendants contended that there was no bargain. The jury were directed that if it was agreed among the parties before the paper was signed that it should not operate as an agreement until the absent engineer approved of the invention, they should find for the defendants. A verdict was accordingly returned for the defendants. Upon a rule nisi for a new trial on the ground of misdirection, the cause was heard before the Court of Queen's Bench. Erle, J., said that, while the production of a paper purporting to be an agreement of a party, with his signature attached, affords a strong presumption
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that it is his written agreement, and if, in fact, he did sign the paper animo contrahendi, the terms contained in it were conclusive, and could not be varied by parol evidence, yet, if it were proved that in fact the paper was signed with the express intention that it should not be an agreement, the other party could not fix it as an agreement upon those so signing. "The distinction in point of law," he said, "is that evidence to vary the terms of an agreement in writing is not admissible, but evidence to show that there is not an agreement at all is admissible." p. 374. Crompton, J., said that he knew of no rule of law estopping parties from showing that a paper, purporting to be a signed agreement, was in fact signed on the terms that it should not be an agreement till money was paid or something else done. "The parties," he observed, "may not vary a written agreement, but they may show that they never came to an agreement at all, and that the signed paper was never intended to be the record of the terms of the agreement; for they never had agreeing minds. Evidence to show that does not vary an agreement, and is admissible." pp. 374, 375. Lord Campbell, C.J.: "I agree. No addition to or variation from the terms of a written contract can be made by parol; but in this case the defence was that there never was any agreement entered into. Evidence to that effect was admissible; and the evidence given in this case was overwhelming. It was proved in the most satisfactory manner that before the paper was signed it was explained to the plaintiff that the defendants did not intend the paper to be an agreement till Abernethie had been consulted, and found to approve of the invention; and that the paper was signed before he was seen only because it was not convenient to the defendants to remain. The plaintiff assented to this, and received the writing on those terms. That being proved, there was no agreement." See also Lindley v. Lacey, 17 C.B. (N.S.) 578, 585; Clever v. Kirkman, 33 L.T. (N.S.) 672; Gudgen v. Besset, 6 El. & Bl. 986; 2 Taylor's Ev. (8th ed.) § 1135.
The case of Wilson v. Powers, above cited, was an action brought by the payee against the sureties in a promissory note. The defence was that the sureties had been discharged
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from liability by a written agreement between the payee and the principal, which was delivered to the principal, whereby the time of payment was extended. To this the plaintiff replied, and sustained his position by proof, that the writing signed by him, and which was relied upon as discharging the sureties, was delivered as a proposition merely, and upon the agreement that it should become binding only upon the assent of the sureties. The Supreme Judicial Court of Massachusetts said: "The manual delivery of an instrument may always be proved to have been on a condition which has not been fulfilled, in order to avoid its effect. This is not to show any modification or alteration of the written agreement, but that it never became operative, and that its obligation never commenced." 131 Mass. 539, 540.
In Benton v. Martin, 52 N.Y. 570, 574, the principle is thus stated: "Instruments not under seal may be delivered to the one to whom upon their face they are made payable, or who by their terms is entitled to some interest or benefit under them, upon conditions, the observance of which is essential to their validity. And the annexing of such conditions to the delivery is not an oral contradiction of the written obligation, though negotiable, as between the parties to it, or others having notice. It needs a delivery to make the obligation operative at all, and the effect of the delivery and the extent of the operation of the instrument may be limited by the conditions with which delivery is made. And so, also, as between the original parties and others having notice, the want of consideration may be shown." To the same effect are Juilliard v. Chaffee, 92 N.Y. 529, 535, and Reynolds v. Robinson, 110 N.Y. 654, in the latter of which it was said that the rule was now well established that "parol evidence is admissible to show that a written paper which, in form, is a complete contract, of which there had been a manual tradition, was, nevertheless, not to become a binding contract until the performance of some condition precedent resting in parol."
The same doctrine was announced in McFarland v. Sikes, 54 Connecticut, 250, 251, 252. That was an action upon a
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note, which, the defendant alleged, had been executed and delivered to the plaintiff upon an agreement that it should be cancelled under certain named circumstances, and in the event he demanded, by a named day, that it be returned to him. The trial court having ruled that the facts relied upon by the defendant did not constitute a defence, the Supreme Court of Errors of Connecticut, reversing the judgment, said: "The error was in applying to the case the familiar and well-established rule that parol evidence is inadmissible to contradict or vary a written contract. A written contract must be in force as a binding obligation to make it subject to this rule. Such a contract cannot become a binding obligation until it has been delivered. Its delivery may be absolute or conditional. If the latter, then it does not become a binding obligation until the condition upon which its delivery depends has been fulfilled. If the payee of a note has it in his possession, that fact would be prima facie evidence that it had been delivered; but it would be only prima facie evidence. The fact could be shown to be otherwise and by parol evidence. Such parol evidence does not contradict the note or seek to vary its terms. It merely goes to the point of its non-delivery. The note in its terms is precisely what both the maker and the payee intended it to be. No one desires to vary its terms or to contradict them."
For the reasons stated, and without considering the case in other aspects, we are of opinion that it was error to exclude the evidence offered by the defendant tending to show that the writing sued on was not delivered to or received by Dulaney as the promissory note of the defendant, binding upon him as a present obligation, enforceable according to its terms, but was delivered to become an obligation of that character when, but not before, the defendant examined and, by working them, tested the mining properties purchased by the plaintiff, and elected to take the stipulated interest in them. According to the evidence so offered and excluded the writing in question never became, as between Burke and Dulaney, the absolute obligation of the former, but was delivered and accepted only as a memorandum of what Burke
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was to pay in the event of his electing to become interested in the property, and from the time he so elected, or could be deemed to have so elected, it was to take effect as his promissory note, payable according to its terms. His election, within a reasonable time, to take such interest, was made a condition precedent to his liability to pay the stipulated price. The minds of the parties never met upon any other basis, and a refusal to give effect to their oral agreement would make for them a contract which they did not choose to make for themselves.
The judgment is reversed and the cause is remanded, that a new trial may be ordered, and further proceedings had in conformity with this opinion.
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