Report from superior court, Essex county; Charles S. Lilley, Judge.

Action by Cordelia A. Silsbee against Parker J. Webber. A verdict was directed for plaintiff, and case reported, on request of the parties, for determination of the supreme judicial court. Verdict set aside.

[171 Mass. 379]J.H. Sisk, for plaintiff.

W.H. Niles & Geo. J. Carr, for defendant.

Field, C.J., and Knowlton and Lathrop, JJ., dissenting.

HOLMES, J.

This is an action to recover money alleged to have been got from the plaintiff by duress. In the court below, a verdict was directed for the defendant, and the case was reported. The plaintiff's son had been in the defendant's employ, had been

[50 N.E. 556]

accused by him of stealing the defendant's money, had signed a confession (whether freely or under duress is not material), and had agreed to give security for $1,500. There was a meeting between the plaintiff and the defendant, in the course of which, as the plaintiff testified, the defendant said he should have to tell the young man's father, the plaintiff's husband. At that time, according to her, her husband had trouble in his head, was melancholy, very irritable, and unable to sleep, so that she feared that, if he were told, the knowledge would make him insane. The plaintiff further testified that she previously had talked with the defendant about her husband's condition, and that she begged him not to tell her husband, and told him that he knew what her husband's condition was; but that he twice threatened to do it in the course of his inquiries as to what property she had, and that, to prevent his doing so, she, the next day, went, by agreement, to the office of the defendant's lawyer, and executed an assignment of her share in her father's estate. Her son was present, and, as he says, protested that this was extortion and blood money. It is under this assignment that the money sued for was collected. In the opinion of a majority of the court, if the evidence above stated was believed, we cannot say that the jury would not have been warranted in finding that the defendant obtained and knew that he was obtaining the assignment from the plaintiff solely by inspiring the plaintiff with fear of what he threatened to do; that the ground for her fear was, and was known to be, her expectation of serious effects upon her husband's health if the defendant did as he threatened; that the fear was reasonable, and a sufficiently powerful motive naturally to overcome self-interest; and, therefore, that the plaintiff had a right to avoid her act. [171 Mass. 380]Harris v. Carmody, 131 Mass. 51, 53, 54;Morse v. Woodworth, 155 Mass. 233, 250, 27 N.E. 1010, and 29 N.E. 525.

It is true that it has been said that the duress must be such as would overcome a person of ordinary courage. We need not consider whether, if the plaintiff reasonably entertained her alleged belief, the well-grounded apprehension of a husband's insanity is something which a wife ought to endure, rather than to part with any money, since we are of opinion that the dictum referred to is taken literally in an attempt to apply an external standard of conduct in the wrong place. If a party obtains a contract by creating a motive from which the other party ought to be free, and which, in fact, is, and is known to be, sufficient to produce the result, it does not matter that the motive would not have prevailed with a differently constituted person, whether the motive be a fraudulently created belief or an unlawfully created fear. Even in torts,-the especial sphere of external standards,-if it is shown that in fact the defendant, by reason of superior insight, contemplated a result which the man of ordinary prudence would not have foreseen, he is answerable for it; and, in dealing with contributory negligence, the personal limitations of the plaintiff, as a child, a blind man, or a foreigner unused to our ways, always are taken into account. Late American writers repudiate the notion of a general external measure for duress, and we agree with them. Clark, Cont. 357; Bish.Cont. (Ed. 1887) § 719. See James v. Roberts, 18 Ohio, 548, 562;Eadie v. Slimmon, 26 N.Y. 9, 12.

The strongest objection to holding the defendant's alleged action illegal duress is that, if he had done what he threatened, it would not have been an actionable wrong. In general, duress going to motives consists in the threat of illegal acts. Ordinarily, what you may do without liability you may threaten to do without liability. See Vegelahn v. Guntner, 167 Mass. 92, 107, 44 N.E. 1077; Allen v. Flood [1898] App.Cas. 1, 129, 165. But this is not a question of liability for threats as a cause of action; and we may leave undecided the question whether, apart from special justification, deliberately and with foresight of the consequences, to tell a man what you believe will drive him mad, is actionable if it has the expected effect. Spade v. Railroad, 168 Mass. 285, 290, 47 N.E. 88;White v. Sander, 168 Mass. 296, 47 N.E. 90. If it [171 Mass. 381]should be held not to be, contrary to the intimations in the cases cited, it would be only on the ground that a different rule was unsafe in the practical administration of justice. If the law were an ideally perfect instrument, it would give damages for such a case as readily as for a battery. When it comes to the collateral question of obtaining a contract by threats, it does not follow that, because you cannot be made to answer for the act, you may use the threat. In the case of the threat, there are no difficulties of proof, and the relation of cause and effect is as easily shown as when the threat is of an assault. If a contract is extorted by brutal and wicked means, and a means which derives its immunity, if it have immunity, solely from the law's distrust of its own powers of investigation, in our opinion the contract may be avoided by the party to whom the undue influence has been applied. Some of the cases go further, and allow to be avoided contracts obtained by the threat of unquestionably lawful acts. Morse v. Woodworth, 155 Mass. 233, 251, 27 N.E. 1010, and 29 N.E. 525;Adams v. Bank, 116 N.Y. 606, 23 N.E. 7; Williams v. Bayley, L.R., 1 H.L. 200, 210.

In the case at bar there are strong grounds for arguing that the plaintiff was not led to make the assignment by the duress alleged. They are to be found in the fact that the plaintiff sought the defendant; in her testimony that when she made the assignment she wanted the defendant to have full security for all her son owed him; and in the plaintiff's later conduct; but we are considering whether there was a case of duress for the jury.

[50 N.E. 557]

The assignment was on October 10, 1894. Before March 12, 1895, the plaintiff had joined with her sisters in employing a lawyer to secure her share in her father's estate, intending it to be paid over to the defendant. On March 12, 1895, to the same end, she signed a petition for distribution, setting forth the assignment, and afterwards took some further steps, and never made any claim that the assignment was not valid until December 19, 1895, before which time it had come to the knowledge of her husband. Apart from the weight which these facts may give to the argument that the plaintiff did not act under duress, they found an independent one,-that, if she did act under duress, she has ratified her act. The assignment was formally valid. The only objection to it, if any, was the motive for it. [171 Mass. 382]Fairbanks v. Snow, 145 Mass. 153, 154, 13 N.E. 596. Therefore it might be ratified by the plaintiff when she was free. But the acts relied on were done in connection with a member of the bar, who had been the defendant's lawyer before he undertook to act for the plaintiff, and who plainly appeared to be acting for the plaintiff only in the defendant's interest. We cannot say that the jury might not find that the later acts of the plaintiff, if not done under the active influence of her supposed original fear, at least were done before the plaintiff had gained an independent foothold, or realized her independence or her rights. We are of opinion that the case should have been left to the jury. Adams v. Bank, 116 N.Y. 606, 614, 615, 23 N.E. 7.

Verdict set aside. Case to stand for trial.

KNOWLTON, J. (dissenting).

The report shows no evidence which seems to me to warrant a finding for the plaintiff. It is not contended that she can prevail in this action on the ground that the parties agreed to compound a felony. The defendant had detected his trusted clerk in embezzling from him. He could not certainly know how long the embezzlement had been going on, or how much money had been taken; but very likely he thought that it had been for a long time, and that the amount was large. The clerk had been in his employment for six years, as chief salesman. It was proper that the defendant should obtain reimbursement if he could. On account of what her son said, the plaintiff visited the defendant at his home. She testified that she wanted him to have full security for all her son owed him, and for anything he had stolen, and that her son had agreed to give security for the $1,500 which he admitted that he had stolen. In all the defendant's dealings with the plaintiff there is not a suggestion that he made a threat, unless it be called a threat to say, when she proposed to give him a chamber set as security, “I do not think that will do. I will have to tell his father;” and to say again, once or twice before the interview ended, that he would tell her husband about the matter. Ordinarily, it would be right and proper for the defendant, if not his duty, to tell the young man's father what had happened.

[171 Mass. 383]In 2 Greenl.Ev. § 301, is this clause: “By duress, in its more extended sense, is meant that degree of severity, either threatened and impending or actually inflicted, which is sufficient to overcome the mind and will of a person of ordinary firmness. *** Duress per minas is restricted to fear of loss of life or mayhem or loss of limb; or, in other words, to remediless harm to the person. If, therefore, duress per minas is pleaded in bar to an action upon a debt, the plea must state a threat of death or mayhem or loss of limb. *** A fear of mere battery or of destruction of property is not technically duress, and, therefore, is not pleadable in bar.” Bishop, in his work on Contracts, at section 715, defines “duress” as “any physical force, applied or threatened to the person of the party, or of the party's husband, wife, parent, or child, through constraint of which he, in form, consents to what he otherwise would not.” While the law in regard to duress per minas in some of the late cases is less strict than that stated by Greenleaf, in none of them, so far as I am aware, is this ground of avoiding a contract changed in its general character, or in the principles on which it is founded. The distinction still remains between threats of grievous injury and legitimate arguments founded on disclosed intentions of the party using the argument as to his lawful conduct affecting the other party. The word “threat” implies intentional detriment. The fundamental reason for depriving one of the benefits of his contract in such cases is that he was guilty of a wrong in obtaining it, and that his wrong was injurious to the other party in inducing the making of it. No contract can be set aside on the ground of duress per minas without the concurrence of these conditions. It is not enough to set aside a contract that the maker of it yielded to motives founded on legitimate arguments, even though the inducements rested in part upon statements by the other party of what would be done if the contract should not be made. It must be shown that the will is overcome by an improper and wrongful influence, producing fear which he has not sufficient strength to withstand. If the other party to the contract is innocent, his defense cannot prevail. Fairbanks v. Snow, 145 Mass. 153, 13 N.E. 596. The cases in which it is held, in this jurisdiction and elsewhere, that one [171 Mass. 384]whose will is overcome, and who is induced to execute a contract by threats of prosecution and imprisonment for a crime, made by one who reasonably believes him to be guilty of the crime, may avoid the contract on the ground of duress, rest upon the principle that it is an abuse of process, and a misuse of the machinery of the law, which the law

[50 N.E. 558]

will not permit, to extort the collection of a private debt, or to procure any other private benefit by proceedings intended only to impose punishment in the interest of the public. It is equally a wrong and an injury to accomplish the same result through threats of such an abuse of process. Morse v. Woodworth, 155 Mass. 233-250,27 N.E. 1010, and 29 N.E. 525.

The burden of proof is on the plaintiff to show that the defendant obtained the contract by threatening to inflict injury upon her husband. A fair interpretation of the evidence indicates that the defendant's reference to her husband was in no sense a threat, but merely a natural statement, when the plaintiff offered inadequate security, that he should see whether the young man's father, who was an owner of houses and lands, was willing to furnish the security which his son had promised. If it was more than that, and was also a legitimate appeal to a motive which the plaintiff might have had to save her husband from the grief and sorrow that knowledge of the facts would be likely to bring to him, or to save herself from additional pain by sharing her husband's trouble, it would hardly be contended that the contracts would thereby be rendered voidable. A party endeavoring to obtain a contract from another may legitimately appeal to all proper motives which will induce the other to agree to his terms.

The only element in this case, as it seems to me, on which a doubt in regard to the proper decision of it can arise, is the testimony as to the condition of the plaintiff's husband. The plaintiff's testimony on this point was as follows: “He was suffering with a mental trouble, which made him very irritable. He suffered pain continually in the head, was melancholy, and unable to sleep. *** He was attending to his business at the time of the trouble with Webber. He had various estates about town, and was collecting rents and looking after his business every day.” There was testimony from other members of the plaintiff's family in regard to the husband's condition, but none more [171 Mass. 385]favorable to her than this. They all agreed that he was collecting his rents, taking charge of repairs, and attending to his business generally, at the time when the contracts were made. She testified that she believed that knowledge of the charges against her son would make her husband insane; but there is not a word of testimony to show that the defendant knew of this belief if she entertained it. She testified that she had previously talked with the defendant about her husband's condition; but this must mean that she spoke about his condition as it was, and not about her belief that this information would make him insane, which, so far as appears, was never disclosed until the trial. In connection with the making of the contracts, there was no conversation about her husband's condition except a reference to it when the plaintiff said, in answer to the defendant's statement that he should have to tell him: “Don't do that; you know what his condition is.”

It is a familiar rule of law that fraud or wrong of any kind is never to be presumed. It cannot be inferred from evidence which is as consistent with right as with wrong. I can see nothing in the evidence that tends to show that the defendant was guilty of any wrong towards the plaintiff. What he proposed could do no direct harm to the person or property of the plaintiff or of her husband. At most, there was merely a possibility or a probability of suffering and harm from reflection upon facts for whose existence the defendant was not responsible, and which the husband would be likely to learn at some time from others if the defendant did not tell him. But this probability, viewed from the defendant's knowledge and information, was no greater than would be expected in the case of any man who was irritable, melancholy, and unable to sleep from trouble in his head, yet whose ailments were not so severe as to prevent him from managing a somewhat extensive and important business. Reading the testimony without favor or prejudice, I do not see how an implication against the defendant of an improper purpose in saying to the plaintiff that he should have to tell her husband can be founded on anything more than conjecture. The presumptions are in favor of honesty and fair dealing, and the testimony is to be interpreted accordingly. Moreover, there is nothing to show a belief on the part of the [171 Mass. 386]defendant that the statement that he should tell her husband would overcome the plaintiff's will. Upon his understanding of the facts, such a suggestion would not be expected to overcome the will of a person of ordinary firmness; and there is no evidence that she was supposed by him to be, or that she was in fact, less firm than other women. Whether the rule so often stated in the books-that, to avoid a contract on the ground of duress by threats, a threat must be such as would overcome the will of a person of ordinary firmness-be of universal application or not, it undoubtedly furnishes a correct guide in cases in which there is nothing to show that the party who seeks to avoid the contract was not of ordinary courage and firmness. Upon an extended examination of the authorities, I have found no case in which a contract has been set aside on the ground of duress on such evidence as appears in this case. I think that the ruling of the superior court was correct.

FIELD, C.J., and LATHROP, J., concur in this dissent.

Alvin A. Simon and Joseph Sachter for appellant.

Herbert L. Ortner and Joel Salon for respondent.

Judges BURKE, SCILEPPI and GIBSON concur with Chief Judge FULD; Judge BERGAN dissents and votes to affirm in a separate opinion in which Judges BREITEL and JASEN concur.

Chief Judge FULD.

The defendant, Loral Corporation, seeks to recover payment for goods delivered under a contract which it had with plaintiff Austin Instrument, Inc., on the ground that the evidence establishes, as a matter of law, that it was forced to agree to an increase in price on the items in question under circumstances amounting to economic duress.

In July of 1965, Loral was awarded a $6,000,000 contract by the Navy for the production of radar sets. The contract contained a schedule of deliveries, a liquidated damages clause applying to late deliveries and a cancellation clause in case of default by Loral. The latter thereupon solicited bids for some 40 precision gear components needed to produce the radar sets, and awarded Austin a subcontract to supply 23 such parts. That party commenced delivery in early 1966.

In May, 1966, Loral was awarded a second Navy contract for the production of more radar sets and again went about soliciting bids. Austin bid on all 40 gear components but, on July 15, a representative from Loral informed Austin's president, Mr. Krauss, that his company would be awarded the subcontract only for those items on which it was low bidder. The Austin officer refused to accept an order for less than all 40 of the gear parts and on the next day he told Loral that Austin would cease deliveries of the parts due under the existing subcontract unless Loral consented to substantial increases in the prices provided for by that agreement — both retroactively for parts already delivered and prospectively on those not yet shipped — and placed with Austin the order for all 40 parts needed under Loral's second Navy contract. Shortly thereafter, Austin did, indeed, stop delivery. After contacting 10 manufacturers of precision gears and finding none who could produce the parts in time to meet its commitments to the Navy,^[1] Loral acceded to Austin's demands; in a letter dated July 22, Loral wrote to Austin that "We have feverishly surveyed other sources of supply and find that because of the prevailing military exigencies, were they to start from scratch as would have to be the case, they could not even remotely begin to deliver on time to meet the delivery requirements established by the Government. * * * Accordingly, we are left with no choice or alternative but to meet your conditions."

Loral thereupon consented to the price increases insisted upon by Austin under the first subcontract and the latter was awarded a second subcontract making it the supplier of all 40 gear parts for Loral's second contract with the Navy.^[2] Although Austin was granted until September to resume deliveries, Loral did, in fact, receive parts in August and was able to produce the radar sets in time to meet its commitments to the Navy on both contracts. After Austin's last delivery under the second subcontract in July, 1967, Loral notified it of its intention to seek recovery of the price increases.

On September 15, 1967, Austin instituted this action against Loral to recover an amount in excess of $17,750 which was still due on the second subcontract. On the same day, Loral commenced an action against Austin claiming damages of some $22,250 — the aggregate of the price increases under the first subcontract — on the ground of economic duress. The two actions were consolidated and, following a trial, Austin was awarded the sum it requested and Loral's complaint against Austin was dismissed on the ground that it was not shown that "it could not have obtained the items in question from other sources in time to meet its commitment to the Navy under the first contract." A closely divided Appellate Division affirmed (35 A D 2d 387). There was no material disagreement concerning the facts; as Justice STEUER stated in the course of his dissent below, "[t]he facts are virtually undisputed, nor is there any serious question of law. The difficulty lies in the application of the law to these facts." (35 A D 2d 392.)

The applicable law is clear and, indeed, is not disputed by the parties. A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat precluding the exercise of his free will. (See Allstate Med. Labs. v. Blaivas, 20 N Y 2d 654; Kazaras v. Manufacturers Trust Co., 4 N Y 2d 930; Adams v. Irving Nat. Bank, 116 N.Y. 606, 611; see, also, 13 Williston, Contracts [3d ed., 1970], § 1603, p. 658.) The existence of economic duress or business compulsion is demonstrated by proof that "immediate possession of needful goods is threatened" (Mercury Mach. Importing Corp. v. City of New York, 3 N Y 2d 418, 425) or, more particularly, in cases such as the one before us, by proof that one party to a contract has threatened to breach the agreement by withholding goods unless the other party agrees to some further demand. (See, e.g., du Pont de Nemours & Co. v. Hass Co., 303 N.Y. 785; Gallagher Switchboard Corp. v. Heckler Elec. Co., 36 Misc 2d 225; see, also, 13 Williston, Contracts [3d ed., 1970], § 1617, p. 705.) However, a mere threat by one party to breach the contract by not delivering the required items, though wrongful, does not in itself constitute economic duress. It must also appear that the threatened party could not obtain the goods from another source of supply^[3] and that the ordinary remedy of an action for breach of contract would not be adequate.^[4]

We find without any support in the record the conclusion reached by the courts below that Loral failed to establish that it was the victim of economic duress. On the contrary, the evidence makes out a classic case, as a matter of law, of such duress.^[5]

It is manifest that Austin's threat — to stop deliveries unless the prices were increased — deprived Loral of its free will. As bearing on this, Loral's relationship with the Government is most significant. As mentioned above, its contract called for staggered monthly deliveries of the radar sets, with clauses calling for liquidated damages and possible cancellation on default. Because of its production schedule, Loral was, in July, 1966, concerned with meeting its delivery requirements in September, October and November, and it was for the sets to be delivered in those months that the withheld gears were needed. Loral had to plan ahead, and the substantial liquidated damages for which it would be liable, plus the threat of default, were genuine possibilities. Moreover, Loral did a substantial portion of its business with the Government, and it feared that a failure to deliver as agreed upon would jeopardize its chances for future contracts. These genuine concerns do not merit the label "`self-imposed, undisclosed and subjective'" which the Appellate Division majority placed upon them. It was perfectly reasonable for Loral, or any other party similarly placed, to consider itself in an emergency, duress situation.

Austin, however, claims that the fact that Loral extended its time to resume deliveries until September negates its alleged dire need for the parts. A Loral official testified on this point that Austin's president told him he could deliver some parts in August and that the extension of deliveries was a formality. In any event, the parts necessary for production of the radar sets to be delivered in September were delivered to Loral on September 1, and the parts needed for the October schedule were delivered in late August and early September. Even so, Loral had to "work * * * around the clock" to meet its commitments. Considering that the best offer Loral received from the other vendors it contacted was commencement of delivery sometime in October, which, as the record shows, would have made it late in its deliveries to the Navy in both September and October, Loral's claim that it had no choice but to accede to Austin's demands is conclusively demonstrated.

We find unconvincing Austin's contention that Loral, in order to meet its burden, should have contacted the Government and asked for an extension of its delivery dates so as to enable it to purchase the parts from another vendor. Aside from the consideration that Loral was anxious to perform well in the Government's eyes, it could not be sure when it would obtain enough parts from a substitute vendor to meet its commitments. The only promise which it received from the companies it contacted was for commencement of deliveries, not full supply, and, with vendor delay common in this field, it would have been nearly impossible to know the length of the extension it should request. It must be remembered that Loral was producing a needed item of military hardware. Moreover, there is authority for Loral's position that nonperformance by a subcontractor is not an excuse for default in the main contract. (See, e.g., McBride & Wachtel, Government Contracts, § 35.10, [11].) In light of all this, Loral's claim should not be held insufficiently supported because it did not request an extension from the Government.

Loral, as indicated above, also had the burden of demonstrating that it could not obtain the parts elsewhere within a reasonable time, and there can be no doubt that it met this burden. The 10 manufacturers whom Loral contacted comprised its entire list of "approved vendors" for precision gears, and none was able to commence delivery soon enough.^[6] As Loral was producing a highly sophisticated item of military machinery requiring parts made to the strictest engineering standards, it would be unreasonable to hold that Loral should have gone to other vendors, with whom it was either unfamiliar or dissatisfied, to procure the needed parts. As Justice STEUER noted in his dissent, Loral "contacted all the manufacturers whom it believed capable of making these parts" (35 A D 2d, at p. 393), and this was all the law requires.

It is hardly necessary to add that Loral's normal legal remedy of accepting Austin's breach of the contract and then suing for damages would have been inadequate under the circumstances, as Loral would still have had to obtain the gears elsewhere with all the concomitant consequences mentioned above. In other words, Loral actually had no choice, when the prices were raised by Austin, except to take the gears at the "coerced" prices and then sue to get the excess back.

Austin's final argument is that Loral, even if it did enter into the contract under duress, lost any rights it had to a refund of money by waiting until July, 1967, long after the termination date of the contract, to disaffirm it. It is true that one who would recover moneys allegedly paid under duress must act promptly to make his claim known. (See Oregon Pacific R. R. Co. v. Forrest, 128 N.Y. 83, 93; Port Chester Elec. Constr. Corp. v. Hastings Terraces, 284 App. Div. 966, 967.) In this case, Loral delayed making its demand for a refund until three days after Austin's last delivery on the second subcontract. Loral's reason — for waiting until that time — is that it feared another stoppage of deliveries which would again put it in an untenable situation. Considering Austin's conduct in the past, this was perfectly reasonable, as the possibility of an application by Austin of further business compulsion still existed until all of the parts were delivered.

In sum, the record before us demonstrates that Loral agreed to the price increases in consequence of the economic duress employed by Austin. Accordingly, the matter should be remanded to the trial court for a computation of its damages.

The order appealed from should be modified, with costs, by reversing so much thereof as affirms the dismissal of defendant Loral Corporation's claim and, except as so modified, affirmed.

BERGAN, J. (dissenting).

Whether acts charged as constituting economic duress produce or do not produce the damaging effect attributed to them is normally a routine type of factual issue.

Here the fact question was resolved against Loral both by the Special Term and by the affirmance at the Appellate Division. It should not be open for different resolution here.

In summarizing the Special Term's decision and its own, the Appellate Division decided that "the conclusion that Loral acted deliberately and voluntarily, without being under immediate pressure of incurring severe business reverses, precludes a recovery on the theory of economic duress" (35 A D 2d 387, 391).

When the testimony of the witnesses who actually took part in the negotiations for the two disputing parties is examined, sharp conflicts of fact emerge. Under Austin's version the request for a renegotiation of the existing contract was based on Austin's contention that Loral had failed to carry out an understanding as to the items to be furnished under that contract and this was the source of dissatisfaction which led both to a revision of the existing agreement and to entering into a new one.

This is not necessarily and as a matter of law to be held economic duress. On this appeal it is needful to look at the facts resolved in favor of Austin most favorably to that party. Austin's version of events was that a threat was not made but rather a request to accommodate the closing of its plant for a customary vacation period in accordance with the general understanding of the parties.

Moreover, critical to the issue of economic duress was the availability of alternative suppliers to the purchaser Loral. The demonstration is replete in the direct testimony of Austin's witnesses and on cross-examination of Loral's principal and purchasing agent that the availability of practical alternatives was a highly controverted issue of fact. On that issue of fact the explicit findings made by the Special Referee were affirmed by the Appellate Division. Nor is the issue of fact made the less so by assertion that the facts are undisputed and that only the application of equally undisputed rules of law is involved.

Austin asserted and Loral admitted on cross-examination that there were many suppliers listed in a trade registry but that Loral chose to rely only on those who had in the past come to them for orders and with whom they were familiar. It was, therefore, at least a fair issue of fact whether under the circumstances such conduct was reasonable and made what might otherwise have been a commercially understandable renegotiation an exercise of duress.

The order should be affirmed.

Ordered accordingly.

[1] The best reply Loral received was from a vendor who stated he could commence deliveries sometime in October.

[2] Loral makes no claim in this action on the second subcontract.

[3] See, e.g., du Pont de Nemours & Co. v. Hass Co., 303 N.Y. 785, supra; Gallagher Switchboard Corp. v. Heckler Elec. Co., 36 Misc 2d 225, 226, supra; 30 East End v. World Steel Prods. Corp., 110 N. Y. S. 2d 754, 757.

[4] See, e.g., Kohn v. Kenton Assoc., 27 A D 2d 709; Colonie Constr. Corp. v. De Lollo, 25 A D 2d 464, 465; Halperin v. Wolosoff, 282 App. Div. 876; J. R. Constr. Corp. v. Berkely Apts., 259 App. Div. 830; Boss v. Hutchinson, 182 App. Div. 88, 92.

[5] The suggestion advanced that we are precluded from reaching this determination because the trial court's findings of fact have been affirmed by the Appellate Division ignores the question to be decided. That question, undoubtedly one of law (see Cohen and Karger, Powers of the New York Court of Appeals [1952], § 115, p. 492), is, accepting the facts found, did the courts below properly apply the law to them.

[6] Loral, as do many manufacturers, maintains a list of "approved vendors," that is, vendors whose products, facilities, techniques and performance have been inspected and found satisfactory.

45 Mich. 569

CHAS. H. HACKLEY AND JAS. MCGORDON
v.
JOHN HEADLEY.

[569] Logging contract—Scale—Expense of sealing—Usage—Duress.

Where a lumberman, in contracting with his jobber for getting out logs, agrees to divide the expense of scaling them and the scaler stipulates that the jobber shall board him, the cost of boarding him is an item of the expense to be divided, and the lumberman is liable for half of it and cannot show that it is the custom of jobbers to board their scalers at their own expense. But if the scaler does not stipulate for his board the lumberman is not liable, and the transaction is between the jobber and scaler alone.

A contract for getting out logs to be scaled "in accordance with the standard rules or scales in general use" on the stream, is governed by the scale in use at the time of scaling.

Duress exists where one is induced, by another's unlawful act, to make a contract or perform some act under circumstances which prevent his [570] exercising free will. It is either of the person or the goods of the party constrained.

Duress of the person is by imprisonment, threats or an exhibition of apparently irresistible force.

Duress of goods may exist when one is compelled to submit to an illegal exaction in order to obtain them from one who has them but refuses to surrender them unless the exaction is endured.

There is no duress where the act threatened is nothing which the party has not a legal right to perform.

Refusal, on demand, to pay a debt that is due, thereby forcing the creditor to receipt in full for only a partial payment, does not constitute duress if the debtor has done nothing unlawful to cause the financial embarassment which compelled him to submit to the extortion.

A receipt obtained by improper means and assuming to discharge any indebtedness not honestly in dispute between the parties and known by the debtor to be owing, is to that extent without consideration and ineffectual.

Error to Kent. Submitted Jan. 26. Decided April 13.

ASSUMPSIT. Defendant brings error. Reversed.

Smith, Nims, Hoyt & Erwin for plaintiffs in error.

Duress is that degree of constraint that is sufficient to overcome the mind and will of a person of ordinary firmness: Brown v. Pierce 7 Wal. 214; as a defense it must be made in good faith and seasonably: Lyon v. Waldo 36 Mich. 356, DeArmand v. Phillips Wal. Ch. 199; a payment is not compulsory unless made to emancipate the person or property from an actual and existing duress imposed upon it by the party to whom it is made: Radich v. Hutchins 95 U. S. 213; it is not ordinarily duress to refuse to pay without litigation: Mayhew v. Phoenix Ins. Co. 23 Mich. 105.

John C. FitzGerald for defendant in error. Procuring a settlement of a debt by taking advantage of the creditor's financial embarassments is duress of goods; Moses v. Macferlan 2 Burr. 1005; Irving v. Wilson 4 D. & E. 485; there is no consideration for a receipt obtained by taking such advantage, to the extent to which it releases the debt: Ryan [571] v. Ward 48 N. Y. 206; Harrison v. Close 2 Johns. 448; Seymour v. Minturn 17 Johns. 170; Mech. Bank v. Hazard 9 Johns. 393; Hendrickson v. Beers 6 Bosw. 639; contracts must be carried into effect according to the intention of the parties at the time of making them: Heald v. Cooper 8 Me. 32; a logging contract providing for scaling by the rule in general use means in use at the time: Williams v. Gilman 3 Me. 276; Homer v. Dorr 10 Mass. 26; Robinson v. Fiske 25 Me. 405; Dawson v. Kittle 4 Hill 108; Thomas v. Wiggers 41 Ill. 470; Karmuller v. Krotz 18 Ia. 352; Rindskoff v. Barrett 14 Ia. 101; 1 Chitty Cont. 135, n 3.

COOLEY, J. Headley sued Hackley & McGordon to recover compensation for cutting, hauling and delivering in the Muskegon river a quantity of logs. The performance of the labor was not disputed, but the parties were not agreed as to the construction of the contract in some important particulars, and the amount to which Headley was entitled depended largely upon the determination of these differences. The defendants also claimed to have had a full and complete settlement with Headley, and produced his receipt in evidence thereof. Headley admitted the receipt, but insisted that it was given by him under duress, and the verdict which he obtained in the circuit court was in accordance with this claim.

I.

The questions in dispute respecting the construction of the contract concerned the scaling of the logs. The contract was in writing, and bore date August 20, 1874. Headley agreed thereby to cut on specified lands and deliver in the main Muskegon river the next spring 8,000,000 feet of logs. The logs were to be measured or scaled by a competent person to be selected by Headley & McGordon, "and in accordance with the standard rules or scales in general use on Muskegon lake and river," and the expense of scaling was to be mutually borne by the parties.

The dispute respecting the expense of scaling related only to the board of the scaler. Headley boarded him and claimed to recover one-half what it was worth. Defendants offered [572] evidence that it was customary on the Muskegon river for jobbers to board the scalers, at their own expense, but we are of opinion that this was inadmissible. If under the contract with the scaler he was to be furnished his board, then the cost of the board was a part of the expense of scaling, and by the express terms of the contract was to be shared by the parties. If that was not the agreement with him, Headley could only look to the scaler himself for his pay.

This is a small matter; but the question what scale was to be the standard is one of considerable importance. The evidence tended to show that at the time the contract was entered into, scaling upon the river and lake was in accordance with the "Scribner rule," so-called; but that the "Doyle rule" was in general use when the logs were cut and delivered, and Hackley & McGordon had the logs scaled by that. By the new rule the quantity would be so much less than by the one in prior use that the amount Headley would be entitled to receive would be less by some $2000; and it was earnestly contended on behalf of Headley that the scale intended, as the one in general use, was the one in general use when the contract was entered into.

We are of opinion, however, that this is not the proper construction. The contract was for the performance of labor in the future, and as the scaling was to be done by third persons, and presumptively by those who were trained to the business, it would be expected they would perform their duties under such rules and according to such standards as were generally accepted at the time their services were called for. Indeed such contracts might contemplate performance at times when it would scarcely be expected that scalers would be familiar with scales in use when they were made. It is true the time that was to elapse between the making of this contract and its performance would be but short, but if it had been many years the question of construction would have been the same; and if we could not suppose under such circumstances that the parties contemplated the scalers should govern their measurements by obsolete and perhaps now unknown rules, neither can we here. It is fair to infer that [573] the existing scale was well known to the parties, and that if they intended to be governed by it at a time when it might have ceased to be used, they would have said so in explicit terms. In the absence of an agreement to that effect, we must suppose they intended their logs to be scaled as the logs of others would be at the place and time of scaling.

II.

The question of duress on the part of Hackley & McGordon, in obtaining the discharge, remains. The paper reads as follows:

                                                                                                                 "MUSKEGON, MICH., August 3, 1875.

Received from Hackley & McGordon their note for four thousand dollars, payable in thirty days, at First National Bank, Grand Rapids, which is in full for all claims of every kind and nature which I have against said Hackley & McGordon.

Witness: THOMAS HUME.                                                                                 JOHN HEADLEY."

Headley's account of the circumstances under which this receipt was given is in substance as follows: On August 3, 1875, he went to Muskegon, the place of business of Hackley & McGordon, from his home in Kent county, for the purpose of collecting the balance which he claimed was due him under the contract. The amount he claimed was upwards of $6200, estimating the logs by the Scribner scale. He had an interview with Hackley in the morning, who insisted that the estimate should be according to the Doyle scale, and who also claimed that he had made payments to others amounting to some $1400 which Headley should allow. Headley did not admit these payments, and denied his liability for them if they had been made. Hackley told Headley to come in again in the afternoon, and when he did so Hackley said to him: "My figures show there is 4260 and odd dollars in round numbers your due, and I will just give you $4000. I will give you our note for $4000." To this Headley replied: "I cannot take that; it is not right, and you know it. There is over $2000 besides that belongs to me, and you know it." Hackley replied: "That is the best I will do with you." Headley said: "I cannot take that, Mr. Hackley," and Hackley replied, "You do the next best thing you are a mind to. [574] You can sue me if you please." Headley then said: "I cannot afford to sue you, because I have got to have the money, and I cannot wait for it. If I fail to get the money to-day, I shall probably be ruined financially, because I have made no other arrangement to get the money only on this particular matter." Finally he took the note and gave the receipt, because at the time he could do nothing better, and in the belief that he would be financially ruined unless he had immediately the money that was offered him, or paper by means of which the money might be obtained.

If this statement is correct, the defendants not only took a most unjust advantage of Headley, but they obtained a receipt which, to the extent that it assumed to discharge anything not honestly in dispute between the parties, and known by them to be owing to Headley beyond the sum received, was without consideration and ineffectual. But was it a receipt obtained by duress? That is the question which the record presents. The circuit judge was of opinion that if the jury believed the statement of Headley they would be justified in finding that duress existed; basing his opinion largely upon the opinion of this Court in Vyne v. Glenn 41 Mich. 112.

Duress exists when one by the unlawful act of another is induced to make a contract or perform some act under circumstances which deprive him of the exercise of free will. It is commonly said to be of either the person or the goods of the party. Duress of the person is either by imprisonment, or by threats, or by an exhibition of force which apparently cannot be resisted. It is not pretended that duress of the person existed in this case; it is if anything duress of goods, or at least of that nature, and properly enough classed with duress of goods. Duress of goods may exist when one is compelled to submit to an illegal exaction in order to obtain them from one who has them in possession but refuses to surrender them unless the exaction is submitted to.

The leading case involving duress of goods is Astley v. Reynolds 2 Strange, 915. The plaintiff had pledged goods for £20, and when he offered to redeem them, the pawnbroker [575] refused to surrender them unless he was paid £10 for interest. The plaintiff submitted to the exaction, but was held entitled to recover back all that had been unlawfully demanded and taken. This, say the court,

"is a payment by compulsion: the plaintiff might have such an immediate want of his goods that an action of trover would not do his business: where the rule volenti non fit injuria is applied, it must be when the party had his freedom of exercising his will, which this man had not: we must take it he paid the money relying on his legal remedy to get it back again."

The principle of this case was approved in Smith v. Bromley Doug. 696, and also in Ashmole v. Wainwright 2 Q. B. 837. The latter was a suit to recover back excessive charges paid to common carriers who refused until payment was made to deliver the goods for the carriage of which the charges were made. There has never been any doubt but recovery could be had under such circumstances. Harmony v. Bingham 12 N. Y. 99. The case is like it of one having securities in his hands which he refuses to surrender until illegal commissions are paid. Scholey v. Mumford 60 N. Y. 498. So if illegal tolls are demanded, for passing a raft of lumber, and the owner pays them to liberate his raft, he may recover back what he pays. Chase v. Dwinal 7 Me. 134. Other cases in support of the same principle are Sham v. Woodcock 7 B. & C. 73; Nelson v. Suddarth 1 H. & Munf. 350; White v. Heylman 34 Penn. St. 142; Sasportas v. Jennings 1 Bay, 470; Collins v. Westbury 2 Bay 211; Crawford v. Cato 22 Ga. 594. So one may recover back money which he pays to release his goods from an attachment which is sued out with knowledge on the part of the plaintiff that he has no cause of action. Chandler v. Sanger 114 Mass. 364. See Spaids v. Barrett 57 Ill. 289. Nor is the principle confined to payments made to recover goods: it applies equally well when money is extorted as a condition to the exercise by the party of any other legal right; for example when a corporation refuses to suffer a lawful transfer of stock till the exaction is submitted to: Bates v. Insurance Co. 3 Johns. Cas. 238; or [576] a creditor witholds his certificate from a bankrupt. Smith v. Bromley Doug. 696. And the mere threat to employ colorable legal authority to compel payment of an unfounded claim is such duress as will support an action to recover back what is paid under it. Beckwith v. Frisbie 32 Vt. 559; Adams v. Reeves 68 N. C. 134; Briggs v. Lewiston 29 Me. 472; Grim v. School District 57 Penn. St. 433; First Nat. Bank v. Watkins 21 Mich. 483.

But where the party threatens nothing which he has not a legal right to perform, there is no duress. Skeate v. Beale 11 Ad. & El. 983; Preston v. Boston 12 Pick. 14. When therefore a judgment creditor threatens to levy his execution on the debtor's goods, and under fear of the levy the debtor executes and delivers a note for the amount, with sureties, the note cannot be avoided for duress. Wilcox v. Howland 23 Pick. 167. Many other cases might be cited, but it is wholly unnecessary. We have examined all to which our attention has been directed, and none are more favorable to the plaintiff's case than those above referred to. Some of them are much less so; notably Atlee v. Backhouse 3 M. & W. 633; Hall v. Schultz 4 Johns. 240; Silliman v. United States 101 U.S. 465.

In what did the alleged duress consist in the present case? Merely in this: that the debtors refused to pay on demand a debt already due, though the plaintiff was in great need of the money and might be financially ruined in case he failed to obtain it. It is not pretended that Hackley & McGordon had done anything to bring Headley to the condition which made this money so important to him at this very time, or that they were in any manner responsible for his pecuniary embarrassment except as they failed to pay this demand. The duress, then, is to be found exclusively in their failure to meet promptly their pecuniary obligation. But this, according to the plaintiffs claim, would have constituted no duress whatever if he had not happened to be in pecuniary straits; and the validity of negotiations, according to this claim, must be determined, not by the defendants' conduct, [577] but by the plaintiff's necessities. The same contract which would be valid if made with a man easy in his circumstances, becomes invalid when the contracting party is pressed with the necessity of immediately meeting his bank paper. But this would be a most dangerous, as well as a most unequal doctrine; and if accepted, no one could well know when he would be safe in dealing on the ordinary terms of negotiation with a party who professed to be in great need.

The case of Vyne v. Glenn 41 Mich. 112, differs essentially from this. There was not a simple withholding of moneys in that case. The decision was made upon facts found by referees who reported that the settlement upon which the defendant relied was made at Chicago, which was a long distance from plaintiff's home and place of business; that the defendant forced the plaintiff into the settlement against his will, by taking advantage of his pecuniary necessities, by informing plaintiff that he had taken steps to stop the payment of money due to the plaintiff from other parties, and that he had stopped the payment of a part of such moneys; that defendant knew the necessities and financial embarrassments in which the plaintiff was involved, and knew that if he failed to get the money so due to him he would be ruined financially; that plaintiff consented to such settlement only in order to get the money due to him, as aforesaid, and the payment of which was stopped by defendant, and which he must have to save him from financial ruin. The report, therefore, showed the same financial embarrassment and the same great need of money which is claimed existed in this case, and the same withholding of moneys lawfully due, but it showed over and above all that an unlawful interference by defendant between the plaintiff and other debtors, by means of which he had stopped the payment to plaintiff of sums due to him from such other debtors. It was this keeping of other moneys from the plaintiff's hands, and not the refusal by defendant to pay his own debt, which was the ruling fact in that case, and which was equivalent, in our opinion, to duress of goods.

[578] These views render a reversal of the judgment necessary, and the case will be remanded for a new trial with costs to the plaintiffs in error.

The other Justices concurred.

230 Minn. 246 (1950)

SPIESS v. BRANDT

Supreme Court of Minnesota.

February 17, 1950.

Fryberger, Fulton & Boyle and Doherty, Rumble, Butler & Mitchell, for appellants.

James J. Courtney & Son, for respondents.

MATSON, JUSTICE.

Defendants appeal from an order denying a new trial in an action for the rescission, because of fraudulent representations, of a contract for the purchase of defendants' summer resort.

Defendants, father and son, in 1940 acquired Jameson's Wilderness Resort located 18 miles north of Hovland, Minnesota, on Lake McFarland. They continued to own and operate the resort until it was sold to plaintiffs by contract for deed December 17, 1947, for $95,000, with a down payment of $10,000 and with the principal balance of $85,000 payable as follows: $20,000 on or before February 15, 1948; $15,000 on or before April 15, 1948; $2,500 on or before July 15, 1948; $2,500 on or before October 1, 1948, and $2,500 on or before July 15 and October 1 of each year thereafter until paid in full. The contract provided that all sums paid prior to a default should be retained by the vendors as liquidated damages. Plaintiffs made the down payment of $10,000 and the $20,000 due February 15, 1948, but thereafter found themselves unable to pay the April 15 installment, with the exception of $6,000, which was not paid until May 28, 1948. The court found — and this finding is sustained by the evidence — that the $6,000 was paid after defendants had agreed that they would not then foreclose but would give plaintiffs a reasonable time to raise additional funds through the sale of an equity in a home owned by one of the plaintiffs. Ten days later, on June 7, 1948, defendants served on plaintiffs a notice of cancellation of the contract. Shortly thereafter plaintiffs, who had not at any time theretofore been represented by counsel, consulted an attorney at law. About June 19, 1948, plaintiffs brought an action to rescind the contract on the ground of fraud and misrepresentation and to restrain defendants pendente lite from further cancellation proceedings. In open court, plaintiffs made a tender of a deed and other instruments necessary for a retransfer of the real and personal property, which tender was refused by defendants.

In addition to a finding that defendants had fraudulently concealed the fact that they had lost money each year, the trial court specifically found that during the negotiations and talks had between the parties prior to entering into the contract for deed defendants represented to plaintiffs:

(1) That defendants were making good money out of the resort;

(2) That plaintiffs could make good money out of it; and

(3) That plaintiffs could make all future payments on the contract out of the profits.

There are further findings that said representations:

(1) Were known by defendants to be untrue when they were made;

(2) Were made by defendants for the purpose of deceiving and inducing plaintiffs to enter into the contract for the purchase of the property at a price clearly in excess of its real value;

(3) Were relied upon by plaintiffs; and

(4) Were material and were an inducing factor causing plaintiffs to enter into the contract.

The trial court also found that defendants at all times knew that plaintiffs were young and inexperienced; that they had no property; that they wished to acquire this property as a means of livelihood; and that, in order to make future payments on the contract, they would have to make them out of the profits from the resort business. Pursuant to its findings, the court ordered judgment for rescission of the contract and for a return to plaintiffs of the $36,000 which they had paid, with interest. Defendants then moved for amended findings or a new trial, and, upon denial thereof, we have this appeal.

1-2. We need consider only the first representation, namely, that defendants represented to plaintiffs that they were making good money out of the resort business. If the court's finding thereon is supported by the evidence, its order denying a new trial must be sustained, and it will be wholly unnecessary to consider the validity or factual basis of the other two representations or of the finding that defendants, when there was a duty to disclose, fraudulently concealed the material fact that they had lost money each year. It is well established that:

"A person is liable for fraud if he makes a false representation of a past or existing material fact susceptible of knowledge, knowing it to be false, or as of his own knowledge without knowing whether it is true or false, with intention to induce the person to whom it is made to act in reliance upon it, or under such circumstances that such person is justified in acting in reliance upon it, and such person is thereby deceived and induced to act in reliance upon it, to his pecuniary damage." 3 Dunnell, Dig. § 3818. See, Gaetke v. Ebarr Co. Inc. 195 Minn. 393, 263 N.W. 448.

A false representation as to past or present income and profits is a false representation of a past or existing material fact within the meaning of the above rule. This is particularly true where he who makes the representations knows them to be false.^[2]

There is ample evidence — although it is conflicting — to sustain the findings that defendants did misrepresent the past income and profits of the resort. We have testimony, which the court could accept as true, that plaintiff Lowell Spiess, when a price of $100,000 was asked, specifically inquired of one of the defendants how long it would take to pay off that amount out of resort profits, and he was told that it could be paid off in five operating seasons. This answer obviously involved something more than a prediction of possible future earnings, in that it would have relation to defendants' past earning experience. Reasonably, there could be no basis for the answer other than that of defendants' past experience. This is corroborated by more specific testimony when Lowell, in response to his direct inquiry, was told that defendants in 1946 "took in" $25,400 with expenses of $6,000. This would indicate net earnings of $19,400 for 1946, which on a five-year basis would practically amount to the asking price of $100,000. One of the defendants admitted that he had stated that the gross income for 1947 was around $19,000. The undisputed facts are that defendants had lost money every year of their operation, inclusive of the years 1946 and 1947, which were generally conceded to have been the most prosperous years in the history of Minnesota's resort business. Defendants also told Lowell Spiess that they were making "good money," and the making of "good money" does not in any man's language — when addressed to persons seriously considering the purchase of a business — square with an undisputed record of substantial loss year after year. We are not here dealing with the mere puff talk of an enthusiastic salesman, but with a statement of facts by one who is possessed of the facts to one to whom the facts are not readily available.^[3]

3-4-5. Defendants' representations of making "good money" and of having taken in $25,400 in 1946 with expenses of $6,000 were made without qualification and were made as of the defendants' own knowledge. An unqualified affirmation amounts to an affirmation as of one's own knowledge. Schlechter v. Felton, 134 Minn. 143, 158 N.W. 813, L.R.A. 1917A, 556. Whether the representations were made innocently or knowingly, they would equally operate as a fraud upon plaintiffs when made unqualifiedly or as of defendants' own knowledge. A bad motive is not an essential element of fraud.^[4] In the instant case, aside from the unqualified representation by defendants of their own knowledge, we have the significant circumstances that on several occasions plaintiffs expressed a desire to see the books — although this is denied by defendants — and that they always received a reply that the books were being worked on and were not then available. In fact, the books were not made available until they were brought into court. The persistent withholding by vendors of the books of business operations, after the making of direct representations of expenses and profits to prospective purchasers who have expressed a desire to see the books, justifies an inference by the trier of fact that such vendors at all times knew their representations were false and that they were made with intent to conceal the truth.

6-7. The rule that "The recipient in a business transaction of a fraudulent misrepresentation is not justified in relying upon its truth if its falsity is obvious" (Restatement, Torts, § 541; 3 Dunnell, Dig. & Supp. § 3822) has no application here. The facts as to past profits were not obvious. In fact, it is the well-established rule that in a business transaction the recipient of a fraudulent misrepresentation of a material fact is justified in relying upon its truth, although he might have ascertained its falsity had he made an investigation. Restatement, Torts, § 540; 3 Dunnell, Dig. & Supp. § 3822. In the case at bar, we have the additional factors that defendants thwarted the efforts of plaintiffs to investigate, in that they withheld the books which were the only practical source of information for determining whether the resort had made money. Plaintiffs' attempt to make an investigation, and their subsequent conduct in proceeding with the transaction without having made it, was not a waiver of the right to rely upon defendants' representations. Schmeisser v. Albinson, 119 Minn. 428, 138 N.W. 775; 3 Dunnell, Dig. & Supp. § 3821; see, Restatement, Torts, § 547(2).

8-9. Not only did plaintiffs have the right to rely upon the truth of defendants' representations, but they did so in fact. It was both natural and reasonable for them to do so. At the time of the transaction, plaintiffs, Lowell and Maurice, who were brothers, were of the respective ages of 21 and 26 years, and they had not had any experience in operating resorts, either large or small. Lowell, the young brother, had operated a motion picture theater under the friendly tutelage of his father. Plaintiffs' visits to the resort, with some insignificant exceptions, were primarily recreational and did not give them a knowledge of the business. Defendants, on the other hand, were mature men of considerable experience in the resort as well as other business. Although the element of disparity in business experience is not of itself a sufficient ground for relief, nevertheless, the law does not ignore such disparity, especially where, as here, the inexperience of youth is coupled with an added factor of special trust and confidence growing out of a reasonable assumption by plaintiffs that a genuine and close friendship existed between them and defendants. See, Gable v. Niles Holding Co. 209 Minn. 445, 296 N.W. 525. On various occasions when plaintiffs visited the resort to enjoy the out of doors, defendants had exhibited many manifestations of friendship. In youth, every manifestation of friendship seems genuine and deserving of special trust and confidence. Disparity may under some circumstance be a factor of considerable importance when we keep in mind that the question is not whether the representation would deceive the average man. In rescission actions for fraud, the question is whether the representations were of such a character and were made under such circumstances that they were reasonably calculated to deceive, not the average man, but a person of the capacity and experience of the particular individual who was the recipient of the representations. Kempf v. Ranger, 132 Minn. 64, 155 N.W. 1059. We have the further circumstance that defendants, by their long and personal operation of the resort, together with their exclusive possession of the books, were possessed of all the facts. We need not labor the point of plaintiffs' reasonable reliance on the representations made, because where representations are made by a party who is presumed to know their truth, reliance thereon will be presumed. Anderson v. Donahue, 116 Minn. 380, 133 N.W. 975; 3 Dunnell, Dig. & Supp. § 3821. We have repeatedly held that one who deceives another to his prejudice ought not to be heard to say in defense that the other party was negligent in taking him at his word. Gaetke v. Ebarr Co. Inc. 195 Minn. 393, 263 N.W. 448; Kempf v. Ranger, supra; 3 Dunnell, Dig. & Supp. § 3822.

The materiality of defendants' representations is so obvious from what has already been said that no discussion thereof is needed.

There was no unreasonable delay after the discovery of the fraud before commencing an action for rescission. Plaintiffs, who had been denied access to the books, were not in a position to learn the facts until they had a reasonable opportunity to observe the resort under operative conditions. They had no opportunity to commence operations until the spring of 1948. The evidence fully justifies a finding that plaintiffs discovered the fraudulent representations within a reasonable time after they had the opportunity to do so. We attach no significance to the fact that the action for rescission was not commenced until shortly after defendants — contrary to their agreement with plaintiffs, as found by the trial court — commenced cancellation proceedings. No doubt the unwarranted cancellation properly made them more vigilant in discovering the true nature of the transaction.

10. Defendants contend that the trial court's decision does not conform to either the pleadings or the proof, in that it is based primarily on the finding that defendants, in violation of a duty to disclose, had fraudulently concealed that they had regularly lost money. It is unnecessary to consider this contention, in that the trial court's decision is sustained upon a different and wholly independent finding, namely, that defendants fraudulently represented to plaintiffs that they were making "good money." Where a trial court has made two or more independent findings of fact, and one of these findings of fact — the making of which has manifestly not been influenced or controlled by an error of law^[5] — is wholly sufficient of and by itself to sustain the trial court's decision, no consideration need be given to the other findings, and any error with respect to them is immaterial. Where a decision is correct, it need not be sustained for the same reason or for all the reasons relied upon by the trial court. Iowa Guarantee Mtg. Corp. v. Kingery, 181 Minn. 477, 233 N.W. 18; 1 Dunnell, Dig. & Supp. § 421; 3 Am. Jur., Appeal and Error, § 1008.

Much ado has been made about the finding that plaintiffs lost money on their operations of the resort in 1948. Although the evidence reasonably sustains the finding, it is of no material consequence, for two reasons. In the first place, we are not concerned in an action for rescission with a question of damages. Kirby v. Dean, 159 Minn. 451, 199 N.W. 174; Gaetke v. Ebarr Co. Inc. 195 Minn. 393, 263 N.W. 448. In the second place, if the particular finding was used for any purpose other than that of throwing some light upon the rental value of the premises, as indicated by the subject of the paragraph in which it is embodied in the findings, such other purpose obviously must have been limited to the function of corroborating the finding that defendants fraudulently represented that plaintiffs could make good money. Whether evidence of plaintiffs' failure to make money in 1948 should have been considered for such other purpose need not be determined, because, as already indicated, the trial court's decision is sustained solely on the ground that defendants fraudulently represented that they had made "good money," and not on the representation that plaintiffs could make good money. If it was error, it was error without prejudice.

11. Defendants assert that the trial court's finding that the improvements made to the resort premises by plaintiffs offset its rental value during the period of their occupancy is arbitrary and without support in the evidence. They alleged that the court failed to find the resort's fair rental value and that no proof was offered on the issue. Apparently defendants overlook the fact that, insofar as the defrauding parties are allowed any rental for the use of the premises in rescission for fraud proceedings, such allowance is made not by reason of any legal right, but purely as an equitable obligation of the parties each to the other to restore the status quo ante by each receiving substantially the property with which he parted without enjoying any unjust enrichment by retention of that of the other. It is simply a rule for meting out substantial justice, so that one may not enjoy unconscionable enrichment at the expense of another.^[6] As a measure for substantially restoring the parties to the status quo ante, we find no abuse of discretion in the determination that plaintiffs' improvements offset the rental value. Testimony was freely admitted showing that the premises were in a run-down condition when plaintiffs took possession and that approximately $2,000 was justifiably expended by plaintiffs for reasonably necessary improvements. On the other side of the evidentiary ledger, we have ample support for a finding that the rental value during plaintiffs' occupancy did not exceed the value of plaintiffs' improvements. In finding rental value, the court could reasonably take into consideration the significant evidence that the resort property had for seven years — even during the most prosperous years of Minnesota's resort history — yielded only a loss under defendants' experienced management. The court could also consider plaintiffs' testimony with respect to the 1948 operations. Plaintiffs, after justifiably paying themselves a reasonable salary (Clark v. Wells, 127 Minn. 353, 149 N.W. 547,L.R.A. 1916F, 476), sustained a loss. For comparative purposes, the court also had the benefit of testimony by other resort operators in the area, who described their operations and physical plants. If we keep in mind that the only purpose for ascertaining the resort's rental value was simply to mete out substantial justice, so that plaintiffs might not enjoy unconscionable enrichment at the expense of defendants, and if we further keep in mind that the resort under the status quo ante operations had regularly yielded defendants a substantial loss year after year, the court could reasonably find that upon the evidence as a whole its rental value did not exceed the value of plaintiffs' improvements. There can be no doubt, insofar as defendants are concerned, that they received thereby their full measure of equity, without any unjust enrichment of plaintiffs.

12. The evidence has been conflicting, but it is clear, in the light of the evidence as a whole, that the findings are sustained by a fair preponderance of the evidence. The rule requiring clear and convincing evidence to justify a rescission of a contract for fraud is merely a rule of caution against setting aside written instruments upon weak and inconclusive evidence. A fair preponderance of the evidence is sufficient. McCarty v. New York L. Ins. Co. 74 Minn. 530, 77 N.W. 426; 1 Dunnell, Dig. & Supp. § 1202.

The order of the trial court is affirmed.

Affirmed.

PETERSON, JUSTICE (dissenting).

While I concur in the views of the majority as to the rules of law stated in their opinion, I dissent upon the ground that, in any reasonable view of the facts, plaintiffs failed to prove a case of fraud.

The evidence conclusively shows that it became known that defendants were willing to sell the property in question for about $100,000. Plaintiffs were familiar with the property. They started negotiations to purchase it. Before defendants made any representations concerning the property, and consequently when plaintiffs were uninfluenced by any such representations, they made an offer to purchase for $90,000. After some negotiations, the parties agreed on $95,000 as the purchase price. The increase in the purchase price as a consequence of the negotiations was a little less than six percent of plaintiffs' offer before any representations had been made. A sale price increased, as a consequence of negotiations, such a slight amount above the buyers' offer, uninfluenced by any representations, cannot be said to be the result of fraud. As a practical proposition, the sale here was at plaintiffs' own price.

A painstaking reading of the record produces the conviction that the trial judge was influenced to find fraud because plaintiffs were young and inexperienced. Neither is a ground for finding fraud. While it is true that they were young, they were not inexperienced. As a consequence of experience, they had acquired unusual business acumen.

THOMAS GALLAGHER, JUSTICE (dissenting).

1. I concur in the dissent. The property was sold to plaintiffs for $95,000. There was substantial testimony, not seriously in dispute, that the reasonable value of the property was in excess of $100,000. In addition to the expert testimony on values submitted by the parties, the trial court, on its own initiative, called three neutral expert witnesses, owners and operators of similar resorts in the same general area, who were familiar with the property involved, to give their opinion as to its value. Their testimony thoroughly substantiated the opinions of defendants' experts as to value, and it clearly indicated that the property, if operated efficiently, was capable of producing a good net income. Under such circumstances, it would seem that there was no substantial evidence to sustain the trial court's finding that the property had been sold for more than its worth.

2. The evidence submitted in support of plaintiffs' allegations as to misrepresentation relative to earnings would hardly seem to sustain a finding of fraud. The statements claimed to have been made by defendants relative thereto to future prospects. Most of them were made prior to the time when either plaintiffs or defendants contemplated a sale of the property. The most that can be drawn therefrom was that defendants had at times stated that they were "making good money" or that they had a "darn good business."

Prior to the letter of September 26, 1947, in which plaintiff Maurice Spiess offered to purchase the property for $90,000 (some $5,000 less than the price finally agreed upon), he had had but one conversation with defendant William Brandt and no conversations whatever with defendant John Carlos Brandt. His talk with William Brandt was immediately after he and plaintiff Lowell Spiess had talked over the matter of a purchase. Nothing was said at that time by either of the Brandts as to earnings of the resort for the year 1946. The conversation reflected only the expectations of William Brandt as to future prospects, in the light of full resumption of auto transportation after the war.

3. A written instrument executed with due formality and known to be executed for the purpose of embodying the agreements of the parties should not be set aside on the ground of fraud unless the proof is clear and strong. First Nat. Bank v. Schroeder, 175 Minn. 341, 221 N.W. 62; 3 Dunnell, Dig. & Supp. § 3839. Opinions expressed as to future prospects of a particular business cannot be used as a basis for fraud. Eurich v. Bartlett, 151 Minn. 86, 186 N.W. 138. Representations made after a decision to purchase cannot be regarded as inducements toward making the purchase agreement, since there could have been no reliance thereon. Nilsen v. Farmers State Bank, 178 Minn. 574, 228 N.W. 152; Rien v. Cooper, 211 Minn. 517, 1 N.W. (2d) 847.

4. With reference to the claim now made that defendants suppressed or withheld facts relating to their past experiences in the operation of the property, it may be said that this ground was never alleged by plaintiffs as a basis for recovery. Plaintiffs did request defendants' books covering past operations. These were not supplied, and at this point there was nothing to prevent plaintiffs from refusing to proceed with the transaction.

5. The court placed much reliance on the ages of plaintiffs, their lack of experience, and the fact that they had not operated properties of this type. John Carlos Brandt, one of the defendants, at the time he purchased the resort was not much older than plaintiff Lowell Spiess when he originally purchased it. Both plaintiffs had had experience in the operation of other properties. Lowell owned an interest in and operated a theater, while Maurice owned real estate in Newport. Both of such properties were to be sold by plaintiffs so that the proceeds might be used as part of the purchase price herein. Their parents and older brother were interested in this transaction and counseled and advised them in connection therewith. The parties were at all times dealing at arm's length.

6. It is asserted that defendants sustained a loss during prior years. This may be largely explained by the extensive capital expenditures made by them in improving the resort. For example, in 1947, $14,231 was put back into the properties in improvements. This, in itself, would indicate that defendants were making "good money" in the business. Many of such improvements were not of a recurrent nature and could be depreciated over a number of years.

7. No allowance was made for the use and rental value of the property during plaintiffs' possession thereof. During 1948, they not only had their living provided, but they were also able to acquire an automobile, an airplane, and at least $1,630.54 in cash from their operation of the resort. The trial court found that the improvements made by them offset the rental value of the property. No finding was made as to fair rental value. The improvements consisted of repairs to motors, patching boats, and completing an apartment and kitchen. Plaintiffs actually received during the year 1948 $19,661.56 in their operation of the property. A gross income of this amount, with any kind of careful management, would yield a profit, and clearly establishes that the premises had a substantial rental value during the period of plaintiffs' occupancy thereof.

8. I cannot subscribe to the theory that this contract, made pursuant to an offer freely given, should be set aside on any of the grounds above outlined. If it may be thus rescinded, I fear that few contracts will withstand the onslaught of another business depression or the disappointment following an optimistic but inefficient purchaser's unsuccessful operation of property purchased.

[1] Reported in 41 N.W. (2d) 561.

[2] Forman v. Hamilburg, 300 Mass. 138, 14 N.E. (2d) 137; Powers v. Rittenberg, 270 Mass. 221, 169 N.E. 913; Stumpf v. Lawrence, 4 Cal. App. (2d) 373, 40 P. (2d) 920; Miller v. Frederick, 171 Wash. 452, 18 P. (2d) 40; J.C. Corbin Co. v. Preston, 109 Or. 230, 218 P. 917; 23 Am. Jur., Fraud and Deceit, §§ 20 and 68; 37 C.J.S., Fraud, § 3, p. 215; see, Restatement, Torts, § 525d; O'Neil v. Davidson, 149 Minn. 457, 184 N.W. 194.

[3] It has been held that, where the vendee after taking possession of a business at once experiences a business volume sharply below that represented to have been enjoyed by the vendor, an inference may be drawn that vendor's representation was false in that an established business will not at once seriously diminish without cause. Forman v. Hamilburg, 300 Mass. 138, 14 N.E. (2d) 137.

[4] Schlechter v. Felton, 134 Minn. 143, 158 N.W. 813, L.R.A. 1917A, 556; Bullitt v. Farrar, 42 Minn. 8, 43 N.W. 566, 6 L.R.A. 149, 18 A.S.R. 485; Hedin v. Minneapolis M. & S. Inst. 62 Minn. 146, 64 N.W. 158, 35 L.R.A. 417, 54 A.S.R. 628; 21 Minn. L. Rev. pp. 446 to 449; Restatement, Torts, § 526; 3 Dunnell, Dig. & Supp. § 3818.

[5] See, 3 Am. Jur., Appeal and Error, § 904.

[6] Hatch v. Kulick, 211 Minn. 309, 1 N.W. (2d) 359, and note 2 thereof; Scheer v. F.P. Harbaugh Co. 165 Minn. 54, 205 N.W. 626; Kirby v. Dean, 159 Minn. 451, 199 N.W. 174.

George E. Netter, Morris A. Marks and Milton Waxenfeld for appellants.

David Haar for respondent.

Chief Judge CONWAY and Judges DESMOND, DYE, FROESSEL and VAN VOORHIS concur with Judge BURKE; Judge FULD dissents in a separate opinion.

BURKE, J.

The plaintiff in its complaint alleges, insofar as its first cause of action is concerned, that it was induced to enter into a contract of sale of a lease of a building held by defendants because of oral representations, falsely made by the defendants, as to the operating expenses of the building and as to the profits to be derived from the investment. Plaintiff, affirming the contract, seeks damages for fraud.

At Special Term, the Supreme Court sustained a motion to dismiss the complaint. On appeal, the Appellate Division unanimously reversed the order granting the dismissal of the complaint. Thereafter the Appellate Division granted leave to appeal, certifying the following question: "Does the first cause of action in the complaint state facts sufficient to constitute a cause of action?"

The basic problem presented is whether the plaintiff can possibly establish from the facts alleged in the complaint (together with the contract which was annexed to the complaint) reliance upon the misrepresentations (Cohen v. Cohen, 1 A D 2d 586, affd. 3 N Y 2d 813).

We must, of course, accept as true plaintiff's statements that during the course of negotiations defendants misrepresented the operating expenses and profits. Such misrepresentations are undoubtedly material. However, the provisions of the written contract which directly contradict the allegations of oral representations are of equal importance in our task of reaching a decisive answer to the question posed in these cases.

The contract, annexed to and made a part of the complaint, contains the following language pertaining to the particular facts of representations: "The Purchaser has examined the premises agreed to be sold and is familiar with the physical condition thereof. The Seller has not made and does not make any representations as to the physical condition, rents, leases, expenses, operation or any other matter or thing affecting or related to the aforesaid premises, except as herein specifically set forth, and the Purchaser hereby expressly acknowledges that no such representations have been made, and the Purchaser further acknowledges that it has inspected the premises and agrees to take the premises `as is' * * * It is understood and agreed that all understandings and agreements heretofore had between the parties hereto are merged in this contract, which alone fully and completely expresses their agreement, and that the same is entered into after full investigation, neither party relying upon any statement or representation, not embodied in this contract, made by the other. The Purchaser has inspected the buildings standing on said premises and is thoroughly acquainted with their condition." (Emphasis supplied.)

Were we dealing solely with a general and vague merger clause, our task would be simple. A reiteration of the fundamental principle that a general merger clause is ineffective to exclude parol evidence to show fraud in inducing the contract would then be dispositive of the issue (Sabo v. Delman, 3 N Y 2d 155). To put it another way, where the complaint states a cause of action for fraud, the parol evidence rule is not a bar to showing the fraud — either in the inducement or in the execution — despite an omnibus statement that the written instrument embodies the whole agreement, or that no representations have been made. (Bridger v. Goldsmith, 143 N.Y. 424; Angerosa v. White Co., 248 App. Div. 425, affd. 275 N.Y. 524; Jackson v. State of New York, 210 App. Div. 115, affd. 241 N.Y. 563; 3 Williston, Contracts [Rev. ed.], § 811A.)

Here, however, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiff's complaint that the agreement was executed in reliance upon these contrary oral representations (Cohen v. Cohen, supra). The Sabo case (supra) dealt with the usual merger clause. The present case, as the Cohen case, additionally, includes a disclaimer as to specific representations.

This specific disclaimer is one of the material distinctions between this case and Bridger v. Goldsmith (supra) and Crowell-Collier Pub. Co. v. Josefowitz (5 N Y 2d 998). In the Bridger case, the court considered the effect of a general disclaimer as to representations in a contract of sale, concluding that the insertion of such a clause at the insistence of the seller cannot be used as a shield to protect him from his fraud. Another material distinction is that nowhere in the contract in the Bridgercase is there a denial of reliance on representations, as there is here. Similarly, in Crowell-Collier Pub. Co. v. Josefowitz (supra), decided herewith, only a general merger clause was incorporated into the contract of sale. Moreover, the complaint there additionally alleged that further misrepresentations were made after the agreement had been signed, but while the contract was held in escrow and before it had been finally approved.

Consequently, this clause, which declares that the parties to the agreement do not rely on specific representations not embodied in the contract, excludes this case from the scope of the Jackson, Angerosa, Bridger and Crowell-Collier cases (supra). (See Foundation Co. v. State of New York, 233 N.Y. 177.)

The complaint here contains no allegations that the contract was not read by the purchaser. We can fairly conclude that plaintiff's officers read and understood the contract, and that they were aware of the provision by which they aver that plaintiff did not rely on such extra-contractual representations. It is not alleged that this provision was not understood, or that the provision itself was procured by fraud. It would be unrealistic to ascribe to plaintiff's officers such incompetence that they did not understand what they read and signed. (Cf. Ernst Iron Works v. Duralith Corp., 270 N.Y. 165, 171.) Although this court in the Ernst case discounted the merger clause as ineffective to preclude proof of fraud, it gave effect to the specific disclaimer of representation clause, holding that such a clause limited the authority of the agent, and hence, plaintiff had notice of his lack of authority. But the larger implication of the Ernst case is that, where a person has read and understood the disclaimer of representation clause, he is bound by it. The court rejected, as a matter of law, the allegation of plaintiffs "that they relied upon an oral statement made to them in direct contradiction of this provision of the contract." The presence of such a disclaimer clause "is inconsistent with the contention that plaintiff relied upon the misrepresentation and was led thereby to make the contract." (Kreshover v. Berger, 135 App. Div. 27, 28.)

It is not necessary to distinguish seriatim the cases in other jurisdictions as they are not, in the main, in point or, in a few instances, clash with the rule followed in the State of New York. The marshaling of phrases plucked from various opinions and references to generalizations, with which no one disagrees, cannot subvert the fundamental precept that the asserted reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud. We must keep in mind that "opinions must be read in the setting of the particular cases and as the product of preoccupation with their special facts" (Freeman v. Hewit, 329 U. S. 249, 252). When the citations are read in the light of this caveat, we find that they are generally concerned with factual situations wherein the facts represented were matters peculiarly within the defendant's knowledge, as in the cases of Sabo v. Delman (supra) and Jackson v. State of New York (supra).

The general rule was enunciated by this court over a half a century ago in Schumaker v. Mather (133 N.Y. 590, 596) that "if the facts represented are not matters peculiarly within the party's knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. (Baily v. Merrell, Bulstrode's Rep. Part III, p. 94; Slaughter v. Gerson, 13 Wall. 383; Chrysler v. Canaday, 90 N.Y. 272.)"

Very recently this rule was approved as settled law by this court in the case of Sylvester v. Bernstein (283 App. Div. 333, affd. 307 N.Y. 778).

In this case, of course, the plaintiff made a representation in the contract that it was not relying on specific representations not embodied in the contract, while, it now asserts, it was in fact relying on such oral representations. Plaintiff admits then that it is guilty of deliberately misrepresenting to the seller its true intention. To condone this fraud would place the purchaser in a favored position. (Cf. Riggs v. Palmer, 115 N.Y. 506, 511, 512.) This is particularly so, where, as here, the purchaser confirms the contract, but seeks damages. If the plaintiff has made a bad bargain he cannot avoid it in this manner.

If the language here used is not sufficient to estop a party from claiming that he entered the contract because of fraudulent representations, then no language can accomplish that purpose. To hold otherwise would be to say that it is impossible for two businessmen dealing at arm's length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact.

Accordingly, the order of the Appellate Division should be reversed and that of Special Term reinstated, without costs. The question certified should be answered in the negative.

FULD, J. (dissenting).

If a party has actually induced another to enter into a contract by means of fraud — and so the complaint before us alleges — I conceive that language may not be devised to shield him from the consequences of such fraud. The law does not temporize with trickery or duplicity, and this court, after having weighed the advantages of certainty in contractual relations against the harm and injustice which result from fraud, long ago unequivocally declared that "a party who has perpetrated a fraud upon his neighbor may [not] * * * contract with him in the very instrument by means of which it was perpetrated, for immunity against its consequences, close his mouth from complaining of it and bind him never to seek redress. Public policy and morality are both ignored if such an agreement can be given effect in a court of justice. The maxim that fraud vitiates every transaction would no longer be the rule but the exception." (Bridger v. Goldsmith, 143 N.Y. 424, 428.) It was a concern for similar considerations of policy which persuaded Massachusetts to repudiate the contrary rule which it had initially espoused. "The same public policy that in general sanctions the avoidance of a promise obtained by deceit", wrote that state's Supreme Judicial Court in Bates v. Southgate (308 Mass. 170, 182), "strikes down all attempts to circumvent that policy by means of contractual devices. In the realm of fact it is entirely possible for a party knowingly to agree that no representations have been made to him, while at the same time believing and relying upon representations which in fact have been made and in fact are false but for which he would not have made the agreement. To deny this possibility is to ignore the frequent instances in everyday experience where parties accept * * * and act upon agreements containing * * * exculpatory clauses in one form or another, but where they do so, nevertheless, in reliance upon the honesty of supposed friends, the plausible and disarming statements of salesmen, or the customary course of business. To refuse relief would result in opening the door to a multitude of frauds and in thwarting the general policy of the law."

It is impossible, on either principle or reasoning, to distinguish the present case from the many others which this court has decided. (See, e.g., Bridger v. Goldsmith, 143 N.Y. 424, 428, supra; Jackson v. State of New York, 210 App. Div. 115, affd. 241 N.Y. 563; Ernst Iron Works v. Duralith Corp., 270 N.Y. 165, 169; Angerosa v. White Co., 248 App. Div. 425, 431, affd. 275 N.Y. 524; Sabo v. Delman, 3 N Y 2d 155, 162; Crowell-Collier Pub. Co. v. Josefowitz, 5 N Y 2d 998, also decided today.) As far back as 1894, we decided, in the Bridger case (143 N.Y. 424, supra), that the plaintiff was not prevented from bringing an action for fraud, based on oral misrepresentations, even though the written contract provided that it was "understood and agreed" that the defendant seller had not made,

"for the purpose of inducing the sale * * * or the making of this agreement * * * any statements or representations * * * other than"

the single one therein set forth (pp. 426-427). And, just today, we are holding, in the Crowell-Collier Publishing case, that the plaintiffs were not barred from suing the defendants for fraud in inducing them to make the contract, despite its recital that

"This Agreement constitutes the entire understanding between the parties, [and] was not induced by any representations * * * not herein contained".

In addition, in Jackson v. State of New York (210 App. Div. 115, affd. 241 N.Y. 563,supra), the contract provided that

the contractor (plaintiff's predecessor in interest) agreed that he had satisfied himself by his own investigation regarding all the conditions of the work to be done and that his conclusion to enter into the contract was based solely upon such investigation and not upon any information or data imparted by the State.

It was held that even this explicit disavowal of reliance did not bar the plaintiff from recovery. In answering the argument that the provision prevented proof either of misrepresentation by the defendant or reliance on the part of the plaintiff, the Appellate Division, in an opinion approved by this court, wrote: "A party to a contract cannot, by misrepresentation of a material fact, induce the other party to the contract to enter into it to his damage and then protect himself from the legal effect of such misrepresentation by inserting in the contract a clause to the effect that he is not to be held liable for the misrepresentation which induced the other party to enter into the contract. The effect of misrepresentation and fraud cannot be thus easily avoided" (pp. 119-120).

Although the clause in the contract before us may be differently worded from those in the agreements involved in the other cases decided by this court, it undoubtedly reflects the same thought and meaning, and the reasoning and the principles which the court deemed controlling in those cases are likewise controlling in this one. Their application, it seems plain to me, compels the conclusion that the complaint herein should be sustained and the plaintiff accorded a trial of its allegations.

It is said, however, that the provision in this contract differs from those heretofore considered in that it embodies a specific and deliberate exclusion of a particular subject. The quick answer is that the clause now before us is not of such a sort. On the contrary, instead of being limited, it is all-embracing, encompassing every representation that a seller could possibly make about the property being sold and, instead of representing a special term of a bargain, is essentially "boiler plate." (See Contract of Sale, Standard N. Y. B. T. U. Form 8041; Bicks, Contracts for the Sale of Realty [1956 ed.], pp. 79-80, 94-95.) The more elaborate verbiage in the present contract cannot disguise the fact that the language which is said to immunize the defendants from their own fraud is no more specific than the general merger clause in Sabo v. Delman (3 N Y 2d 155, supra) and far less specific than the provision dealt with in the Jackson case (210 App. Div. 115, affd. 241 N.Y. 563,supra) or in Crowell-Collier.

In any event, though, I cannot believe that the outcome of a case such as this, in which the defendant is charged with fraud, should turn on the particular language employed in the contract. As Judge AUGUSTUS HAND, writing for the Federal Court of Appeals, observed, "the ingenuity of draftsmen is sure to keep pace with the demands of wrongdoers, and if a deliberate fraud may be shielded by a clause in a contract that the writing contains every representation made by way of inducement, or that utterances shown to be untrue were not an inducement to the agreement," a fraudulent seller would have a simple method of obtaining immunity for his misconduct. (Arnold v. National Aniline & Chem. Co., 20 F.2d 364, 369.)

The guiding rule — that fraud vitiates every agreement which it touches — has been well expressed not only by the courts of this state, but by courts throughout the country and by the House of Lords in England. And, in recognizing that the plaintiff may assert a cause of action in fraud, the courts have not differentiated between the type or form of exculpatory provision inserted in the contract. It matters not, the cases demonstrate, whether the clause simply recites that no representations have been made or more fully stipulates that the seller has not made any representations concerning certain enumerated subjects and that the purchaser has made his own investigation and has not relied upon any representation by the seller, not embodied in the writing. (See, e.g., Sabo v. Delman, 3 N Y 2d 155, 161-162, supra; Ernst Iron Works v. Duralith Corp., 270 N.Y. 165, 169, supra; Bridger v. Goldsmith, 143 N.Y. 424, 428, supra; Angerosa v. White Co., 248 App. Div. 425, 431, affd. 275 N.Y. 524, supra; Jackson v. State of New York, 210 App. Div. 115, affd. 241 N.Y. 563, supra; Pearson & Son v. Dublin Corp., [1907] A. C. 351, 353-354, 362; Arnold v. National Aniline & Chem. Co., 20 F.2d 364, 369, supra; Lutfy v. Roper & Sons Motor Co., 57 Ariz. 495, 506; Omar Oil Co. v. MacKenzie Oil Co., 33 Del. 259, 289-290; Jordan v. Nelson, 178 N. W. 544 [Iowa]; Bryant v. Troutman, 287 S. W. 2d 918, 921 [Ky.]; Bates v. Southgate, 308 Mass. 170, 182, supra; Ganley Bros. v. Butler Bros. Bldg. Co., 170 Minn. 373, 376-377; Brown v. Ohman, 42 So. 2d 209, 212-213 [Miss.]; Martin v. Harris, 121 Neb. 372; Blacknall v. Rowland, 108 N. C. 554, 557-558; Pennsylvania Turnpike Comm. v. Smith, 350 Pa. 355, 361-362; Dallas Farm Mach. Co. v. Reaves, 307 S. W. 2d 233, 239 [Texas]; Dieterich v. Rice, 115 Wash. 365; see, also, 3 Williston, Contracts [Rev. ed., 1936], §§ 811, 811A; Corbin, Contracts [1951], Vol. 3, § 578; Vol. 6, § 1516; Restatement of Contracts, § 573.)

In England, in the Pearson case ([1907] A. C. 351, supra), the contract to perform certain construction work provided that

the contractor "should satisfy himself" as to various specified items connected with the job and that the defendant corporation "did not hold itself responsible for the accuracy of [such] information" (p. 351).

After performing the contract, the plaintiffs brought a deceit action, claiming damages for false representations as to the very items concerning which they had agreed they would satisfy themselves. The House of Lords reversed the judgment directed for the defendants and held that the action could be maintained; the Lord Chancellor, after noting that "The contract contained clauses * * * to the effect that the contractors must not rely on any representation * * * but must ascertain and judge of the facts for themselves" (p. 353), went on to say (pp. 353-354):

"Now it seems clear that no one can escape liability for his own fraudulent statements by inserting in a contract a clause that the other party shall not rely upon them."

Lord Ashbourne, concurring with the Lord Chancellor, pointed out that the clause relied upon "might in some cases be part of a fraud, and might advance and disguise a fraud" (p. 360) and Lord Hereford, also concurring, declared (p. 362) that, if the "protecting clause" be inserted fraudulently,

"When the fraud succeeds, surely those who designed the fraudulent protection cannot take advantage of it. Such a clause would be good protection against any mistake or miscalculation, but fraud vitiates every contract and every clause in it."

In the Dieterich case (115 Wash. 365, supra), the contract contained the provision that

"The land is sold to [the plaintiff buyer] * * * with the understanding that he has personally and carefully inspected said premises, and is purchasing the same by said inspection and not from any other sayings or inducements by [the seller] * * * and there has been no other inducements other than recited herein".

Despite this explicit disclaimer of reliance and inducement, the Washington Supreme Court decided that the recital did not bar the plaintiff from showing "the fraudulent nature of the contract" (p. 373) and, in the course of its opinion, observed (p. 368) that the contention of the defendants to the contrary was "effectually answered by the court of appeals of New York, in the case of Bridger v. Goldsmith, 143 N.Y. 424".

In Martin v. Harris (121 Neb. 372, supra), the agreement recited:

"There have been no representations of the reasonable value of any of the properties herein described made by or to either party to this contract. Each party is relying upon his own judgment of such values after a personal inspection of the properties."

The plaintiff, alleging that the defendant fraudulently misrepresented the value of the property, sought damages. Again, despite the explicit statement that such a representation had not been made and the specific disavowal of reliance thereon, the court upheld the plaintiff's right to bring the action (p. 376).

In the Ganley case (170 Minn. 373, supra), too, the disclaimer was quite specific, reading in this way:

"The [plaintiff] contractor has examined the said contracts * * * and the specifications and plans forming a part thereof, and is familiar with the location of said work and the conditions under which the same must be performed * * * and is not relying upon any statement made by the company in respect thereto."

In deciding that a defendant could not protect himself against liability for fraud by such a provision or, indeed, by any language, the court wrote in no uncertain terms (p. 377):

"The law should not and does not permit a covenant of immunity to be drawn that will protect a person against his own fraud. Such is not enforceable because of public policy. Industrial & General Trust, Ltd. v. Tod, 180 N.Y. 215 * * *. Language is not strong enough to write such a contract. Fraud destroys all consent. It is the purpose of the law to shield only those whose armor embraces good faith. Theoretically, if there is no fraud the rule we announce is harmless. If there is fraud the rule we announce is wholesome. Whether the rule is effective depends upon the facts. Public interest supports our conclusion."

And, said the court, while the argument that a party should have the right "to let his work to a certain person because the other will therein agree that he relies and acts only upon his own knowledge and not upon the representations of his adversary", might on first thought seem plausible, it does not stand analysis. "It may be desirable in dealing with unscrupulous persons to have this clause as a shield against wrongful charges of fraud. But, if there is no fraud, that fact will be established on the trial. The merits of defendant's claim reach only the expense and annoyance of litigation. But every party should have his day in court. * * * We are unable to formulate a rule of law sustaining defendant's contention which would not at the same time give opportunities for the commission of fraud for which the wronged party would have no redress" (p. 376).

And in the Lutfy case (57 Ariz. 495, supra), the contract of sale contained as specific a disavowal of reliance upon a particular representation as could be written:

"It is understood and agreed that there is no representation or warranty that the `year model' of said property, as hereinbefore stated, correctly states the year in which said property was manufactured, but is merely used by the parties hereto for convenience in describing it. * * * Purchaser agrees that he has made an independent investigation of the property and has relied solely upon his own investigation with reference thereto in entering into this contract, and has placed no reliance and acted upon no representations or warranties upon the part of the Seller."

The plaintiff, suing for damages, alleged that the defendant had falsely represented the year model of the automobile which he purchased, and the high court of Arizona held that he could prove that such a representation had been made and that he had relied upon it, notwithstanding the contract's most explicit recital to the contrary (p. 506):

"If binding upon [plaintiff] appellant, it would protect appellee from the consequences of any fraudulent misrepresentations it might have made to appellant to induce him to sign the contract and, as we see it, any provision in a contract making it possible for a party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid and necessarily constitutes no defense."

The cases cited — all upholding the sufficiency of a complaint based on fraud no matter how the exculpatory language in the contract is phrased — show how firmly established the rule is, and the passages quoted show how compelling are the reasons for the rule. Nor is their force or value weakened or impaired by the decisions upon which the court now appears to rely. Except for Cohen v. Cohen (3 N Y 2d 813), no one of them has anything to do with the adequacy of the complaint as a pleading; two are concerned with the proof adduced at the trial (Schumaker v. Mather, 133 N.Y. 590; Ernst Iron Works v. Duralith Corp., 270 N.Y. 165, supra), while the third deals with the subject of res judicata (Sylvester v. Bernstein, 283 App. Div. 333, affd. 307 N.Y. 778).

In the Ernst Iron Works case, the appeal was, as I have noted, taken after trial and was concerned with the proof and not, as is the present appeal, with the sufficiency of the complaint. The contract contained both a blanket merger clause and a recital that the defendant "makes no representation regarding previous sales" in Buffalo, where the plaintiff did business. Notwithstanding that provision, the plaintiff claimed that he had relied upon a representation by the defendant's salesman that the product had not been sold in that city, and testimony to that effect was received at the trial. The court did reverse the judgment for the plaintiff, but not on any theory that the specific disclaimer clause barred suit or that the evidence was inadmissible because of it. It was the court's conclusion, based on the evidence adduced at the trial, first, that the false representation attributed to the defendant had not been made (270 N. Y., at pp. 169-170); second, that, in any event, the defendant's salesman did not have authority to make such a representation and the plaintiff knew this (pp. 170-171); and, finally, that "it [was] clear [from the proof at the trial] that the plaintiff did not rely upon the statement" (pp. 171-172). And, most significantly, the court did not question the general principle but affirmed it, stating that "A rogue cannot protect himself from liability for his fraud by inserting a printed clause in his contract" (270 N. Y., at p. 169).

As to Cohen v. Cohen, I dissented from the decision there made and still consider it to have been wrongly decided. Constrained to accept it, I do so, but I cannot subscribe to extending its application beyond its own peculiar fact setting. A husband and wife had separated; there were bitter mutual recriminations followed by three separate lawsuits. The parties were ultimately reconciled and their lawyers drew a settlement agreement, which they executed, reciting that the husband had not made any representations "as to the continuation of the marital status". The wife sometime later brought another action, alleging that her husband had falsely represented that he "would effect a reconciliation with [her], return to live with her * * * permanently, and permanently resume their marital relationship". As is quite evident, the Cohen case is a most unusual one, not only because it involved an agreement designed to settle pending marital litigation, but because of the extraordinary and promissory nature of the misrepresentation alleged. Indeed, the only resemblance claimed for the cases — that is, for Cohen and the present one — is that in both there is a specific disclaimer by the plaintiff of the very representations charged against the defendant. However, as noted above (pp. 325-326), since the provision in the contract before us encompasses every representation which a seller of real estate could possibly have made, including those alleged, even the asserted similarity does not in fact exist.

Contrary to the intimation in the court's opinion (p. 323), the nonreliance clause cannot possibly operate as an estoppel against the plaintiff. Essentially equitable in nature, the principle of estoppel is to be invoked to prevent fraud and injustice, not to further them. The statement that the representations in question were not made was, according to the complaint, false to the defendant's knowledge. Surely, the perpetrator of a fraud cannot close the lips of his victim and deny him the right to state the facts as they actually exist. Indeed, the contention that a person, such as the defendant herein, could urge an estoppel was considered and emphatically disposed of in Bridger v. Goldsmith with this statement: "The question now is whether [the no-representation non-inducement clause] can be given the effect claimed for it by the learned counsel for the defendant, to preclude the plaintiff from alleging fraud in the sale and pursuing in the courts the remedies which the law gives in such cases. It cannot operate by way of estoppel for the obvious reason that the statements were false to the defendant's knowledge. He may, indeed, have relied upon its force and efficacy to protect him from the consequences of his own fraud, but he certainly could not have relied upon the truth of any statement in it. A mere device of the guilty party to a contract intended to shield himself from the results of his own fraud, practiced upon the other party, cannot well be elevated to the dignity and importance of an equitable estoppel" (143 N.Y. 424, 427-428, emphasis supplied; see, also, Angerosa v. White Co., 248 App. Div. 425, 433-434, affd. 275 N.Y. 524, supra).

The rule heretofore applied by this court presents no obstacle to honest business dealings, and dishonest transactions ought not to receive judicial protection. The clause in the contract before us may lend support to the defense and render the plaintiff's task of establishing its claim more difficult, but it should not be held to bar institution of an action for fraud. Whether the defendants made the statements attributed to them and, if they did, whether the plaintiff relied upon them, whether, in other words, the defendants were guilty of fraud, are questions of fact not capable of determination on the pleadings alone. The plaintiff is entitled to its day in court.

Order reversed, etc.

The cause was argued before HAMMOND, C.J., and HORNEY, OPPENHEIMER, BARNES and FINAN, JJ.

R. Lewis Bainder for appellant.

Morton L. Goldner, with whom was Ellis Peregoff on the brief, for appellees.

FINAN, J., delivered the opinion of the Court.

Appellant, Merit Music Service, Inc., is a Maryland corporation engaged in the business of leasing coin-operated vending and amusement machines in various locations in and around Baltimore City. Appellees, Sidney Sonneborn and Jennie Sonneborn, his wife, own and operate a tavern located on South Monroe Street in Baltimore and trade as Jen's Park Inn, hereinafter referred to as Jen's, at that location. Prior to August, 1962, appellees operated a similar business on Ridgely Street in Baltimore, which was closed during the latter part of July, 1962, due to urban renewal. For approximately five months appellees tried to find another location for their business and in November, 1962, the appellees were informed by a real estate agency that Jen's was for sale. In order to consummate the purchase of the new tavern, appellees approached the appellant for a loan of $1,500. Appellant had supplied amusement machines to appellees for a number of years at their former place of business and appellees owed appellant over $5,000 from their previous dealings.

Settlement for the purchase of the tavern took place on the evening of November 16, 1962, at Jen's. Present when settlement talks began were the seller, the appellees, Julius W. Lichter, appellees' attorney, and Lee Fine, a real estate agent for the seller. Shortly after settlement began Mr. Morris Silverberg, president of appellant, arrived. After discussions, which lasted almost half an hour, Silverberg agreed to loan appellees $1,500 provided that security was given for the loan; this much is not disputed. However the testimony is contradictory as regards the security discussed by the parties at the settlement. Mr. Lichter, appellees' attorney, testified that Silverberg requested that the appellees' prior indebtedness as well as the $1,500 loan be secured by the liquor license formerly located at appellees' previous place of business and that this was the only security agreement discussed or executed by the parties in his presence. Mr. Fine, the real estate agent and who is also an attorney, testified that in addition to the assignment of the liquor license Silverberg wanted additional security by way of a minimum guarantee from machines he was going to install in Jen's and that he believed appellees' attorney was present during this discussion. He further testified that he was not present when the contract embodying the minimum guarantee provision was signed. Mr. Silverberg, who is also a member of the Bar of Maryland but not a practicing attorney, corroborated the testimony of Fine and further testified that after he had given the Sonneborns his check for $1,500, he telephoned his son, David Silverberg, and told him to bring to Jen's a form contract relating to the leasing of amusement and vending machines from Merit to appellees. After his son arrived with the form agreement, Morris Silverberg testified that he inserted the minimum guarantee clauses^[1] in the blank spaces, after explaining them to the appellees, after which the contract was executed by the Sonneborns. It was also Silverberg's testimony that the terms of this agreement were discussed with Mr. Lichter prior to its formal execution; however, from the preponderance of the evidence, it would appear that Mr. Lichter was not present when the contract was executed. According to the testimony of appellee Jennie Sonneborn, Mr. Silverberg left after he had given the appellees his check for $1,500 and received the assignment of the liquor license; that was the only security arrangement discussed before his departure. She further testified that Silverberg returned alone to Jen's about midnight and "asked us [Sidney Sonneborn et ux.] to sign a paper he had in his handwriting in reference to the $1500. He said, `Just sign this.' We thought it was a note that he had loaned us the $1500." The appellees signed the contract without reading it and alleged that no copy of the agreement was left by Silverberg with them.

Immediately thereafter appellant installed one pinball machine and shortly thereafter a music box pursuant to the terms of the agreement. Within two weeks of the conception of the contract appellant learned that competitive equipment was installed in the appellees' premises in violation of the agreement. This violation was called to the Sonneborns' attention by letters dated December 8 an December 21, 1962. In March or April of 1963, the competitive bowling machine was removed and appellant installed its own, which according to Jennie Sonneborn was continually out of order.

Collections from the machines were started by the appellant on a weekly basis and for the first few weeks the proceeds were divided on a 50-50 basis — apparently to give the appellees an incentive. Thereafter the minimum guarantee clause was invoked and this is when controversy developed.

According to the testimony of Jennie Sonneborn the appellees were first told in the early part of 1963 that they were going to be held to a minimum guarantee and they objected. It was not until after they refused to sign collection slips, reflecting a division of the proceeds according to the minimum guarantee clause, that they allegedly became aware of the leasing contract. Periodic collections continued on a regular basis until June of 1963, after which only intermittent collections were made because, according to Mr. Silverberg, of appellees' interference.

On August 21, 1964, by letter of their counsel, the appellees ordered the appellant to remove its equipment from their premises. Two subsequent letters dated February 16, and March 30, 1965, ordered removal of the machines and as a result of this correspondence, counsel for the parties reached an agreement for the removal of appellant's equipment and disposition of the proceeds from a final collection to be made without prejudicing the rights of either party.

On July 6, 1965, Merit filed a bill of camplaint in the Circuit Court for Baltimore City alleging breach of paragraph g of the agreement of November 16, 1962, which reads as follows:

"During the term of this lease, or of any renewal thereof, no other electrical, manual, or mechanical coin operated equipment, machines or phonographs of any kind, nature or description shall be permitted on the premise, and in accordance with such provision the Proprietor agrees to permit no other party, parties, firm, corporation or even the Proprietor himself to install and operate any such machine or machines on the said premises during the term of this lease, or any renewal thereof. The Proprietor agrees for himself, his personal representatives, his heirs, successors and assigns, by reason of the aforementioned consideration passing to him, that a decree may be passed by any Court of Equity in which suit is brought for such purpose, enjoining him, his personal representatives, heir[s], successors and assigns from violating this covenant."

The relief prayed was an injunction restraining appellees "from permitting any electrical, * * * coin-operated equipment, machines, or phonographs of any nature or description of any operator or operators than" appellant on appellees' premises; an accounting and a monetary decree for damages. Appellees' answer denied the existence of a valid, legal and enforceable contract between the parties and in the alternative pleaded that, assuming a valid contract, the appellant breached the agreement by its failure to properly service the equipment and account for the proceeds derived therefrom as provided for in the contract. The Chancellor dismissed the bill of complaint finding that the appellees never agreed to a minimum guarantee; that the alleged contract was without consideration; that the agreement would be unconscionable if the minimum guarantee were to be enforced and the minimum guarantee clause constituted a material addition to the agreement by the appellant. From the Chancellor's order dismissing the bill of complaint, appellant has taken this appeal.

The Chancellor, sitting as a judge of the law as well as of the facts, found that the contract between the appellant and the appellees on its face was valid despite the apparent harshness of its terms, citing Stamatiades v. Merit Music, 210 Md. 597, 124 A.2d 829 (1956), a case in which the present appellant was involved in litigation regarding a contract similar to that in the case at bar.

The question now before us is whether or not the Chancellor was clearly in error (Rule 886 a) in his finding that the contract was materially altered by the appellant after its execution by the appellees. The Chancellor in his oral opinion stated: "I find as a fact that this contract was not the contract that the Sonneborns [appellees] agreed to; that the clause in dispute, namely the minimum guarantee clause, was not part of it [contract] at the time they signed it; that there has been a material addition made by the operator, [appellant] * * *."

This Court is of the opinion that the evidence in this case does not support the finding of the lower court.

There was no question in the Chancellor's mind that the appellees executed a contract, the court stating:

"I have no doubt they both signed it. Mrs. Sonneborn identifies her signature and admits it to be her signature. Mr. Sonneborn is not so sure, but I believe this is his signature. I have no difficulty over that."

The persons who should have been in the best position to give testimony as to whether or not the contract had been altered after its execution were the appellees, but they foreclosed themselves from giving trustworthy testimony on this all important issue because, by their own admission, neither of them read the contract prior to signing it nor, according to their testimony, did they retain a copy in their possession. Mrs. Sonneborn, when asked by counsel what she thought she was signing, testified: "I imagined it was a note." Both appellees readily admitted that they did not read the written document prepared for their signature.

The date of execution of the contract was November 16, 1962. It was not until March of 1963, that their attorney obtained a photostatic copy of it. After he explained the contract to them, both appellees stated they would never have signed a contract with such harsh terms. Mrs. Sonneborn perhaps best summed it up when replying to a question from appellant's trial attorney regarding her reactions when the contract was explained to them, stating: "When he said it was a seven year contract I said I would never sign a seven year contract under those terms, I would be foolish to sign a contract for $30 a week on a pinball machine and $12 on a music box. I didn't know what those machines would take in a week." Again, later in her testimony, she said: "I never signed a seven year contract calling for a minimum." But the fact remains she did sign a contract and furthermore, she left herself in such a position that she cannot actually say what was, or was not, in the contract for the simple reason that she did not read it, and the same applies to Mr. Sonneborn.

In the case of Rossi v. Douglas, 203 Md. 190, 100 A.2d 3 (1953) wherein this Court reversed a decree of the Chancellor granting an injunction to restrain the appellant from using certain land reserved to them pursuant to a reservation in a lease agreement; Chief Judge Sobeloff, speaking for the Court, said (p. 199, 100 A.2d 7):

"There is no claim here of fraud or duress or mutual mistake, and it is well established that in the absence of these features one having the capacity to understand a written document who reads it, or, without reading it or having it read to him, signs it, is bound by his signature. Spitze v. B. & O.R.R., 75 Md. 162, 23 A. 307; Columbia Paper Bag Co. v. Carr, 116 Md. 541, 82 A. 442; McGrath v. Peterson, 127 Md. 412, 96 A. 551; Western Maryland Dairy v. Brown, 169 Md. 257, 262, 181 A. 468, 471; Gardiner v. Gardiner, 200 Md. 233, 88 A.2d 481; Ray v. Eurice, supra; Williston, Contracts, sec. 90 A; Restatement of Contracts, sec. 70. Indeed Williston says that even if an illiterate executes a deed under a mistake as to its contents, he is bound both at law and in equity if he did not require it to be read to him or its object explained. This is everywhere the rule. Williston, Contracts, sec. 1577."

There is a qualification to the above mentioned rule which this Court recognized in Binder v. Benson, 225 Md. 456, 171 A.2d 248 (1961). Judge Hammond (present Chief Judge), speaking for the Court, said (p. 461, 171 A.2d 250):

"A qualification of the rule is that an apparent manifestation of assent will not operate to make a contract if the other party knows, or as a reasonable person should know, that the apparent acceptor does not intend what his words or other acts ostensibly indicate. Restatement, Contracts, Sec. 71(c); 3 Corbin, Contracts, Sec. 610; 17 C.J.S. Contracts, Sec. 143, p. 497; Frederich v. Union Electric Light & Power Co. (Mo.), 82 S.W.2d 79, 86; General Electric Supply Corp. v. Republic Construction Corp. (Ore.), 272 P.2d 201; Beatty v. Donahue (Ky.), 249 S.W.2d 33; Lange v. United States (C.C.A. 4th), 120 F.2d 886, 889."

However, there is nothing in the facts of this case to justify the application of this exception.

In the case before us there is no evidence of fraud; unless we accept the gratuitous assumption that the appellant altered the lease after its execution and to arrive at such a conclusion, one must engage in unwarranted speculation.

The agreement in question was a form type of contract, part pre-typed and part left in blank, to be filled in to suit the specific terms of a given situation. It was these terms filled in by Morris Silverberg in ink, in his handwriting, that has caused the controversy between the parties.

If Silverberg filled in the blank spaces of the contract with the very material provisions covering the duration of the contract and the minimum guarantees, after he had obtained the appellees' signatures, then the contract was null and void because there was no concursus ad idem concerning essential provisions of the contract. Robert Fraley v. Null, Inc., et al., 244 Md. 567, 224 A.2d 448 (1966).

Conversely, if the material provisions had been inserted in the blank spaces prior to the execution of the contract by the appellees, it was a valid contract for the law presumes that a person knows the contents of a document that he executes and undertstands at least the literal meaning of its terms. As was said by Judge Boyd in Smith v. Humphreys, 104 Md. 285, 290-91, 65 A. 57, 59 (1906):

"Any person who comes into a Court of equity admitting that he can read, and showing that he has average intelligence, but asking the aid of the Court because he did not read a paper involved in the controversy, and was thereby imposed on, should be required to establish a very clear case before receiving the assistance of the Court in getting rid of such document. It is getting to be too common to have parties ask Courts to do what they could have done themselves, if they had exercised ordinary prudence, or, to state it in another way, to ask Courts to undo what they have done by reason of their own negligence or carelessness."

Morris Silverberg testified in effect that all insertions had been made at the time of the execution of the contract by the appellees and that a copy of the contract was left with them:

Q. At the time of the execution, when the Sonneborns signed it was this the same kind of agreement?

A. Yes.

His testimony was corroborated by his son, David Silverberg:

Q. You witnessed the signatures?

A. That's right.

Q. Was it explained to them? What happened?

A. My father told them that he would write the minimum into the contract and I explained —

Mr. Peregoff: I didn't hear that.

A. My father told them as he was filling in the contract, explained the different terms and one of them was the minimum guarantee, and he explained it to them, then I took a piece of scrap paper from somewhere and I wrote it out, giving various examples; if there was $100 in the machine and if there was maybe $20 in the machine, how the money would be divided.

Q. When you had the discussion of a minimum guarantee were any amounts mentioned?

A. Yes.

Q. What were the amounts mentioned?

A. $30 on the pinball and $12 on the music box per week.

Q. Was that put in the contract?

A. Yes, it was.

The Chancellor also found the contract wanting in consideration. The appellees' counsel did not avail themselves of this argument in their brief and presentation to this Court; we find no merit in this defense. The contract clearly sets forth the loan of $1,500 from the appellant to the appellees as consideration and even though this loan is also evidenced by an interest bearing note, we feel that the making of this sum available to the appellees at a time when it was needed by them, an act which the appellant was under no obligation to perform, was a consideration sufficient to sustain the contract. In addition to the advance of the $1,500 there were other acts which the appellant was obliged to perform pursuant to the contract, such as providing, installing and servicing the machines. Stamatiades v. Merit Music, supra; Hendler Creamery Co. v. Lillich, 152 Md. 190, 136 A. 631 (1927).

The lower court was heavy in its censure, and rightfully so, of Morris Silverberg's conduct in bringing up the contract, discussing its terms and having it executed after Mr. Lichter, attorney for the appellees, had left Jen's. However, in the Court's opinion, this would not of itself have prevented a valid contract from being consummated. The lower court also scored Silverberg for violating Canon 9, entitled "Negotiations With Opposite Party," of The Canons of Professional Ethics,^[2] in that he failed to notify Mr. Lichter that he intended to discuss the terms of the proposed contract and thus afford him the opportunity to participate in the contract negotiations. This conduct prompted the Chancellor to state: "He negotiated a contract which I think under the circumstances becomes highly suspect." Had such facts been committed by a practicing attorney, we may well have concluded that the foundation had been laid from which a deliberate scheme of fraudulent conduct could be adduced. However, Morris Silverberg, although a member of the Bar, was not a practicing attorney and apparently had never represented himself to the public as a member of the Bar. Also he was legitimately present in his capacity as president of the appellant, one of the parties to the contract. Therefore, this Court does not feel that the discussion of the terms of the contract with the appellees, out of the presence of their attorney, was a deliberate artifice resorted to by Silverberg to deceive the appellees or to gain a better bargaining position. The lower court was also skeptical of the fact that a part of the written insertions, covering the minimum guarantee, was inserted in the wrong place in the contract — thus creating an ambiguity. This might well lend credence to the contention of the appellant that the insertions were made in the barroom prior to the execution of the contract and under noisy and argumentative conditions. If the insertions were made later, as the Chancellor believed, would it not have been more likely that greater pains would have been taken by the appellant in filling in the blank spaces when accomplished at his own leisure?

The lower court also found the contract to be "most unconscionable," yet, harsh as it is, this type of contract is not without precedent in the "pinball" trade. In Stamatiades, supra, the terms of the contract were almost identical with the contract in the case at bar, except that in Stamatiades the life of the contract was five years instead of seven and the amount of the guarantee was $70 per week instead of $42.

The parties to the contract in the case before us were not strangers to each other. Silverberg had loaned the Sonneborns money on other occasions. They had litigated against each other, they dealt at arms length and neither was prompted by altruism. Their association was sustained by business expediency — not by mutual respect; all the more compelling reasons why the appellees should have read the contract.

Our sympathy, as did that of the lower court, runs with the appellees, yet we must not fall prey to the old maxim: "Hard cases make bad law." It is equally true that: "Hard cases must not be allowed to make bad equity any more than bad law." Moore v. Pierson, 71 Am. Dec. 409, 417 (Iowa 1858).

We are of the opinion that the Chancellor was clearly erroneous in his finding of fact that the provisions concerning minimum guarantees were inserted by the appellants after the signing of the contract by the appellees and accordingly, we reverse his order dismissing the bill of complaint. We further remand the case to the lower court for the granting of injunctive relief consistent with this opinion and for the assessment of damages.

Order reversed and remanded for injunctive relief and assessment of damages, appellees to pay the costs.

[1] "1. The Operator agrees:

"a. To install at his expense for the effective period of this lease as hereinafter stated in each space or spaces mutually agreed upon in the main room of the Proprietor's premises, the following machines:

"One Pinball Amusement Machine (at a minimum guarantee of $30.00 per week to operator) plus licence taxes. One Music Machine (at a minimum guarantee to operator of $12.00 per week) plus licence taxes, hereinafter known as `Equipment.'"

* * *

"4. The Proprietor further agrees and guarantees that at no time shall the Operator's share be less than Forty Two Dollars ($42.00) per week, each and every week, and in the event that the proceeds to the Operator falls below the aforesaid amount, the Operator shall have the right to terminate this agreement, and all monies due him shall become payable to him immediately."

[2] "A lawyer should not in any way communicate upon the subject of controversy with a party represented by counsel; much less should he undertake to negotiate or compromise the matter with him, but should deal only with his counsel. It is incumbent upon the lawyer most particularly to avoid everything that may tend to mislead a party not represented by counsel, and he should not undertake to advise him as to the law."

Dunn, Porterfield, McDowell & Scholl, and Thomas E. Baddley, Jr., Birmingham, for appellant.

William J. Trussell and James L. Clark, Birmingham, for appellees.

BLOODWORTH, Justice.

This is an appeal from a summary judgment. The pleadings and depositions in support of the motion for summary judgment disclose that appellant-plaintiff Birmingham Television Corporation (bailor) stored for a consideration certain television equipment with appellees-defendants Harris Transfer Company, Harris Warehouse Company and Harris Transfer and Storage Company (bailees). On the reverse side of the warehouse receipts issued to appellant evidencing the bailment of this equipment there appeared the following:

PROPERTY WILL BE ACCEPTED BY THIS COMPANY FOR STORAGE ONLY UNDER THE FOLLOWING TERMS, CONDITIONS AND AGREEMENTS:

(A) All charges are due and payable before delivery or transfer of goods.

All property will be stored at owner's risk of loss from fire, water, leakage, vermin, rattage, breakage, shrinkage in weights, accidental or providential causes, strikes, riots or insurrections or from inherent qualities of the goods.

(B) And subject further to the following:

STANDARD CONTRACT TERMS AND CONDITIONS FOR MERCHANDISE WAREHOUSEMEN ACCEPTANCE—Sec. 1

(a) This contract and rate quotation including accessorial charges endorsed on or attached hereto must be accepted within 30 days from the proposal date by signature of depositor on the reverse side of this contract. In the absence of written acceptance, the act of tendering goods described herein for storage by warehouseman within 30 days, from the proposal date shall constitute such acceptance by depositor.

(b) In the event that goods tendered for storage do not conform to the description contained herein, or conforming goods are tendered for storage after 30 days from the proposal date without prior written acceptance by depositor as provided in paragraph (a) of this section, warehouseman may refuse to accept such goods for storage. If warehouseman accepts such goods for storage, depositor agrees to rates and charges as may be assigned and invoiced by warehouseman and to all terms of this contract.

(c) This contract is deemed cancelled should the described goods not be stored with warehouseman for any period exceeding 180 days.

SHIPPING—Sec. 2

Depositor agrees not to ship goods to warehouseman as the named consignee. If, in violation of this agreement, goods are shipped to warehouseman as named consignee, depositor agrees to notify carrier in writing prior to such shipment, with copy of such notice to the warehouseman, that warehouseman named as consignee is a warehouseman and has no beneficial title or interest in such property and depositor further agrees to indemnify and hold harmless warehouseman from any and all claims for unpaid transportation charges, including undercharges, demurrage, detention or charges of any nature, in connection with goods so shipped. Depositor further agrees that, if it fails to notify carrier as required by the next preceding sentence, warehouseman shall have the right to refuse such goods and shall not be liable or responsible for any loss, injury or damage of any nature to, or related to such goods. Depositor agrees that all promises contained in this section will be binding on depositor's heirs, successors and assigns.

TENDER FOR STORAGE—Sec. 3

All goods for storage shall be delivered at the warehouse properly marked and packed for handling. The depositor shall furnish at or prior to such delivery, a manifest showing marks, brands or sizes to be kept and accounted for separately, and the class of storage desired.

STORAGE PERIOD AND CHARGES—Sec. 4

(a) All goods are stored on a month to month basis. All charges for storage are per package or other agreed unit per month.

(b) A storage month shall extend from a date in one calendar month to, but not including, the same date of the next and all succeeding months, except as provided in paragraph (c) of this section. All storage charges are due and payable on the first day of the storage month.

(c) When mutually agreed by the warehouseman and the depositor a full month's storage charge will apply on all goods received between the first and the 15th, inclusive, of a calendar month; one-half month's storage charge will apply on all goods received between the 16th and last day, inclusive, of a calendar month, and a full month's storage charge will apply to all goods in storage on the first day of the next and succeeding calendar months. All storage charges are due and payable on the first day of storage for the initial month and thereafter on the first day of the calendar month.

TRANSFER, TERMINATION OF STORAGE, REMOVAL OF GOODS—Sec. 5

(a) Instructions to transfer goods on the books of the warehouseman are not effective until delivered to and accepted by warehouseman, and all charges up to the time transfer is made are chargeable to the depositor of record. If a transfer involves rehandling the goods, such will be subject to a charge. When goods in storage are transferred from one party to another through issuance of a new warehouse receipt, a new storage date is established on the date of transfer.

(b) The warehouseman reserves the right to move, at his expense, 14 days after notice is sent by certified or registered mail to the depositor of record or to the last known holder of the negotiable warehouse receipt, any goods in storage from the warehouse in which they may be stored to any other of his warehouses; but if such depositor or holder takes delivery of his goods in lieu of transfer, no storage charge shall be made for the current storage month. The warehouseman may, without notice, move goods within the warehouse in which they are stored.

(c) The warehouseman may, upon written notice to the depositor of record and any other person known by the warehouseman to claim an interest in the goods, require the removal of any goods by the end of the next succeeding storage month. Such notice shall be given to the last known place of business or abode of the person to be notified. If goods are not removed before the end of the next succeeding storage month, the warehouseman may sell them in accordance with applicable law.

(d) If warehouseman in good faith believes that the goods are about to deteriorate or decline in value to less than the amount of warehouseman's lien before the end of the next succeeding storage month, the warehouseman may specify in the notification any reasonable shorter time for removal of the goods and in case the goods are not removed, may sell them at public sale held one week after a single advertisement or posting as provided by law.

(e) If as a result of a quality or condition of the goods of which the warehouseman had no notice at the time of deposit the goods are a hazard to other property or to the warehouse or to persons, the warehouseman may sell the goods at public or private sale without advertisement on reasonable notification to all persons known to claim an interest in the goods. If the warehouseman, after a reasonable effort is unable to sell the goods he may dispose of them in any lawful manner and shall incur no liability by reason of such disposition.

HANDLING—Sec. 6

(a) The handling charge covers the ordinary labor involved in receiving goods at warehouse door, placing goods in storage, returning of goods to the warehouse door, and unless otherwise specified, includes the unloading of regular box cars at warehouse door. Handling charges are due and payable on receipt of goods.

(b) Labor for unloading goods from other than regular box cars at warehouse door, additional expenses incurred by the warehouseman in unloading damaged goods, and additional expenses in unloading cars not at warehouse door will be subject to charge.

(c) Labor and materials used in loading rail cars or other vehicles are chargeable to the depositor.

(d) When goods are ordered out in quantities less than in which received, the warehouseman may make an additional charge for each order or each item of an order.

(e) The warehouseman shall not be liable for demurrage, delays in unloading inbound cars, or delays in obtaining and loading cars for outbound shipment unless warehouseman, has failed to exercise reasonable care.

DELIVERY REQUIREMENTS—Sec. 7

(a) No goods shall be delivered or transferred except upon receipt by the warehouseman of complete instructions properly signed by the depositor. However, when no negotiable receipt is outstanding, goods may be delivered upon instructions by telephone in accordance with a prior written agreement, but the warehouseman shall not be responsible for loss or error occasioned thereby.

(b) When a negotiable receipt has been issued no goods covered by that receipt shall be delivered, or transferred on the books of the warehouseman, unless the receipt, properly indorsed, is surrendered for cancellation, or for indorsement of partial delivery thereon. If a negotiable receipt is lost or destroyed, delivery of goods may be made only upon order of a court of competent jurisdiction and the posting of security approved by the court as provided by law.

(c) When goods are ordered out a reasonable time shall be given the warehouseman to carry out instructions, and if he is unable because of acts of God, war, public enemies, seizure under legal process, strikes, lockouts, riots and civil commotions, or because of loss or destruction of goods for which warehouseman is not liable, or because of any other excuse provided by law, the warehouseman shall not be liable for failure to carry out such instructions and goods remaining in storage will continue to be subject to regular storage charges.

EXTRA SERVICES (SPECIAL SERVICES)—Sec. 8

(a) Warehouse labor required for services other than ordinary handling and storage will be charged to the depositor.

(b) Special services requested by depositor including but not limited to compiling of special stock statements; reporting marked weights, serial numbers or other data from packages; physical check of goods; and handling transit billing will be subject to a charge.

(c) Dunnage, bracing, packing materials or other special supplies, may be provided for the depositor at a charge in addition to the warehouseman's cost.

(d) By prior arrangement, goods may be received or delivered during other than usual business hours, subject to a charge.

(e) Communication expense including postage, teletype, telegram, or telephone, will be charged to the depositor at cost if such concern more than the normal inventory reporting or if, at the request of the depositor, communications are made by other than regular United States Mail.

BONDED STORAGE—Sec. 9

(a) A charge in addition to regular rates will be made for merchandise in bond.

(b) Where a warehouse receipt covers goods in U. S. Customs bond, such receipt shall be void upon the termination of the storage period fixed by law.

MINIMUM CHARGES—Sec. 10

(a) A minimum handling charge per lot and a minimum storage charge per lot per month will be made. When a warehouse receipt covers more than one lot or when a lot is in assortment, a minimum charge per mark, brand, or variety will be made.

(b) A minimum monthly charge to one account for storage and/or handling will be made. This charge will apply also to each account when one customer has several accounts, each requiring separate records and billing.

LIABILITY AND LIMITATION OF DAMAGES—Sec. 11

(A) THE WAREHOUSEMAN SHALL NOT BE LIABLE FOR ANY LOSS OR INJURY TO GOODS STORED HOWEVER CAUSED UNLESS SUCH LOSS OR INJURY RESULTED FROM THE FAILURE BY THE WAREHOUSEMAN TO EXERCISE SUCH CARE IN REGARD TO THEM AS A REASONABLY CAREFUL MAN WOULD EXERCISE UNDER LIKE CIRCUMSTANCES AND WAREHOUSEMAN IS NOT LIABLE FOR DAMAGES WHICH COULD NOT HAVE BEEN AVOIDED BY THE EXERCISE OF SUCH CARE.

(B) GOODS ARE NOT INSURED BY WAREHOUSEMAN AGAINST LOSS OR INJURY HOWEVER CAUSED.

(C) THE DEPOSITOR DECLARES THAT DAMAGES ARE LIMITED TO _______________________, PROVIDED, HOWEVER, THAT SUCH LIABILITY MAY AT THE TIME OF ACCEPTANCE OF THIS CONTRACT AS PROVIDED IN SECTION 1 BE INCREASED ON PART OR ALL OF THE GOODS HEREUNDER IN WHICH EVENT A MONTHLY CHARGE OF______________________WILL BE MADE IN ADDITION TO THE REGULAR MONTHLY STORAGE CHARGE.

NOTICE OF CLAIM AND FILING OF SUIT—Sec. 12

(a) Claims by the depositor and all other persons must be presented in writing to the warehouseman within a reasonable time, and in no event longer than either 60 days after delivery of the goods by the warehouseman or 60 days after depositor of record or the last known holder of a negotiable warehouse receipt is notified by the warehouseman that loss or injury to part or all of the goods has occurred, whichever time is shorter.

(b) No action may be maintained by the depositor or others against the warehouseman for loss or injury to the goods stored unless timely written claim has been given as provided in paragraph (a) of this section and unless such action is commenced either within nine months after date of delivery by warehouseman or within nine months after depositor of record or the last known holder of a negotiable warehouse receipt is notified that loss or injury to part or all of the goods has occurred, whichever time is shorter.

(c) When goods have not been delivered, notice may be given of known loss or injury to the goods by mailing of a registered or certified letter to the depositor of record or to the last known holder of a negotiable warehouse receipt. Time limitations for presentation of claim in writing and maintaining of action after notice begin on the date of mailing of such notice by warehouseman.

Additional Terms and Conditions Applicable to this Contract and Rate Quotation.

Nothing entered hereon shall be constructed to extend the warehouseman's liability beyond the standard of care specified in Section 11 above.

The sole issue on this appeal is whether or not the trial court was correct in granting a motion for summary judgment in favor of the appellees based upon the warehouse receipt provision limiting the time within which action may be maintained by the appellant against the appellees for damages to the bailed goods. We conclude that the trial court erred herein and reverse and remand.

It appears that on or about April 24, 1971, a water main at or near the appellees' warehouse burst, flooding the warehouse and damaging appellant's equipment. It is disputed precisely what date appellant was notified of the occurrence; however, a representative of appellant did come and inspect the damage within a week or ten days.

Almost a year later, on April 18, 1972, appellant filed suit against the defendants The Water Works, The Water Works Board, Harris Transfer Company, Harris Warehouse Company and Harris Transfer and Storage Company charging that through the defendants' joint and concurring negligence the stored equipment was damaged. Appellees-bailees filed a motion for summary judgment setting up a nine-month limitation as a bar to the action against them.^[1] (The nine-month limitation appears at the bottom of the copy hereinabove set forth under the heading "NOTICE OF CLAIM AND FILING OF SUIT—Sec. 12".) Motion for summary judgment was granted, whereupon appellant appealed. The Water Works is not a party to this appeal. The trial court directed the entry of final judgment as to appellees in accordance with Rule 54(b), Alabama Rules of Civil Procedure.

Appellant makes three arguments on this appeal: first, that the law permits warehousemen to limit time when suit may be brought on a bailment only by reasonable provisions and that reasonableness is a question of fact for the jury; second, that even if reasonableness is a question of law, nine months is unreasonable as a matter of law; and third, that the trial court erred in holding appellant to be bound by the nine-month limitation because there was no evidence that the provision was specifically called to appellant's attention, that appellant cannot be charged with knowledge of the contract terms, and consequently that there was no meeting of the minds on the bailment contract.

A motion for summary judgment may be granted only when there is no genuine issue as to any material fact, and the moving party is entitled to judgment as a matter of law. Rule 56 of the Alabama Rules of Civil Procedure; 6 Moore's Federal Practice, § 56.04(1) (2d ed., 1972); 10 Wright & Miller, Federal Practice and Procedure, § 2712 (1973).

As applied to the case at bar, we think there existed for the jury's determination a genuine issue of fact as to whether the conditions of bailment set forth on the reverse side of the warehouse receipt were accepted by the appellant-bailor so as to become part of the bailment contract.

The case of Kravitz v. Parking Service Co., 29 Ala.App. 523, 199 So. 727 (1940), cert. denied, 240 Ala. 467, 199 So. 731 (1941), involved a clause limiting a bailee's liability (found on the reverse side of a ticket given to the bailor identifying the bailed property). The Court of Appeals stated the law as follows:

"The parties to a bailment, however, may limit liability by special contract provided such diminishment of liability is not violative of law or public policy. 8 C.J.S. Bailments § 26c, pp. 264, 265.

"Such special provision in a contract of bailment limiting bailee's liability, to be effective, must be known to, or brought to the notice of, the bailor, and be assented to by him. 8 C.J.S. Bailments § 26c; p. 264, 6 Am.Jur. pp. 271, 272, Sec. 177. It is axiomatic that in bailments, as in other contracts, there must be a meeting of minds thereon and assent of both parties thereto; and a disclaimer of liability can only become effective if brought to the bailor's knowledge. 8 C.J.S. and 6 Am.Jur., supra; Beetson v. Hollywood Ath. Club, 109 Cal.App. 715, 293 P. 821; Galowitz v. Magner, 208 App.Div. 6, 203 N.Y.S. 421, 422.

"More specifically, to the case at bar, the rule of modern authorities is that the bailor is not chargeable with notice of special provisions diminishing liability of the bailee which appear upon something not apparently related to the bailment contract itself or given to the bailor ostensibly as a ticket of identification of the bailed property, unless called to his attention or known to him. 6 Am.Jur. pp. 274-5, Sections 178, 179. Accordingly when appellant-bailor delivered `possession, custody and control' of his automobile to appellee-bailee `for a reward'—i. e. compensation for its safe-keeping— there was imposed on appellee the duty to exercise reasonable care to protect the property and upon request, within the terms of the contract when the condition of the bailment shall have been terminated, to redeliver it to the appellant. For negligent breach of this duty there was consequent liability.

"The receipt by appellant of the `ticket' did not bind him to recitals of the disclaimer of liability on its reverse side unless known to him or brought to his notice or attention, thereby bringing such provision within and making it part of the terms of the bailment. Goldstein v. Harris, 24 Ala.App. 3, 130 So. 313, certiorari denied 221 Ala. 612, 130 So. 315; Marine Ins. Co., etc. v. Rehm, La.App., 177 So. 79; Beetson v. Hollywood Ath. Club, supra; Galowitz v. Magner, supra; 8 C.J.S. and 6 Am.Jur., supra." [Emphasis ours.]

Reviewing the facts in the instant case in light of the above stated principles, we find that a genuine issue of fact exists as to whether the terms on the reverse side of the warehouse receipt were accepted by the appellant-bailor and thereby became a part of the contract of bailment. Neither the motion for summary judgment nor appellees' pleas state whether the terms set forth on the reverse side of the warehouse receipt (which purport to materially modify both the common-law rights and obligations of bailor and bailee as well as the statutory provisions respecting limitation of actions) were called to the appellant's attention and were accepted by it.

Nor do we think that such knowledge on appellant's part can be presumed from the issuance of the warehouse receipt itself. The front of the warehouse receipt appears to be just that—a receipt identifying the bailed goods and listing charges— nothing more. No part of the contract appears on the face of the receipt. No notation appears on the face of the receipt advising the bailor to "see reverse side." Nothing on the face of the receipt in any way gives notice that the receipt is a contract of bailment which materially alters the rights of the parties.

Yet, we note that in the form for "Standard Contract Terms and Conditions for Merchandise Warehousemen, approved and promulgated by the American Warehousemen's Association," the contract terms commence on the face of the receipt, with a notation that the terms are "continued" on the reverse side and a place for a signature by the bailor showing acceptance of the terms. See U.L.A. UCC § 7-202 Form 3.

As was stated in 6 Am.Jur., p. 274, and quoted approvingly by the then Court of Appeals in Kravitz v. Parking Service Co., supra, 199 So. at p. 730:

"`In accordance with the foregoing principle, the general rule supported by the modern authorities appears to be that the bailor, unless his attention is called to the fact that such conditions are intended as a part of the contract, is not charged with notice, where he has no actual knowledge, of provisions limiting liability which appear upon something not apparently related to the contract itself, or given to the bailor ostensibly for some other purpose.There is authority which justifies the rule on the ground, among others, that the bailee, if he wishes to qualify his contract, should do so in an unmistakable manner, and it is not reasonably to be expected, nor is the bailor required to anticipate, that important terms of a contract will be found upon what is accepted merely as a means of identification or for some other purpose which to a reasonable man would not appear to be germane to the agreement itself.'" (Emphasis supplied by the Court of Appeals.)

We further note that appellant did not sign the purported contract of bailment on the reverse side of the warehouse receipt; nor is there anything in the record to reflect that appellant orally acknowledged and accepted these terms and conditions as being the contract of bailment.

Appellees argue that appellant's act of leaving the goods with the appellees constituted an acceptance of the terms on the reverse side of the warehouse receipt. Section 1(a) of the purported contract does provide that "the act of tendering goods described herein for storage by the warehouseman within 30 days from the proposal date shall constitute such acceptance by depositor."

While the acts of a party may under some circumstances be such as to constitute an acceptance of a contract, surely such could not be the case unless the acting party is shown to have had knowledge of the contract. Certainly, it would be unreasonable to interpret the act of tendering goods for bailment as an acceptance of specific contract terms where the bailor is not shown to have had knowledge or notice of the existence of said contract terms. 17 C.J.S. Contracts § 41g, pp. 672-3. In the usual circumstances, the tendering of goods creates only a common law bailment.

Looking to appellees' Plea Six in this cause, appellees aver that the delivery of the receipts containing the purported contract followed appellant's depositing the equipment for storage. An act which precedes notice of the contract (assuming only for purposes of argument such receipt did give appellant notice) cannot be reasonably interpreted as an acceptance of said contract. 17 C.J.S. Contracts § 41g, p. 674.

Nor can appellant's subsequent retention of the receipt be interpreted as an acceptance of the terms and conditions on the reverse side. Again, as the court stated in Kravitz v. Parking Service Co., at 199 So. 731, quoting with approval 8 C.J.S. Bailments § 26c, p. 266 ff.:

"`Where, however, the bailor receives and retains the ticket without knowing that it contained any special terms or conditions and without his attention being called to that fact, and on the assumption that the ticket was merely a token or means of identifying his property, the majority of cases hold that such retention of the ticket does not constitute an acceptance of the terms therein and so he is not bound by the provisions for limited liability, on the theory that the minds of the parties never met: hence, the special contract was never entered into. The mere fact that the bailor examined the ticket sufficiently to know that there was printed matter thereon, and had opportunity to examine it critically, and had capacity to understand the meaning of it still does not make him chargeable with notice of the special provisions therein, for he is under no legal duty to read such matter, since, as has been stated, the ticket is considered primarily as a token or means of identification which is to be surrendered when the property is redelivered.'"

It is thus that we hold only that, under the facts of this cause as they appear in the record at this early stage of the proceedings, we cannot say that as a matter of law appellant accepted the terms and conditions on the reverse side of the warehouse receipt as part of the contract of bailment. At the very least, it appears to be a question of fact for the jury as to whether or not appellant had actual notice, or under the circumstances should be charged with notice, of the terms and conditions on the reverse side of the warehouse receipt, most notably the requirement that suit be brought within nine months rather than the usual six years.

Having concluded that there exists at least one genuine issue of fact for the jury's determination, we find it unnecessary to consider the other issues argued on this appeal.

We, therefore, conclude that the trial court erred in granting the motion for summary judgment in favor of appellees Harris Transfer Company, Harris Warehouse Company and Harris Transfer & Storage Company and that the same is due to be reversed and remanded.

Reversed and remanded.

HEFLIN, C. J., and COLEMAN, McCALL and JONES, JJ., concur.

[1] The Water Works was charged with negligence in allowing the water main to break. The bailees were charged with negligence in failing to store the goods in a safe place, inter alia.

193 Cal.Rptr. 130

145 Cal.App.3d 261

Dorris Joni REED, Plaintiff and Appellant,
v.
Robert J. KING et al., Defendants and Respondents.

Civ. 21937.

Court of Appeal, Third District, California.

June 21, 1983.
Hearing Denied Oct. 6, 1983.

[145 Cal.App.3d 263] McKernan & Lanam and Stephen E. Benson, Chico, for plaintiff and appellant.

Price, Burnes, Price, Davis & Brown, Philip B. Price, Chico, and Mary Marsh Linde for defendants and respondents.

BLEASE, Associate Justice.

In the sale of a house, must the seller disclose it was the site of a multiple murder? Dorris Reed purchased a house from Robert King. Neither King nor his real estate agents (the other named defendants) told Reed that a woman and her four children were murdered there ten years earlier. However, it seems "truth will come to light; murder cannot be hid long." (Shakespeare, Merchant of Venice, Act II, Scene II.) Reed learned of the gruesome episode from a neighbor after the sale. She sues seeking rescission and damages. King and the real estate agent defendants successfully demurred to her first [145 Cal.App.3d 264] amended complaint for failure to state a cause of action. Reed appeals the ensuing judgment of dismissal. We will reverse the judgment.

FACTS

We take all issuable facts pled in Reed's complaint as true. (See 3 Witkin, Cal.Procedure [193 Cal.Rptr. 131] (2d ed. 1971) Pleading, § 800.) King and his real estate agent knew about the murders and knew the event materially affected the market value of the house when they listed it for sale. They represented to Reed the premises were in good condition and fit for an "elderly lady" living alone. They did not disclose the fact of the murders. At some point King asked a neighbor not to inform Reed of that event. Nonetheless, after Reed moved in neighbors informed her no one was interested in purchasing the house because of the stigma. Reed paid $76,000, but the house is only worth $65,000 because of its past.

The trial court sustained the demurrers to the complaint on the ground it did not state a cause of action. The court concluded a cause of action could only be stated "if the subject property, by reason of the prior circumstances, were presently the object of community notoriety ...." (Original italics.) Reed declined the offer of leave to amend.

Discussion

Does Reed's pleading state a cause of action? Concealed within this question is the nettlesome problem of the duty of disclosure of blemishes on real property which are not physical defects or legal impairments to use.

Reed seeks to state a cause of action sounding in contract, i.e. rescission, or in tort, i.e. deceit. In either event her allegations must reveal a fraud. (See Civ.Code, §§ 1571-1573, 1689, 1709-1710.) "The elements of actual fraud, whether as the basis of the remedy in contract or tort, may be stated as follows: There must be (1) a false representation or concealment of a material fact (or, in some cases, an opinion) susceptible of knowledge, (2) made with knowledge of its falsity or without sufficient knowledge on the subject to warrant a representation, (3) with the intent to induce the person to whom it is made to act upon it; and such person must (4) act in reliance upon the representation (5) to his damage."^[1] (Original italics.) (1 Witkin, Summary of California Law (8th ed. 1973) Contracts, § 315.)

The trial court perceived the defect in Reed's complaint to be a failure to allege concealment of a material fact. "Concealment" and "material" are [145 Cal.App.3d 265] legal conclusions concerning the effect of the issuable facts pled. As appears, the analytic pathways to these conclusions are intertwined.

Concealment is a term of art which includes mere non-disclosure when a party has a duty to disclose. (See e.g. Lingsch v. Savage (1963) 213 Cal.App.2d 729, 738, 29 Cal.Rptr. 201; Rest.2d Contracts, § 161; Rest.2d Torts, § 551; Rest.Restitution, § 8, esp. com. b.) Reed's complaint reveals only non-disclosure despite the allegation King asked a neighbor to hold his peace. There is no allegation the attempt at suppression was a cause in fact of Reed's ignorance.^[2] (See Rest.2d Contracts, §§ 160, 162-164; Rest.2d Torts, § 550; Rest.Restitution, § 9.) Accordingly, the critical question is: does the seller have duty to disclose here? Resolution of this question depends on the materiality of the fact of the murders.

In general, a seller of real property has a duty to disclose: "where the seller knows of facts materially affecting the value or desirability of the property which are [193 Cal.Rptr. 132] known or accessible only to him and also knows that such facts are not known to, or within the reach of the diligent attention and observation of the buyer, the seller is under a duty to disclose them to the buyer.^[3] [Emphasis added; Citations omitted.]" (Lingsch v. Savage, supra, 213 Cal.App.2d at p. 735, 29 Cal.Rptr. 201.) This broad statement of duty has led one commentator to conclude: "The ancient maxin caveat emptor ('let the buyer beware.') has little or no application to California real estate transactions." (1 Miller and Starr, Current Law of Cal.Real Estate (rev. ed. 1975) § 1:80.)

Whether information "is of sufficient materiality to affect the value or desirability of the property ... depends on the facts of the particular case." (Lingsch, supra, 213 Cal.App.2d at p. 737, 29 Cal.Rptr. 201.) Materiality "is a question of law, and is part of the concept of right to rely or justifiable reliance." (3 Witkin, Cal.Procedure (2d ed. 1971) Pleading, § 578, p. 2217.) Accordingly,[145 Cal.App.3d 266] the term is essentially a label affixed to a normative conclusion.^[4] Three considerations bear on this legal conclusion: the gravity of the harm inflicted by non-disclosure; the fairness of imposing a duty of discovery on the buyer as an alternative to compelling disclosure, and its impact on the stability of contracts if rescission is permitted.

Numerous cases have found non-disclosure of physical defects and legal impediments to use of real property are material. (See 1 Miller and Starr, supra, § 181.)^[5] However, to our knowledge, no prior real estate sale case has faced an issue of non-disclosure of the kind presented here. (Compare Earl v. Saks & Co., supra; Kuhn v. Gottfried (1951) 103 Cal.App.2d 80, 85-86, 229 P.2d 137.) Should this variety of ill-repute be required to be disclosed? Is this a circumstance where "non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing [?]" (Rest.2d Contracts, § 161, subd. (b).)

The paramount argument against an affirmative conclusion is it permits the camel's nose of unrestrained irrationality admission to the tent. If such an "irrational" consideration is permitted as a basis of rescission the stability of all conveyances will be seriously undermined. Any fact that might disquiet the enjoyment of some segment of the buying public may be seized upon by a disgruntled purchaser to void a bargain.^[6] In our view, keeping [145 Cal.App.3d 267] this genie [193 Cal.Rptr. 133] in the bottle is not as difficult a task as these arguments assume. We do not view a decision allowing Reed to survive a demurrer in these unusual circumstances as endorsing the materiality of facts predicating peripheral, insubstantial, or fancied harms.

The murder of innocents is highly unusual in its potential for so disturbing buyers they may be unable to reside in a home where it has occurred. This fact may foreseeably deprive a buyer of the intended use of the purchase. Murder is not such a common occurrence that buyers should be charged with anticipating and discovering this disquieting possibility. Accordingly, the fact is not one for which a duty of inquiry and discovery can sensibly be imposed upon the buyer.

Reed alleges the fact of the murders has a quantifiable effect on the market value of the premises.^[7] We cannot say this allegation is inherently wrong and, in the pleading posture of the case, we assume it to be true. If information known or accessible only to the seller has a significant and measureable effect on market value and, as is alleged here, the seller is aware of this effect, we see no principled basis for making the duty to disclose turn upon the character of the information. Physical usefulness is not and never has been the sole criterion of valuation. Stamp collections and gold speculation would be insane activities if utilitarian considerations were the sole measure of value. (See also Civ.Code, § 3355 [deprivation of property of peculiar value to owner]; Annot. (1950) 12 A.L.R.2d 902 [measure of damages for conversion or loss of, or damage to, personal property having no market value].)

Reputation and history can have a significant effect on the value of realty. "George Washington slept here" is worth something, however physically inconsequential that consideration may be. Ill-repute or "bad will" conversely may depress the value of property. Failure to disclose such a negative fact where it will have a forseeably depressing effect on income expected to be generated by a business is tortious. (See Rest.2d Torts, § 551, illus. 11.) Some cases have held that unreasonable fears of the potential buying public that a gas or oil pipeline may rupture may depress the market value of land and entitle the owner to incremental compensation in eminent domain. (See Annot., Eminent Domain: Elements and measure of compensation for oil or gas pipeline through private property (1954) 38 A.L.R.2d 788, 801-804.)

[145 Cal.App.3d 268] Whether Reed will be able to prove her allegation the decade-old multiple murder has a significant effect on market value we cannot determine.^[8] If she is able to do so by competent evidence she is entitled to a favorable ruling on the issues of materiality and duty to disclose.^[9] Her demonstration [193 Cal.Rptr. 134] of objective tangible harm would still the concern that permitting her to go forward will open the floodgates to rescission on subjective and idiosyncratic grounds.

A more troublesome question would arise if a buyer in similar circumstances were unable to plead or establish a significant and quantifiable effect on market value. However, this question is not presented in the posture of this case. Reed has not alleged the fact of the murders has rendered the premises useless to her as a residence. As currently pled, the gravamen of her case is pecuniary harm. We decline to speculate on the abstract alternative.

The judgment is reversed.

EVANS, Acting P.J., and CARR, J., concur.

Hearing denied; RICHARDSON, J., dissenting.

[1] Proof of damage, i.e. specific pecuniary loss, is not essential to obtain rescission alone. (See 1 Witkin, op. cit. supra, §§ 324-325; see also Earl v. Saks & Co. (1951) 36 Cal.2d 602, 226 P.2d 340.)

[2] Reed elsewhere in the complaint asserts defendants "actively concealed" the fact of the murders and this in part misled her. However, no connection is made or apparent between the legal conclusion of active concealment and any issuable fact pled by Reed. Accordingly, the assertion is insufficient. (See Bacon v. Soule (1912) 19 Cal.App. 428, 438, 126 P. 384.) Similarly we do not view the statement the house was fit for Reed to inhabit as transmuting her case from one of non-disclosure to one of false representation. To view the representation as patently false is to find "elderly ladies" uniformly susceptible to squeamishness. We decline to indulge this stereotypical assumption. To view the representation as misleading because it conflicts with a duty to disclose is to beg that question.

[3] The real estate agent or broker representing the seller is under the same duty of disclosure. (Lingsch v. Savage, supra, 213 Cal.App.2d at p. 736, 29 Cal.Rptr. 201.)

[4] This often subsumes a policy analysis of the effect of permitting rescission on the stability of contracts. (See fn. 6, ante.) "In the case law of fraud, the word 'material' has become a sort of talisman. It is suggested that it has no meaning when undefined other than to the user since the word actually means no more than that the fraud is the sort which will justify rescission or damages in deceit. However, courts continue to use materiality as a test without explanatory reference to the varying standards of reliance, damage, etc. they are following." (Note, Rescission: Fraud as Ground: Contracts (1951) 39 Cal.L.Rev. 309, 310-311, fn. 4.)

[5] For example, the following have been held of sufficient materiality to require disclosure: the home sold was constructed on filled land (Burkett v. J.A. Thompson & Son (1957) 150 Cal.App.2d 523, 526, 310 P.2d 56); improvements were added without a building permit and in violation of zoning regulations (Barder v. McClung (1949) 93 Cal.App.2d 692, 697, 209 P.2d 808) or in violation of building codes (Curran v. Heslop (1953) 115 Cal.App.2d 476, 480-481, 252 P.2d 378); the structure was condemned (Katz v. Department of Real Estate (1979) 96 Cal.App.3d 895, 900, 158 Cal.Rptr. 766); the structure was termite-infested (Godfrey v. Steinpress (1982) 128 Cal.App.3d 154, 180 Cal.Rptr. 95); there was water infiltration in the soil (Barnhouse v. City of Pinole (1982) 133 Cal.App.3d 171, 187-188, 183 Cal.Rptr. 881); the correct amount of net income a piece of property would yield (Ford v. Cournale (1973) 36 Cal.App.3d 172, 179-180, 111 Cal.Rptr. 334.)

[6] Concern for the effects of an overly indulgent rescission policy on the stability of bargains is not new. Our Supreme Court early on quoted with approval the sentiment: "The power to cancel a contract is a most extraordinary power. It is one which should be exercised with great caution,--nay, I may say, with great reluctance,--unless in a clear case. A too free use of this power would render all business uncertain, and, as has been said, make the length of a chancellor's foot the measure of individual rights. The greatest liberty of making contracts is essential to the business interests of the country. In general, the parties must look out for themselves." (Colton v. Stanford (1890) 82 Cal. 351, 398, 23 P. 16.)

[7] See Evidence Code section 810 et seq. We note the traditional formulation of market value assumes a buyer "with knowledge of all the uses and purposes to which [the realty] is adapted." (See e.g. South Bay Irr. Dist. v. California-American Water Co. (1976) 61 Cal.App.3d 944, 961 and 970, 133 Cal.Rptr. 166.)

[8] "[I]n determining what factors would motivate [buyers and sellers] in reaching an agreement as to price, and in weighing the effect of their motivation, [the trier of fact] may rely upon the opinion of experts in the field and also upon its knowledge and experience shared in common with people in general." (South Bay Irr. Dist., supra, 61 Cal.App.3d at p. 970, 133 Cal.Rptr. 166; see also 3 Wigmore, Evidence (Chadbourn rev. ed. 1970) § 711 et seq.)

[9] The ruling of the trial court requiring the additional element of notoriety, i.e. widespread public knowledge, is unpersuasive. Lack of notoriety may facilitate resale to yet another unsuspecting buyer at the "market price" of a house with no ill-repute. However, it appears the buyer will learn of the possibly unsettling history of the house soon after moving in. Those who suffer no discomfort from the specter of residing in such quarters per se, will nonetheless be discomforted by the prospect they have bought a house that may be difficult to sell to less hardy souls. Non-disclosure must be evaluated as fair or unfair regardless of the ease with which a buyer may escape this discomfort by foisting it upon another.

[364] Mr. Bernard Chazen argued the cause for plaintiffs (Mr. Carmen C. Rusignola, attorney; Messrs. Baker, Garber & Chazen, of counsel; Mr. Martin Itzikman, on the brief).

Mr. Samuel Weitzman argued the cause for defendant Bloomfield Motors, Inc. (Messrs. Parsonnet, Weitzman & Oransky, attorneys).

Mr. Sidney M. Schreiber argued the cause for defendant Chrysler Corporation (Messrs. Schreiber, Lancaster & Demos, attorneys; Mr. Roger F. Lancaster, of counsel).

The opinion of the court was delivered by FRANCIS, J.

Plaintiff Claus H. Henningsen purchased a Plymouth automobile, manufactured by defendant Chrysler Corporation, from defendant Bloomfield Motors, Inc. His wife, plaintiff Helen Henningsen, was injured while driving it and instituted suit against both defendants to recover damages on account of her injuries. Her husband joined in the action seeking compensation for his consequential [365] losses. The complaint was predicated upon breach of express and implied warranties and upon negligence. At the trial the negligence counts were dismissed by the court and the cause was submitted to the jury for determination solely on the issues of implied warranty of merchantability. Verdicts were returned against both defendants and in favor of the plaintiffs. Defendants appealed and plaintiffs cross-appealed from the dismissal of their negligence claim. The matter was certified by this court prior to consideration in the Appellate Division.

The facts are not complicated, but a general outline of them is necessary to an understanding of the case.

On May 7, 1955 Mr. and Mrs. Henningsen visited the place of business of Bloomfield Motors, Inc., an authorized De Soto and Plymouth dealer, to look at a Plymouth. They wanted to buy a car and were considering a Ford or a Chevrolet as well as a Plymouth. They were shown a Plymouth which appealed to them and the purchase followed. The record indicates that Mr. Henningsen intended the car as a Mother's Day gift to his wife. He said the intention was communicated to the dealer. When the purchase order or contract was prepared and presented, the husband executed it alone. His wife did not join as a party.

The purchase order was a printed form of one page. On the front it contained blanks to be filled in with a description of the automobile to be sold, the various accessories to be included, and the details of the financing. The particular car selected was described as a 1955 Plymouth, Plaza "6," Club Sedan. The type used in the printed parts of the form became smaller in size, different in style, and less readable toward the bottom where the line for the purchaser's signature was placed. The smallest type on the page appears in the two paragraphs, one of two and one-quarter lines and the second of one and one-half lines, on which great stress is laid by the defense in the case. These two paragraphs are the least legible and the most difficult to read in the instrument, but they are most important in [366] the evaluation of the rights of the contesting parties. They do not attract attention and there is nothing about the format which would draw the reader's eye to them. In fact, a studied and concentrated effort would have to be made to read them. De-emphasis seems the motif rather than emphasis. More particularly, most of the printing in the body of the order appears to be 12 point block type, and easy to read. In the short paragraphs under discussion, however, the type appears to be six point script and the print is solid, that is, the lines are very close together.

The two paragraphs are:

"The front and back of this Order comprise the entire agreement affecting this purchase and no other agreement or understanding of any nature concerning same has been made or entered into, or will be recognized. I hereby certify that no credit has been extended to me for the purchase of this motor vehicle except as appears in writing on the face of this agreement.

I have read the matter printed on the back hereof and agree to it as a part of this order the same as if it were printed above my signature. I certify that I am 21 years of age, or older, and hereby acknowledge receipt of a copy of this order."

On the right side of the form, immediately below these clauses and immediately above the signature line, and in 12 point block type, the following appears:

"CASH OR CERTIFIED CHECK ONLY ON DELIVERY."

On the left side, just opposite and in the same style type as the two quoted clauses, but in eight point size, this statement is set out:

"This agreement shall not become binding upon the Dealer until approved by an officer of the company."

The two latter statements are in the interest of the dealer and obviously an effort is made to draw attention to them.

The testimony of Claus Henningsen justifies the conclusion that he did not read the two fine print paragraphs referring [367] to the back of the purchase contract. And it is uncontradicted that no one made any reference to them, or called them to his attention. With respect to the matter appearing on the back, it is likewise uncontradicted that he did not read it and that no one called it to his attention.

The reverse side of the contract contains 8 1/2 inches of fine print. It is not as small, however, as the two critical paragraphs described above. The page is headed "Conditions" and contains ten separate paragraphs consisting of 65 lines in all. The paragraphs do not have headnotes or margin notes denoting their particular subject, as in the case of the "Owner Service Certificate" to be referred to later. In the seventh paragraph, about two-thirds of the way down the page, the warranty, which is the focal point of the case, is set forth. It is as follows:

"7. It is expressly agreed that there are no warranties, express or implied, made by either the dealer or the manufacturer on the motor vehicle, chassis, or parts furnished hereunder except as follows:

"The manufacturer warrants each new motor vehicle (including original equipment placed thereon by the manufacturer except tires), chassis or parts manufactured by it to be free from defects in material or workmanship under normal use and service. Its obligation under this warranty being limited to making good at its factory any part or parts thereof which shall, within ninety (90) days after delivery of such vehicle to the original purchaser or before such vehicle has been driven 4,000 miles, whichever event shall first occur, be returned to it with transportation charges prepaid and which its examination shall disclose to its satisfaction to have been thus defective; this warranty being expressly in lieu of all other warranties expressed or implied, and all other obligations or liabilities on its part, and it neither assumes nor authorizes any other person to assume for it any other liability in connection with the sale of its vehicles. * * *.'" (Emphasis ours)

After the contract had been executed, plaintiffs were told the car had to be serviced and that it would be ready in two days. According to the dealer's president, a number of cars were on hand at the time; they had come in from the factory about three or four weeks earlier and at least [368] some of them, including the one selected by the Henningsens, were kept in the back of the shop for display purposes. When sold, plaintiffs' vehicle was not "a serviced car, ready to go." The testimony shows that Chrysler Corporation sends from the factory to the dealer a "New Car Preparation Service Guide" with each new automobile. The guide contains detailed instructions as to what has to be done to prepare the car for delivery. The dealer is told to "Use this form as a guide to inspect and prepare this new Plymouth for delivery." It specifies 66 separate items to be checked, tested, tightened or adjusted in the course of the servicing, but dismantling the vehicle or checking all of its internal parts is not prescribed. The guide also calls for delivery of the Owner Service Certificate with the car.

This Certificate, which at least by inference is authorized by Chrysler, was in the car when released to Claus Henningsen on May 9, 1955. It was not made part of the purchase contract, nor was it shown to him prior to the consummation of that agreement. The only reference to it therein is that the dealer "agrees to promptly perform and fulfill all terms and conditions of the owner service policy." The Certificate contains a warranty entitled "Automobile Manufacturers Association Uniform Warranty." The provisions thereof are the same as those set forth on the reverse side of the purchase order, except that an additional paragraph is added by which the dealer extends that warranty to the purchaser in the same manner as if the word "Dealer" appeared instead of the word "Manufacturer."

The new Plymouth was turned over to the Henningsens on May 9, 1955. No proof was adduced by the dealer to show precisely what was done in the way of mechanical or road testing beyond testimony that the manufacturer's instructions were probably followed. Mr. Henningsen drove it from the dealer's place of business in Bloomfield to their home in Keansburg. On the trip nothing unusual appeared in the way in which it operated. Thereafter, it was used for short trips on paved streets about the town. It had [369] no servicing and no mishaps of any kind before the event of May 19. That day, Mrs. Henningsen drove to Asbury Park. On the way down and in returning the car performed in normal fashion until the accident occurred. She was proceeding north on Route 36 in Highlands, New Jersey, at 20-22 miles per hour. The highway was paved and smooth, and contained two lanes for northbound travel. She was riding in the right-hand lane. Suddenly she heard a loud noise "from the bottom, by the hood." It "felt as if something cracked." The steering wheel spun in her hands; the car veered sharply to the right and crashed into a highway sign and a brick wall. No other vehicle was in any way involved. A bus operator driving in the left-hand lane testified that he observed plaintiffs' car approaching in normal fashion in the opposite direction; "all of a sudden [it] veered at 90 degrees * * * and right into this wall." As a result of the impact, the front of the car was so badly damaged that it was impossible to determine if any of the parts of the steering wheel mechanism or workmanship or assembly were defective or improper prior to the accident. The condition was such that the collision insurance carrier, after inspection, declared the vehicle a total loss. It had 468 miles on the speedometer at the time.

The insurance carrier's inspector and appraiser of damaged cars, with 11 years of experience, advanced the opinion, based on the history and his examination, that something definitely went "wrong from the steering wheel down to the front wheels" and that the untoward happening must have been due to mechanical defect or failure; "something down there had to drop off or break loose to cause the car" to act in the manner described.

As has been indicated, the trial court felt that the proof was not sufficient to make out a prima facie case as to the negligence of either the manufacturer or the dealer. The case was given to the jury, therefore, solely on the warranty theory, with results favorable to the plaintiffs against both defendants.

[370] I.

THE CLAIM OF IMPLIED WARRANTY AGAINST THE MANUFACTURER.

In the ordinary case of sale of goods by description an implied warranty of merchantability is an integral part of the transaction. R.S. 46:30-20. If the buyer, expressly or by implication, makes known to the seller the particular purpose for which the article is required and it appears that he has relied on the seller's skill or judgment, an implied warranty arises of reasonable fitness for that purpose. R.S. 46:30-21(1). The former type of warranty simply means that the thing sold is reasonably fit for the general purpose for which it is manufactured and sold. Giant Mfg. Co. v. Yates-American Mach. Co., 111 F.2d 360 (8 Cir. 1940); Dunbar Bros. Co. v. Consolidated Iron-Steel Mfg. Co., 23 F.2d 416, 419 (2 Cir. 1928); Simmons v. Rhodes & Jamieson, Ltd., 46 Cal.2d 190, 293 P.2d 26 (Sup. Ct. 1956); Mead v. Coca Cola Bottling Co., 329 Mass. 440, 108 N.E.2d 757 (Sup. Jud. Ct. 1952); Ryan v. Progressive Grocery Stores, 255 N.Y. 388, 175 N.E. 105, 74 A.L.R. 339 (Ct. App. 1931); 1 Williston on Sales, § 243 (Rev. ed. 1948). As Judge (later Justice) Cardozo remarked in Ryan, supra, the distinction between a warranty of fitness for a particular purpose and of merchantability in many instances is practically meaningless. In the particular case he was concerned with food for human consumption in a sealed container. Perhaps no more apt illustration of the notion can be thought of than the instance of the ordinary purchaser who informs the automobile dealer that he desires a car for the purpose of business and pleasure driving on the public highway.

In this connection, it is appropriate to note that sale of an article by a trade name does not negate the warranty of merchantability. Adams v. Peter Tramontin Motor Sales, 42 N.J. Super. 313 (App. Div. 1956); Ryan v. Progressive [371] Grocery Stores, supra; Frigidinners, Inc. v. Branchtown Gun Club, 176 Pa. Super. 643, 109 A.2d 202 (Super. Ct. 1954); 2 Harper & James, Law of Torts, § 28.20, p. 1082 (1956). An informative statement of the rule (said to be supported by overwhelming authority) was made by the Supreme Court of Pennsylvania in Frantz Equipment Co. v. Leo Butler Co., 370 Pa. 459, 88 A.2d 702, 706 (Sup. Ct. 1952):

"It is perfectly clear, then, that even if the sale be under a trade name there is implied an obligation on the part of the seller that the article delivered will be of the same quality, material, workmanship, and availability for use as articles generally sold under such name. It would be wholly unreasonable to hold that, if one were to purchase, for example, an automobile under the trade name of `Ford' or `Buick' or `Cadillac' or the like, no implied warranty of merchantable quality could be asserted by the purchaser even though the particular car delivered was in such bad condition, so gravely defective in materials and construction, that it could not be operated at all and was wholly useless for the ordinary purpose which an automobile is designed to serve."

Of course such sales, whether oral or written, may be accompanied by an express warranty. Under the broad terms of the Uniform Sale of Goods Law any affirmation of fact relating to the goods is an express warranty if the natural tendency of the statement is to induce the buyer to make the purchase. R.S. 46:30-18. And over the years since the almost universal adoption of the act, a growing awareness of the tremendous development of modern business methods has prompted the courts to administer that provision with a liberal hand. Vold, Law of Sales, § 86, p. 429 (2d ed. 1959). Solicitude toward the buyer plainly harmonizes with the intention of the Legislature. That fact is manifested further by the later section of the act which preserves and continues any permissible implied warranty, despite an express warranty, unless the two are inconsistent. R.S. 46:30-21(6).

The uniform act codified, extended and liberalized the common law of sales. The motivation in part was to [372] ameliorate the harsh doctrine of caveat emptor, and in some measure to impose a reciprocal obligation on the seller to beware. The transcendent value of the legislation, particularly with respect to implied warranties, rests in the fact that obligations on the part of the seller were imposed by operation of law, and did not depend for their existence upon express agreement of the parties. And of tremendous significance in a rapidly expanding commercial society was the recognition of the right to recover damages on account of personal injuries arising from a breach of warranty. R.S. 46:30-75, 76; Simon v. Graham Bakery, 31 N.J. Super. 117 (App. Div. 1954), reversed on other grounds 17 N.J. 525 (1955); Marko v. Sears, Roebuck and Co., 24 N.J. Super. 295, 303 (App. Div. 1953); Ryan v. Progressive Grocery Stores, supra; Stonebrink v. Highland Motors, 171 Or. 415, 137 P.2d 986 (Sup. Ct. 1953); Wells v. Oldsmobile Co., 147 Or. 687, 35 P.2d 232 (Sup. Ct. 1934); Ebbert v. Philadelphia Electric Co., 126 Pa. Super. 351, 191 A. 384 (Super. Ct. 1937), affirmed 330 Pa. 257, 198 A. 323 (Sup. Ct. 1938); 77 C.J.S., Sales, § 383; Prosser, Law of Torts, p. 493 (1955). The particular importance of this advance resides in the fact that under such circumstances strict liability is imposed upon the maker or seller of the product. Recovery of damages does not depend upon proof of negligence or knowledge of the defect. Simon v. Graham Bakery, supra; Tomlinson v. Armour & Co., 75 N.J.L. 748, 754 (E. & A. 1907); Frank R. Jelleff, Inc. v. Braden, 98 U.S. App. D.C. 180, 233 F.2d 671, 63 A.L.R.2d 400 (D.C. App. 1956); 2 Harper & James, supra, § 28.15; Prosser, supra, 494, 506, 523.

As the Sales Act and its liberal interpretation by the courts threw this protective cloak about the buyer, the decisions in various jurisdictions revealed beyond doubt that many manufacturers took steps to avoid these ever increasing warranty obligations. Realizing that the act governed the relationship of buyer and seller, they undertook to withdraw from actual and direct contractual contact with the [373] buyer. They ceased selling products to the consuming public through their own employees and making contracts of sale in their own names. Instead, a system of independent dealers was established; their products were sold to dealers who in turn dealt with the buying public, ostensibly solely in their own personal capacity as sellers. In the past in many instances, manufacturers were able to transfer to the dealers burdens imposed by the act and thus achieved a large measure of immunity for themselves. But, as will be noted in more detail hereafter, such marketing practices, coupled with the advent of large scale advertising by manufacturers to promote the purchase of these goods from dealers by members of the public, provided a basis upon which the existence of express or implied warranties was predicated, even though the manufacturer was not a party to the contract of sale.

The general observations that have been made are important largely for purposes of perspective. They are helpful in achieving a point from which to evaluate the situation now presented for solution. Primarily, they reveal a trend and a design in legislative and judicial thinking toward providing protection for the buyer. It must be noted, however, that the sections of the Sales Act, to which reference has been made, do not impose warranties in terms of unalterable absolutes. R.S. 46:30-3 provides in general terms that an applicable warranty may be negatived or varied by express agreement. As to disclaimers or limitations of the obligations that normally attend a sale, it seems sufficient at this juncture to say they are not favored, and that they are strictly construed against the seller. 2 Harper & James, supra, § 28.25; Vold, supra, p. 459; "Warranties of Kind & Quality," 57 Yale L.J. 1388, 1400-1401 (1948).

With these considerations in mind, we come to a study of the express warranty on the reverse side of the purchase order signed by Claus Henningsen. At the outset we take notice that it was made only by the manufacturer and that by its terms it runs directly to Claus Henningsen. [374] On the facts detailed above, it was to be extended to him by the dealer as the agent of Chrysler Corporation. The consideration for this warranty is the purchase of the manufacturer's product from the dealer by the ultimate buyer. Studebaker Corp. v. Nail, 82 Ga. App. 779, 62 S.E.2d 198 (Ct. App. 1950).

Although the franchise agreement between the defendants recites that the relationship of principal and agent is not created, in particular transactions involving third persons the law will look at their conduct and not to their intent or their words as between themselves but to their factual relation. Restatement (Second), Agency § 27 (1958). The normal pattern that the manufacturer-dealer relationship follows relegates the position of the dealer to the status of a way station along the car's route from maker to consumer. This is indicated by the language of the warranty. Obviously the parties knew and so intended that the dealer would not use the automobile for 90 days or drive it 4,000 miles. And the words "original purchaser," taken in their context, signify the purchasing member of the public. Columbia Motors Co. v. Williams, 209 Ala. 640, 96 So. 900 (Sup. Ct. 1923); Miller Rubber Co. v. Blewster-Stephens Service Station, 171 Ark. 1179, 287 S.W. 577, 59 A.L.R. 1237 (Sup. Ct. 1926). Moreover, the language of this warranty is that of the uniform warranty of the Automobile Manufacturers Association, of which Chrysler is a member. See Automotive Facts & Figures, 1958 Edition, published by Automotive Manufacturers Association, p. 69; Automotive News 1959 Almanac (Slocum Publishing Co., Inc., Detroit) p. 25. And it is the form appearing in the Plymouth Owner Service Certificate mentioned in the servicing instruction guide sent with the new car from the factory. The evidence is overwhelming that the dealer acted for Chrysler in including the warranty in the purchase contract. And see, Studebaker Corp. v. Nail, supra; Advance Rumley Thresher Co. v. Briggs Hardware Co., 202 Mo. App. 603, 206 S.W. 587 (Ct. App. 1918); New Way Motor [375] Co. v. Farmers' Electro-Lighting Co., 48 S.D. 4, 201 N.W. 1000 (Sup. Ct. 1925); Pelletier v. Brown Bros. Chevrolet & Oldsmobile, 164 (N.Y.S.2d 249 (Sup. Ct. 1956); Fetzer v. Haralson, 147 S.W. 290 (Tex. Civ. App. 1912); cf. General Motors Corporation v. Dodson, ___ Tenn. ___, ___ S.W.2d ___ (Jan. 15, 1960).

The terms of the warranty are a sad commentary upon the automobile manufacturers' marketing practices. Warranties developed in the law in the interest of and to protect the ordinary consumer who cannot be expected to have the knowledge or capacity or even the opportunity to make adequate inspection of mechanical instrumentalities, like automobiles, and to decide for himself whether they are reasonably fit for the designed purpose. Greenland Develop. Corp. v. Allied Heat. Prod. Co., 184 Va. 588, 35 S.E.2d 801, 164 A.L.R. 1312 (Sup. Ct. App. 1945); 1 Williston, supra, pp. 625, 626. But the ingenuity of the Automobile Manufacturers Association, by means of its standardized form, has metamorphosed the warranty into a device to limit the maker's liability. To call it an "equivocal" agreement, as the Minnesota Supreme Court did, is the least that can be said in criticism of it. Federal Motor Truck Sales Corporation v. Shanus, 190 Minn. 5, 250 N.W. 713, 714 (Sup. Ct. 1933).

The manufacturer agrees to replace defective parts for 90 days after the sale or until the car has been driven 4,000 miles, whichever is first to occur, if the part is sent to the factory, transportation charges prepaid, and if examination discloses to its satisfaction that the part is defective. It is difficult to imagine a greater burden on the consumer, or less satisfactory remedy. Aside from imposing on the buyer the trouble of removing and shipping the part, the maker has sought to retain the uncontrolled discretion to decide the issue of defectiveness. Some courts have removed much of the force of that reservation by declaring that the purchaser is not bound by the manufacturer's decision. Mills v. Maxwell Motor Sales Corporation, 105 Neb. 105, Neb. 465, 181 N.W. [376] 152, 22 A.L.R. 130 (Sup. Ct. 1920); Cannon v. Pulliam Motor Company, 230 S.C. 131, 94 S.E.2d 397 (Sup. Ct. 1956). In the Mills case, the court said:

"It would nevertheless be repugnant to every conception of justice to hold that, if the parts thus returned for examination were, in point of fact, so defective as to constitute a breach of warranty, the appellee's right of action could be defeated by the appellant's arbitrary refusal to recognize that fact. Such an interpretation would substitute the appellant for the courts in passing upon the question of fact, and would be unreasonable." Supra, 181 N.W., at page 154.

Also suppose, as in this case, a defective part or parts caused an accident and that the car was so damaged as to render it impossible to discover the precise part or parts responsible, although the circumstances clearly pointed to such fact as the cause of the mishap. Can it be said that the impossibility of performance deprived the buyer of the benefit of the warranty?

Moreover, the guaranty is against defective workmanship. That condition may arise from good parts improperly assembled. There being no defective parts to return to the maker, is all remedy to be denied? One court met that type of problem by holding that where the purchaser does not know the precise cause of inoperability, calling a car a "vibrator" would be sufficient to state a claim for relief. It said that such a car is not an uncommon one in the industry. The general cause of the vibration is not known. Some part or parts have been either defectively manufactured or improperly assembled in the construction and manufacture of the automobile. In the operation of the car, these parts give rise to vibrations. The difficulty lies in locating the precise spot and cause. Allen v. Brown, 181 Kan. 301, 310 P.2d 923 (Sup. Ct. 1957). But the warranty does not specify what the purchaser must do to obtain relief in such case, if a remedy is intended to be provided. Must the purchaser return the car, transportation charges prepaid, over a great distance to the factory? It may be said that in the usual [377] case the dealer also gives the same warranty and that as a matter of expediency the purchaser should turn to him. But under the law the buyer is entitled to proceed against the manufacturer. Further, dealers' franchises are precarious (see, Automobile Franchise Agreements, Hewitt (1956)). For example, Bloomfield Motors' franchise may be cancelled by Chrysler on 90 days' notice. And obviously dealers' facilities and capacity, financial and otherwise, are not as sufficient as those of the primarily responsible manufacturer in his distant factory.

The matters referred to represent only a small part of the illusory character of the security presented by the warranty. Thus far the analysis has dealt only with the remedy provided in the case of a defective part. What relief is provided when the breach of the warranty results in personal injury to the buyer? (Injury to third persons using the car in the purchaser's right will be treated hereafter.) As we have said above, the law is clear that such damages are recoverable under an ordinary warranty. The right exists whether the warranty sued on is express or implied. See, e.g., Ryan v. Progressive Grocery Stores, supra. And, of course, it has long since been settled that where the buyer or a member of his family driving with his permission suffers injuries because of negligent manufacture or construction of the vehicle, the manufacturer's liability exists. Prosser, supra, §§ 83, 84. But in this instance, after reciting that defective parts will be replaced at the factory, the alleged agreement relied upon by Chrysler provides that the manufacturer's "obligation under this warranty" is limited to that undertaking; further, that such remedy is "in lieu of all other warranties, express or implied, and all other obligations or liabilities on its part." The contention has been raised that such language bars any claim for personal injuries which may emanate from a breach of the warranty. Although not urged in this case, it has been successfully maintained that the exclusion "of all other obligations and liabilities on its part" precludes [378] a cause of action for injuries based on negligence. Shafer v. Reo Motors, 205 F.2d 685 (3 Cir. 1953). Another Federal Circuit Court of Appeals holds to the contrary. Doughnut Mach. Corporation v. Bibbey, 65 F.2d 634 (1 Cir. 1933). There can be little doubt that justice is served only by the latter ruling.

Putting aside for the time being the problem of the efficacy of the disclaimer provisions contained in the express warranty, a question of first importance to be decided is whether an implied warranty of merchantability by Chrysler Corporation accompanied the sale of the automobile to Claus Henningsen.

Preliminarily, it may be said that the express warranty against defective parts and workmanship is not inconsistent with an implied warranty of merchantability. Such warranty cannot be excluded for that reason. Knapp v. Willys-Ardmore, Inc., 174 Pa. Super. 90, 100 A.2d 105 (1953). And see, Hambrick v. Peoples Mercantile & Implement Co., 228 Ark. 1021, 311 S.W.2d 785 (Sup. Ct. 1958); Hardy v. General Motors Acceptance Corporation, 38 Ga. App. 463, 144 S.E. 327 (Ct. App. 1928); Bekkevold v. Potts, 173 Minn. 87, 216 N.W. 790, 59 A.L.R. 1164 (Sup. Ct. 1927); Hooven & Allison Co. v. Wirtz, 15 N.D. 477, 107 N.W. 1078 (Sup. Ct. 1906); Frigidinners, Inc. v. Branchtown Gun Club, supra.

Chrysler points out that an implied warranty of merchantability is an incident of a contract of sale. It concedes, of course, the making of the original sale to Bloomfield Motors, Inc., but maintains that this transaction marked the terminal point of its contractual connection with the car. Then Chrysler urges that since it was not a party to the sale by the dealer to Henningsen, there is no privity of contract between it and the plaintiffs, and the absence of this privity eliminates any such implied warranty.

There is no doubt that under early common-law concepts of contractual liability only those persons who were parties to the bargain could sue for a breach of it. In more recent [379] times a noticeable disposition has appeared in a number of jurisdictions to break through the narrow barrier of privity when dealing with sales of goods in order to give realistic recognition to a universally accepted fact. The fact is that the dealer and the ordinary buyer do not, and are not expected to, buy goods, whether they be foodstuffs or automobiles, exclusively for their own consumption or use. Makers and manufacturers know this and advertise and market their products on that assumption; witness, the "family" car, the baby foods, etc. The limitations of privity in contracts for the sale of goods developed their place in the law when marketing conditions were simple, when maker and buyer frequently met face to face on an equal bargaining plane and when many of the products were relatively uncomplicated and conducive to inspection by a buyer competent to evaluate their quality. See, Freezer, "Manufacturer's Liability for Injuries Caused by His Products," 37 Mich. L. Rev. 1 (1938). With the advent of mass marketing, the manufacturer became remote from the purchaser, sales were accomplished through intermediaries, and the demand for the product was created by advertising media. In such an economy it became obvious that the consumer was the person being cultivated. Manifestly, the connotation of "consumer" was broader than that of "buyer." He signified such a person who, in the reasonable contemplation of the parties to the sale, might be expected to use the product. Thus, where the commodities sold are such that if defectively manufactured they will be dangerous to life or limb, then society's interests can only be protected by eliminating the requirement of privity between the maker and his dealers and the reasonably expected ultimate consumer. In that way the burden of losses consequent upon use of defective articles is borne by those who are in a position to either control the danger or make an equitable distribution of the losses when they do occur. As Harper & James put it, "The interest in consumer protection calls for warranties by the maker that do run with the goods, to reach all who are [380] likely to be hurt by the use of the unfit commodity for a purpose ordinarily to be expected." 2 Harper & James, supra, 1571, 1572; also see, 1535; Prosser, supra, 506-511. As far back as 1932, in the well known case of Baxter v. Ford Motor Co., 168 Wash. 456, 12 P.2d 409 (Sup. Ct. 1932), affirmed 15 P.2d 1118, 88 A.L.R. 521 (Sup. Ct. 1932), the Supreme Court of Washington gave recognition to the impact of then existing commercial practices on the strait jacket of privity, saying:

"It would be unjust to recognize a rule that would permit manufacturers of goods to create a demand for their products by representing that they possess qualities which they, in fact, do not possess, and then, because there is no privity of contract existing between the consumer and the manufacturer, deny the consumer the right to recover if damages result from the absence of those qualities, when such absence is not readily noticeable." 12 P.2d, at page 412.

The concept was expressed in a practical way by the Supreme Court of Texas in Jacob E. Decker & Sons, Inc. v. Capps, 139 Tex. 609, 164 S.W.2d 828, 833, 142 A.L.R. 1479 (1942):

"In fact, the manufacturer's interest in the product is not terminated when he has sold it to the wholesaler. He must get it off the wholesaler's shelves before the wholesaler will buy a new supply. The same is not only true of the retailer, but of the house wife, for the house wife will not buy more until the family has consumed that which she has in her pantry. Thus the manufacturer or other vendor intends that this appearance of suitability of the article for human consumption should continue and be effective until some one is induced thereby to consume the goods. It would be but to acknowledge a weakness in the law to say that he could thus create a demand for his products by inducing a belief that they are suitable for human consumption, when, as a matter of fact, they are not, and reap the benefits of the public confidence thus created, and then avoid liability for the injuries caused thereby merely because there was no privity of contract between him and the one whom he induced to consume the food. * * *"

Although only a minority of jurisdictions have thus far departed from the requirement of privity, the movement in that direction is most certainly gathering momentum. Liability [381] to the ultimate consumer in the absence of direct contractual connection has been predicated upon a variety of theories. Some courts hold that the warranty runs with the article like a covenant running with land; others recognize a third-party beneficiary thesis; still others rest their decision on the ground that public policy requires recognition of a warranty made directly to the consumer. Welter v. Bowman Dairy Co., 318 Ill. App. 305, 47 N.E.2d 739 (App. Ct. 1943); Bahlman v. Hudson Motor Car Co., 290 Mich. 683, 288 N.W. 309 (Sup. Ct. 1939); Worley v. Procter & Gamble Mfg. Co., 241 Mo. App. 1114, 253 S.W.2d 532 (Ct. App. 1953); Markovich v. McKesson and Robbins, Inc., 106 Ohio App. 265, 149 N.E.2d 181 (Ct. App. 1958); 2 Harper & James, supra, 1573; Prosser, supra, 507; Jeanblanc, "Manufacturers' Liability to Persons other than their Immediate Vendees," 24 Va. L. Rev. 134, 156 (1937).

Further reference to Decker, supra, is enlightening:

"There certainly is justification for indulging a presumption of a warranty that runs with the article in the sale of food products. A party who processes a product and gives it the appearance of being suitable for human consumption, and places it in the channels of commerce, expects some one to consume the food in reliance on its appearance that it is suitable for human consumption. He expects the appearance of suitableness to continue with the product until some one is induced to consume it as food. But a modern manufacturer or vendor does even more than this under modern practices. He not only processes the food and dresses it up so as to make it appear appetizing, but he uses the newspapers, magazines, bill-boards, and the radio to build up the psychology to buy and consume his products. The invitation extended by him is not only to the house wife to buy and serve his product, but to the members of the family and guest to eat it. * * * The mere fact that a manufacturer or other vendor may thus induce the public to consume unwholesome food evidences the soundness of the rule which imposes a warranty, as a matter of public policy on the sale of food or other products intended for human consumption." 164 S.W.2d, at pages 832, 833. (Emphasis added)

In Patargias v. Coca-Cola Bottling Co. of Chicago, 332 Ill. App. 117, 74 N.E.2d 162 (App. Ct. 1947), involving the sale of a bottle of coca-cola by a dealer, the court said:

[382] "We are impelled to hold that, where an article of food or drink is sold in a sealed container for human consumption, public policy demands that an implied warranty be imposed upon the manufacturer thereof that such article is wholesome and fit for use, that said warranty runs with the sale of the article for the benefit of the consumer thereof * * *." 74 N.E.2d, at page 169. (Emphasis added)

And in Worley v. Procter & Gamble Mfg. Co., supra, it was said that:

"In the case of food products sold in original packages, and other articles dangerous to life [here a box of soap powder], if defective, the manufacturer, who alone is in a position to inspect and control their preparation, should be held as a warrantor, whether he purveys his products by his own hand, or through a network of independent distributing agencies. In either case, the essence of the situation is the same — the placing of goods in the channels of trade, representations directed to the ultimate consumer, and damaging reliance by the latter on those representations. Such representations, being inducements to the buyers making the purchase, should be regarded as warranties imposed by law, independent of the vendors' contractual intentions. The liability thus imposed springs from representations directed to the ultimate consumer, and not from the breach of any contractual undertaking on the part of the vendor. This is in accord with the original theory of the action * * *." 253 S.W.2d at page 537. (Insertion ours)

See to the same effect: Davis v. Van Camp Packing Co., 189 Iowa 775, 176 N.W. 382, 17 A.L.R. 649 (Sup. Ct. 1920); Nichols v. Nold, 174 Kan. 613, 258 P.2d 317, 38 A.L.R.2d 887 (Sup. Ct. 1953); Parks v. G.C. Yost Pie Co., 93 Kan. 334, 144 P. 202, L.R.A. 1915C, 179 (Sup. Ct. 1914); Madouros v. Kansas City Coca-Cola Bottling Co., 230 Mo. App. 275, 90 S.W.2d 445 (Ct. App. 1936); Ward v. Morehead City Sea Food Co., 171 N.C. 33, 87 S.E. 958 (Sup. Ct. 1916).

Most of the cases where lack of privity has not been permitted to interfere with recovery have involved food and drugs. Haut v. Kleene, 320 Ill. App. 273, 50 N.E.2d 855 (App. Ct. 1943); Welter v. Bowman Dairy Co., supra; Davis v. Van Camp Packing Co., supra; Madouros v. Kansas [383] City Coca-Cola Bottling Co., supra; Greenberg v. Lorenz, 12 Misc.2d 883, 178 N.Y.S.2d 407 (Sup. Ct. 1958); Ryan v. Progressive Grocery Stores, Inc., supra; Jacob E. Decker & Sons, Inc. v. Capps, supra; La Hue v. Coca-Cola Bottling, 50 Wash.2d 645, 314 P.2d 421 (Sup. Ct. 1957). In fact, the rule as to such products has been characterized as an exception to the general doctrine. But more recently courts, sensing the inequity of such limitation, have moved into broader fields: home permanent wave set, Markovich v. McKesson and Robbins, Inc., supra; Rogers v. Toni Home Permanent Co., 167 Ohio St. 244, 147 N.E.2d 612 (Sup. Ct. 1958); soap detergent, Worley v. Procter & Gamble Mfg. Co., supra; inflammable cowboy suit (by clear implication), Blessington v. McCrory Stores Corp., 305 N.Y. 140, 111 N.E.2d 421, 37 A.L.R.2d 698 (Ct. App. 1953); exploding bottle, Mahoney v. Shaker Square Beverages, 46 Ohio Op. 250, 102 N.E.2d 281 (C.P. 1951); defective emery wheel, DiVello v. Gardner Machine Co., 46 Ohio Op. 161, 102 N.E.2d 289 (C.P. 1951); defective wire rope, Mannsz v. Macwhyte Co., 155 F.2d 445 (3 Cir. 1946); defective cinder blocks, Spence v. Three Rivers Builders & Masonry Supply, 353 Mich. 120, 90 N.W.2d 873 (Sup. Ct. 1958).

We see no rational doctrinal basis for differentiating between a fly in a bottle of beverage and a defective automobile. The unwholesome beverage may bring illness to one person, the defective car, with its great potentiality for harm to the driver, occupants, and others, demands even less adherence to the narrow barrier of privity. 2 Harper & James, supra, 1572; 1 Williston, supra, § 244a, p. 648; Note, 46 Harv. L. Rev. 161 (1932). In Mannsz v. Macwhyte Co., supra, Chief Judge Biggs, speaking for the Third Circuit Court of Appeals, said:

"We think it is clear that whether the approach to the problem be by way of warranty or under the doctrine of negligence, the requirement of privity between the injured party and the manufacturer [384] of the article which has injured him has been obliterated from the Pennsylvania law. The abolition of the doctrine occurred first in the food cases, next in the beverage decisions and now it has been extended to those cases in which the article manufactured, not dangerous or even beneficial if properly made, injured a person because it was manufactured improperly." 155 F.2d, at pages 449-450.

Under modern conditions the ordinary layman, on responding to the importuning of colorful advertising, has neither the opportunity nor the capacity to inspect or to determine the fitness of an automobile for use; he must rely on the manufacturer who has control of its construction, and to some degree on the dealer who, to the limited extent called for by the manufacturer's instructions, inspects and services it before delivery. In such a marketing milieu his remedies and those of persons who properly claim through him should not depend "upon the intricacies of the law of sales. The obligation of the manufacturer should not be based alone on privity of contract. It should rest, as was once said, upon `the demands of social justice.'" Mazetti v. Armour & Co., 75 Wash. 622, 135 P. 633, 48 L.R.A., N.S., 213 (Sup. Ct. 1913). "If privity of contract is required," then, under the circumstances of modern merchandising, "privity of contract exists in the consciousness and understanding of all right-thinking persons." Madouros v. Kansas City Coca-Cola Bottling Co., supra, 90 S.W.2d, at page 450.

Accordingly, we hold that under modern marketing conditions, when a manufacturer puts a new automobile in the stream of trade and promotes its purchase by the public, an implied warranty that it is reasonably suitable for use as such accompanies it into the hands of the ultimate purchaser. Absence of agency between the manufacturer and the dealer who makes the ultimate sale is immaterial.

[385] II.

THE EFFECT OF THE DISCLAIMER AND LIMITATION OF LIABILITY CLAUSES ON THE IMPLIED WARRANTY OF MERCHANTABILITY.

Judicial notice may be taken of the fact that automobile manufacturers, including Chrysler Corporation, undertake large scale advertising programs over television, radio, in newspapers, magazines and all media of communication in order to persuade the public to buy their products. As has been observed above, a number of jurisdictions, conscious of modern marketing practices, have declared that when a manufacturer engages in advertising in order to bring his goods and their quality to the attention of the public and thus to create consumer demand, the representations made constitute an express warranty running directly to a buyer who purchases in reliance thereon. The fact that the sale is consummated with an independent dealer does not obviate that warranty. Mannsz v. Macwhyte Co., supra; Bahlman v. Hudson Motor Car Co., supra; Rogers v. Toni Home Permanent Co., supra; Meyer v. Packard Cleveland Motor Co., 106 Ohio St. 328, 140 N.E. 118, 28 A.L.R. 986 (1922); Baxter v. Ford Motor Co., supra; 1 Williston, Sales, supra, § 244a.

In view of the cases in various jurisdictions suggesting the conclusion which we have now reached with respect to the implied warranty of merchantability, it becomes apparent that manufacturers who enter into promotional activities to stimulate consumer buying may incur warranty obligations of either or both the express or implied character. These developments in the law inevitably suggest the inference that the form of express warranty made part of the Henningsen purchase contract was devised for general use in the automobile industry as a possible means of avoiding the consequences of the growing judicial acceptance of the thesis that the described express or implied warranties run directly to the consumer.

[386] In the light of these matters, what effect should be given to the express warranty in question which seeks to limit the manufacturer's liability to replacement of defective parts, and which disclaims all other warranties, express or implied? In assessing its significance we must keep in mind the general principle that, in the absence of fraud, one who does not choose to read a contract before signing it, cannot later relieve himself of its burdens. Fivey v. Pennsylvania R.R. Co., 67 N.J.L. 627 (E. & A. 1902). And in applying that principle, the basic tenet of freedom of competent parties to contract is a factor of importance. But in the framework of modern commercial life and business practices, such rules cannot be applied on a strict, doctrinal basis. The conflicting interests of the buyer and seller must be evaluated realistically and justly, giving due weight to the social policy evinced by the Uniform Sales Act, the progressive decisions of the courts engaged in administering it, the mass production methods of manufacture and distribution to the public, and the bargaining position occupied by the ordinary consumer in such an economy. The history of the law shows that legal doctrines, as first expounded, often prove to be inadequate under the impact of later experience. In such case, the need for justice has stimulated the necessary qualifications or adjustments. Perkins v. Endicott Johnson Corporation, 128 F.2d 208, 217 (2 Cir. 1942), affirmed 317 U.S. 501, 63 S.Ct. 339, 87 L.Ed. 424 (1943); Greenberg v. Lorenz, supra.

In these times, an automobile is almost as much a servant of convenience for the ordinary person as a household utensil. For a multitude of other persons it is a necessity. Crowded highways and filled parking lots are a commonplace of our existence. There is no need to look any farther than the daily newspaper to be convinced that when an automobile is defective, it has great potentiality for harm.

No one spoke more graphically on this subject than Justice Cardozo in the landmark case of MacPherson v. Buick Motor [387] Co., 217 N.Y. 382, 111 N.E. 1050, 1053, L.R.A. 1916 F, 696 (Ct. App. 1916):

"Beyond all question, the nature of an automobile gives warning of probable danger if its construction is defective. This automobile was designed to go 50 miles per hour. Unless its wheels were sound and strong, injury was almost certain. It was as much a thing of danger as a defective engine for a railroad. * * * The dealer was indeed the one person of whom it might be said with some approach to certainty that by him the car would not be used. * * * Precedents drawn from the days of travel by stagecoach do not fit the conditions of travel to-day. The principle that the danger must be imminent does not change, but the things subject to the principle do change. They are whatever the needs of life in a developing civilization require them to be."

In the 44 years that have intervened since that utterance, the average car has been constructed for almost double the speed mentioned; 60 miles per hour is permitted on our parkways. The number of automobiles in use has multiplied many times and the hazard to the user and the public has increased proportionately. The Legislature has intervened in the public interest, not only to regulate the manner of operation on the highway but also to require periodic inspection of motor vehicles and to impose a duty on manufacturers to adopt certain safety devices and methods in their construction. R.S. 39:3-43 et seq. It is apparent that the public has an interest not only in the safe manufacture of automobiles, but also, as shown by the Sales Act, in protecting the rights and remedies of purchasers, so far as it can be accomplished consistently with our system of free enterprise. In a society such as ours, where the automobile is a common and necessary adjunct of daily life, and where its use is so fraught with danger to the driver, passengers and the public, the manufacturer is under a special obligation in connection with the construction, promotion and sale of his cars. Consequently, the courts must examine purchase agreements closely to see if consumer and public interests are treated fairly.

[388] What influence should these circumstances have on the restrictive effect of Chrysler's express warranty in the framework of the purchase contract? As we have said, warranties originated in the law to safeguard the buyer and not to limit the liability of the seller or manufacturer. It seems obvious in this instance that the motive was to avoid the warranty obligations which are normally incidental to such sales. The language gave little and withdrew much. In return for the delusive remedy of replacement of defective parts at the factory, the buyer is said to have accepted the exclusion of the maker's liability for personal injuries arising from the breach of the warranty, and to have agreed to the elimination of any other express or implied warranty. An instinctively felt sense of justice cries out against such a sharp bargain. But does the doctrine that a person is bound by his signed agreement, in the absence of fraud, stand in the way of any relief?

In the modern consideration of problems such as this, Corbin suggests that practically all judges are "chancellors" and cannot fail to be influenced by any equitable doctrines that are available. And he opines that "there is sufficient flexibility in the concepts of fraud, duress, misrepresentation and undue influence, not to mention differences in economic bargaining power" to enable the courts to avoid enforcement of unconscionable provisions in long printed standardized contracts. 1 Corbin on Contracts (1950) § 128, p. 188. Freedom of contract is not such an immutable doctrine as to admit of no qualification in the area in which we are concerned. As Chief Justice Hughes said in his dissent in Morehead v. People of State of New York ex rel. Tipaldo, 298 U.S. 587, 627, 56 S.Ct. 918, 80 L.Ed. 1347, 1364 (1936):

"We have had frequent occasion to consider the limitations on liberty of contract. While it is highly important to preserve that liberty from arbitrary and capricious interference, it is also necessary to prevent its abuse, as otherwise it could be used to override all public interests and thus in the end destroy the very freedom of opportunity which it is designed to safeguard." [389] That sentiment was echoed by Justice Frankfurter in his dissent in United States v. Bethlehem Steel Corp., 315 U.S. 289, 326, 62 S.Ct. 581, 86 L.Ed. 855, 876 (1942):

"It is said that familiar principles would be outraged if Bethlehem were denied recovery on these contracts. But is there any principle which is more familiar or more firmly embedded in the history of Anglo-American law than the basic doctrine that the courts will not permit themselves to be used as instruments of inequity and injustice? Does any principle in our law have more universal application than the doctrine that courts will not enforce transactions in which the relative positions of the parties are such that one has unconscionably taken advantage of the necessities of the other?

These principles are not foreign to the law of contracts. Fraud and physical duress are not the only grounds upon which courts refuse to enforce contracts. The law is not so primitive that it sanctions every injustice except brute force and downright fraud. More specifically, the courts generally refuse to lend themselves to the enforcement of a `bargain' in which one party has unjustly taken advantage of the economic necessities of the other. * * *"

The traditional contract is the result of free bargaining of parties who are brought together by the play of the market, and who meet each other on a footing of approximate economic equality. In such a society there is no danger that freedom of contract will be a threat to the social order as a whole. But in present-day commercial life the standardized mass contract has appeared. It is used primarily by enterprises with strong bargaining power and position. "The weaker party, in need of the goods or services, is frequently not in a position to shop around for better terms, either because the author of the standard contract has a monopoly (natural or artificial) or because all competitors use the same clauses. His contractual intention is but a subjection more or less voluntary to terms dictated by the stronger party, terms whose consequences are often understood in a vague way, if at all." Kessler, "Contracts of Adhesion — Some Thoughts About Freedom of Contract," 43 Colum. L. Rev. 629, 632 (1943); Ehrenzweig, "Adhesion Contracts in the Conflict of Laws," 53 Colum. L. Rev. 1072, 1075, 1089 (1953). Such standardized contracts have been [390] described as those in which one predominant party will dictate its law to an undetermined multiple rather than to an individual. They are said to resemble a law rather than a meeting of the minds. Siegelman v. Cunard White Star, 221 F.2d 189, 206 (2 Cir. 1955).

Vold, in the recent revision of his Law of Sales (2d ed. 1959), at page 447, wrote of this type of contract and its effect upon the ordinary buyer:

"In recent times the marketing process has been getting more highly organized than ever before. Business units have been expanding on a scale never before known. The standardized contract with its broad disclaimer clauses is drawn by legal advisers of sellers widely organized in trade associations. It is encountered on every hand. Extreme inequality of bargaining between buyer and seller in this respect is now often conspicuous. Many buyers no longer have any real choice in the matter. They must often accept what they can get though accompanied by broad disclaimers. The terms of these disclaimers deprive them of all substantial protection with regard to the quality of the goods. In effect, this is by force of contract between very unequal parties. It throws the risk of defective articles on the most dependent party. He has the least individual power to avoid the presence of defects. He also has the least individual ability to bear their disastrous consequences."

The warranty before us is a standardized form designed for mass use. It is imposed upon the automobile consumer. He takes it or leaves it, and he must take it to buy an automobile. No bargaining is engaged in with respect to it. In fact, the dealer through whom it comes to the buyer is without authority to alter it; his function is ministerial — simply to deliver it. The form warranty is not only standard with Chrysler but, as mentioned above, it is the uniform warranty of the Automobile Manufacturers Association. Members of the Association are: General Motors, Inc., Ford, Chrysler, Studebaker-Packard, American Motors (Rambler), Willys Motors, Checker Motors Corp., and International Harvester Company. Automobile Facts and Figures (1958 Ed., Automobile Manufacturers Association) 69. Of these companies, the "Big Three" (General Motors, Ford, and Chrysler) represented 93.5% of the passenger-car production for 1958 [391] and the independents 6.5%. Standard & Poor (Industrial Surveys, Autos, Basic Analysis, June 25, 1959) 4109. And for the same year the "Big Three" had 86.72% of the total passenger vehicle registrations. Automotive News, 1959 Almanac (Slocum Publishing Co., Inc.) p. 25.

The gross inequality of bargaining position occupied by the consumer in the automobile industry is thus apparent. There is no competition among the car makers in the area of the express warranty. Where can the buyer go to negotiate for better protection? Such control and limitation of his remedies are inimical to the public welfare and, at the very least, call for great care by the courts to avoid injustice through application of strict common-law principles of freedom of contract. Because there is no competition among the motor vehicle manufacturers with respect to the scope of protection guaranteed to the buyer, there is no incentive on their part to stimulate good will in that field of public relations. Thus, there is lacking a factor existing in more competitive fields, one which tends to guarantee the safe construction of the article sold. Since all competitors operate in the same way, the urge to be careful is not so pressing. See "Warranties of Kind and Quality," 57 Yale L.J. 1389, 1400 (1948).

Although the courts, with few exceptions, have been most sensitive to problems presented by contracts resulting from gross disparity in buyer-seller bargaining positions, they have not articulated a general principle condemning, as opposed to public policy, the imposition on the buyer of a skeleton warranty as a means of limiting the responsibility of the manufacturer. They have endeavored thus far to avoid a drastic departure from age-old tenets of freedom of contract by adopting doctrines of strict construction, and notice and knowledgeable assent by the buyer to the attempted exculpation of the seller. 1 Corbin, supra, 337; 2 Harper & James, supra, 1590; Prosser, "Warranty of Merchantable Quality," 27 Minn. L. Rev. 117, 159 (1932). Accordingly to be found in the cases are statements that disclaimers and [392] the consequent limitation of liability will not be given effect if "unfairly procured," Davis Motors, Dodge and Plymouth Co. v. Avett, 294 S.W.2d 882, 887 (Tex. Civ. App. 1956); International Harvester Co. of America v. Bean, 159 Ky. 842, 169 S.W. 549 (Ct. App. 1914); if not brought to the buyer's attention and he was not made understandingly aware of it, Vaughan's Seed Store v. Stringfellow, 56 Fla. 708, 48 So. 410 (Sup. Ct. 1908); Parsons Band Cutter & Self-Feeder Co. v. Haub, 83 Minn. 180, 86 N.W. 14 (Sup. Ct. 1901); Bell v. Mills, 78 App. Div. 42, 80 N.Y.S. 34 (1902); Landreth v. Wyckoff, 67 App. Div. 145, 73 N.Y.S. 388 (1901); St. Louis Cordage Mills v. Western Supply Co., 54 Okl. 757, 154 P. 646 (Sup. Ct. 1916); Reliance Varnish Co. v. Mullins Lumber Co., 213 S.C. 84, 48 S.E.2d 653 (Sup. Ct. 1948); Stevenson v. B.B. Kirkland Seed Co., 176 S.C. 345, 180 S.E. 197 (Sup. Ct. 1935); Black v. B.B. Kirkland Seed Co., 158 S.C. 112, 155 S.E. 268 (Sup. Ct. 1930); or if not clear and explicit, McPeak v. Boker, 236 Minn. 420, 53 N.W.2d 130 (Sup. Ct. 1952).

Some of these cases are worthy of more specific reference. In Stevenson v. B.B. Kirkland Seed Co., supra [176 S.C. 345, 180 S.E. 199], plaintiff asked for Abruzzi rye seed and defendant's agent sold seed to him as such. The invoice contained a non-warranty or disclaimer clause to the effect that no warranty, express or implied, was given by the seller "as to description, quality, productiveness, or any other matter of any seeds, bulbs, or plants," that there would be no responsibility for the crop, and that if the goods were not acceptable they were to be returned at once. The seed was discovered not to be Abruzzi when it had grown sufficiently to be distinguished. In the absence of proof that the disclaimer was actually brought to the attention of the buyer, it was declared not binding.

In St. Louis Cordage Mills v. Western Supply Co., supra [54 Okl. 757, 154 P. 648], the seller claimed that a card was attached to certain cables when they were sold. It purported to notify plaintiff that defendant "sells no goods [393] with a warranty." On this basis, the contention was advanced that any oral guaranty was rebutted. The "complete answer" was adjudged to be that the record failed to show that the card was brought to the attention of the plaintiff. And the court went on to say that if there was evidence tending to establish the fact, the problem was for determination by the jury.

International Harvester Co. of America v. Bean, supra, involved the purchase of an "auto wagon" which the buyer wanted for use in the transportation of passengers and their baggage between two cities. He explained the kind of roads to be traversed and the salesman recommended the type of vehicle purchased. The car could not operate on the roads described and rescission was sought.

International Harvester contended that the only warranty extended was contained in the purchase order. It was substantially similar to the one in the present case, providing for the replacement of defective parts over a 60-day period and reciting that "This express warranty excludes all implied warranties." The Kentucky Court of Appeals affirmed a rescission judgment saying:

"It must be borne in mind that the warranty of fitness for a particular use, which is implied by law where a manufacturer sells machinery for a purpose made known to him by the buyer thereof, relying on the skill and judgment of the manufacturer in selecting machinery adapted thereto, is a warranty which attaches itself to the contract of sale, independent of any express representation by the manufacturer of the suitability of the machinery for such use. It attaches by implication of law as a direct result of the communication by the buyer to the manufacturer of the nature of the intended use.

And while, if the parties to a contract for the sale of machinery, under such circumstances, expressly stipulate against all warranties implied by law, none will be imposed by the court against their consent, still such stipulation will not be given effect unless fairly made as a part of the contract of sale. Such a stipulation, relieving, as it does, the manufacturer from duties imposed by law, will be conclusively presumed to have been inserted in the contract of sale for the sole benefit of the manufacturer, the beneficiary of such relieving stipulation, and effect will not be given to such stipulation unless its inclusion in the contract was fairly procured.

[394] In the case under consideration, this stipulation was contained in a printed form of order blank or contract used by appellant company. The language of the stipulation is extremely technical, `This express warranty excludes all implied warranties'; its meaning is clear to but few persons. The writing in which such stipulation appears directs appellant company to furnish to appellee an auto vehicle, a class of machinery concerning which appellee was indisputably ignorant; and the particular style or pattern of auto vehicle ordered was that selected and recommended by the company's agent; this is undenied. Appellee testified that he explained to the company's agent the purposes for which he intended to use the auto wagon; and it is apparent that, had he understood the full import of the stipulation, he would not have signed the order. Under these circumstances, the court will not say that the stipulation against implied warranties was fairly procured to be included in the contract of sale. To hold that it was so included would be to give life to the letter of the contract and render inanimate the spirit thereof." 169 S.W., at pages 550, 551. (Emphasis ours)

The same court, in Myers v. Land, 314 Ky. 514, 235 S.W.2d 988 (1950), made a similar forthright declaration. The plaintiff purchased a new machine designed and represented as capable of making concrete blocks. It would not do the work and recovery of the purchase price was sought.

The purchase order contained this provision:

"There are no understandings, agreements, representations or warranties, expressed or implied, not specified herein respecting this order. The warranties, provisions, terms and conditions on the reverse side hereof are expressly made a part of this agreement." 235 S.W.2d, at page 990.

The back of the order contained special warranties limiting the seller's liability to defects in material and workmanship which might develop under normal use and service, the obligation being limited to making good at its factory any defective parts.

Attention is attracted to the fact that the language quoted above is more comprehensive and formidable in its adverse implications to the buyer than in our case. The clause in the Henningsen purchase order makes no express reference to the exclusion of warranties express or implied except those appearing on the back of the contract. But in the case under [395] discussion, a jury question was held to exist as to the binding effect of the limitation of liability. The court said:

"In short, this contract undertakes to eliminate and to avoid practically every sort of warranty except the very limited one stated. There is no remedy provided in case the machinery proves to be worthless. The appellant relies upon this negation of an implied warranty.

The statute is, in the particulars involved here, a codification of the prevailing common law on the subject. This court long before its enactment recognized the principle that it was competent for the parties to a contract to stipulate expressly against implied or extrinsic warranties and to confine the obligations of the seller to specific terms. But we have always required that such limitation of liability shall be plainly expressed. * * * Though the present disclaimer of warranty is clear in its terms, we cannot overlook the fact that it is to be found in a long and formidable document prepared by the seller and that it was doubtless unnoticed or its import uncomprehended by the buyer. Anyone brought up to believe that for every wrong there is a remedy will pause before saying that the seller will escape all liability by merely putting in an order blank a statement to the effect that there is no assurance that the buyer will get a machine that will work. We have paused for the moment and have readily concluded that the avoidance of liability under such a circumstance is not permitted by the law. * * *" 235 S.W.2d, at page 990. (Emphasis ours)

The sales contract in Reliance Varnish Co. v. Mullins Lumber Co., supra, contained a limited liability warranty in fine print. The officers of the buyer who made the purchase testified they had not observed the limiting clause and that it was not called to their attention. The court pointed out that it was "so located as to easily escape attention" and declared:

"Certainly it could not be said as a matter of law that appellant should have been aware of the stipulation. `The rule in this state is that for such a clause to be applicable in any case it must be shown that it was brought to the attention of the purchaser.'" 48 S.E.2d, at page 659.

Although Cutler Corp. v. Latshaw, 374 Pa. 1, 97 A.2d 234 (Sup. Ct. 1953), involves a contract for the performance of work for a homeowner, and not a sale, the result reached [396] by the court reflects a pertinent point of view. The contract for the work contained on its reverse side a warrant of attorney for the confession of judgment. In denying enforcement, this was said:

"Equally in the case at bar the defendant did not sign the warrant of attorney-confession of judgment. The reference on the face side of the contract to the `conditions' on the reverse side, among which was buried the supposed authority for a warrant of attorney, can hardly be accepted in a court of law as an acknowledgment of a confession of judgment. While the word `condition' may conceivably embrace almost any circumstance, upon which, or, because of which, a right is created or a liability attaches, it cannot be used to mean surrender of fundamental personal and property absolutes unless the word appears within a setting which warns of the potency of the capitulation being made.

* * * * * * * *

The case at bar falls far short of producing evidence that Miss Latshaw was even aware that a warrant of attorney was remotely contemplated. The physical characteristics of the five-page document demonstrate that the reverse sides were entirely ignored." 97 A.2d, at page 236.

The rigid scrutiny which the courts give to attempted limitations of warranties and of the liability that would normally flow from a transaction is not limited to the field of sales of goods. Clauses on baggage checks restricting the liability of common carriers for loss or damage in transit are not enforceable unless the limitation is fairly and honestly negotiated and understandingly entered into. If not called specifically to the patron's attention, it is not binding. It is not enough merely to show the form of a contract; it must appear also that the agreement was understandingly made. Hill v. Adams Express Co., 82 N.J.L. 373 (E. & A. 1911); S.S. Ansaldo San Giorgio I v. Rheinstrom Bros. Co., 294 U.S. 494, 55 S.Ct. 483, 79 L.Ed. 1016 (1935) (clause void as against public policy); Ferris v. Minneapolis & St. L. Ry. Co., 143 Minn. 90, 173 N.W. 178 (Sup. Ct. 1919); Healy v. New York Cent. & H.R.R. Co., 153 App. Div. 516, 138 N.Y.S. 287 (1912). The same holds true in cases of such limitations [397] on parcel check room tickets, Jones v. Great Northern Ry. Co., 68 Mont. 231, 217 P. 673, 37 A.L.R. 754 (1923); Klar v. H. & M. Parcel Room, 270 App. Div. 538, 61 N.Y.S.2d 285 (1946), affirmed 296 N.Y. 1044, 73 N.E.2d 912 (Ct. App. 1947); and on storage warehouse receipts, French v. Bekins Moving & Storage Co., 118 Colo. 424, 195 P.2d 968 (Sup. Ct. 1948); Denver Public Warehouse Co. v. Munger, 20 Colo. App. 56, 77 P. 5 (1904); Brasch v. Sloan's Moving & Storage Co., 237 Mo. App. 597, 176 S.W.2d 58 (1943); Voyt v. Bekins Moving & Storage Co., 169 Or. 30, 119 P.2d 586 (Sup. Ct. 1941), affirmed on rehearing 127 P.2d 360 (Sup. Ct. 1942); on automobile parking lot or garage tickets or claim checks, Kravitz v. Parking Service Co., 29 Ala. App. 523, 199 So. 727 (Ct. App. 1940); Hoel v. Flour City Fuel & Transfer Co., 144 Minn. 280, 175 N.W. 300 (Sup. Ct. 1919); Miller's Mut. Fire Ins. Ass'n of Alton, Ill. v. Parker, 234 N.C. 20, 65 S.E.2d 341 (Sup. Ct. 1951); Agricultural Ins. Co. v. Constantine, 144 Ohio St. 275, 58 N.E.2d 658 (Sup. Ct. 1944); as to exculpatory clauses in leases releasing a landlord of apartments in a multiple dwelling house from all liability for negligence where inequality of bargaining exists, see Annotation, 175 A.L.R. 8 (1948). And the validity of release clauses in orders signed by a depositor directing a bank to stop payment of his check, exonerating the bank from liability for negligent payment, has been seriously questioned on public policy grounds in this State, Reinhardt v. Passaic-Clifton Nat. Bank, 16 N.J. Super. 430, 436 (App. Div. 1951), affirmed 9 N.J. 607 (1952). Elsewhere they have been declared void as opposed to public policy. Speroff v. First-Cent. Trust Co., 149 Ohio St. 415, 79 N.E.2d 119, 1 A.L.R.2d 1150 (Sup. Ct. 1948).

French v. Bekins Moving & Storage Co., supra [118 Colo. 425, 195 P.2d 970], is particularly significant in the present connection. There the patron signed a storage receipt which contained blanks in which were written the details of removal of the household articles, charges and other information. [398] Toward the bottom, in "smaller poorly printed five-point type" were eight lines authorizing the handling of the goods at a limited valuation. Plaintiff testified that she did not read the provision and no one informed her of it or of its implications. The Supreme Court of Colorado, in commenting upon the clause, said:

"`While a warehouseman may not avoid his liability for negligence, he may nevertheless stipulate with the owner as to what the extent of the latter's recovery shall be, where the rate charged the owner is based upon an agreed valuation which is put upon the property. * * * if the condition was to become a part of the contract, it was necessary that plaintiff's attention be called to it, and that she be advised that the rate to be charged was a reduced rate to be applied in consideration of her consent to the limitation of defendant's liability.'" 195 P.2d, at page 971.

It is true that the rule governing the limitation of liability cases last referred to is generally applied in situations said to involve services of a public or semi-public nature. Typical, of course, are the public carrier or storage or parking lot cases. Kuzmiak v. Brookchester, 33 N.J. Super. 575 (App. Div. 1954); Annotation, supra, 175 A.L.R., at pp. 14-17. But in recent times the books have not been barren of instances of its application in private contract controversies, witness, e.g., Kuzmiak v. Brookchester, supra; Fairfax Gas & Supply Co. v. Hadary, 151 F.2d 939 (4 Cir. 1945); and Cutler Corp. v. Latshaw, supra. In the last named matter, which has been noted earlier, the court relied upon the public interest cases as authority. It said:

"Although these cases have to do with limitation on the liability of common carriers, their reasoning applies with equal force to the facts in the case at bar. When a party to a contract seeks to bind the other party with the unyielding thongs of a warrant of attorney-confession of judgment, a device not ordinarily expected by a homeowner in a simple agreement for alterations and repairs, the inclusion of such a self-abnegating provision must appear in the body of the contract and cannot be incorporated by casual reference with a designation not its own." 97 A.2d, at page 238. [399] Basically, the reason a contracting party offering services of a public or quasi-public nature has been held to the requirements of fair dealing, and, when it attempts to limit its liability, of securing the understanding consent of the patron or consumer, is because members of the public generally have no other means of fulfilling the specific need represented by the contract. Having in mind the situation in the automobile industry as detailed above, and particularly the fact that the limited warranty extended by the manufacturers is a uniform one, there would appear to be no just reason why the principles of all of the cases set forth should not chart the course to be taken here.

It is undisputed that the president of the dealer with whom Henningsen dealt did not specifically call attention to the warranty on the back of the purchase order. The form and the arrangement of its face, as described above, certainly would cause the minds of reasonable men to differ as to whether notice of a yielding of basic rights stemming from the relationship with the manufacturer was adequately given. The words "warranty" or "limited warranty" did not even appear in the fine print above the place for signature, and a jury might well find that the type of print itself was such as to promote lack of attention rather than sharp scrutiny. The inference from the facts is that Chrysler placed the method of communicating its warranty to the purchaser in the hands of the dealer. If either one or both of them wished to make certain that Henningsen became aware of that agreement and its purported implications, neither the form of the document nor the method of expressing the precise nature of the obligation intended to be assumed would have presented any difficulty.

But there is more than this. Assuming that a jury might find that the fine print referred to reasonably served the objective of directing a buyer's attention to the warranty on the reverse side, and, therefore, that he should be charged with awareness of its language, can it be said that an ordinary layman would realize what he was relinquishing in [400] return for what he was being granted? Under the law, breach of warranty against defective parts or workmanship which caused personal injuries would entitle a buyer to damages even if due care were used in the manufacturing process. Because of the great potential for harm if the vehicle was defective, that right is the most important and fundamental one arising from the relationship. Difficulties so frequently encountered in establishing negligence in manufacture in the ordinary case make this manifest. 2 Harper & James, supra, §§ 28.14, 28.15; Prosser, supra, 506. Any ordinary layman of reasonable intelligence, looking at the phraseology, might well conclude that Chrysler was agreeing to replace defective parts and perhaps replace anything that went wrong because of defective workmanship during the first 90 days or 4,000 miles of operation, but that he would not be entitled to a new car. It is not unreasonable to believe that the entire scheme being conveyed was a proposed remedy for physical deficiencies in the car. In the context of this warranty, only the abandonment of all sense of justice would permit us to hold that, as a matter of law, the phrase "its obligation under this warranty being limited to making good at its factory any part or parts thereof" signifies to an ordinary reasonable person that he is relinquishing any personal injury claim that might flow from the use of a defective automobile. Such claims are nowhere mentioned. The draftsmanship is reflective of the care and skill of the Automobile Manufacturers Association in undertaking to avoid warranty obligations without drawing too much attention to its effort in that regard. No one can doubt that if the will to do so were present, the ability to inform the buying public of the intention to disclaim liability for injury claims arising from breach of warranty would present no problem.

In this connection, attention is drawn to the Plymouth Owner Certificate mentioned earlier. Obviously, Chrysler is aware of it because the New Car Preparation Service Guide sent from the factory to the dealer directs that it be given to the purchaser. That certificate contains a paragraph called [401] "Explanation of Warranty." Its entire tenor relates to replacement of defective parts. There is nothing about it to stimulate the idea that the intention of the warranty is to exclude personal injury claims.

At this point, a recent decision of the New York Court of Appeals is relevant. In Lachs v. Fidelity & Casualty Co. of New York, 306 N.Y. 357, 118 N.E.2d 555, 557 (1954), the plaintiff's mother went to Newark Airport in order to obtain a plane flight to Miami, Florida. A vending machine was located in front of the Air Service counter where she obtained her transportation ticket. On the machine, in letters ten times as large as any other words on it, appeared "Airline Trip Insurance." Over that legend was a well illuminated display of airplanes flying round and round, and in large characters the words and numerals "25¢ For Each $5,000. Maximum $25,000." Below that on a placard, in letters "many times" the size of the other words thereon, was printed:

"Domestic

Airline Trip Insurance

25¢ for each $5,000. Maximum $25,000."

Below, in much smaller print on the same placard, appeared:

"Covers one-way flight shown on application * * * completed in 12 months within [certain points] on any scheduled airline. Policy void outside above limits."

The application mentioned was obtained by inserting 25¢ in a slot for each $5,000 of insurance desired. The application says, among other things: "I hereby apply to Company named below for Airline Trip Insurance to insure me on one Airline trip between:- * * *." Provision is made therein for the naming of a beneficiary and for the signature of the applicant.

Upon completion of the application, the prospective insured pressed a button and a policy of insurance emerged from the machine. The contract was about 11 inches long [402] and both sides of it were filled with printed matter. Across the front of it, in large letters which obliterated some of the printing beneath, was the statement: "This Policy Is Limited To Aircraft Accidents. Read It Carefully." The coverage clause on page 1 said:

"This insurance shall apply only to such injuries sustained following the purchase by or for the Insured of a transportation ticket from * * * a Scheduled Airline during any portion of the first one way or round airline trip covered by such transportation ticket * * * in consequence of: (a) boarding, riding as a passenger in * * * any aircraft operated on a regular or special or chartered flight by a Civilian Scheduled Airline maintaining regular, published schedules and licensed for interstate, intrastate or international transportation of passengers by the Governmental Authority having jurisdiction over Civil Aviation * * *." 118 N.E.2d, at page 557.

The mother's plane ticket (plaintiff was the named beneficiary) was for transportation on a Miami Airline, Inc. plane. It crashed on the way to Florida and she was killed. The insurance carrier refused to pay on the ground that the flight was not operated by a Civilian Scheduled Airline. The court sustained the refusal to dismiss the complaint, saying:

"What contract of insurance, then, did the decedent purchase? She intended to buy coverage for her flight to Miami. The defendant says it did not intend to cover her on that flight. We all know that a contract of insurance, drawn by the insurer, must be read through the eyes of the average man on the street or the average housewife who purchases it. Neither of them is expected to carry the Civil Aeronautics Act or the Code of Federal Regulations when taking a plane. * * * Was the decedent entitled to believe that she had purchased `Airline Trip Insurance' through a policy `Limited To Aircraft Accidents'? It seems to us that a jury could find that when decedent purchased her policy on an application for `Airline Trip Insurance' from a machine having in prominent lighting those same three words, before obtaining her ticket from a counter in front of which the machine stood, she was covered on her flight, since the minds of the decedent and the company had met on that basis. * * *

* * * As we pointed out in Hartol Products Corp. v. Prudential Ins. Co., supra, the burden in such a case as this is on the [403] defendant to establish that the words and expressions used not only are susceptible of the construction sought by defendant but that it is the only construction which may fairly be placed on them. The defendant in its large illuminated lettering and in its application could have added proper, unambiguous words or a definition or could have avoided allowing its vending machine to be placed in front of the ticket counter `utilized by all non-scheduled airlines operating out of the Newark Airport,' thus removing the ambiguity or equivocal character of the invitation to insure, of the application for insurance and the contract of insurance itself." 118 N.E.2d, at pages 558-559. (Emphasis ours)

The task of the judiciary is to administer the spirit as well as the letter of the law. On issues such as the present one, part of that burden is to protect the ordinary man against the loss of important rights through what, in effect, is the unilateral act of the manufacturer. The status of the automobile industry is unique. Manufacturers are few in number and strong in bargaining position. In the matter of warranties on the sale of their products, the Automotive Manufacturers Association has enabled them to present a united front. From the standpoint of the purchaser, there can be no arms length negotiating on the subject. Because his capacity for bargaining is so grossly unequal, the inexorable conclusion which follows is that he is not permitted to bargain at all. He must take or leave the automobile on the warranty terms dictated by the maker. He cannot turn to a competitor for better security.

Public policy is a term not easily defined. Its significance varies as the habits and needs of a people may vary. It is not static and the field of application is an ever increasing one. A contract, or a particular provision therein, valid in one era may be wholly opposed to the public policy of another. See Collopy v. Newark Eye & Ear Infirmary, 27 N.J. 29, 39 (1958). Courts keep in mind the principle that the best interests of society demand that persons should not be unnecessarily restricted in their freedom to contract. But they do not hesitate to declare void as against public policy contractual provisions which clearly tend to the injury of [404] the public in some way. Hodnick v. Fidelity Trust Co., 96 Ind. App. 342, 183 N.E. 488 (App. Ct. 1932).

Public policy at a given time finds expression in the Constitution, the statutory law and in judicial decisions. In the area of sale of goods, the legislative will has imposed an implied warranty of merchantability as a general incident of sale of an automobile by description. The warranty does not depend upon the affirmative intention of the parties. It is a child of the law; it annexes itself to the contract because of the very nature of the transaction. Minneapolis Steel & Machinery Co. v. Casey Land Agency, 51 N.D. 832, 201 N.W. 172 (Sup. Ct. 1924). The judicial process has recognized a right to recover damages for personal injuries arising from a breach of that warranty. The disclaimer of the implied warranty and exclusion of all obligations except those specifically assumed by the express warranty signify a studied effort to frustrate that protection. True, the Sales Act authorizes agreements between buyer and seller qualifying the warranty obligations. But quite obviously the Legislature contemplated lawful stipulations (which are determined by the circumstances of a particular case) arrived at freely by parties of relatively equal bargaining strength. The lawmakers did not authorize the automobile manufacturer to use its grossly disproportionate bargaining power to relieve itself from liability and to impose on the ordinary buyer, who in effect has no real freedom of choice, the grave danger of injury to himself and others that attends the sale of such a dangerous instrumentality as a defectively made automobile. In the framework of this case, illuminated as it is by the facts and the many decisions noted, we are of the opinion that Chrysler's attempted disclaimer of an implied warranty of merchantability and of the obligations arising therefrom is so inimical to the public good as to compel an adjudication of its invalidity. See 57 Yale L.J., supra, at pp. 1400-1404; proposed Uniform Commercial Code, 1958 Official Text, § 202.

[405] The trial court sent the case to the jury against Chrysler on the theory that the evidence would support a finding of breach of an implied warranty of merchantability. In fact, at one point in his charge he seemed to say that as a matter of law such a warranty existed. He also told them that:

"A provision in a purchase order for an automobile that an express warranty shall exclude all implied warranties will not be given effect so as to defeat an implied warranty that the machine shall be fit for the purposes for which it was intended unless its inclusion in the contract was fairly procured or obtained."

Thereafter, the court charged that when the car was sold a warranty arose that it was reasonably suited for ordinary use, and that if they found that it was defective and "not reasonably suited for ordinary driving" liability would exist "provided * * * you find there was an implied warranty and a breach thereof." The reasonable inference to be drawn from the whole context is that a preliminary finding against the binding effect of the disclaimer would have to be made, i.e., that the disclaimer was not "fairly procured," before an implied warranty could be deemed to exist. Even assuming that the duty to make such a finding was not as explicit as it should have been, in view of our holding that the disclaimer is void as a matter of law, the charge was more favorable to the defendant than the law required it to be. The verdict in favor of the plaintiffs and against Chrysler Corporation establishes that the jury found that the disclaimer was not fairly obtained. Thus, this defendant cannot claim to have been prejudiced by a jury finding on an aspect of the case which the court should have disposed of as a matter of law.

Chrysler raises in this court for the first time the defense that plaintiffs' failure to give reasonable notice of the breach of warranty bars their recovery. The claim was not made in the answer, pretrial order, at the trial or as a ground of appeal in the brief filed on this review. It [406] was added by letter filed after oral argument. It comes too late for consideration at this point in the proceedings.

The same situation arose in National Equipment Corporation v. Moore, 189 Minn. 632, 250 N.W. 677 (Sup. Ct. 1933). The contention was rejected, the court saying:

"It is enough to say that no such defense to the counterclaim was pleaded, litigated, or submitted to the jury. There was some testimony as to whether certain complaints were made * * * but nothing to indicate to the court or opposing counsel that such evidence was directed to prove noncompliance with said section 8423, and no such issue was submitted, or requested to be submitted, to the jury." 250 N.W., at page 679.

III.

THE DEALER'S IMPLIED WARRANTY.

The principles that have been expounded as to the obligation of the manufacturer apply with equal force to the separate express warranty of the dealer. This is so, irrespective of the absence of the relationship of principal and agent between these defendants, because the manufacturer and the Association establish the warranty policy for the industry. The bargaining position of the dealer is inextricably bound by practice to that of the maker and the purchaser must take or leave the automobile, accompanied and encumbered as it is by the uniform warranty.

Moreover, it must be remembered that the actual contract was between Bloomfield Motors, Inc., and Claus Henningsen, and that the description of the car sold was included in the purchase order. Therefore, R.S. 46:30-21(2) annexed an implied warranty of merchantability to the agreement. Stuart v. Burlington Co. Farmers' Exchange, 90 N.J.L. 584 (E. & A. 1917); Adams v. Peter Tramontin Motor Sales, supra; Cassini v. Curtis Candy Co., 113 N.J.L. 91 (Sup. Ct. 1934); McCabe v. L.K. Liggett Drug Co., 330 Mass. 177, 112 N.E.2d 254 [407] (Sup. Jud. Ct. 1953); Ryan v. Progressive Grocery Stores, supra; Mahoney v. Shaker Square Beverages, Inc., supra; Prosser, Law of Torts, supra, at p. 495; Vold on Sales, supra, at pp. 436, 442-443; 1 Williston on Sales, supra, §§ 233, 242. It remains operative unless the disclaimer and liability limitation clauses were competent to exclude it and the ordinary remedy for its breach. It has been said that this doctrine is harsh on retailers who generally have only a limited opportunity for inspection of the car. But, as Chief Judge Cardozo said in Ryan, supra:

"The burden may be heavy. It is one of the hazards of the business.

* * * * * * * *

* * * In such circumstances, the law casts the burden on the seller, who may vouch in the manufacturer, if the latter was to blame. The loss in its final incidence will be borne where it is placed by the initial wrong." 175 N.E., at pages 106 and 107.

Re-examination of the purchase contract discloses an ambiguous situation with respect to the warranty position of the dealer. Section 7, on the reverse side thereof, says no warranties, express or implied, are made by the dealer or manufacturer except the express warranty of the manufacturer discussed above. However, the last paragraph of the section says that: "The dealer also agrees to promptly perform and fulfill all terms and conditions of the owner service policy." That policy, as noted above, sets forth the same manufacturer's warranty and then adds a stipulation substituting "dealer" in the context wherever "manufacturer" appears. Presumably the intention was to incorporate the policy into the sales contract by reference. Accepting that to be the dealer's intention, the binding character of the limitation on its liability to the buyer under the warranty is even less apparent than in the case of Chrysler. The uncontradicted proof shows that the policy was not shown or given to Henningsen prior to or at the time of execution of the sales agreement; it was delivered with the car. No [408] one suggests that the clause limiting the dealer's liability to replacement of defective parts and excluding implied warranties as well as responsibility for personal injury claims was specifically brought to Henningsen's attention, or that any attempt was made to make him understand that he was yielding his right, and that of any third person claiming in his right, to recover for such injuries.

For the reasons set forth in Part I hereof, we conclude that the disclaimer of an implied warranty of merchantability by the dealer, as well as the attempted elimination of all obligations other than replacement of defective parts, are violative of public policy and void.

The trial court submitted to the jury, on the same basis as in the claim against the manufacturer, the issue of whether the disclaimer provisions in the contract were fairly procured by the dealer. The dealer also contends that the language is susceptible of the conclusion that the jurors were told as a matter of law that an implied warranty of merchantability came into existence once the sale was made by him. As we have said, a reasonable purport of the instructions in context is that upon the evidence adduced at the trial a decision was to be made as to whether the disclaimer clauses were valid, and if it was found that they were not valid, then an implied warranty existed, breach of which would support plaintiffs' action. Submission of the case to the jury on that basis represented more favorable treatment than the dealer was entitled to receive. But assuming the contention to be correct that the only conclusion to be drawn from the court's statements is that the jury were told that an implied warranty of merchantability arose from the sale as a matter of law, and that they were to decide if the proof demonstrated a breach of it, such advice was correct for the public policy reasons already expressed. Under the circumstances, there is nothing in defendant Bloomfield Motors' criticism of the charge on that score which would warrant reversal of the judgment.

[409] IV.

PROOF OF BREACH OF THE IMPLIED WARRANTY OF MERCHANTABILITY.

Both defendants argue that the proof adduced by plaintiffs as to the happening of the accident was not sufficient to demonstrate a breach of warranty. Consequently, they claim that their motion for judgment should have been granted by the trial court. We cannot agree. In our view, the total effect of the circumstances shown from purchase to accident is adequate to raise an inference that the car was defective and that such condition was causally related to the mishap. See, Yormack v. Farmers' Co-op. Ass'n of N.J., 11 N.J. Super. 416 (App. Div. 1951); Knapp v. Willys-Ardmore, Inc., supra. Thus, determination by the jury was required.

The proof adduced by the plaintiffs disclosed that after servicing and delivery of the car, it operated normally during the succeeding ten days, so far as the Henningsens could tell. They had no difficulty or mishap of any kind, and it neither had nor required any servicing. It was driven by them alone. The owners service certificate provided for return for further servicing at the end of the first 1,000 miles — less than half of which had been covered at the time of Mrs. Henningsen's injury.

The facts, detailed above, show that on the day of the accident, ten days after delivery, Mrs. Henningsen was driving in a normal fashion, on a smooth highway, when unexpectedly the steering wheel and the front wheels of the car went into the bizarre action described. Can it reasonably be said that the circumstances do not warrant an inference of unsuitability for ordinary use against the manufacturer and the dealer? Obviously there is nothing in the proof to indicate in the slightest that the most unusual action of the steering wheel was caused by Mrs. Henningsen's operation of the automobile on this day, or by the use of the car between delivery and the happening of the incident. Nor is there [410] anything to suggest that any external force or condition unrelated to the manufacturing or servicing of the car operated as an inducing or even concurring factor.

It is a commonplace of our law that on a motion for dismissal all of the evidence and the inferences therefrom must be taken most favorably to the plaintiff. And if reasonable men studying the proof in that light could conclude that the car was not merchantable, the issue had to be submitted to the jury for determination. Applying that test here, we have no hesitation in holding that the settlement of the question of breach of warranty as to both defendants was properly placed in the hands of the jury. In our judgment, the evidence shown, as a matter of preponderance of probabilities, would justify the conclusion by the ultimate triers of the facts that the accident was caused by a failure of the steering mechanism of the car and that such failure constituted a breach of the warranty of both defendants.

A somewhat similar case is Knapp v. Willys-Ardmore, Inc., supra, where liability was predicated upon breach of implied warranty of merchantability. Plaintiff bought a new car from defendant and drove it 107 miles in eight days. During that period it was used only for pleasure and was driven properly and without incident. Immediately before the accident, Mrs. Knapp was driving along at a moderate speed, when the steering mechanism failed to function and the car suddenly veered to the right over the curb and into a telephone pole. After the collision it was noted that the tie-rod at the right end of the steering assembly had become disconnected and had dropped to the ground. Inspection showed that the rod had been bent and a connecting sleeve or turn-buckle had been broken. A witness who had been driving in the opposite direction testified that he observed the right front wheel "wobbling" and the car "seemed to go out of control," over the curb and into the pole. A mechanic gave some testimony from which it might be inferred that the tie-rod had been broken before the impact with the pole. [411] It was held that the facts created a reasonable inference that the car was defective when delivered and that the defect was not caused by subsequent conduct of the plaintiff. The court pointed out that while existence of a defect cannot be found on the basis of mere conjecture or guess, yet it is not necessary to exclude every other possible cause which the ingenuity of counsel might suggest. The finding of breach of an implied warranty of merchantability was held to be circumstantially supportable by the necessary quantum of proof.

It may be conceded that the opinion of the automobile expert produced by the plaintiffs in the present case was not entitled to very much probative force. However, his assertion in answer to the hypothetical question that the unusual action of the steering wheel and front wheels must have been due to a mechanical defect or failure of something from the steering wheel down to the front wheels, that "something down there had to drop off or break loose" to cause the car to act in the manner it did, cannot be rejected as a matter of law. Its evaluation under all of the circumstances was a matter for jury consideration. Defendants argue that the proof of his qualifications was not adequate to warrant the admission of his testimony. But the matter of an expert's competency to testify is primarily for the discretion of the trial court. An appellate tribunal will not interfere unless a clear abuse of discretion appears. Carbone v. Warburton, 11 N.J. 418 (1953). In our view, the experience of the witness, as an automobile repairman and as an appraiser of damaged cars, was such as to preclude a holding by us that the trial court accepted his qualifications without any reasonable basis.

In M. Dietz & Sons, Inc. v. Miller, 43 N.J. Super. 334 (App. Div. 1957), defendant purchased a new car from a dealer. He drove it only 50 miles when, on the day of the accident while driving in traffic, he applied the brakes in order to stop in back of the Dietz vehicle. The brakes failed completely and Miller ran into the rear of that car. [412] Dietz sued Miller, who cross-claimed against the dealer for negligent installation or inspection of the power brakes. The Appellate Division properly declared that "even where the rule of res ipsa loquitur does not apply, the plaintiff may nevertheless show `defendant's negligence by circumstantial or direct evidence of specific acts from which liability may be inferred.'" Supra, at page 338. And further that: "The real issue here is the efficacy of the circumstantial proof to create a fact issue as to defendant's negligence either in installation or inspection of the unit upon installation. There can be no doubt as to the sufficiency of the evidence to justify the finding that there was a power brake failure * * *." Supra, at pages 338-339. And see, Mazzietelle v. Belleville Nutley Buick Co., 46 N.J. Super. 410 (App. Div. 1957); Yormack v. Farmers' Co-op. Ass'n of N.J., supra. Although these latter cases sound in negligence, the test for finding a jury question in them is even more stringent. Circumstantial evidence sufficient to create a jury question as to the negligence of a manufacturer or dealer would clearly justify the same result where the issue is breach of warranty. As the late Chief Justice Vanderbilt said, in Simon v. Graham Bakery, supra, liability would exist notwithstanding all care was used to prevent a breach.

V.

THE DEFENSE OF LACK OF PRIVITY AGAINST MRS. HENNINGSEN.

Both defendants contend that since there was no privity of contract between them and Mrs. Henningsen, she cannot recover for breach of any warranty made by either of them. On the facts, as they were developed, we agree that she was not a party to the purchase agreement. Faber v. Creswick, 31 N.J. 234 (1959). Her right to maintain the action, therefore, depends upon whether she occupies such legal status thereunder as to permit her to take advantage of a breach of defendants' implied warranties.

[413] For the most part the cases that have been considered dealt with the right of the buyer or consumer to maintain an action against the manufacturer where the contract of sale was with a dealer and the buyer had no contractual relationship with the manufacturer. In the present matter, the basic contractual relationship is between Claus Henningsen, Chrysler, and Bloomfield Motors, Inc. The precise issue presented is whether Mrs. Henningsen, who is not a party to their respective warranties, may claim under them. In our judgment, the principles of those cases and the supporting texts are just as proximately applicable to her situation. We are convinced that the cause of justice in this area of the law can be served only by recognizing that she is such a person who, in the reasonable contemplation of the parties to the warranty, might be expected to become a user of the automobile. Accordingly, her lack of privity does not stand in the way of prosecution of the injury suit against the defendant Chrysler.

The context in which the problem of privity with respect to the dealer must be considered, is much the same. Defendant Bloomfield Motors is chargeable with an implied warranty of merchantability to Claus Henningsen. There is no need to engage in a separate or extended discussion of the question. The legal principles which control are the same in quality. The manufacturer establishes the network of trade and the dealer is a unit utilized in that network to accomplish sales. He is the beneficiary of the same express and implied warranties from the manufacturer as he extends to the buyer of the automobile. If he is sued alone, he may implead the manufacturer. Davis v. Radford, 233 N.C. 283, 63 S.E.2d 822, 24 A.L.R.2d 906 (Sup. Ct. 1951); Annotation, 24 A.L.R.2d 913 (1952). His understanding of the expected use of the car by persons other than the buyer is the same as that of the manufacturer. And so, his claim to the doctrine of privity should rise no higher than that of the manufacturer. See, e.g., Haut v. [414] Kleene, supra; Greenberg v. Lorenz, supra; Ryan v. Progressive Grocery Stores, Inc., supra.

The situation before us in its legal aspects is very similar to that which we dealt with recently in Faber v. Creswick, supra. There, in a landlord and tenant relationship the lease contained a covenant to have the premises in good repair at the inception of the occupancy. The wife of the tenant was injured by reason of a breach of that agreement. We held that she was entitled to recover damages even though she was not a party to the lease. In doing so, our approval was given to the doctrine proposed by Section 357 of the Restatement of Torts that where a lessor agrees to keep the premises let in good repair, he is subject to liability for bodily harm caused to the lessee and others on the land with his consent by a condition of disrepair. True, the suit in Faber was in tort while this one is in contract. But it cannot be overlooked that historically actions on warranties were in tort also, sounding in deceit. Simon v. Graham Bakery, supra, 17 N.J., at pages 528, 529; 1 Williston on Sales, supra, §§ 195-197. The contract theory gradually emerged, although the tort idea has continued to lurk in the background, making the warranty "a curious hybrid of tort and contract." Prosser, supra, § 83. An awareness of this evolution makes for ready acceptance of the relaxation of rigid concepts of privity when third persons, who in the reasonable contemplation of the parties to a warranty might be expected to use or consume the product sold, are injured by its unwholesome or defective state.

It is important to express the right of Mrs. Henningsen to maintain her action in terms of a general principle. To what extent may lack of privity be disregarded in suits on such warranties? In that regard, the Faber case points the way. By a parity of reasoning, it is our opinion that an implied warranty of merchantability chargeable to either an automobile manufacturer or a dealer extends to the purchaser of the car, members of his family, and to other persons occupying or using it with his consent. It would be [415] wholly opposed to reality to say that use by such persons is not within the anticipation of parties to such a warranty of reasonable suitability of an automobile for ordinary highway operation. Those persons must be considered within the distributive chain.

Harper and James suggest that this remedy ought to run to members of the public, bystanders, for example, who are in the path of harm from a defective automobile. 2 Harper & James, supra, note 6, p. 1572. Section 2-318 of the Uniform Commercial Code proposes that the warranty be extended to "any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty." And the section provides also that "A seller may not exclude or limit the operation" of the extension. A footnote thereto says that beyond this provision "the section is neutral and is not intended to enlarge or restrict the developing case law on whether the seller's warranties, given to his buyer, who resells, extend to other persons in the distributive chain." Uniform Commercial Code, supra, at p. 100.

It is not necessary in this case to establish the outside limits of the warranty protection. For present purposes, with respect to automobiles, it suffices to promulgate the principle set forth above.

In his charge as to Mrs. Henningsen's right to recover on the implied warranty, the trial court referred to her husband's testimony that he was buying the car for her use, and then instructed the jury that on such facts the warranty extended to her. In view of our holding, obviously the protection of the warranty runs to her as an incident of the sale without regard to such testimony. Accordingly, the contention that the instruction was reversible error must be rejected.

Defendants rely upon certain cases for the proposition that lack of privity of contract bars Mrs. Henningsen's recovery. [416] The pertinent ones are Tomlinson v. Armour & Co., supra; Cassini v. Curtis Candy Co., supra; Schlosser v. Goldberg, 123 N.J.L. 470 (Sup. Ct. 1939); General Home, etc., Co. v. American, etc., Inc., 26 N.J. Misc. 24 (Cir. Ct. 1947). Tomlinson v. Armour & Co. provides the foundation for the others. It was decided 52 years ago and the principle on which defendants seek support for their case is contained in a short statement which, if applied in the light of the modern marketing conditions, is not inconsistent with the basic substance of the rule we have now espoused. In discussing the legal consequences of a sale of canned ham, Chancellor Pitney said:

"Whether a warranty be express or implied, it is a matter of contract, rendering the maker liable in case of breach, notwithstanding he used all care to prevent a breach, but rendering him liable in ordinary circumstances only to the party with whom he contracted, or to others for whose benefit the contract was made." 75 N.J.L., at pages 754-755. (Emphasis ours)

In 1908, the need of the community for the making of distinctions growing out of the nature of the contract was not as pressing as it is in this commercial era. A common rule was applied, as indicated by the citation of Marvin Safe Co. v. Ward, 46 N.J.L. 19 (Sup. Ct. 1884), and Styles v. F.R. Long Company, 67 N.J.L. 413 (Sup. Ct. 1902), which involved agreements wholly unrelated to the sale of products for consumer use. In this day, given the present situation, it is extremely unlikely that such an enlightened jurist as Chancellor Pitney would not find his expression that "others for whose benefit the contract was made" could sue for its breach compatible in spirit with the doctrine we deem to be necessary in the interest of justice. In any event, to the extent that Tomlinson v. Armour & Co. and its cited progeny conflict with our ruling, they can no longer be considered the law of this State. See Collopy v. Newark Eye and Ear Infirmary, supra.

The final argument on this point relates to the damage claim of Claus Henningsen. That claim has two [417] aspects: one for property damage to the automobile and the other for medical and hospital expenses and loss of his wife's society and services. As to the first, he being an actual party to the contract of sale, and the owner of the automobile, clearly the property damage is recoverable. The second claim is a derivative one, stemming from his wife's right. Faber v. Creswick, supra. But it is universally known that in family relations husbands and fathers are ordinarily responsible for such expenses of spouses and children. It would be illogical to accept the right of a wife to recover in contract for breach of warranty and to hold that the husband's derivative claim was not within the contemplation of the parties when the agreement of sale was made. For this reason it was proper to submit Henningsen's consequential losses to the jury as an element of damage.

VI.

Plaintiffs contend on cross-appeal that the negligence claim against the defendants should not have been dismissed. Their position is that on the facts developed, the issue should have been submitted to the jury for determination. The result we have reached on the other aspects of the case makes it unnecessary to consider the problem. For that reason we express no opinion thereon.

All other ground of appeal raised by both parties have been examined and we find no reversible error in any of them.

VII.

Under all of the circumstances outlined above, the judgments in favor of the plaintiffs and against defendants are affirmed.

For affirmance — Chief Justice WEINTRAUB, and Justices BURLING, JACOBS, FRANCIS, PROCTOR and SCHETTINO — 6.

For reversal — None.

[350 F.2d 446]

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[350 F.2d 447]

Mr. Pierre E. Dostert, Washington, D. C., counsel for appellants in No. 18,605, argued for all appellants.

        Mr. R. R. Curry, Washington, D. C., for appellant in No. 18,604.

        Mr. Harry Protas, Washington, D. C., for appellee.

        Mr. Gerhard P. Van Arkel (appointed by this court), Washington, D. C., as amicus curiae.

        Before BAZELON, Chief Judge, and DANAHER and WRIGHT, Circuit Judges.

        J. SKELLY WRIGHT, Circuit Judge:

        Appellee, Walker-Thomas Furniture Company, operates a retail furniture store in the District of Columbia. During the period from 1957 to 1962 each appellant in these cases purchased a number of household items from Walker-Thomas, for which payment was to be made in installments. The terms of each purchase were contained in a printed form contract which set forth the value of the purchased item and purported to lease the item to appellant for a stipulated monthly rent payment. The contract then provided, in substance, that title would remain in Walker-Thomas until the total of all the monthly payments made equaled the stated value of the item, at which time appellants could take title. In the event of a default in the payment of any monthly installment, Walker-Thomas could repossess the item.

        The contract further provided that "the amount of each periodical installment payment to be made by purchaser to the Company under this present lease shall be inclusive of and not in addition to the amount of each installment payment to be made by purchaser under such prior leases, bills or accounts; and all payments now and hereafter made by purchaser shall be credited pro rata on all outstanding leases, bills and accounts due the Company by purchaser at the time each such payment is made." Emphasis added.) The effect of this rather obscure provision was to keep a balance due on every item purchased until the balance due on all items, whenever purchased, was liquidated. As a result, the debt incurred at the time of purchase of each item was secured by the right to repossess all the items previously purchased by the same purchaser, and each new item purchased automatically became subject to a security interest arising out of the previous dealings.

        On May 12, 1962, appellant Thorne purchased an item described as a Daveno, three tables, and two lamps, having total stated value of $391.10. Shortly thereafter, he defaulted on his monthly payments and appellee sought to replevy all the items purchased since the first transaction in 1958. Similarly, on April 17, 1962, appellant Williams bought a stereo set of stated value of $514.95.¹ She too defaulted shortly thereafter, and appellee sought to replevy all the items purchased since December, 1957. The Court of General Sessions granted judgment for appellee. The District of Columbia Court of Appeals affirmed, and we granted appellants' motion for leave to appeal to this court.

        Appellants' principal contention, rejected by both the trial and the appellate courts below, is that these contracts, or at least some of them, are unconscionable and, hence, not enforceable. In its opinion

[350 F.2d 448]

in Williams v. Walker-Thomas Furniture Company, 198 A.2d 914, 916 (1964), the District of Columbia Court of Appeals explained its rejection of this contention as follows:

"Appellant's second argument presents a more serious question. The record reveals that prior to the last purchase appellant had reduced the balance in her account to $164. The last purchase, a stereo set, raised the balance due to $678. Significantly, at the time of this and the preceding purchases, appellee was aware of appellant's financial position. The reverse side of the stereo contract listed the name of appellant's social worker and her $218 monthly stipend from the government. Nevertheless, with full knowledge that appellant had to feed, clothe and support both herself and seven children on this amount, appellee sold her a $514 stereo set.

"We cannot condemn too strongly appellee's conduct. It raises serious questions of sharp practice and irresponsible business dealings. A review of the legislation in the District of Columbia affecting retail sales and the pertinent decisions of the highest court in this jurisdiction disclose, however, no ground upon which this court can declare the contracts in question contrary to public policy. We note that were the Maryland Retail Installment Sales Act, Art. 83 §§ 128-153, or its equivalent, in force in the District of Columbia, we could grant appellant appropriate relief. We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar."

        We do not agree that the court lacked the power to refuse enforcement to contracts found to be unconscionable. In other jurisdictions, it has been held as a matter of common law that unconscionable contracts are not enforceable.² While no decision of this court so holding has been found, the notion that an unconscionable bargain should not be given full enforcement is by no means novel. In Scott v. United States, 79 U.S. (12 Wall.) 443, 445, 20 L.Ed. 438 (1870), the Supreme Court stated:

"* * * If a contract be unreasonable and unconscionable, but not void for fraud, a court of law will give to the party who sues for its breach damages, not according to its letter, but only such as he is equitably entitled to. * * *"³

        Since we have never adopted or rejected such a rule,⁴ the question here presented is actually one of first impression.

        Congress has recently enacted the Uniform Commercial Code, which specifically provides that the court may refuse to enforce a contract which it finds to be unconscionable at the time it was made. 28 D.C.CODE § 2-302 (Supp. IV 1965). The enactment of this section, which occurred subsequent to the contracts here in suit, does not mean that

[350 F.2d 449]

the common law of the District of Columbia was otherwise at the time of enactment, nor does it preclude the court from adopting a similar rule in the exercise of its powers to develop the common law for the District of Columbia. In fact, in view of the absence of prior authority on the point, we consider the congressional adoption of § 2-302 persuasive authority for following the rationale of the cases from which the section is explicitly derived.⁵ Accordingly, we hold that where the element of unconscionability is present at the time a contract is made, the contract should not be enforced.

        Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.⁶ Whether a meaningful choice is present in a particular case can only be determined by consideration of all the circumstances surrounding the transaction. In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power.⁷ The manner in which the contract was entered is also relevant to this consideration. Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain.⁸ But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the

[350 F.2d 450]

agreement are not to be questioned⁹ should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.¹⁰

        In determining reasonableness or fairness, the primary concern must be with the terms of the contract considered in light of the circumstances existing when the contract was made. The test is not simple, nor can it be mechanically applied. The terms are to be considered "in the light of the general commercial background and the commercial needs of the particular trade or case."¹¹ Corbin suggests the test as being whether the terms are "so extreme as to appear unconscionable according to the mores and business practices of the time and place." 1 CORBIN, op. cit. supra Note 2.¹² We think this formulation correctly states the test to be applied in those cases where no meaningful choice was exercised upon entering the contract.

        Because the trial court and the appellate court did not feel that enforcement could be refused, no findings were made on the possible unconscionability of the contracts in these cases. Since the record is not sufficient for our deciding the issue as a matter of law, the cases must be remanded to the trial court for further proceedings.

        So ordered.

        DANAHER, Circuit Judge (dissenting):

        The District of Columbia Court of Appeals obviously was as unhappy about the situation here presented as any of us can possibly be. Its opinion in the Williams case, quoted in the majority text, concludes: "We think Congress should consider corrective legislation to protect the public from such exploitive contracts as were utilized in the case at bar."

        My view is thus summed up by an able court which made no finding that there had actually been sharp practice. Rather the appellant seems to have known precisely where she stood.

        There are many aspects of public policy here involved. What is a luxury to some may seem an outright necessity to others. Is public oversight to be required of the expenditures of relief funds? A washing machine, e. g., in the hands of a relief client might become a fruitful source of income. Many relief clients may well need credit, and certain business establishments will take long chances on the sale of items, expecting their pricing policies will afford a degree of protection commensurate with the risk. Perhaps a remedy when necessary will be found within the provisions of the "Loan Shark" law, D.C.CODE §§ 26-601 et seq. (1961).

        I mention such matters only to emphasize the desirability of a cautious approach to any such problem, particularly since the law for so long has allowed parties such great latitude in making their own contracts. I dare say there must annually be thousands upon thousands of installment credit transactions in this jurisdiction, and one can only speculate

[350 F.2d 451]

as to the effect the decision in these cases will have.¹

        I join the District of Columbia Court of Appeals in its disposition of the issues.

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Notes:

        1 At the time of this purchase her account showed a balance of $164 still owing from her prior purchases. The total of all the purchases made over the years in question came to $1,800. The total payments amounted to $1,400.

        2 Campbell Soup Co. v. Wentz, 3 Cir., 172 F.2d 80 (1948); Indianapolis Morris Plan Corporation v. Sparks, 132 Ind.App. 145, 172 N.E.2d 899 (1961); Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A.2d 69, 84-96, 75 A.L.R.2d 1 (1960). Cf. 1 CORBIN, CONTRACTS § 128 (1963).

        3 See Luing v. Peterson, 143 Minn. 6, 172 N.W. 692 (1919); Greer v. Tweed, N.Y. C.P., 13 Abb.Pr., N.S., 427 (1872); Schnell v. Nell, 17 Ind. 29 (1861); and see generally the discussion of the English authorities in Hume v. United States, 132 U.S. 406, 10 S.Ct. 134, 33 L.Ed. 393 (1889).

        4 While some of the statements in the court's opinion in District of Columbia v. Harlan & Hollingsworth Co., 30 App.D.C. 270 (1908), may appear to reject the rule, in reaching its decision upholding the liquidated damages clause in that case the court considered the circumstances existing at the time the contract was made, see 30 App.D.C. at 279, and applied the usual rule on liquidated damages. See 5 CORBIN, CONTRACTS §§ 1054-1075 (1964); Note, 72 YALE L.J. 723, 746-755 (1963). Compare Jaeger v. O'Donoghue, 57 App.D.C. 191, 18 F.2d 1013 (1927).

        5 See Comment, § 2-302, Uniform Commercial Code (1962). Compare Note, 45 VA.L.REV. 583, 590 (1959), where it is predicted that the rule of § 2-302 will be followed by analogy in cases which involve contracts not specifically covered by the section. Cf. 1 STATE OF NEW YORK LAW REVISION COMMISSION, REPORT AND RECORD OF HEARINGS ON THE UNIFORM COMMERCIAL CODE 108-110 (1954) (remarks of Professor Llewellyn).

        6 See Henningsen v. Bloomfield Motors, Inc., supra Note 2; Campbell Soup Co. v. Wentz, supra Note 2.

        7 See Henningsen v. Bloomfield Motors, Inc., supra Note 2, 161 A.2d at 86, and authorities there cited. Inquiry into the relative bargaining power of the two parties is not an inquiry wholly divorced from the general question of unconscionability, since a one-sided bargain is itself evidence of the inequality of the bargaining parties. This fact was vaguely recognized in the common law doctrine of intrinsic fraud, that is, fraud which can be presumed from the grossly unfair nature of the terms of the contract. See the oft-quoted statement of Lord Hardwicke in Earl of Chesterfield v. Janssen, 28 Eng. Rep. 82, 100 (1751):

        "* * * Fraud may be apparent from the intrinsic nature and subject of the bargain itself; such as no man in his senses and not under delusion would make * * *."

        And cf. Hume v. United States, supra Note 3, 132 U.S. at 413, 10 S.Ct. at 137, where the Court characterized the English cases as "cases in which one party took advantage of the other's ignorance of arithmetic to impose upon him, and the fraud was apparent from the face of the contracts." See also Greer v. Tweed, supra Note 3.

        8 See RESTATEMENT, CONTRACTS § 70 (1932); Note, 63 HARV.L.REV. 494 (1950). See also Daley v. People's Building, Loan & Savings Ass'n, 178 Mass. 13, 59 N.E. 452, 453 (1901), in which Mr. Justice Holmes, while sitting on the Supreme Judicial Court of Massachusetts, made this observation:

        "* * * Courts are less and less disposed to interfere with parties making such contracts as they choose, so long as they interfere with no one's welfare but their own. * * * It will be understood that we are speaking of parties standing in an equal position where neither has any oppressive advantage or power * * *."

        9 This rule has never been without exception. In cases involving merely the transfer of unequal amounts of the same commodity, the courts have held the bargain unenforceable for the reason that "in such a case, it is clear, that the law cannot indulge in the presumption of equivalence between the consideration and the promise." 1 WILLISTON, CONTRACTS § 115 (3d ed. 1957).

        10 See the general discussion of "Boiler-Plate Agreements" in LLEWELLYN, THE COMMON LAW TRADITION 362-371 (1960).

        11 Comment, Uniform Commercial Code § 2-307.

        12 See Henningsen v. Bloomfield Motors, Inc., supra Note 2; Mandel v. Liebman, 303 N.Y. 88, 100 N.E.2d 149 (1951). The traditional test as stated in Greer v. Tweed, supra Note 3, 13 Abb.Pr.,N.S., at 429, is "such as no man in his senses and not under delusion would make on the one hand, and as no honest or fair man would accept, on the other."

        1 However the provision ultimately may be applied or in what circumstances, D.C. CODE § 28-2-301 (Supp. IV, 1965) did not become effective until January 1, 1965.

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For the petitioner there was a brief by Henry A. Tessmer, attorney, and Michael E. Geary, of counsel, both of Milwaukee, and oral argument by Michael E. Geary.

For the respondent there was a brief by Louis A. Maier, Jr., and Maier & Fitzpatrick, Ltd., of Milwaukee, and oral argument by Louis A. Maier, Jr.

Affirming 91 Wis.2d 847, 282 N.W.2d 638.

WILLIAM G. CALLOW, J.

On this review we must decide whether a minor who disaffirms a contract for the purchase of a vehicle which is not a necessity must make restitution to the vendor for damage sustained by the vehicle prior to the time the contract was disaffirmed. The court of appeals affirmed the judgment in part, reversed in part, and remanded the cause to the circuit court for Milwaukee County, the Honorable Robert J. Miech presiding.

I.

This matter was before the trial court upon stipulated facts. On or about July 13, 1973, James Halbman, Jr. (Halbman), a minor, entered into an agreement with Michael Lemke (Lemke) whereby Lemke agreed to sell Halbman a 1968 Oldsmobile for the sum of $1,250. Lemke was the manager of L & M Standard Station in Greenfield, Wisconsin, and Halbman was an employe at L & M. At the time the agreement was made Halbman paid Lemke $1,000 cash and took possession of the car. Arrangements were made for Halbman to pay $25 per week until the balance was paid, at which time title would be transferred. About five weeks after the purchase agreement, and after Halbman had paid a total of $1,100 of the purchase price, a connecting rod on the vehicle's engine broke. Lemke, while denying any obligation, offered to assist Halbman in installing a used engine in the vehicle if Halbman, at his expense, could secure one. Halbman declined the offer and in September took the vehicle to a garage where it was repaired at a cost of $637.40. Halbman did not pay the repair bill.

In October of 1973, Lemke endorsed the vehicle's title over to Halbman, although the full purchase price had not been paid by Halbman, in an effort to avoid any liability for the operation, maintenance, or use of the vehicle. On October 15, 1973, Halbman returned the title to Lemke by letter which disaffirmed the purchase contract and demanded the return of all money theretofore paid by Halbman. Lemke did not return the money paid by Halbman.

The repair bill remained unpaid, and the vehicle remained in the garage where the repairs had been made. In the spring of 1974, in satisfaction of a garageman's lien for the outstanding amount, the garage elected to remove the vehicle's engine and transmission and then towed the vehicle to the residence of James Halbman, Sr., the father of the plaintiff minor. Lemke was asked several times to remove the vehicle from the senior Halbman's home, but he declined to do so, claiming he was under no legal obligation to remove it. During the period when the vehicle was at the garage and then subsequently at the home of the plaintiff's father, it was subjected to vandalism, making it unsalvageable.

Halbman initiated this action seeking the return of the $1,100 he had paid toward the purchase of the vehicle, and Lemke counterclaimed for $150, the amount still owing on the contract. Based upon the uncontroverted facts, the trial court granted judgment in favor of Halbman, concluding that when a minor disaffirms a contract for the purchase of an item, he need only offer to return the property remaining in his hands without making restitution for any use or depreciation. In the order granting judgment, the trial court also allowed interest to the plaintiff dating from the disaffirmance of the contract. On postjudgment motions, the court amended its order for judgment to allow interest to the plaintiff from the date of the original order for judgment, July 26, 1978.

Lemke appealed to the court of appeals, and Halbman cross-appealed from the disallowance of prejudgment interest. The appellate court affirmed the trial court with respect to the question of restitution for depreciation, but reversed on the question of prejudgment interest, remanding the cause for reimposition of interest dating from the date of disaffirmance. The question of prejudgment interest is not before us on this review.

II.

The sole issue before us is whether a minor, having disaffirmed a contract for the purchase of an item which is not a necessity and having tendered the property back to the vendor, must make restitution to the vendor for damage to the property prior to the disaffirmance. Lemke argues that he should be entitled to recover for the damage to the vehicle up to the time of disaffirmance, which he claims equals the amount of the repair bill.

[1]

Neither party challenges the absolute right of a minor to disaffirm a contract for the purchase of items which are not necessities. That right, variously known as the doctrine of incapacity or the "infancy doctrine," is one of the oldest and most venerable of our common law traditions. See: Grauman, Marx & Cline Co. v. Krienitz, 142 Wis. 556, 560, 126 N.W. 50 (1910); 2 Williston, Contracts sec. 226 (3d ed. 1959); 42 Am. Jur.2d Infants sec. 84 (1969). Although the origins of the doctrine are somewhat obscure, it is generally recognized that its purpose is the protection of minors from foolishly squandering their wealth through improvident contracts with crafty adults who would take advantage of them in the marketplace. Kiefer v. Fred Howe Motors, Inc., 39 Wis. 2d 20, 24, 158 N.W.2d 288 (1968). Thus it is settled law in this state that a contract of a minor for items which are not necessities is void or voidable at the minor's option. Id. at 23; Schoenung v. Gallet,206 Wis. 52, 55, 238 N.W. 852 (1931); Grauman, Marx & Cline v. Krienitz, supra at 560-61; Thormaehlen v. Kaeppel, 86 Wis. 378, 380, 56 N.W. 1089 (1893).

[2, 3]

Once there has been a disaffirmance, however, as in this case between a minor vendee and an adult vendor, unresolved problems arise regarding the rights and responsibilities of the parties relative to the disposition of the consideration exchanged on the contract. As a general rule a minor who disaffirms a contract is entitled to recover all consideration he has conferred incident to the transaction. Schoenung v. Gallet, supra. In return the minor is expected to restore as much of the consideration as, at the time of disaffirmance, remains in the minor's possession. Thormaehlen v. Kaeppel, supra at 380; Grauman, Marx & Cline v. Krienitz, supra at 560-61. See also: Restatement of Restitution, sec. 62, comment b, (1937); Restatement (Second) of Contracts, sec. 18B, comment c, (Tent. Draft No. 1, 1964). The minor's right to disaffirm is not contingent upon the return of the property, however, as disaffirmance is permitted even where such return cannot be made. Olson v. Veum, 197 Wis. 342, 345, 222 N.W. 233 (1928). See also: Nelson v. Browning, 391 S.W.2d 873, 875-76 (Mo. 1965); Boudreaux v. State Farm Mutual Auto. Ins. Co., 385 So. 2d 480, 483 (La. App. 1980); Williston, supra,sec. 238, 39-41.

The return of property remaining in the hands of the minor is not the issue presented here. In this case we have a situation where the property cannot be returned to the vendor in its entirety because it has been damaged and therefore diminished in value, and the vendor seeks to recover the depreciation. Although this court has been cognizant of this issue on previous occasions, we have not heretofore resolved it. See: Schoenung v. Gallet, supra at 57-58; Wallace v. Newdale Furniture Co., 188 Wis. 205, 207-08, 205 N.W. 819 (1925).

The law regarding the rights and responsibilities of the parties relative to the consideration exchanged on a disaffirmed contract is characterized by confusion, inconsistency, and a general lack of uniformity as jurisdictions attempt to reach a fair application of the infancy doctrine in today's marketplace. See: Robert G. Edge, Voidability of Minors' Contracts: A Feudal Doctrine in a Modern Economy, 1 Ga. L. Rev. 205 (1967); Walter D. Navin, Jr., The Contracts of Minors Viewed from the Perspective of Fair Exchange, 50 N.C.L. Rev. 517 (1972); Note, Restitution in Minors' Contracts in California, 19 Hastings L. Rev. 1199 (1968); 52 Marq. L. Rev. 437 (1969). See also: John D. McCamus, Restitution of Benefits Conferred Under Minors' Contracts, 28 U.N.B.L.J. 89 (1979); Annot., Infant's Liability for Use or Depreciation of Subject Matter, in Action to Recover Purchase Price Upon His Disaffirmance of Contract to Purchase Goods, 12 A.L.R.3d 1174 (1967). That both parties rely on this court's decision in Olson v. Veum, supra, is symptomatic of the problem.

In Olson a minor, with his brother, an adult, purchased farm implements and materials, paying by signing notes payable at a future date. Prior to the maturity of the first note, the brothers ceased their joint farming business, and the minor abandoned his interest in the material purchased by leaving it with his brother. The vendor initiated an action against the minor to recover on the note, and the minor (who had by then reached majority) disaffirmed. The trial court ordered judgment for the plaintiff on the note, finding there had been insufficient disaffirmance to sustain the plea of infancy. This court reversed, holding that the contract of a minor for the purchase of items which are not necessities may be disaffirmed even when the minor cannot make restitution. Lemke calls our attention to the following language in that decision:

"To sustain the judgment below is to overlook the substantial distinction between a mere denial by an infant of contract liability where the other party is seeking to enforce it and those cases where he who was the minor not only disaffirms such contract but seeks the aid of the court to restore to him that with which he has parted at the making of the contract. In the one case he is using his infancy merely as a shield, in the other also as a sword." 197 Wis. at 344.

From this Lemke infers that when a minor, as a plaintiff, seeks to disaffirm a contract and recover his consideration, different rules should apply than if the minor is defending against an action on the contract by the other party. This theory is not without some support among scholars. See: Calamari and Perillo, The Law of Contracts, sec. 126, 207-09 (Hornbook Series 1970), treating separately the obligations of the infant as a plaintiff and the infant as a defendant.

Additionally, Lemke advances the thesis in the dissenting opinion by court of appeals Judge Cannon, arguing that a disaffirming minor's obligation to make restitution turns upon his ability to do so. For this proposition, the following language in Olson v. Veum, supra at 345, is cited:

"The authorities are clear that when it is shown, as it is here, that the infant cannot make restitution, then his absolute right to disaffirm is not to be questioned."

In this case Lemke argues that the Olson language excuses the minor only when restitution is not possible. Here Lemke holds Halbman's $1,100, and accordingly there is no question as to Halbman's ability to make restitution.

Halbman argues in response that, while the "sword-shield" dichotomy may apply where the minor has misrepresented his age to induce the contract, that did not occur here and he may avoid the contract without making restitution notwithstanding his ability to do so.

[4, 5]

The principal problem is the use of the word "restitution" in Olson. A minor, as we have stated, is under an enforceable duty to return to the vendor, upon disaffirmance, as much of the consideration as remains in his possession. When the contract is disaffirmed, title to that part of the purchased property which is retained by the minor revests in the vendor; it no longer belongs to the minor. See, e.g., Restatement (Second) of Contracts, sec. 18B, comment c, (Tent. Draft No. 1, 1964). The rationale for the rule is plain: a minor who disaffirms a purchase and recovers his purchase price should not also be permitted to profit by retaining the property purchased. The infancy doctrine is designed to protect the minor, sometimes at the expense of an innocent vendor, but it is not to be used to bilk merchants out of property as well as proceeds of the sale. Consequently, it is clear that, when the minor no longer possesses the property which was the subject matter of the contract, the rule requiring the return of property does not apply.^[1]The minor will not be required to give up what he does not have. We conclude that Olson does no more than set forth the foregoing rationale and that the word "restitution" as it is used in that opinion is limited to the return of the property to the vendor. We do not agree with Lemke and the court of appeals dissent that Olsonrequires a minor to make restitution for loss or damage to the property if he is capable of doing so.

Here Lemke seeks restitution of the value of the depreciation by virtue of the damage to the vehicle prior to disaffirmance. Such a recovery would require Halbman to return more than that remaining in his possession. It seeks compensatory value for that which he cannot return. Where there is misrepresentation by a minor or willful destruction of property, the vendor may be able to recover damages in tort. See, e.g., Kiefer v. Fred Howe Motors, Inc., supra;42 Am. Jur.2d Infants sec. 105 (1969). But absent these factors, as in the present case, we believe that to require a disaffirming minor to make restitution for diminished value is, in effect, to bind the minor to a part of the obligation which by law he is privileged to avoid. See: Nelson v. Browning, supra at 875-76; Williston, supra, sec. 238, 39-41.

The cases upon which the petitioner relies for the proposition that a disaffirming minor must make restitution for loss and depreciation serve to illustrate some of the ways other jurisdictions have approached this problem of balancing the needs of minors against the rights of innocent merchants. In Barber v. Gross, 74 S.D. 254, 51 N.W.2d 696 (1952), the South Dakota Supreme Court held that a minor could disaffirm a contract as a defense to an action by the merchant to enforce the contract but that the minor was obligated by a South Dakota statute, upon sufficient proof of loss by the plaintiff, to make restitution for depreciation. Cain v. Coleman, 396 S.W.2d 251 (Tex. Civ. App. 1965), involved a minor seeking to disaffirm a contract for the purchase of a used car where the dealer claimed the minor had misrepresented his age. In reversing summary judgment granted in favor of the minor, the court recognized the minor's obligation to make restitution for the depreciation of the vehicle. The Texas court has also ruled, in a case where there was no issue of misrepresentation, that upon disaffirmance and tender by a minor the vendor is obligated to take the property "as is." Rutherford v. Hughes,228 S.W.2d 909, 912 (Tex. Civ. App. 1950). Scalone v. Talley Motors, Inc., 158 N.Y.S.2d 615, 3 App. Div.2d 674 (1957), and Rose v. Sheehan Buick, Inc., 204 So.2d 903 (Fla. App. 1967), represent the proposition that a disaffirming minor must do equity in the form of restitution for loss or depreciation of the property returned. Because these cases would at some point force the minor to bear the cost of the very improvidence from which the infancy doctrine is supposed to protect him, we cannot follow them.

[6, 7]

As we noted in Kiefer, modifications of the rules governing the capacity of infants to contract are best left to the legislature. Until such changes are forthcoming, however, we hold that, absent misrepresentation or tortious damage to the property, a minor who disaffirms a contract for the purchase of an item which is not a necessity may recover his purchase price without liability for use, depreciation, damage, or other diminution in value.

Recently the Illinois Court of Appeals came to the same conclusion. In Weisbrook v. Clyde C. Netzley, Inc., 58 Ill. App.3d 862, 374 N.E.2d 1102 (1978), a minor sought to disaffirm a contract for the purchase of a vehicle which developed engine trouble after its purchase. In the minor's action the dealer counterclaimed for restitution for use and depreciation. The court affirmed judgment for the minor and, with respect to the dealer's claim for restitution, stated:

"In the present case, of course, the minor plaintiff never misrepresented his age and, in fact, informed defendant that he was 17 years old. Nor did plaintiff represent to defendant that his father was to be the owner or have any interest in the automobile. There is no evidence in the present case that plaintiff at the time of entering the contract with defendant intended anything more than to enjoy his new automobile. He borrowed the total purchase price and paid it to defendant carrying out the transaction fully at the time of taking delivery of the vehicle. Plaintiff sought to disaffirm the contract and the return of the purchase price only when defendant declined to make repairs to it. In these circumstances we believe the weight of authority would permit the minor plaintiff to disaffirm the voidable contract and that defendant-vendor would not be entitled to recoup any damages which he believes he suffered as a result thereof."

Id. at 1107. See also: Johnson Motors, Inc. v. Coleman, 232 So.2d 716 (Miss. 1970); Rutherford v. Hughes, supra; Fisher v. Taylor Motor Co., 249 N.C. 617, 107 S.E. 2d 94 (1959). We believe this result is consistent with the purpose of the infancy doctrine.

By the Court.—The decision of the court of appeals is affirmed.

[1] Although we are not presented with the question here, we recognize there is considerable disagreement among the authorities on whether a minor who disposes of the property should be made to restore the vendor with something in its stead. The general rule appears to limit the minor's responsibility for restoration to specie only. Terrace Company v. Calhoun, 37 Ill. App.3d 757, 347 N.E.2d 315, 320 (1976); Adamowski v. Curtiss-Wright Flying Service, 300 Mass. 281, 15 N.E.2d 467 (1938); Quality Motors v. Hays, 225 S.W.2d 326, 328 (Ark. 1949). But see: Boyce v. Doyle, 113 N.J. Super. 240, 273 A.2d 408 (1971), adopting a "status quo" theory which requires the minor to restore the precontract status quo, even if it means returning proceeds or other value; Fisher v. Taylor Motor Co.,249 N.C. 617, 107 S.E.2d 94 (1959), requiring the minor to restore only the property remaining in the hands of the minor, "`or account for so much of its value as may have been invested in other property which he has in hand or owns and controls.'" Id. at 97. Finally, some attention is given to the "New Hampshire Rule" or benefits theory which requires the disaffirming minor to pay for the contract to the extent he benefited from it. Hall v. Butterfield, 59 N.H. 354 (1879); Porter v. Wilson, 106 N.H. 270, 209 A.2d 730 (1965). See also: 19 Hastings L.J. 1199, 1205-08 (1968); 52 Marq. L. Rev. 437 (1969); Calamari and Perillo, The Law of Contracts, sec. 129, 215-16 (Hornbook Series 1970).

A. Richard Golub and Gary S. Graifman for respondent-appellant.

Sandor Frankel and Peter M. Thall for respondent-appellant.

Chief Judge COOKE and Judges JONES and WACHTLER concur with Judge SIMONS; Judge JASEN dissents in part and votes to affirm in a separate opinion in which Judges FUCHSBERG and MEYER concur.

SIMONS, J.

The issue on this appeal is whether an infant model may disaffirm a prior unrestricted consent executed on her behalf by her parent and maintain an action pursuant to section 51 of the Civil Rights Law against her photographer for republication of photographs of her. We hold that she may not.

Plaintiff is now a well-known actress. For many years prior to these events she had been a child model and in 1975, when she was 10 years of age, she obtained several modeling jobs with defendant through her agent, the Ford Model Agency. One of the jobs, a series of photographs to be financed by Playboy Press, required plaintiff to pose nude in a bathtub. It was intended that these photos would be used in a publication entitled "Portfolio 8" (later renamed "Sugar and Spice"). Before the photographic sessions, plaintiff's mother and legal guardian, Teri Shields, executed two consents in favor of defendant.^[*] After the pictures were taken, they were used not only in "Sugar and Spice" but also, to the knowledge of plaintiff and her mother, in other publications and in a display of larger-than-life photo enlargements in the windows of a store on Fifth Avenue in New York City. Indeed, plaintiff subsequently used the photos in a book that she published about herself and to do so her mother obtained an authorization from defendant to use them. Over the years defendant has also photographed plaintiff for Penthouse Magazine, New York Magazine and for advertising by the Courtauldts and Avon companies.

In 1980 plaintiff learned that several of the 1975 photographs had appeared in a French magazine called "Photo" and, disturbed by that publication and by information that defendant intended others, she attempted to buy the negatives. In 1981, she commenced this action in tort and contract seeking compensatory and punitive damages and an injunction permanently enjoining defendant from any further use of the photographs. Special Term granted plaintiff a preliminary injunction. Although it determined that as a general proposition consents given by a parent pursuant to section 51 barred the infant's action, it found that plaintiff's claim that the consents were invalid or restricted the use of the photographs by Playboy Press presented questions of fact. After a nonjury trial the court ruled that the consents were unrestricted as to time and use and it therefore dismissed plaintiff's complaint. In doing so, however, it granted plaintiff limited relief. On defendant's stipulation it permanently enjoined defendant from using the photographs in "pornographic magazines or publications whose appeal is of a predominantly prurient nature" and it charged him with the duty of policing their use. The Appellate Division, by a divided court, modified the judgment on the law and granted plaintiff a permanent injunction enjoining defendant from using the pictures for purposes of advertising or trade. Two Justices voted for the result believing that plaintiff possessed a common-law right to disaffirm the consent given defendant by her parent. Justice KUPFERMAN concurred, believing that in addition to the common-law right, the consents were governed by section 3-105 of the General Obligations Law and therefore could be interpreted to have expired after three years. Justice ASCH also concurred in the result but on other grounds. He construed the transaction as a sale of pictures, not services, and applying the Uniform Commercial Code, he interpreted the consents and found them void because they were "unconscionable" (see Uniform Commercial Code, §§ 2-102, 2-302). Plaintiff had not raised that issue before the trial court, however, nor did the parties present evidence on it and we have not considered it (see Uniform Commercial Code, § 2-302, subd [2]). Justice CARRO dissented and voted to affirm the judgment of Trial Term. It was his view that the consents given in conformity with the statute constituted general releases and provided a complete defense to plaintiff's subsequent action.

The parties have filed cross appeals. Defendant requests reinstatement of the trial court's judgment. Plaintiff requests, in the alternative, that the order of the Appellate Division be modified by striking the limitation enjoining use only for purposes of advertising and trade, or that the order of the Appellate Division should be affirmed or, failing both of these, that a new trial be granted. Since the Appellate Division accepted the trial court's findings that the consents were valid and unrestricted as to time and use, we are presented with only a narrow issue of law concerning the legal effect to be given to the parent's consents.

Historically, New York common law did not recognize a cause of action for invasion of privacy (Arrington v New York Times Co., 55 N.Y.2d 433; Roberson v Rochester Folding Box Co., 171 N.Y. 538). In 1909, however, responding to the Robersondecision, the Legislature enacted sections 50 and 51 of the Civil Rights Law. Section 50 is penal and makes it a misdemeanor to use a living person's name, portrait or picture for advertising purposes without prior "written consent". Section 51 is remedial and creates a related civil cause of action on behalf of the injured party permitting relief by injunction or damages (see Arrington v New York Times Co., supra, at p 439; Flores v Mosler Safe Co., 7 N.Y.2d 276, 280). Section 51 of the statute states that the prior "written consent" which will bar the civil action is to be as "above provided", referring to section 50, and section 50, in turn, provides that: "A person, firm or corporation that uses for advertising purposes, or for the purposes of trade, the name, portrait or picture of any living person without having first obtained the written consent of such person, or if a minor of his or her parent or guardian, is guilty of a misdemeanor" (emphasis added).

Thus, whereas in Roberson, the infant plaintiff had no cause of action against the advertiser under the common law for using her pictures, the new statute gives a cause of action to those similarly situated unless they have executed a consent or release in writing to the advertiser before use of the photographs. The statute acts to restrict an advertiser's prior unrestrained common-law right to use another's photograph until written consent is obtained. Once written consent is obtained, however, the photograph may be published as permitted by its terms (see Welch v Mr. Christmas, 57 N.Y.2d 143).

Concededly, at common law an infant could disaffirm his written consent (see Joseph v Schatzkin, 259 N.Y. 241; Casey v Kastel, 237 N.Y. 305) or, for that matter, a consent executed by another on his or her behalf (see Lee v Silver, 262 App Div 149, affd 287 N.Y. 575; Goldfinger v Doherty, 153 Misc 826, affd 244 App Div 779; Aborn v Janis, 62 Misc 95, affd 122 App Div 893). Notwithstanding these rules, it is clear that the Legislature may abrogate an infant's common-law right to disaffirm (see, e.g., General Obligations Law, § 3-101, subd 3; § 3-102, subd 1; § 3-103; Education Law, § 281; Insurance Law, § 145) or, conversely, it may confer upon infants the right to make binding contracts (see Matter of T.W.C., 38 N.Y.2d 128, 130 [Domestic Relations Law, § 115-b]; Hamm v Prudential Ins. Co. of Amer., 137 App Div 504 [Insurance Law, § 145, formerly § 55]; Matter of Presler, 171 Misc 559). Where a statute expressly permits a certain class of agreements to be made by infants, that settles the question and makes the agreement valid and enforceable. That is precisely what happened here. The Legislature, by adopting section 51, created a new cause of action and it provided in the statute itself the method for obtaining an infant's consent to avoid liability. Construing the statute strictly, as we must since it is in derogation of the common law (see McKinney's Cons Laws of NY, Book 1, Statutes, § 301, subd b), the parent's consent is binding on the infant and no words prohibiting disaffirmance are necessary to effectuate the legislative intent. Inasmuch as the consents in this case complied with the statutory requirements, they were valid and may not be disaffirmed (see Matter of T.W.C., supra).

Nor do we believe that the consents may be considered void because the parties failed to comply with the provisions of section 3-105 of the General Obligations Law requiring prior court approval of infants' contracts. By its terms, section 3-105 applies only to performing artists, such as actors, musicians, dancers and professional athletes moreover, it is apparent by comparing other statutes with it that the Legislature knowingly has differentiated between child performers and child models. Thus, section 3229 (formerly § 3216-c) of the Education Law, which applies to "Child performers", is referred to in section 3-105 (subd 2, par a) of the General Obligations Law but section 3230 of the Education Law, which applies to child models, is not. Child models are also recognized as a separate work classification in section 172 (subd 2, par f) of the Labor Law. Furthermore, section 3-105 was not designed to expand the rights of infants to disaffirm their contracts, as the concurring Justice at the Appellate Division would apply it, but to provide assurance to those required to deal with infants that the infants would not later disaffirm executory contracts to the adult contracting party's disadvantage (see Matter of Prinze [Jonas], 38 N.Y.2d 570, 575). Sections 50 and 51 as we interpret them serve the same purpose, to bring certainty to an important industry which necessarily uses minors for its work. This same need for certainty was the impetus behind not only section 3-105 but the various other sections of the General Obligations Law which prohibit disaffirmance of an infant's contract.

Realistically, the procedures of prior court approval set forth in section 3-105, while entirely appropriate and necessary for performing artists and professional athletes, are impractical for a child model who, whether employed regularly or sporadically, works from session to session, sometimes for many different photographers. Moreover, they work for fees which are relatively modest when compared to those received by actors or professional athletes who may be employed by one employer at considerably greater remuneration for a statutorily permissible three-year term. Indeed, the fee in this case was $450, hardly sufficient to warrant the elaborate court proceedings required by section 3-105 or to necessitate a court's determination of what part should be set aside and preserved for the infant's future needs. Nor do we think court approval necessary under the circumstances existing in the normal child model's career. Given the nature of the employment, it is entirely reasonable for the Legislature to substitute the parents' judgment and approval of what is best for their child for that of a court.

It should be noted that plaintiff did not contend that the photographs were obscene or pornographic. Her only complaint was that she was embarrassed because "they [the photographs] are not me now." The trial court specifically found that the photographs were not pornographic and it enjoined use of them in pornographic publications. Thus, there is no need to discuss the unenforceability of certain contracts which violate public policy (see, e.g., Penal Law, § 235.00 et seq.) or to equate an infant's common-law right to disaffirm with that principle, as the dissent apparently does.

Finally, it is claimed that the application of the statute as we interpret it may result in unanticipated and untoward consequences. If that be so, there is an obvious remedy. A parent who wishes to limit the publicity and exposure of her child need only limit the use authorized in the consent, for a defendant's immunity from a claim for invasion of privacy is no broader than the consent executed to him (see Welch v Mr. Christmas, 57 N.Y.2d 143, supra; Adrian v Unterman, 281 App Div 81,affd 306 N.Y. 771).

The order of the Appellate Division should be modified by striking the further injunction against use of the photographs for uses of advertising and trade, and as so modified, the order should be affirmed.

JASEN, J. (dissenting).

Since I believe that the interests of society and this State in protecting its children must be placed above any concern for trade or commercialism, I am compelled to dissent. The State has the right and indeed the obligation to afford extraordinary protection to minors.

At the outset, it should be made clear that this case does not involve the undoing of a written consent given by a mother to invade her infant daughter's privacy so as to affect prior benefits derived by a person relying on the validity of the consent pursuant to sections 50 and 51 of the Civil Rights Law. Rather, what is involved is the right of an infant, now 17 years of age, to disaffirm her mother's consent with respect to future use of a nude photograph taken of her at age 10.

The majority holds, as a matter of law, not only in this case but as to all present and future consents executed by parents on behalf of children pursuant to sections 50 and 51 of the Civil Rights Law, that once a parent consents to the invasion of privacy of a child, the child is forever bound by that consent and may never disaffirm the continued invasion of his or her privacy, even where the continued invasion of the child's privacy may cause the child enormous embarrassment, distress and humiliation.

I find this difficult to accept as a rational rule of law, particularly so when one considers that it has long been the rule in this State that a minor enjoys an almost absolute right to disaffirm a contract entered into either by the minor or by the minor's parent on behalf of the minor (Sternlieb v Normandie Nat. Securities Corp., 263 N.Y. 245; Joseph v Schatzkin, 259 N.Y. 241; International Text Book Co. v Connelly, 206 N.Y. 188; Rice v Butler, 160 N.Y. 578; Sparman v Keim, 83 N.Y. 245; Green v Green, 69 N.Y. 553) and the statute in question does not in any manner abrogate this salutary right.

This right has been upheld despite the fact that the minor held himself out to be an adult (Sternlieb v Normandie Nat. Securities Corp., supra) or that a parent also attempted to contractually bind the minor (Kaufman v American Youth Hostels, 13 Misc 2d 8, mod on other grounds 6 AD2d 223, mod and certified question answered in negative 5 N.Y.2d 1016). Significantly, whether or not the minor can restore the other contracting party to the position he was in prior to entering the contract is pertinent only to the extent that the minor, by disaffirming the contract, cannot put himself into a better position than he was in before entering the contract. (Sternlieb v Normandie Nat. Securities Corp., supra; Rice v Butler,supra.) In the past, this court has noted that those who contract with minors do so at their own peril. (Joseph v Schatzkin, supra, at p 243.)

Understandably, such a broad right has evolved as a result of the State's policy to provide children with as much protection as possible against being taken advantage of or exploited by adults. "The right to rescind is a legal right established for the protection of the infant" (Green v Green, supra, at p 556). This right is founded in the legal concept that an infant is incapable of contracting because he does not understand the scope of his rights and he cannot appreciate the consequences and ramifications of his decisions. Furthermore, it is feared that as an infant he may well be under the complete influence of an adult or may be unable to act in any manner which would allow him to defend his rights and interests. (28 NY Jur, Infants, § 3, pp 221-222.) Allowing a minor the right to disaffirm a contract is merely one way the common law developed to resolve those inequities and afford children the protection they require to compensate for their immaturity.

Can there be any question that the State has a compelling interest in protecting children? Indeed, the most priceless possessions we have in the Nation are our children. Recognizing this compelling interest in children, the State has assumed the role of parens patriae, undertaking with that role the responsibility of protecting children from their own inexperience. Acting in that capacity, the State has put the interests of minors above that of adults, organizations or businesses. (Rice v Butler, supra; Kaufman v American Youth Hostels, supra; Sternlieb v Normandie Nat. Securities Corp., supra.) The broad right given a minor to disaffirm a contract is, of course, an obvious example of the State's attempt to afford an infant protection against exploitation by adults. (28 NY Jur, Infants, op. cit.) Thus, I am persuaded that, in this case, 17-year-old Brooke Shields should be afforded the right to disaffirm her mother's consent to use a photograph of her in the nude, taken when she was 10 years old, unless it can be said, as the majority holds, that the Legislature intended to abrogate that right when it enacted sections 50 and 51 of the Civil Rights Law.

The legislative history of this statute enacted in the early 1900's is understandably scarce. The case law prior to its passage, however, indicates that a minor's right to disaffirm a contract under the common law was well established at that time. Additionally, it is well accepted that this statute was enacted in response to this court's decision in Roberson v Rochester Folding Box Co. (171 N.Y. 538; see, also, Arrington v New York Times Co., 55 N.Y.2d 433, 439) in which the court held that a minor had no recourse against an entrepreneur who made commercial use out of her picture without her consent. Apparently, in order to alleviate litigation over whether or not consent had been given, the Legislature required that such consent be in writing and, if the person was a minor, that the parent sign the consent form. There is no indication that by requiring consent from the minor's parents, the Legislature intended in any way to abrogate that minor's right to disaffirm a contract at some future date. Indeed, the requirement of parental consent, like the broad right to disaffirm a contract, was granted in order to afford the minor as much protection against exploitation as possible. The assumption, of course, was that a parent would protect the child's interests. But if that assumption proves invalid, as may well be the case if a minor upon reaching the age of maturity realizes that the parent, too, has been exploiting him or her or had failed to adequately guard his or her interest by giving consent for pictures which caused humiliation, embarrassment and distress, then the child should be able to cure the problem by disaffirming the parent's consent. To say, as does the majority, that the mother could have limited her consent avoids the issue. If the parent has failed to put any restrictions on the consent, as occurred in this case, and has thus failed to protect the child's future interests, I see no reason why the child must continue to bear the burden imposed by her mother's bad judgment. This means the child is forever bound by its parent's decisions, even if those decisions turn out to have been exploitative of the child and detrimental to the child's best interests.

Furthermore, nothing compels the majority's conclusion that the right to disaffirm a contract was eliminated when the Legislature created a new cause of action for invasion of privacy merely because that statute provided safeguards for the child's privacy by giving the parent the right to grant or withhold consent. When both rights are viewed, as I believe they must be, as protection for the child, logic and policy compels the conclusion that the two rights should exist coextensively. The requirement that a parent consent before the child's privacy can be invaded by commercial interests establishes the parent as the first guardian of the child's interest. But the State retains its long-standing role of parens patriae so that if the parent fails to protect the child's interests, the State will intervene and do so. One means of doing so is to allow the child to exercise its right to disaffirm if the child concludes that its parent improvidently consented to the invasion of the child's privacy interests. Given the strong policy concern of the State in the child's best interests,^[*] I can only conclude that the Legislature did not intend to abrogate the child's commonlaw right to disaffirm a contract when it required, by statute, the additional protection of written, parental consent prior to any commercial use of the child's image.

This conclusion is further supported by other statutes in which the Legislature has clearly abrogated the infant's right to disaffirm a contract in those situations in which it has determined that the damage incurred by the minor will be minimal and the cost to the contracting party or society would be great. Invariably, these are contractual situations in which the minor has incurred a contractual obligation in order to receive a benefit which cannot be deemed anything other than a benefit. For example, section 281 of the Education Law negates a minor's right to disaffirm a contract when that contract afforded him a student loan to pursue an advanced education. (See, also, General Obligations Law, § 3-103.) No one can argue that the contract was anything other than beneficial to the minor. Such legislation was endorsed by the Law Revision Commission on the basis of a legislative finding "that the type of contract involved is clearly for the benefit of the infant". (1961 Report of NY Law Rev Comm, pp 269, 275, citing Touster, Contracts Relating to the Services of Talented Minors and the Treatment of Their Earnings Therefrom.)

Two factors distinguish sections 50 and 51 of the Civil Rights Law from those statutory provisions which do, in certain contexts, abolish the minor's right to disaffirm a contract. The first is that in all cases when the Legislature has intended to do so, they have made their intention clear by specific language which directly refers to the infant's common-law right. The absence of any reference in the Civil Rights Law to the minor's right to disaffirm a contract, especially when it is clear that the right to disaffirm was well established, indicates that the Legislature did not intend to affect that right. Secondly, unlike the other kinds of contracts which the Legislature has designated as immune from the minor's right to disaffirm, it cannot be said that a contract releasing all rights to photographs or even limited rights to those pictures is necessarily beneficial to the infant. This is even more true when the pictures, as in this case, are of the variety which can be exploited in the future or used in publications of questionable taste.

I do not believe that the Legislature's intent in enacting sections 50 and 51 of the Civil Rights Law was to elevate the interests of business and commercialism above the State's interest in protecting its children. Since this statute was enacted in response to this court's decision in Roberson v Rochester Folding Box Co.(supra), which denied an infant plaintiff any recovery for the invasion of her privacy by a commercial enterprise in using her picture without her consent, it would seem to me that the legislative intent was to expand individual protections, rather than to afford protection to commercial enterprises.

The fact that when an infant disaffirms a contract there may be harsh results to the person or commercial enterprise attempting to exploit the child has never caused the courts to alter the scope of the protection that right affords the child. The overriding interest of society in protecting its children has long been held to outweigh the interests of merchants who attempt to contract with children. (Sternlieb v Normandie Nat. Securities Corp., supra, at p 250.)

In those situations in which the Legislature has decided that business ventures need additional protection, it has done so not merely by abolishing the infant's right to disaffirm, but, rather, by providing alternative protection. Section 3-105 of the General Obligations Law provides for judicial approval of contracts for the services of child performers or professional athletes. It is clear that the statute protects not only the business interests which are investing in and profiting from the child's talents, but also the child. For instance, paragraph d of subdivision 2 generally restricts such contracts to a three-year period and paragraph e of subdivision 2 provides that even after approving a contract of a child performer, the court may, if it finds that the child's well-being is in any way being impaired by its performance under the contract, revoke or modify the contract so as to protect the child. Similarly, it provides for supervision by the court of the child's earnings to assure that the child will benefit from his labors. The clear intent of such provisions is to protect the child against any exploitation. The failure of the Legislature to cover child models in this provision indicates to me that they intended child models to retain the protections afforded by the common-law right to disaffirm a contract. It is unfortunate that by virtue of the majority's interpretation of the Civil Rights Law those children may not in the future be afforded protection against exploitation by their own parents.

It is even more unfortunate that by its interpretation of sections 50 and 51 the majority takes away a large part of the protection those children had at common law.

Order modified, with costs to defendant, in accordance with the opinion herein and, as so modified, affirmed.

[*] The consents provided in pertinent part:

"I hereby give the photographer, his legal representatives, and assigns, those for whom the photographer is acting, and those acting with his permission, or his employees, the right and permission to copyright and/or use, reuse and/or publish, and republish photographic pictures or portraits of me, or in which I may be distorted in character, or form, in conjunction with my own or a fictitious name, on reproductions thereof in color, or black and white made through any media by the photographer at his studio or elsewhere, for any purpose whatsoever, including the use of any printed matter in conjunction therewith.

"I hereby waive any right to inspect or approve the finished photograph or advertising copy or printed matter that may be used in conjunction therewith or to the eventual use that it might be applied."

[*] The discussion in this opinion of the policy behind affording a child the extraordinary protection of the right to disaffirm a contract should not be read, as the majority does, to equate the right to disaffirm with the principle that a court will refuse to enforce contracts which violate public policy. Indeed, had the courts below found that her mother had contracted for her daughter to pose in an obscene manner or that the photographs were obscene or pornographic, then we would not need to decide the applicability of the infant's right to disaffirm that contract as I assume the majority would find the contract and the consent incorporated in it to violate public policy. (Penal Law, § 235.00 et seq.; People v Ferber, 52 N.Y.2d 674 [JASEN, J., dissenting], revd 458 US ___, 102 S Ct 3348, on remand 57 N.Y.2d 256.) A contract held to be unenforceable because it violates public policy is void ab initio and, thus, there is no need to consider whether or not it may be disaffirmed.

Irving I. Lederman and Arnold Davis for plaintiff. Jules B. St. Germain for defendant.

BERNARD S. MEYER, J.

The relationship of psychiatry to the criminal law has been the subject of study and recommendation by the Temporary Commission on Revision of the Penal Law and Criminal Code (Leg. Doc. [1963], No. 8, pp. 16-26). This court had reason to touch upon the relationship of psychiatry to matrimonial law in Anonymous v. Anonymous (37 Misc 2d 773). The instant case presents yet a third aspect of the same basic problem: that involving the law of contract.

Plaintiff herein seeks rescission of a contract for the purchase of vacant land in Long Beach on the ground that he was not at the time the contract was entered into of sufficient mental competence. Defendant counterclaims for specific performance.

The evidence demonstrates that from April until July, 1961, plaintiff was in the depressed phase of a manic-depressive psychosis and that from August until the end of October he was in the manic stage. Though under care of Dr. Levine, a psychiatrist, beginning June 8 for his depression, he cancelled his August 8 appointment and refused to see the doctor further. Previously frugal and cautious, he became more expansive beginning in August, began to drive at high speeds, to take his wife out to dinner, to be sexually more active and to discuss his prowess with others. In a short period of time, he purchased three expensive cars for himself, his son and his daughter, began to discuss converting his Long Beach bathhouse and garage property into a 12-story co-operative and put up a sign to that effect, and to discuss the purchase of land in Brentwood for the erection of houses. In September, against the advice of his lawyer, he contracted for land at White Lake in the Catskills costing $11,500 and gave a $500 deposit on acreage, the price of which was $41,000 and talked about erecting a 400-room hotel with marina and golf course on the land.

On September 16, 1961, he discussed with Mr. Kass, defendant's president, the purchase of the property involved in this litigation for the erection of a discount drugstore and merchandise mart. During the following week Kass advised plaintiff that defendant would sell. On the morning of Saturday, September 23, plaintiff and Kass met at the office of defendant's real estate broker. Kass asked $55,000, plaintiff offered $50,000; when the broker agreed to take $1,500 commission, Kass offered to sell for $51,500 and plaintiff accepted. It was agreed the parties would meet for contract that afternoon. Kass obtained the services of attorney Nathan Suskin who drew the contract prior to the 2:00 P.M. conference. Plaintiff returned to that conference with his lawyer (who is also his brother-in-law) who approved the contract as to form but asked plaintiff how he would finance it and also demanded that the contract include as a condition that a nearby vacant property would be occupied by Bohack. No mention was made of plaintiff's illness. When Suskin refused to consider such a condition, plaintiff's lawyer withdrew. The contract was signed in the absence of plaintiff's lawyer and the $5,150 deposit paid by check on plaintiff's checking account in a Rockaway bank.

On the following Monday morning, plaintiff transferred funds from his Long Beach bank account to cover the check. On the same day, he went to Jamaica and arranged with a title abstract company for the necessary search and policy, giving correct details concerning the property, price and his brother-in-law's address and phone number and asking that search be completed within one week. Between September 23 when the contract was signed and October 8 when plaintiff was sent to a mental institution, he persuaded Leonard Cohen, a former employee, to join in the building enterprise promising him a salary of $150 a week and a Lincoln Continental when the project was complete, caused a sign to be erected on the premises stating that "Faber Drug Company" and a "merchandise mart" were coming soon, hired an architect, initiated a mortgage application giving correct details as to price and property dimensions, hired laborers to begin digging (though title was not to close until Oct. 20), filed plans with city officials and when told by them that State Labor Department approval was required, insisted on driving to Albany with the architect and Leonard Cohen to obtain the necessary approval.

On September 25 plaintiff saw Dr. Levine as a result of plaintiff's complaint that his wife needed help, that she was stopping him from doing what he wanted to. He was seen again on September 26 and 28, October 2 and October 8, and hospitalized on October 8 after he had purchased a hunting gun. Dr. Levine, Dr. Sutton, who appeared for defendant, and the hospital all agree in a diagnosis of manic-depressive psychosis. Dr. Levine testified that on September 23 plaintiff was incapable of reasoned judgment; the hospital record shows that on October 9, Dr. Krinsky found plaintiff's knowledge good, his memory and comprehension fair, his insight lacking and his judgment defective. Dr. Sutton's opinion, based on the hospital record and testimony of plaintiff's wife and Dr. Levine, was that plaintiff was subject to mood swings, but that there was no abnormality in his thinking, that his judgment on September 23 was intact.

The contract of a mental incompetent is voidable at the election of the incompetent (Blinn v. Schwarz, 177 N.Y. 252) and if the other party can be restored to status quo rescission will be decreed upon a showing of incompetence without more (Verstandig v. Schlaffer, 296 N.Y. 62; see Church v. Dreier, 205 App. Div. 820). If the status quo cannot be restored and the other party to the contract was ignorant of the incompetence and the transaction was fair and reasonable, rescission will, however, be denied notwithstanding incompetence (Mutual Life Ins. Co. v. Hunt, 79 N.Y. 541, 545; see Riggs v. American Tract Soc., 84 N.Y. 330, 337). The burden of proving incompetence is upon the party alleging it, but once incompetence has been shown, the burden of proving lack of knowledge and fairness is upon the party asking that the transaction be enforced (Merritt v. Merritt, 43 App. Div. 68, 70; Aikens v. Roberts, 164 N. Y. S. 502; Beale v. Gibaud, 15 F.Supp. 1020, 1028). In the instant case the contract concerns vacant land and is executory and though plaintiff caused some digging to be done on the premises, the proof shows that the land has been levelled again. Clearly, the status quo can be restored and plaintiff is, therefore, entitled to rescission if the condition described meets the legal test of incompetence.

The standards by which competence to contract is measured were, apparently, developed without relation to the effects of particular mental diseases or disorders and prior to recognition of manic-depressive psychosis as a distinct form of mental illness (Matter of Martin, 82 Misc. 574, 578). Primarily they are concerned with capacity to understand: (Aldrich v. Bailey, 132 N.Y. 85, 87-88) "so deprived of his mental faculties as to be wholly, absolutely and completely unable to understand or comprehend the nature of the transaction"; (Paine v. Aldrich, 133 N.Y. 544, 546) "such mental capacity at the time of the execution of the deed that he could collect in his mind without prompting, all the elements of the transaction and retain them for a sufficient length of time to perceive their obvious relations to each other, and to form a rational judgment in regard to them"; (Matter of Delinousha v. National Biscuit Co., 248 N.Y. 93, 95) "A contract may be avoided only if a party is so affected as to be unable to see things in their true relations and to form correct conclusions in regard thereto". (See, also, Aikens v. Roberts, supra, p. 504; Morse v. Miller, 39 N. Y. S. 2d 815, 818, affd. 267 App. Div. 801; Martin v. Teachers' Retirement Bd., 70 N. Y. S. 2d 593, 594.) If cognitive capacity is the sole criterion used, the manic must be held competent (Lovell v. Keller, 146 Misc. 100; Beale v. Gibaud, supra; cf. Matter of Martin, supra), for manic-depressive psychosis affects motivation rather than ability to understand.

The law does, however, recognize stages of incompetence other than total lack of understanding. Thus it will invalidate a transaction when a contracting party is suffering from delusions if there is "some such connection between the insane delusions and the making of the deed as will compel the inference that the insanity induced the grantor to perform an act, the purport and effect of which he could not understand, and which he would not have performed if thoroughly sane" (Moritz v. Moritz, 153 App. Div. 147, 152, affd. 211 N.Y. 580, see Beisman v. New York City Employees' Retirement System, 275 App. Div. 836, affd. 300 N.Y. 580). Moreover, it holds that understanding of the physical nature and consequences of an act of suicide does not render the suicide voluntary within the meaning of a life insurance contract if the insured "acted under the control of an insane impulse caused by disease, and derangement of his intellect, which deprived him of the capacity of governing his own conduct in accordance with reason." (Newton v. Mutual Benefit Life Ins. Co., 76 N.Y. 426, 429; Van Zandt v. Mutual Benefit Life Ins. Co., 55 N.Y. 169.) Finally, Paine v. Aldrich (supra) and the Delinousha case consider not only ability to understand but also capacity to form "a rational judgment" or "correct conclusions." Thus, capacity to understand is not, in fact, the sole criterion. Incompetence to contract also exists when a contract is entered into under the compulsion of a mental disease or disorder but for which the contract would not have been made.

Whether under the latter test a manic will be held incompetent to enter into a particular contract will depend upon an evaluation of (1) testimony of the claimed incompetent, (2) testimony of psychiatrists, and (3) the behavior of the claimed incompetent as detailed in the testimony of others (Green, Judicial Tests of Mental Incompetency, 6 Mo. L. R. 141), including whether by usual business standards the transaction is normal or fair (Green, Proof of Mental Incompetency and the Unexpressed Major Premise, 53 Yale L. J. 271, 299-305). Testimony of the claimed incompetent often is not available, and in any event is subject to the weakness of his mental disorder, on the one hand, and of his self-interest on the other. The psychiatrist in presenting his opinion is, in final analysis, evaluating factual information rather than medical data, and is working largely with the same evidence presented to the court by the other witnesses in the action (Leifer, Competence of the Psychiatrist to Assist In the Determination of Incompetency, 14 Syracuse L. R. 564). Moreover, in the great majority of cases psychiatrists of equal qualification and experience will reach diametrically opposed conclusions on the same behavioral evidence. The courts have, therefore, tended to give less weight to expert testimony than to objective behavioral evidence (Halpern, Civil Insanity: The New York Treatment of the Issue of Mental Incapacity in Non-Criminal Cases, 44 Corn. L. Q. 76; Green, op. cit., 53 Yale L. J., p. 306).

In the instant case, plaintiff did not testify at the trial but his examination before trial was read into the record. It shows that he understood the transaction in which he was engaged, but throws no light on his motivation. Plaintiff introduced no evidence concerning the rationality or fairness of the transaction (in the apparent belief that Merritt v. Merritt, 43 App. Div. 68, supra, applied and that such proof, therefore, was not part of his case) so the court has no basis for comparison in that respect. Plaintiff's evidence concerning the location of the property and the nature of the business he proposed to carry on there fell short of establishing irrationality, nor can it be said that the making of an all cash contract was abnormal, even if the two earlier White Lake dealings are considered, in view of the testimony of plaintiff and his wife that the Long Beach bathhouse property was worth $200,000 and that it was free and clear. But the rapidity with which plaintiff moved to obtain an architect and plans, hire laborers, begin digging on the property, and his journey to Albany to obtain building approval, all prior to title closing, are abnormal acts. Viewing those acts in the context of his actions, detailed above, with respect to the White Lake properties, his plans with respect to the Brentwood property and the conversion of his bathhouse premises, and his complaint to Dr. Levine on September 25 that his wife was in need of help because she was trying to hold him back, the court is convinced that the contract in question was entered into under the compulsion of plaintiff's psychosis. That conclusion is contrary to the opinion expressed by Dr. Sutton, but the court concludes that Doctors Levine and Krinsky as treating physicians had the better basis for the opinions they expressed. In any event their opinions are but confirmatory of the conclusion reached by the court on the basis of the evidence above detailed.

Defendant argues, however, that the contract was ratified by the acts of plaintiff's attorney in forwarding a title objection sheet to defendant's attorney and in postponing the closing and by plaintiff himself. Ratification requires conscious action on the part of the party to be charged. Plaintiff was still in the mental hospital when the objection sheet was sent and the closing date postponed and these acts have not been shown to have been carried out with his knowledge or by his direction. As for his own action it was merely to answer, in reply to an inquiry from defendant's president as to when he was going to take title, that he did not know, it was up to his attorney. The contract with defendant had been signed on September 23, plaintiff had been sent to the hospital on October 8 and remained there until November 11, having a series of electro-shock treatments while there, and the complaint in this action was verified November 20. The conversation with defendant's president could not have occurred until after November 11 and must have occurred several days prior to November 20. An answer as equivocal in nature and made under the circumstances as the one under consideration cannot in any fair sense be characterized as an exercise of plaintiff's right of election to "hold on to the bargain if it is good and let it go if it is bad" (Blinn v. Schwarz, 177 N.Y. 252, 263, supra).

Accordingly, defendant's motions at the end of plaintiff's case and of the whole case, on which decision was reserved, are now denied, and judgment will be entered declaring the contract rescinded and dismissing the counterclaim. The foregoing constitutes the decision of the court pursuant to section 440 of the Civil Practice Act.

During trial motions were granted amending the title of the action to read "Isidore Faber by Esther Faber, his guardian ad litem, plaintiff, v. Sweet Style Manufacturing Corporation, successor by merger to Semel Realty Corp., defendant." The judgment to be settled hereon shall be entitled accordingly.

Alan R. Scott, Jr., Eugene, argued the cause and filed the brief for appellant.

Gerald R. Pullen, Portland, argued the cause and filed the brief for respondent.

Before TANZER, P.J., and THORNTON and CAMPBELL, JJ.

THORNTON, Judge.

This is an appeal from a decree directing specific performance of two contracts to sell land.^[1] Defendant assigns as error the trial court's finding that one of the vendors, Mrs. Bonham, had the capacity to contract for the sale of her parcel. Defendant also assigns error to the decree of specific performance contending that the ten percent liquidated damages clause in the contracts was intended by the parties to be the exclusive remedy for breach.

The facts are as follows:

Ruby Bonham, aged 81 at the date of the contract, owned 80 acres of land near Grants Pass. Her daughter, defendant Pauline Olson (who appeals both in her personal capacity and as conservator of the estate of her mother) owned an adjacent 10 acre parcel. In early 1976, Mrs. Bonham decided to sell her property and, desiring a national listing, contacted Mr. Martin of United Farm Agency. She originally wanted to ask $80,000 for the property but was persuaded by Mr. Martin, based on his experience and the fact that he had listed a similar parcel for $55,000, to reduce the asking price to $60,000. Mr. Martin further advised her that she should consider any offer above $50,000.

In July, 1976, plaintiff became interested in the property. He visited it on July 31, 1976. Based on this inspection he offered $50,000 for the parcel, contingent on Mrs. Olson's agreeing to sell her adjacent property for which he offered $15,000. The following day, Mr. Martin discussed the offer with both women and they rejected the offer as too low. Following a discussion with Mrs. Olson's attorney, they made a counter-offer to plaintiff of $52,500 and $20,000 for the two parcels respectively. This offer was accepted and Mr. Martin procured the signatures of each of them. He testified that before she signed the earnest money agreement on September 28, 1976, he had explained the details of the transaction to Mrs. Bonham in the presence of her sister. In December, 1976, Mrs. Olson decided that her mother was not competent at the time she signed the counter-offer and both refused to sign the final contracts.

Medical evidence of two doctors who treated Mrs. Bonham beginning in November, 1976, showed that she suffered from a heart blockage which caused seizures and blackouts and involutional psychosis resulting in depression. Both agreed that the condition would have been present prior to September, 1976, and could well have affected her mental processes.

Friends and relatives of Mrs. Bonham all testified to a gradual deterioration of her mental acuity over several years prior to the transaction in question. This deterioration manifested itself in a number of ways, including periods of disorientation and depression, occasional paranoia, an increase in eccentric habits and delusions concerning people long dead and imagined friendships with Barry Goldwater and Frank Sinatra.

On the other hand, plaintiff testified that while Mrs. Bonham appeared eccentric to him, he had no reason to question her capacity. When he visited the property, she showed him around and answered all his questions respecting the features of the property. Mr. Martin testified that she accurately answered all his questions when he prepared the listing agreement and appeared at all times to know that she was engaged in selling her property, apparently intending to move back to Tennessee, where she had grown up.

On September 28, 1976, when Mrs. Bonham signed the earnest money agreement, Mr. Martin testified he explained the details to her carefully, that she read the agreement and appeared to understand. Mrs. Bonham's sister, who was also present, testified that Mrs. Bonham just stared into space while Mr. Martin read the agreement to her and her only comment was, "I don't care what you do with this property. You can give it back to the Indians if you want to."

Mrs. Olson testified that she finally accepted that her mother was incompetent in October, 1976, and first discussed with her attorney the possibility of creating a conservatorship at that time. Based on this decision, she refused to sign the final contracts.

The test of contractual capacity is whether a person is able to understand the nature of his action and apprehend its consequences. Coke v. Coke, 242 Or. 486, 489, 410 P.2d 214 (1966). This capacity is measured at the time of the execution of the contract, in this case, the earnest money agreement. First Christian Church v. McReynolds, 194 Or. 68, 72, 241 P.2d 135 (1952). Even where there are substantial indications of mental incompetence, it is possible that a person may have "lucid intervals" during which he possesses the requisite capacity. Pioneer Trust Co. v. Currin, 210 Or. 343, 347, 311 P.2d 445 (1957). Capacity includes the ability to reason and exercise judgment and, in essence, to bargain with the other party. First Christian Church v. McReynolds, supra, 194 Or. at 72-73, 241 P.2d 135. Neither old age, illness nor extreme emotional distress is sufficient of itself to negate such capacity. Id.

In Gindhart v. Skourtes, 271 Or. 115, 530 P.2d 827 (1975), the seller suffered from an arteriosclerotic condition which caused periods of confusion which he claimed reduced his mental competence. He suffered a stroke shortly after the sale. The evidence showed, however, that he had tried to sell the land for two years without success, rejected the buyers' first offer and subsequently reached a compromise price which defendant's experts testified was in line with other prices for land in the area. 271 Or. at 119, 530 P.2d 827. The court found him competent.

In Pioneer Trust Co. v. Currin, supra, plaintiff's ward appeared disoriented and unresponsive and frequently talked to himself. He was committed to a mental hospital four months after selling the land in question. Nevertheless, he had lucid periods and defendant testified he had shown him around the place and answered all his questions in a normal fashion. The ward told defendant he was anxious to sell because he intended to leave the state soon and wanted cash. Defendant purchased the property for cash at a price below what probably could have been obtained. The court held the ward competent to enter into the contract.

While there is ample evidence to establish that Mrs. Bonham's mental state on September 28, 1976, had deteriorated substantially from what it once had been, this does not resolve the matter. We are persuaded, largely by the circumstances of the sale, that Mrs. Bonham was competent to sell her land. Mrs. Bonham had definite ideas about how the property should be listed and accurately supplied all the necessary information. The purchase price was negotiated over several months and the offer that was ultimately accepted was made by Mrs. Bonham and Mrs. Olson. Before obtaining her signature, Mr. Martin read the important features of the earnest money agreement to Mrs. Bonham and had her read the document, a point of considerable significance. First Christian Church v. McReynolds, supra,194 Or. at 83, 241 P.2d 135. Furthermore, Mrs. Olson and her attorney were constantly involved and no one, prior to November, 1976, suggested that Mrs. Bonham did not possess the requisite competence. In fact, defendant's primary dissatisfaction with the deal appears to be the price obtained, not the fact that the property was sold. In sum, the evidence indicates that Mrs. Bonham knew what she was doing and, though her reasons for selling may not have been altogether wise, she intended to sell and was cognizant of the consequences.

PROPRIETY OF THE REMEDY

Defendant contends that the liquidated damages clause in the earnest money agreements evinces the intent of the parties that it be the exclusive remedy in the event one party decided not to proceed with the sale.

The clause in question reads:

"It is agreed, if either seller or buyer fails to perform his part of this agreement, he shall forthwith pay to the other party hereto a sum equal to 10% of the agreed price of sale as consideration for the execution of this agreement by such other party."

The presence in a contract to sell real estate of a liquidated damages or forfeiture provision will not per se preclude specific performance. Slattery v. Gross, 96 Or. 554, 558, 187 P. 300, 190 P. 577 (1920); 5A Corbin, Contracts 435-36, § 1213. It must appear from the construction of the contract that the damages provision was intended by the parties to be the exclusive remedy for breach. Potter Realty Co. v. Derby, 75 Or. 563, 571, 147 P. 548 (1915). In Potter, the contract provided that in the event of breach by the buyer, installments made under the contract would be forfeited, and the "contract shall be null and void as to both parties hereto * * *." 75 Or. at 566, 147 P. at 549. The court held this remedy to be exclusive.

Defendant cites Dillard Homes, Inc. v. Carroll, 152 So.2d 738 (Fla.App. 1963). That case does not support defendant's position since the clause provided that the deposit of ten percent of the purchase price would be forfeited and "the parties hereto shall be relieved of all obligations under this instrument." 152 So.2d at 739. The authorities cited in that case support the proposition that the intent to preclude specific performance as a remedy must clearly appear. Deborah Homes, Inc. v. Firestone, 135 N.Y.S.2d 289 (Sup.Ct. 1954) (upon buyer's failure to take title, contract would be "deemed cancelled"); In re Tatnall, 102 N.J. Eq. 445, 141 A. 174 (1928) (sum to be retained "as liquidated damages, without any further liability of any kind whatsoever * * *.") 152 So.2d at 740-41. See also Rootberg v. Richard J. Brown Associates of Delaware, Inc., 14 Ill. App.3d 301, 302 N.E.2d 467, 469-70 (1973), where the contract contained a clause reserving specific performance as a seller's remedy which had been lined out prior to execution of the contract and the court remanded rather than hold as a matter of law that it constituted an intent to bar specific performance.

The intent to eliminate specific performance as a remedy does not appear from the clause in the contracts at issue.

Affirmed.

[1] The specific performance decree included an abatement of the purchase price for timber which was removed from the land by a third party at defendant's request following repudiation of the contracts.

Present: QUA, C.J., LUMMUS, RONAN, WILLIAMS, & COUNIHAN, JJ.

[367] Joseph B. Abrams, (Leo Gordon with him,) for the defendants.

Benjamin Goldman, (Arthur Ellison with him,) for the plaintiff.

RONAN, J.

This is an action of tort for deceit brought against two defendants, Hanover-Elm Building Corporation and one Gordon, who, it is alleged, became in November, 1946, the owners of a building a portion of which was then occupied by the plaintiff under a lease from a former owner in which the rent was reserved at a rate of $4,500 and which would expire on March 1, 1947. It is also alleged that the defendants falsely represented to the plaintiff, with the intent that he should rely thereon, that they had a bona fide offer from one Levine for the leasing of the premises at the rate of $10,000 a year; that unless the plaintiff entered into a new lease at said rental for a term of twelve years they would evict the plaintiff on March 1, 1947; and that the plaintiff relied upon such misrepresentations and entered into such a lease with the corporate defendant, all to his damage. The declaration was held good when the case was here before. Kabatchnick v. Hanover-Elm Building Corp. 328 Mass. 341. The jury found against both defendants, and the case is here on various exceptions by the defendants. The plaintiff has also filed a bill of exceptions based upon the refusal of the judge, in allowing the bill of exceptions of the defendants, to include therein a certain paragraph that the plaintiff desired to have inserted.

During the empanelling of the jury, counsel for the defendants exercised two peremptory challenges which he stated were made in behalf of the individual defendant. He then attempted to claim two more such challenges in behalf of the corporate defendant. The defendants contended that the action was one against a principal and an agent. The plaintiff stated that the declaration set forth a joint action. The judge ruled that the cause of action alleged in the declaration was a joint action "impressed in a single count," and that such challenges should be made in behalf of the defendants collectively, and ruled that the [368] defendants had exhausted their challenges. He allowed the first two challenges and, subject to exception, denied the right of the defendants to make more than two challenges in all.

The right to make a peremptory challenge did not exist at common law but is of statutory origin which in this Commonwealth arose out of St. 1862, c. 84, which provided that "either party in a civil cause, and the defendant in a criminal cause, shall, before the trial commences, be entitled to challenge peremptorily two of the jurors from the panel called to try the cause." Soon after its enactment, the interpretation of this statute came before the court in Stone v. Segur, 11 Allen, 568, which was an action for assault and battery against eleven defendants, each of whom claimed the right to two peremptory challenges. It was said that the words "either party" meant those on one side of a case, whether they be one or more persons, that those who unite in perpetrating a wrong upon another are in legal contemplation but one party, and that it was in this sense that the word "party" was used in the statute. It was accordingly held that the defendants together were entitled to only two peremptory challenges. The statute which has remained substantially unchanged in so far as it pertains to civil cases appears in G.L. (Ter. Ed.) c. 234, § 29, as amended by St. 1945, c. 428, § 2. It has been strictly construed. The right to more than two such challenges was denied in Matthews v. New York Central & Hudson River Railroad, 231 Mass. 10, where two trustees brought an action of tort to recover for damage to their real estate because of the improper operation of the railroad. They were coowners and constituted but a single party within the meaning of the statute.

One who has sustained an injury in person or damage to his property by a wrong committed in which several persons have actively participated may bring an action against one or more of them, although of course he can have but one satisfaction of the judgments which he may recover. Corey v. Havener, 182 Mass. 250. Donnelly v. Larkin, 327 Mass. 287.

[369] It has long been established in this Commonwealth that a principal or master who has not actively engaged with his agent or servant in committing a wrong, where liability is attempted to be imposed upon him because the wrong was committed by the agent or servant while acting within the scope of his employment, is not a joint tortfeasor with the offending agent or servant and cannot be joined in an action with the latter, Parsons v. Winchell, 5 Cush. 592, Mulchey v. Methodist Religious Society, 125 Mass. 487, Feneff v. Boston & Maine Railroad, 196 Mass. 575, 581; and if the principal or master is compelled to pay a judgment because of the wrongful act of the agent or servant, he can compel the latter to indemnify him. Barry v. Keeler, 322 Mass. 114, 128. Restatement: Restitution, § 96. See Karcher v. Burbank, 303 Mass. 303; Restatement: Agency, § 401.

But the plaintiff contends that by virtue of G.L. (Ter. Ed.) c. 231, § 4A, inserted by St. 1943, c. 350, § 1, as amended by St. 1947, c. 408, § 1, two or more persons may be joined in one action as defendants if there is asserted against them jointly or severally any right to recover in respect of or rising out of the same matter or transaction. This statute is one of procedure and permits the joining in a single action of wrongdoers, even acting independently of each other, who have contributed to cause the injury or damage of which the plaintiff complains. This remedial statute has been frequently employed. Thorneal v. Cape Pond Ice Co. 321 Mass. 528. Repucci v. Exchange Realty Co. 321 Mass. 571. Nunan v. Dudley Properties, Inc. 325 Mass. 551. Koleshinski v. David, 328 Mass. 276. It changes the former rule and now permits the joining of the principal and the agent in a single action even where the principal or master did not participate in the wrongful act of the agent or servant. Collins v. Croteau, 322 Mass. 291, 296. The statute, however, does not change the substantive law. It does not convert the several liability of the principal or master into a joint tort liability with the agent or servant. It certainly did not justify dealing with them as joint tortfeasors. In [370] the next place, the question of the number of peremptory challenges that should be allowed arises at the opening of the trial. A judge has little, at that stage of the trial, other than the pleadings upon which to determine whether the relations of the respective litigants to each other and to the cause of action are such that under the statute, G.L. (Ter. Ed.) c. 234, § 29, any of them is entitled to two such challenges, or whether all together they comprise one party plaintiff or defendant as the case may be. It is, however, to be noted in this case that a pre-trial report, which we assume was in the papers before the judge and which shaped and limited the issues which were to be tried, stated that the defendant Gordon was the president and treasurer of the corporate defendant and was authorized to negotiate for the lease in its behalf. This was persuasive evidence that the action was to be tried on the theory that Gordon was acting within the scope of his employment as agent of the corporate defendant. That report seems to have been overlooked although the defendants' counsel directed the judge's attention to the fact that the action was against a principal and an agent. We think a separate cause of action against the principal could be joined with a cause of action arising out of the wrong committed by its agent within the scope of his employment, but we do not think that putting them in a single count changed the nature of the cause of action against each of them or deprived them of two peremptory challenges to which each was entitled under the statute.^[1]

The right to exercise peremptory challenges gives a litigant a limited opportunity of choice and allows him to have a juror withdrawn who in his opinion, because of bias, prejudice, or some other personal characteristic, is not inclined to look with favor upon him or upon the nature of the controversy, where he lacks sufficient grounds to support a challenge for cause. The right is a valuable one, and where, as [371] here, a party is deprived of its exercise he has a just cause of complaint. Sackett v. Ruder, 152 Mass. 397, 400-402. Searle v. Roman Catholic Bishop of Springfield, 203 Mass. 493, 499-500.

There was evidence that, during the negotiations for the lease, the plaintiff, in order to satisfy Gordon that he would be able to pay the increased rent, stated to Gordon that his gross sales amounted to $300,000 to $350,000 a year and that he made a "terrific profit" upon some of the sales of his merchandise. The judge subject to the exception of the defendants refused to permit them to inquire of the plaintiff with respect to his gross business and profits. The defendants contended that the evidence was competent upon the issues of liability and the value of the lease.

One of the issues of liability was what influence, if any, the alleged misstatements of Gordon had upon the plaintiff. We think it was open to the defendants to show that the amount of business and profits which the plaintiff had made during his occupancy of the premises was the real inducement for executing the new lease and not reliance, as the plaintiff contended, upon the alleged misrepresentations. In order to recover it was not necessary for the plaintiff to prove that he relied solely upon the misrepresentations. It was enough if he could prove that they were one of the principal grounds that caused him to execute the new lease or, in other words, that he would not have executed the lease if the false statements had not been made. What it was that actuated him to do so was a question of fact. The evidence was competent as tending to show on what the plaintiff relied. National Shawmut Bank v. Johnson, 317 Mass. 485, 490. Golding v. 108 Longwood Avenue, Inc. 325 Mass. 465, 468.

The evidence was not competent on the value of the lease which was the other ground upon which it was offered. Doubtless, where the plaintiff in an action of deceit was induced to purchase property by statements of the vendor that the profits were a certain amount, he may show that the profits were less than represented in order to prove the [372] falsity of the representations and to prove his damages by using the profits as represented as evidence to compute the value of the property if the statements were true and by using the evidence of actual profits to compute the actual value of the property. Powers v. Rittenberg, 270 Mass. 221, 223-224. Forman v. Hamilburg, 300 Mass. 138, 140-141. In the instant case, the defendants made no misrepresentations concerning profits. Here the evidence was offered to prove the value of the lease. The value of a leasehold used for the conduct of business depends upon so many factors that the amount of gross receipts or of net profits alone would not furnish an adequate criterion for the determination of its value. In the case at bar, evidence of profits to prove the value of the lease had such little persuasive effect that the judge in his discretion properly excluded it. Nelson Theatre Co. v. Nelson, 216 Mass. 30, 36. Revere v. Revere Construction Co. 285 Mass. 243, 248-250. Ferrick v. Barry, 320 Mass. 217, 227. Amory v. Commonwealth, 321 Mass. 240, 258. The case is distinguishable from those where evidence as to loss of profits, when shown with a reasonable degree of certainty to have been within the contemplation of the parties in making the lease, has been admitted where the lessor has broken the lease by refusing to grant a renewal or to prevent competition with the lessee's business. Neal v. Jefferson, 212 Mass. 517. Sheff v. Candy Box Inc. 274 Mass. 402. Parker v. Levin, 285 Mass. 125.

The defendants' motions for directed verdicts in so far as they related to the merits were properly denied for all the essential elements of an action for deceit were proved, Alpine v. Friend Bros. Inc. 244 Mass. 164, 167; Piper v. Childs, 290 Mass. 560, 562, even though there were some variations in testimony as to the exact terms of the representation made by Gordon. It was enough that the jury could find that they could have been fairly understood as alleged. See Adams v. Collins, 196 Mass. 422, 430; Sheffer v. Rudnick, 291 Mass. 205, 209; Downey v. Finucane, 205 N.Y. 251. These motions were also based upon the pleadings. The declaration alleged that the defendants were co-owners. [373] The few isolated places in the testimony where Gordon appears to have said that he was the new owner, in the teeth of all the rest of the evidence relating to ownership of the demised premises, the truth of which can hardly be challenged, to the effect that the corporate defendant had purchased the property, that Gordon was an officer of the corporation and managed its affairs, that he held a second mortgage from the corporation, that the plaintiff and the corporation alone mutually released each other under the existing lease before the present lease was executed, and that the only parties to the present lease were the plaintiff and the corporate defendant, were at most no more than a mere scintilla of evidence which fell far short of warranting a finding that Gordon was a coowner with the corporation. It was said in Buswell v. Fuller, 156 Mass. 309, 312-313, quoting from Hillyer v. Dickinson, 154 Mass. 502, 503-504, "The view no longer prevails that a party who has the burden of proof can retain a verdict in his favor by pointing to a mere scintilla of evidence, when, on an examination of the whole case, the court can find no substantial evidence to support it." Rainger v. Boston Mutual Life Association, 167 Mass. 109, 110. Farnham v. Lenox Motor Car Co. 229 Mass. 478, 484. Hartmann v. Boston Herald-Traveler Corp. 323 Mass. 56, 59-60. There was a variance between the declaration and the proof.

There is nothing here that would warrant us in now dealing with Gordon as the sole defendant, as the plaintiff now offers to do, by discontinuing against the corporation, as was done in Mulchey v. Methodist Religious Society, 125 Mass. 487, where after a full trial found free from error except in joining the principal and the agents, the plaintiff was permitted to discontinue against the agents.

Where a verdict has been directed on the ground of variance and where the plaintiff has failed to make out a case, the plaintiff's exceptions have been overruled. Glynn v. Blomerth, 312 Mass. 299. In other cases where the plaintiff has made out a meritorious case but different from the one alleged and where the motion has been based on a variance, [374] we have given the plaintiff an opportunity to apply in the trial court to amend the pleadings to conform to the proof. Coburn v. Moore, 320 Mass. 116, 123-124. We have at times simply sustained the defendant's exceptions where the plaintiff has made out a case but not the case alleged. Richards v. New York, New Haven & Hartford Railroad, 328 Mass. 204. We think the last course is the proper one to adopt here.

The plaintiff's exception is to the refusal of the judge, in allowing the defendants' substitute bill of exceptions, to include therein a certain paragraph as requested by the plaintiff. If we assume, without deciding, that an exception is the proper remedy, the exception must be overruled since in any event the defendants' exceptions must be sustained; consequently the plaintiff was not harmed.

We have considered all matters which are likely to arise at the new trial.

Plaintiff's exceptions overruled.

Defendants' exceptions sustained.

[1] Both principals and agents are considered as one party under statutes regulating the number of peremptory challenges in jurisdictions where the principals and agents are deemed to be joint tortfeasors. See 136 A.L.R. 417.

Mattahiah Eytan, pro se.

Ella Eytan, pro se.

No appearance was entered for appellee.

Before FICKLING^[1] and KERN, Associate Judges, and REILLY, Chief Judge, Retired.

REILLY, Chief Judge, Retired:

This is an appeal from a judgment in the Small Claims Court^[2] dismissing an action to recover $157.50 — the total sales price of three paintings paid to a Georgetown retailer of antiques and miscellaneous second-hand furniture by appellants (a married couple). Their basic contention was that they had bought these paintings because the vendor had represented them to be the original productions of some 19th Century artist (or artists), notwithstanding the fact [880] that these were merely copies (as the purchasers subsequently discovered) processed and placed in frames to convey the impression of age.

When this case was reached on the calendar, the trial judge, in compliance with Small Claims Rule 12(a), sought to elicit from the parties the information bearing on the case and attempted to obtain a pretrial settlement. The principal claimant, the husband, told the court that he and his wife had come to the defendant's shop to purchase some antique paintings, where they inspected and touched several canvases. They selected three because the brittleness of the material, cracks in the paint, discoloration, grease stains on the back, and punctures in the frame, he asserted, led them to believe these particular items were old. The proprietor of the shop, conceding that these paintings were not genuine originals but recent reproductions, nevertheless insisted that they were worth considerably more than the purchasers had paid, saying that he had agreed to cut his prices in order to effectuate the sale. At the court's suggestion, he offered the claimants $50 in settlement. This offer was rejected, and the parties were instructed to return that afternoon for trial.^[3]

When court reconvened, the trial judge said that in his opinion the complainants had no cause of action. At the request of the principal claimant, however, the court permitted him to make a statement of the facts and to present argument.

In his presentation, this appellant repeated much of what he had said in the conciliation proceedings, conceded that the vendor had made no express representation that the paintings were either originals or ancient, but contended that because he and his wife had, in the course of their inspection, displayed such interest in indicia of age, it became the legal duty of the dealer to disclose the true facts before the sale was completed. The only new fact he adduced was that the dealer did make a comment on one of the paintings — a plantation scene in which a group of white men in costumes of a past century were depicted with a black man in one corner of the canvas. The dealer remarked that paintings with black men in them were unusual in the 19th Century.^[4] Plaintiff then argued that defendant was guilty of a breach of implied or express warranty. The court disagreed.

The trial judge found "no controverted issues of material fact."^[5] Based on a "general knowledge of the economics of the locality," the trial judge concluded that the average price paid for each of the three paintings — approximately $50 — was ". . a sufficiently small amount to put any purchaser on notice that he was not buying a legitimate antique original work of art" and summarily dismissed the complaint.^[6]

In the brief accompanying the application for allowance of appeal, appellants contended that the court erred in (1) ruling that the failure of a seller to disclose a material fact does not amount to a misrepresentation, (2) ruling that the doctrine of implied warranty of fitness has no application to secondhand goods, (3) relying upon its own knowledge and expertise in American art history to reach the conclusion that the purchasers should have known that the paintings were not old, but were reproductions, and (4) basing its judgment solely upon something said in the course of conciliation.

As abstract propositions of law, some of these contentions are not devoid of merit. This court has recognized that in certain circumstances, concealment of a "material fact is as fraudulent as a positive direct misrepresentation." Andolsun v. Berlitz Schools of Languages of America, Inc., D.C. App., 196 A.2d 926, 927 (1964). Moreover, [881] D.C.Code 1973, § 28:2-315 makes no distinction between new and used goods in its discussion of implied warranties of fitness for a particular purpose. This section was enacted as a part of the Uniform Commercial Code, and courts have adopted the view that secondhand goods are within its coverage. See Green v. Northeast Motor Co., D.C.Mun.App., 166 A.2d 923 (1961); Overland Bond and Investment Corp. v. Howard, 9 Ill.App.3d 348, 292 N.E.2d 168 (1972).

An examination of the proceedings — transcribed after appeal was allowed — reveals, however, that none of these issues is really raised by the record and that the judgment of the court does not rest upon any of the rulings attributed to it by appellants. What the court did hold was that a purchaser who bought artificially aged copies of primitive paintings for the low unit prices upon which he and the dealer ultimately agreed, could not credibly assign as fraud the fact that the articles purchased turned out not to be vastly more valuable — as, of course, original paintings would have been. Under the circumstances — the customer not having inquired as to whether the canvases were originals — we perceive no duty upon the part of the vendor to inform him of the obvious. If a customer went into a jewelry store and bought for $50 an item which looked like a diamond pendant set with pearls, it would plainly not be incumbent upon the sales clerk to warn the customer that what he had selected was a piece of costume jewelry with synthetic gems.

In taking this view of the matter, the record does not reflect that the trial judge^[7] relied upon — or took judicial notice of his own knowledge of the history of American art — although in the course of oral argument, appellant accused him of doing so. The trial judge disclaimed this approach and his written findings make clear that this was not a factor.

Although appellants strongly urge that they were aggrieved because the court entered judgment against them before any testimony was taken and thereby prevented their calling witnesses, it is fundamental that a court may direct a verdict where the opening statement of plaintiff reveals that no cause of action exists. Cook v. Safeway Stores, Inc., D.C.App., 354 A.2d 507 (1976) and cases cited at 508. Plainly, this principle also applies to jury-waived cases, including trials in the Small Claims Branch. Appellants argue, however, that it was improper for the court to decide the case simply upon something said in the conciliation proceedings. Presumably they are adverting to the familiar rule of evidence which excludes testimony of concessions made in settlement conferences.

It is not altogether clear that proceedings under Rule 12(a) fall into this category, for this rule requires the court to inquire into the nature of the claims and defenses — thereby implying that if there are no substantial issues of fact to support a valid claim, the court may take appropriate action even though Rule 12(b) provides for a trial when the parties fail to settle the controversy. But we need not decide this question here. Although the court expressed its view of the matter when the parties reconvened for trial, it did not enter formal judgment until it had heard the principal appellant's opening statement and orally pointed out what it deemed to be the fatal flaws in the described claim. It then granted summary judgment.

It is immaterial that the defendant did not formally move for summary judgment, but rather was awarded judgment by the court sua sponte. In the Small Claims Branch, informal procedures govern and the relevant inquiry is whether "substantial justice" has been achieved. Interstate Bankers Corp. v. Kennedy, D.C.Mun.App., 33 A.2d 165, 166 (1943).

Affirmed.

[1] Associate Judge Fickling participated at argument and in the post-argument conference prior to his death on March 6, 1977.

[2] Now a branch of the Superior Court. Plaintiffs in the action filed an application for allowance of appeal, which was granted. D.C.Code 1973, § 11-721.

[3] All parties were present and not represented by counsel.

[4] The claimant contends that this comment was tantamount to warranting that the painting was done in the 19th Century, but the trial judge noted that the vendor's observation seemed to be a caveat rather than a representation.

[5] Certification of Trial Court at 1, Oct. 28, 1975.

[6] Id. at 2.

[7] The trial judge, Hon. Edward A. Beard, was the moving force in the creation of the Superior Court Art Trust, a collection which includes some excellent examples of American art.

Tom Thomas, Dallas, Tex., for plaintiff-appellant-cross appellee.

Wentworth T. Durant, Ronald G. Williams, Dallas, Tex., for defendant-appellee-cross appellant.

Before THORNBERRY, AINSWORTH, and MORGAN, Circuit Judges.

THORNBERRY, Circuit Judge:

This diversity dispute^[1] centers around an oral employment agreement, its modification, and the fallout resulting therefrom. Bad feelings abound between former employee and former employer, and we resolve the dispute by affirming the district court's decision that both sides take nothing.

Defendant C. A. Roberts Co., an Illinois corporation, distributes tubing, pipes, and similar metal goods. Although the company has done business in Texas for more than 40 years, it did not have an employee in the state until July 1968, when it hired plaintiff Mercer. A Dallas sales office was established a few months later, with Mercer as its manager. The employment agreement between the parties was oral and was without a definite term of duration; however, it was understood that Mercer would develop the Dallas office to maturity, a process that would take from three to five years. Mercer was well-suited for the job, having left the employ of one of Roberts' competitors to assume this position.

In August 1970, it was agreed that Mercer would receive incentive compensation in addition to his regular salary. This bonus plan consisted of fifteen per cent of the Dallas office's contribution to the company's annual profits. The bonus was payable quarterly and retroactive to January 1, 1970. Again there was no written agreement. More than four years later, in August 1974, Mercer was informed of a change in his compensation formula retroactive to January 1 of that year. Apparently the unanticipated revenue from the Dallas office resulted in Mercer's compensation under the formula being disproportionate to the compensation received by other employees. Dissatisfied with this revision, Mercer resigned on January 20, 1975.

Upon leaving the company, Mercer took with him a "customer data book" containing the names of all his customers, the types of materials purchased by each, their purchasing habits, information on various suppliers, and the like. He also took the company's price book, which contained a list of every item it sold and the price. Mercer has since engaged in a competition with Roberts and has solicited business from Roberts' customers in the Dallas area. The day after he resigned, he formed a Texas corporation — C. A. Roberts Co., Inc. — with himself as sole stockholder. However, pursuant to the Texas "assumed name" statutes,^[2]he filed a certificate with the clerks of Dallas and Tarrant Counties to do business under the name "Mercer Metals." Defendant Roberts had never registered or reserved its corporate name with the Texas Secretary of State.^[3] Mercer subsequently dissolved his corporation and now makes no claim to its name.

Mercer filed this suit on the day of his resignation, seeking approximately $37,000 in unpaid salary and bonuses, plus attorney's fees. Roberts filed an answer and counterclaimed for injunctive relief and some $35,000 in damages on the theory that Mercer had breached his fiduciary duty to the company by appropriating trade secrets and engaging in unfair competition. The district court held that the employment contract was unenforceable under the statute of frauds, Tex.Bus. & Comm.Code § 26.01, and that Mercer had not taken any trade secrets, engaged in unfair competition, or breached a fiduciary duty. Accordingly, judgment was entered for Roberts on the complaint and for Mercer on the counterclaim. Mercer brought this appeal, and Roberts cross-appealed.

I. STATUTE OF FRAUDS

The Texas "statute of frauds" is found in Tex.Bus. & Comm.Code § 26.01, which provides in pertinent part:

(a) A promise or agreement described in Subsection (b) of this section is not enforceable unless the promise or agreement, or a memorandum of it, is

(1) in writing; and

(2) signed by the person to be charged with the promise or agreement or by someone lawfully authorized to sign for him.

(b) Subsection (a) of this section applies to . . .

(6) an agreement which is not to be performed within one year from the date of making the agreement; . . ..

In interpreting this provision,^[4] the Texas courts have consistently held that where the time for performance of an oral agreement — including an oral employment agreement — is uncertain and performance can conceivably occur within one year, the statute of frauds is inapplicable, even if performance within the year is highly improbable. Miller v. Riata Cadillac Co., 517 S.W.2d 773 (Tex.1974); Bratcher v. Dozier, 162 Tex. 319, 346 S.W.2d 795 (1961); Hall v. Hall, 158 Tex. 95, 308 S.W.2d 12 (1957).

However, when no time for performance has been specified in the agreement, a reasonable time will be implied on the basis of all circumstances surrounding adoption of the agreement, the situation of the parties, and the subject matter of the agreement. Hall v. Hall, supra; Krueger v. Young, 406 S.W.2d 751 (Tex.Civ.App.-Eastland 1966, writ ref. n. r. e.); Adams v. Big Three Indus., Inc., 549 S.W.2d 411 (Tex.Civ.App.-Beaumont 1977, writ ref. n. r. e.). If the agreement, so interpreted, cannot be performed within one year, it comes within the statute of frauds and is unenforceable.

When the agreement is unwritten and its interpretation depends on disputed facts, the question of "reasonable duration" is one of fact to be determined by the trier of fact. Adams v. Big Three Indus., Inc., supra; McRae v. Lindale Ind. School Dist.,450 S.W.2d 118 (Tex.Civ.App.-Tyler 1970, writ ref. n. r. e.). That is the situation in the instant case, and the district court found that the agreement was not performable in one year because the parties contemplated that Mercer would develop the Dallas office to maturity, a process that would take three to five years. That finding is not clearly erroneous. Rule 52(a), Fed.R.Civ.P.^[5]

Given this finding and the above-stated Texas law, it is clear that the employment agreement is within the statute of frauds and thus unenforceable. Insufficiency of a contract on such grounds precludes both recovery for specific performance and damages for breach of contract. Wilson v. Fisher, 144 Tex. 53, 188 S.W.2d 150 (1945); Edward Scharf Associates, Inc. v. Skiba, 538 S.W.2d 501 (Tex.Civ.App.-Waco 1976, no writ).

Mercer argues, however, that the statute of frauds does not apply because the agreement has been fully performed. The Texas courts have, in many situations, held that full or partial performance of an oral agreement by one party precludes invocation of the statute of frauds by the other. E. g., Hooks v. Bridgewater, 111 Tex. 122, 229 S.W. 114 (1921) (contract for sale of realty); Kirk v. Beard, 162 Tex. 144, 345 S.W.2d 267 (1961) (agreement to make mutual wills that disposed of real property); Oak Cliff Realty Corp. v. Mauzy, 354 S.W.2d 693 (Tex.Civ.App.-Dallas 1962, writ ref. n. r. e.) (lease of real property); Vick v. McPherson, 360 S.W.2d 866 (Tex.Civ.App.-Amarillo 1962, writ ref. n. r. e.) (purchase of insurance agency); Wynnewood State Bank v. Brigham, 434 S.W.2d 874 (Tex.Civ.App.-Texarkana 1968, writ ref. n. r. e.) (agreement of bank to purchase credit life insurance for maker of note). To justify such equitable intervention by the courts in light of a clear statute, there must be something more than a mere wrong or breach of contract. The situation must be such that nonenforcement of the contract would itself plainly amount to fraud. Meyer v. Texas Nat'l Bank of Commerce, 424 S.W.2d 417 (Tex.1968).

Oral employment agreements, however, have been treated as contracts of a different color. Partial or full performance of such agreements by an employee has been held insufficient to render the statute of frauds inoperative. E. g., Paschall v. Anderson, 127 Tex. 251, 91 S.W.2d 1050 (Tex.Comm.App.1936, opinion adopted); Chevalier v. Lane's, Inc., 147 Tex. 106, 213 S.W.2d 530 (1948); Collins v. McCombs, 511 S.W.2d 745 (Tex.Civ.App.-San Antonio 1974, writ ref. n. r. e.); Choleva v. Spartan Aviation, Inc., 524 S.W.2d 739 (Tex.Civ.App.-Corpus Christi 1975, no writ). Nonetheless, there are circumstances in which the employee's performance of the agreement may trigger equitable relief. See Paschall v. Anderson, supra, 91 S.W.2d at 1051; Chevalier v. Lane's, Inc., supra, 213 S.W.2d at 534. However, the Texas courts found no such circumstances present in the above-cited cases, and we find none here.

The result may seem harsh, since Mercer worked from January to August 1974 under the assumption that he would receive his incentive pay. In August the company altered the compensation formula and made the change retroactive to January 1. However, the Texas courts have made clear that an oral agreement within the statute of frauds will not be enforced except in egregious situations. For example, in Collins v. McCombs, supra, Collins entered into an oral agreement with McCombs under which he would receive a set salary for operating a miniature train ride. At the end of three years, he would begin to share in the profits of the business. The three years passed, with Collins receiving the agreed upon salary, but when he approached McCombs about receiving a portion of the business, McCombs told him he "was not ever going to get" such an interest. The court held the contract was within the statute of frauds and thus unenforceable.

The instant case is similar. Mercer worked from January to August expecting to receive his incentive pay. During that time he was paid his regular salary. However, in August he was informed that he would not receive the commission, just as Collins was told he would not receive an interest in the train business. Mercer was arguably earning the commission during the eight-month period, but Collins, too, was in a real sense earning his share of the business. The Texas court in Collinswas not willing to upset the clear legislative policy embodied in the statute of frauds, and we are unwilling to do so in the instant case. Accordingly, we hold the oral agreement unenforceable.^[6]

II. TRADE SECRETS

When Mercer left the company, he took with him a "customer data book" containing an alphabetical listing of Roberts' customers, with notations stating the type and amount of material purchased, its price, addresses of the purchaser, and names of its agents; a "price book" listing all of Roberts' products and prices; and related information including Roberts' analysis of the company's suppliers. Roberts argues that these were confidential materials containing valuable trade secrets and that Mercer took them in breach of a fiduciary duty and used them in unfair competition against the company.

Our initial inquiry is whether a confidential relationship existed between Mercer and Roberts, for Texas follows the rule that one is liable for disclosure of trade secrets (1) if he discovers the secret by improper means or (2) his disclosure constitutes a breach of confidence. Hyde Corp. v. Huffines, 158 Tex. 566, 314 S.W.2d 763, 769 (1958). Only the second possibility is at issue here.

The district court found that the parties did not agree that the material was to be confidential, but there need not be such an express agreement as to confidentiality. Hyde Corp. v. Huffines, supra at 770. The law will imply as part of the employment contract an agreement not to disclose information which the employee receives as an incident of his employment "if the employee knows that his employer desires such information be kept secret, or if, under the circumstances, he should have realized that secrecy was desired." Lamons Metal Gasket Co. v. Traylor, 361 S.W.2d 211, 213 (Tex.Civ.App.-Houston 1961, writ ref. n. r. e.).

It is clear that not all employment relationships are confidential. Rimes v. Club Corp. of America, 542 S.W.2d 909 (Tex.Civ.App.-Dallas 1976, writ ref. n. r. e); Furr's, Inc. v. United Specialty Advertising Co., 385 S.W.2d 456 (Tex.Civ.App.-El Paso 1964, writ ref. n. r. e.), cert. denied, 382 U.S. 824, 86 S.Ct. 59, 15 L.Ed.2d 71 (1965). When an employee acquires an intimate knowledge of the employer's business, however, the relationship can be deemed confidential. Thermotics, Inc. v. Bat-Jac Tool Co., 541 S.W.2d 255 (Tex.Civ.App.-Houston [1st Dist.] 1976, no writ); Orkin Exterminating Co. v. Wilson, 501 S.W.2d 408, 411 (Tex.Civ.App.-Tyler 1973, writ dism'd); Rimes v. Club Corp. of America, supra at 914 (dictum).

While there is no doubt that Mercer had gained an "intimate knowledge" of Roberts' operations, we do not think that a confidential employment relationship existed. Mercer was not informed that the information was to be kept secret, and under the circumstances he could have reasonably assumed that the material was not confidential. The district court found that one of Mercer's assets as a new employee was his ability to retain a substantial number of customers in the area that he had served while working for one of Roberts' competitors. He thus brought considerable information about these customers to Roberts and apparently saw nothing wrong with taking similar information with him when he struck out on his own.^[7]

Alternatively, we hold that the information in question is not a trade secret under Texas law. At the outset, it should be noted that Roberts' price list was admittedly not kept from competitors and thus cannot be a trade secret. Rimes v. Club Corp. of America, supra; Research Equipment Co. v. Galloway, 485 S.W.2d 953 (Tex.Civ.App.-Waco 1972, no writ). Moreover, it has been held that a mere list of customers does not constitute a trade secret. SCM Corp. v. Triplett Co., 399 S.W.2d 583 (Tex.Civ.App.-San Antonio 1966, no writ); Gaal v. BASF Wyandotte Corp., 533 S.W.2d 152 (Tex.Civ.App.-Houston [14th Dist.] 1976, no writ); Research Equipment Co. v. Galloway, supra.

Roberts contends that its own analysis of suppliers and the specific needs and buying habits of various customers are trade secrets. There is no doubt that this information would greatly aid a would-be competitor, but we cannot say it rises to the level of a trade secret. In Brooks v. American Biomedical Corp., 503 S.W.2d 683 (Tex.Civ.App.-Eastland 1973, writ ref. n. r. e.), the court held that credit information regarding prices, courier routes, and customers of a business, as well as the employees of those customers, did not constitute a trade secret. The court stressed that these matters "are generally known to any person engaged in this business or can be ascertained by an independent investigation." Id. at 685.^[8]Similarly, we think that much of the information contained in the material taken by Mercer could be obtained from other sources. The district court so found, and the finding is not clearly erroneous. It seems obvious that the needs and purchasing habits of customers could be readily ascertained through simple observation or contact with each customer. Although the supplier evaluations present somewhat different considerations, this information is only a portion of data utilized by a company in selecting a supplier. For example, one supplier may be considered more reliable, but it may have significantly higher prices than another supplier. Moreover, Mercer had worked as a salesman for a competitor before joining Roberts, and anyone with experience in the field must certainly have had experience with various suppliers. Therefore, although the supplier evaluations may not be readily available from other sources, we conclude that they are not in themselves trade secrets.

Our conclusion on this issue is buttressed by the fact that Roberts hired Mercer to develop its Dallas office in part because of Mercer's knowledge of the trade area gained as an employee for a competitor and his ability to retain a substantial number of those customers when he joined Roberts. As the district court found, "[i]mplicit in the ability to retain these customers was Roberts' knowledge of the identities and needs of those customers which [Mercer] retained and furnished to Roberts". This finding is not clearly erroneous. Moreover, while Mercer may not have had certain information regarding Roberts' customers had he not work for the company, Roberts would not have had similar information about its competitors had it not hired Mercer. To put it simply, "what is sauce for the goose is sauce for the gander."

III. MISAPPROPRIATION OF CORPORATE NAME

The district court found that Mercer did not use the name of his Texas corporation, C. A. Roberts Co., Inc., to solicit business, that he did not mislead potential customers by using that name, and that he transacted no business whatsoever under that name. These findings are not clearly erroneous.

Roberts, however, contends that Mercer's reservation of the name "C. A. Roberts Co., Inc." with the Texas Secretary of State prevented the company from qualifying to do business in Texas and from building a warehouse in the state. However, the record is devoid of any attempt of the company to so qualify to do business in Texas. See Tex.Bus.Corp.Act art. 8.01. At the time of trial Roberts had not paid franchise taxes to the State of Texas, although it had been doing business in the state for several years, and had not attempted to register its corporate name with the Secretary of State. See Tex.Rev.Civ.Stat.Ann., Taxation-General, art. 12.01 (franchise taxes); Tex.Bus.Corp. Act art. 2.07 (reservation of corporate name). The district court properly concluded that Roberts suffered no injury from Mercer's formation of the Texas corporation, which was dissolved prior to trial.

IV. CONCLUSION

Because of our treatment of this case, we need not reach other issues addressed by the parties. The judgment of the district court is affirmed in all respects, and each party shall bear his own costs on appeal.

AFFIRMED.

AINSWORTH, Circuit Judge, dissenting:

I respectfully dissent from the failure of the court to reverse that portion of the district court judgment which denied relief to plaintiff Mercer. I agree, however, that the judgment should be affirmed insofar as it denies defendant's counterclaims.

In my view the Texas statute of frauds, Tex.Bus. & Comm.Code § 26.01, does not apply to the oral employment contract between plaintiff Mercer and defendant C. A. Roberts Company involved in this case, for the following reasons.

First, I would hold that the employment agreement was an annual agreement beginning on January 1 of each year, and thus was to be performed within one year from the date of its making. See Tex.Bus. & Comm.Code § 26.01(b)(6) (Texas statute of frauds applies only to "an agreement which is not to be performed within one year from the date of making the agreement . .."). The parties may have contemplated that it would take Mercer three to five years to develop the Dallas office of C. A. Roberts Company to maturity, but they specified no definite time for performance. On the contrary, the parties treated the agreement as if executed on an annual basis. See Miller v. Riata Cadillac Co., 517 S.W.2d 773 (Tex. 1974); Bratcher v. Dozier, 162 Tex. 319, 346 S.W.2d 795 (1961); Hall v. Hall, 158 Tex. 95, 308 S.W.2d 12 (1957).

Second, and most importantly, Mercer has fully performed the agreement upon which he now sues. He does not seek recovery for prospective employment compensation, but only for the months during which he was actually employed and fulfilled his employment obligations. The majority points out that the Texas courts have on occasion held that partial or full performance by an employee of an oral employment contract is insufficient to render the statute of frauds inoperative. At least two of those courts, however, have stated there are circumstances in which an employee's performance of the oral agreement does call for equitable relief — when nonenforcement of the agreement would amount to fraud. Chevalier v. Lane's, Inc., 147 Tex. 106, 213 S.W.2d 530, 534 (1948); Paschall v. Anderson, 127 Tex. 251, 91 S.W.2d 1050, 1051 (Tex.Comm.App.1936, opinion adopted).

Thus the Texas statute is subject to the exception that its provisions will not be maintained where to do so would amount to a denial of equity to a plaintiff in circumstances which show that employment for the year involved was induced by defendant's fraud. It must be emphasized that it was not until August 1974 — of the year sued upon — that defendant C. A. Roberts unilaterally notified plaintiff Mercer that his compensation, bonus and salary, would be substantially reduced retroactive to January 1, 1974. Mercer had first been employed by defendant in 1968. It is undisputed that in August 1970 the parties agreed that Mercer's compensation would be $870 per month plus 15% of defendant's Dallas office contribution to profits for the year, retroactive to January 1, 1970. Thereafter, for four consecutive years, 1970-1973, Mercer was paid in accordance with this agreement. But defendant seeks nevertheless to abort its agreement and deprive Mercer of money fully earned, by resorting to the Texas statute of frauds. Defendant C. A. Roberts is thus attempting by fraudulent means to obtain an advantage over plaintiff which equity clearly forbids. Mercer was induced to work for defendant in the year 1974, believing his compensation would be the same as in the four previous years, but defendant changed the basis of compensation in August 1974 without mutual agreement and retroactive to January 1974. Certainly defendant should be estopped from attempting to avoid payment of just compensation in this inequitable way.

The majority concedes that C. A. Roberts Company changed Mercer's compensation formula simply because his compensation had become disproportionate to that of other employees. The court's opinion observes that "The result may seem harsh since Mercer worked from January to August 1974 under the assumption that he would receive his incentive pay." Yet Mercer's earnings had risen only as a result of his doing what the company hired him to do — develop the Dallas office into a profitable enterprise. As C. A. Roberts Company made money, Mercer was to make money; that was the agreement. We should not and need not reach a "harsh" result in this case since neither the Texas statute nor the Texas decisions require it. The laborer is worthy of his hire. An appropriate order should be entered requiring that he be paid.

[1] We apply the law of Texas, the forum state. Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938).

[2] Tex.Bus.Corp. Act art. 2.05; Tex.Rev.Civ.Stat.Ann. art. 5924 et seq. The Texas Legislature recently overhauled the assumed name requirements by adding Chapter 36 to the Business and Commerce Code. Session Laws 65th Legislature, Ch. 403, at 1095 (1977).

[3] Tex.Bus.Corp. Act art. 2.07.

[4] The statute of frauds was first enacted in Texas on January 8, 1840, when, of course, Texas was a republic. Acts of 1840, at 28; Gammel's Laws of Texas, vol. 2, at 202. It followed the statute of King Charles II, 29 Car. II, c. 3, § 4 (1677), and provided that no action shall be brought "upon any agreement which is not to be performed within the space of one year from the making thereof" unless the "agreement upon which action shall be brought, or some memorandum or note thereof, shall be in writing, and signed by the party to be charged therewith, or by some person by him thereunto authorized." The statute appeared in various codifications of Texas law over the years, finally coming to rest in Art. 3995, Tex.Rev.Civ.Stat., in 1925. There it remained until 1967 when the Legislature enacted the Business and Commerce Code, the first code to be passed under the state's statutory revision program.

[5] A finding is clearly erroneous when, although there is evidence to support it, the reviewing court, after examining the entire record, is left with a "definite and firm conviction that a mistake has been committed by the district court." Causey v. Ford Motor Co., 516 F.2d 416, 420 (5 Cir. 1975).

[6] The dissent would go well beyond Collins and hold the agreement enforceable, but it does not even attempt to distinguish that case. As pointed out previously, Texas courts have recognized that an agreement may be enforced where nonenforcement would amount to fraud. Chevalier v. Lane's, Inc., supra; Paschall v. Anderson, supra. However, in neither of those cases did the court enforce the agreement; moreover, the court in Collins, faced with circumstances at least as harsh as those in the instant case, held the contract unenforceable. Were we writing on a clean slate, the dissent's position would certainly be a tenable one, but being Erie-bound, we cannot ignore the parameters of the Texas case law.

Mercer also argues that payment of compensation on a monthly or annual basis removes the contract from the statute of frauds, citing Miller v. Riata Cadillac Co., supra. That case, however, is wholly inapposite, and it has been held that the fact that payment is made monthly does not take an employment agreement out of the statute of frauds. Jackman v. Anheuser-Busch, 162 S.W.2d 744 (Tex.Civ.App.-Dallas 1942, writ ref'd). This argument is without merit.

[7] Moreover, Roberts obviously benefited from Mercer's prior knowledge of customers and their needs and should not be heard to complain now that the shoe is on the other foot.

[8] Apparently contra is Crouch v. Swing Machinery Co., 468 S.W.2d 604 (Tex.Civ.App.-San Antonio 1971, no writ), which is not cited or distinguished in the later Brooks decision. However, we consider Brooks the more authoritative of the two, since the Supreme Court of Texas refused to hear the case, noting that there was no reversible error. Crouch, on the other hand, has no writ history, indicating that it was not appealed to the Supreme Court.

262 N.Y. 80 (N.Y. 1933)

MICHAEL T. WATTS, Respondent, v. JOHN B. MALATESTA, Appellant, Impleaded with Others

Court of Appeals of the State of New York

May 22, 1933

CROUCH, J.

The action is under section 994 of the Penal Law to recover money paid by plaintiff to defendant upon the event of prohibited wagers or bets. Plaintiff proved conclusively that on divers dates and occasions from April 28, 1928, to April 17, 1930, he had paid defendant, a bookmaker, various sums of money aggregating $37,535 for wagers lost upon a series of horse races. The defendant adduced evidence which, it may be assumed, warranted a finding that during the same period defendant lost and paid to plaintiff like wagers aggregating a much larger sum. It was the contention of the defendant, under a pleaded counterclaim, that he was entitled to recover from the plaintiff a sum equal to the excess of the total amount lost and paid by him to the plaintiff over the total amount lost and paid by the plaintiff to him. That contention, accepted by the trial court, was rejected by the Appellate Division. Plaintiff was granted judgment for the entire amount of the wagers lost and paid by him to the defendant. As matter of law, the judgment was right.

Under the evidence and for the purpose of this case, plaintiff must be regarded as a casual, and the defendant as a professional gambler. "The statute against betting and gaming was enacted as a protection of the public morals. The intention of the legislature was to discourage and repress gambling in all its forms, and the law * * * is to be construed so as to accomplish, so far as possible, the suppression of the mischief against  which it was directed." ( Luetchford v. Lord, 132 N.Y. 465, 469, citing Ruckman v. Pitcher, 1 N.Y. 392, 396, and Storey v. Brennan, 15 N.Y. 524, 527.) But casual betting or gaming by individuals as distinguished from betting or gambling as a business or profession, is not a crime. ( People v. Stedeker, 175 N.Y. 57; People v. Bright, 203 N.Y. 73; People ex rel. Collins v. McLaughlin, 128 App. Div. 599.) The distinction between the two species has long "obtained in this state where ordinary betting has never been made a crime * * * while the keeping of a gambling house, selling lottery tickets and the profession of a common gambler have been subjected to severe punishment." ( People v. Stedeker, supra, p. 62.) Discouragement of casual betting has never gone beyond the point of making recovery by a winner impossible upon default by the loser (Penal Law, §§ 991 and 992); and of compelling return to the loser of voluntary payments made by him. (Penal Law, §§ 994 and 995.) Attack or defense in a civil action has been regarded as adequate — "as one of the best and surest means" ( Ruckman v. Pitcher, supra, p. 405) — for the suppression of that kind of betting. The evil which the law chiefly condemns (N.Y. Const. art. I, § 9) and makes criminal (Penal Law, art. 88) is betting and gambling organized and carried on as a systematic business. The reason seems obvious. Curb the professional with his constant offer of temptation coupled with ready opportunity, and you have to a large extent controlled the evil.

It is clear that in the eye of the law the professional gambler and his customer do not stand on the same plane. They are not in pari delicto.

To argue, therefore, that the Legislature, by using the phrase "any person" in section 994 of the Penal Law, intended to confer a right upon the professional to recover his losses from his customer, is unconvincing. Under such a construction, a criminal act would give rise to a cause of action. That cannot be the law. (Cf. Riggs  v. Palmer, 115 N.Y. 506; Murray v. Interurban Street Ry. Co., 118 App. Div. 35.) By no possibility could such a construction tend, as we have said it should, to "the suppression of the mischief against which it [the statute] is directed."

But it is urged that in any event the defendant, a professional specializing in the field of bookmaking, may offset his losses against the plaintiff's claim. How may that be, if he has no cause of action at all? To permit it would be to permit pro tanto what the law denies in toto. Nowhere in the statute is there any indication of an intent to afford a locus poenitentiae to the professional. Quite the contrary. Whatever his shape may be, he is an outlaw. Moreover it is to be remembered that the right of recovery given by statute to the casual gamester is not intended to benefit him, but to put teeth in the prohibition against all betting.

As a precedent for the theory of offset, however, there is pressed to our attention the case of Elias Shepherd v. Gill ( 92 Ky. 569). The compromise involved in that decision is a sporting one, and on that ground admirable. We think it can be sustained on no other, and prefer to follow Lyons v. Coe ( 177 Mass. 382), which dealt with an analogous, if less ambiguous, statute.

The judgment should be affirmed, with costs.

CRANE, J. (dissenting).

The plaintiff and the defendant are two gamblers, the defendant being a bookmaker at the race tracks, and the plaintiff placing his bets on the races with the defendant through himself and his betting agent. These transactions covered the period between April 27, 1928, and May 28, 1929, during which time the plaintiff won nearly $250,000, and had lost about $150,000. His gains over losses were about $100,000. All the money he won was paid to him. He now brings this action under section 994 of the Penal Law to recover his losses but makes no offer to repay his winnings — these he wants to keep. 

In his complaint he alleges that between the dates stated he paid to John B. Malatesta $37,773 as his wagers upon horse races at the Belmont track, the Jamaica race track and the Empire City race track; that having lost, he demanded back his money which the defendant failed to pay. Mind you, he sues to recover no single bet, nor does he even state or prove what the wagers were as made. He lumps his demands for a year's betting and asks for the total; he treats the transactions as a running account.

The defendant in his answer admits that between the dates mentioned he and the plaintiff entered into a series of wagers upon horse races but denies that the plaintiff's losses have not been repaid. He further alleges, as a counterclaim, the fact that he paid the plaintiff $95,938, his winnings at the track over and above the losses, and demands judgment for its return.

At the trial the complaint was dismissed and the defendant was awarded judgment on his counterclaim. The Appellate Division reversed the judgment and gave judgment for the plaintiff, dismissing the counterclaim. The result in my judgment is that both parties should have lost; that neither should have recovered from the other; that they were in pari delicto and that section 994 never intended that a person who makes a wager may sue for and recover the same, although he may at the same time keep all his own winnings made in the same course of transactions more than sufficient to meet his losses.

Section 991 reads as follows: "All wagers, bets or stakes, made to depend upon any race, or upon any gaming by lot or chance, or upon any lot, chance, casualty, or unknown or contingent event whatever, shall be unlawful."

Section 992 reads: "All contracts for or on account of any money or property, or thing in action wagered, bet  or staked, as provided in the preceding section, shall be void."

The plaintiff could not have recovered his winnings from the defendant. He would have no standing in court, for the law refuses to recognize gambling debts or afford the winner any relief. ( Meech v. Stoner, 19 N.Y. 26.) The Revised Statutes (1 R.S. p. 662), the forerunner of section 994 of the Penal Law, permitted a recovery of his losses.

When, however, the plaintiff, under section 994, seeks to recover what he has lost, at the same time having in his possession and having received from the defendant more than sufficient to cover such losses, all coming out of the same course of transactions, the court should afford him no relief. Section 994 of the Penal Law was never intended to cover such a case. Instead of discouraging gambling and bookmaking, which is the purpose of the law, such a result would do the very reverse by encouraging people to wager on horse races with a bookmaker whose money they could legally take, and then recover all that they may have lost in the same afternoon. The very purpose of section 994 is thus nullified.

This was the view taken of a similar statute by the Supreme Court of Kentucky in Elias Shepherd v. Gill ( 92 Ky. 569). The Kentucky statute, like our Revised Statute (1 R.S. p. 662), provides (General Statutes, ch. 47, art. 1, § 2) that "if any person shall lose to another at one time or within any twenty-four hours, five dollars or more * * * and shall pay * * * the same, such loser or any creditor of his may recover the same * * * from the winner * * * by suit brought within five years after the payment."

Under this statute it was held that where one sought to recover of pool sellers on horse races the money which had been lost in wagering, the pool sellers were entitled to deduct from the amount lost or paid to them the sum  which they had paid and which the person laying the wager had won. The court said: "But while it is true appellants could not, by an original action, have recovered any part of the amount lost in their own pool-rooms to appellee, nor are entitled to judgment even on their counter-claim, still, whatever amount or amounts they lost to him on account of wagers between them on horse races at the dates or within the period mentioned in the petition, should be set off against or deducted from what he may be entitled to recover in this action. For certainly it was not the intention of the Legislature to afford to a party voluntarily buying pools on horse races, or betting at a faro-bank, the undue advantage of recovering back what he may have lost to the seller or dealer, without disgorging and accounting for what he won from him. The purpose of the statute was to afford to such party remedy to the extent of his actual loss, not to enable him to recover back what he lost, while keeping and profiting by what he won from the defendant. It therefore seems to us clear that the criterion of the amount appellee is entitled to recover, if any at all, is the excess of what he lost to appellants above what he won from them during the period mentioned; and at the trial the burden should be on him to show the amount of his losses to appellants, subject to reduction or set-off by the amount he won from them."

This is the exact situation in the case now before us. Our section 994 of the Penal Law likewise was never intended to enable a better on horse races to profit by his losses. In interpreting our laws, we must have in mind as a fundamental principle the evils which they are sought to prevent and not so construe them as to create greater evils.

My associate, Judge CROUCH, is of the opinion that the plaintiff and the defendant are in different positions because the defendant has committed crime, being a bookmaker. In this I think he is mistaken. He cites  for authority Riggs v. Palmer ( 115 N.Y. 506, 511), which held that a beneficiary, under a will, could not recover his benefactions where he had murdered the testator in order speedily to come into possession of the estate. The rule, however, that one may not profit by his own wrong is not confined to criminal acts. It applies equally to those who have done wrong, not amounting to crimes, such as acting contrary to public policy. "No one," said the court, "shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime." Thus, in Attridge v. Pembroke ( 235 App. Div. 101, 102), it was held that a mutual agreement that if the plaintiff would terminate and break her engagement to marry her fiance, the defendant, a third party, would pay her a sum of money, is void, as against public policy, for it bound the plaintiff to do an illegal act. "It is not necessary," said the court, "to plead the illegality of a contract which is contrary to public policy; the court will, of its own motion, step in and deny the right to any relief thereunder without reference to the state of the pleadings, whenever it becomes apparent that the agreement is antagonistic to the interests of the public."

In Continental Wall Paper Co. v. Voight Sons Co. ( 212 U.S. 227) it was held that a vendor could not recover for the price of wall paper sold and delivered, as to enforce the claim would be to aid in the execution of an agreement in restraint of trade. (See, also, Morgan Munitions Co. v. Studebaker Corp., 226 N.Y. 94.) The rule, therefore, was not confined to one who was a criminal. No one could recover on a contract which was contrary to the public policy of the State.

The position, in this particular, of the plaintiff and the defendant at common law was the same. Neither could recover losses sustained upon a wagering contract. Both were equally barred from the courts and the position of  the man who bet was no better than the criminal who was a common gambler. The plaintiff in this case by betting on the horse races was acting contrary to the public policy of this State, as evidenced by the provisions of the Penal Law, above cited, and article I, section 9, of the Constitution of New York. When, therefore, section 994 of the Penal Law and its predecessor, the Revised Statutes (1 R.S. p. 662), removed this ban so as to permit any person who shall pay money upon the event of any wager to recover the same, it applied to the bookmaker as well as to the better. The statute makes no exceptions. Both were equally barred by the common law as equally culpable and when the prohibition was removed both were afforded equal rights, not for their own sakes, but for the benefit of the public. Personally, I believe that the defendant in this case has as much right to recover on his counterclaim as the plaintiff has to recover his losses. Both come under section 994 of the Penal Law. But at least I am convinced that the defendant having paid the plaintiff his winnings, is entitled to have them considered as repayment of the losses.

The remedy, under section 994 of the Penal Law, is not confined to those who bet with professional gamblers or with bookmakers at race tracks, but applies also to to those who bet at poker or on the result of elections. The loser may always sue to recover back his lost wager. This he could not do at common law. Betting was illegal, or, as stated by Judge CULLEN in People v. Lambrix ( 204 N.Y. 261, 264), "All gambling has for a long time been illegal in this State." The Constitution (Art. I, § 9) has enacted that no kind of gambling shall be authorized or allowed within this State. Prior to these provisions of the Revised Statutes, followed by section 994 of the Penal Law, the loser could not maintain an action to recover his losses because, having participated in an illegal act, the courts would not aid him. It left the parties in the position in which it found them. This court said in  Meech v. Stoner ( 19 N.Y. 26, 27): "If the statute had not given an action to recover money lost at play, it is quite certain that on the general principles of law a suit for such a purpose could not be maintained. The winner's exemption from suit and recovery would not result, however, from any title in himself to the money or thing won and received by him. On the contrary, the whole transaction being unlawful, he is bound in conscience to make restoration, and would be bound in law to do so, but for a peculiar maxim having the force of law, and according to which the courts withhold their remedial processes from each of the offending parties. ` In pari delicto potior est conditio defendentis,' is the rule in such cases; but this is a rule which acknowledges no just or legal title in the defendant. It assumes, on the other hand, that the money or thing in his possession has been acquired in violation of the law, and it then denies a remedy to the other party because he has been an equal sharer in the same offense. Thus the parties are left where the law finds them, and the defendant prevails, not upon his own merits or title, but because the plaintiff is deemed unworthy to be heard in the particular case. ( Nellisv. Clark, 20 Wend. 24, and cases cited; S.C. in Court of Errors, 4 Hill, 424.)"

The purpose of section 994 was merely to restore — to put the party back in the same position as if he had never parted with his property, to disregard the wager as an illegal act and to give the bettor that which he had lost, or, in the words of the decisions, that which the winner wrongfully kept. The statute, however, never intended to go further than this, or to permit one to profit out of his wrong, recover not only what he has lost, but also keep all that he has won. As above stated, to permit him to do this is to afford a rare opportunity for adventure or extortion, or betting on a "sure thing."

While the law prohibits bookmaking and makes it a criminal offense, it also provides the punishment.  Although the bookmaker may be subject to this punishment, he is not to be made the victim of frauds and cheats. One cannot steal from a bookmaker simply because he is a bookmaker. He has his remedy in court. When, therefore, the law allows the loser to recover from the bookmaker the money he has lost, it does not or should not permit the better to also keep what he has won from the bookmaker.

The purpose of section 994 of the Penal Law was to prevent under the mandate of the Constitution all forms of gambling. It was not aimed at professional gambling or against bookmakers or poolsellers; it was aimed at any person who gambles. This court, therefore, in construing this statute, should not deal with it as one in aid of the loser, but construe it in such a way as to aid in the purpose of the Legislature to stop, and not encourage betting. No surer way can be devised to encourage the gambling instinct than to say to these semi-professional gamblers like the plaintiff, "You can risk all your money on the horses and, if you lose, recover it back. If you win, you need never pay back." This makes a sure thing of this form of gambling. A gambler like the plaintiff can always win and never lose. Such a construction of this statute is to defeat its very purpose and resurrect that which the law has buried. We are at least in harmony with the intentions of the Constitutional Convention and of the Legislature when we hold that while the loser may recover from a bookmaker at the race track his losses, he cannot recover more, and if the bookmaker in the same course of transactions has paid winnings equal to the amount of the losses, the plaintiff or the better has suffered no loss. "It is the function of the court to construe the statute, not to defeat it as construed. * * * To construe statutes so as to avoid absurd or glaringly unjust results, foreign to the legislative purpose is, as we have seen, a traditional and appropriate function of the courts." ( Sorrells v. United States, 287 U.S. 435, 449, 450.)

There is another ground for holding that this plaintiff cannot recover. The reason he recovers at all is because under the statute the bet is illegal (§§ 991, 992). Section 991 says that all bets upon a race are unlawful and that all contracts for money wagered shall be void. The money paid by the bookmaker to the plaintiff was on a void transaction. The plaintiff is not entitled to it. It is not his money. In the eyes of the law it is money had and received which he should pay back. The plaintiff still has money which belongs to the defendant. There is nothing I know of in the law which prevents this defendant from pleading that the plaintiff has been paid in full. Even if the bookmaker may not be able to recover back his money (which I doubt) he is fully authorized when sued to set up any defense known to the law. He has proved payment by showing that the plaintiff has received more than he gave.

I, therefore, am for reversal, the dismissal of the complaint and of the counterclaim, basing my opinion upon these two grounds: (1) Section 994 of the Penal Law was never intended to cover a case like this which would permit a bettor to recover all his losses without offsetting his winnings, and (2) for the reason that the winnings, growing out of the same course of transactions, amount to a repayment of the losses.

POUND, Ch. J., KELLOGG and O'BRIEN, JJ., concur with CROUCH, J.; CRANE, J., dissents in opinion in which LEHMAN, J., concurs; HUBBS, J., not sitting.

Judgment affirmed.

291 F.2d 471 (5th Cir. 1961)

New York Football Giants, Inc., Appellant. v. Los Angeles Chargers Football Club, Inc., and Charles Flowers, Appellees

U.S. Court of Appeals for the Fifth Circuit

June 14, 1961

Joel T. Camche, J. Howard Carter, New York City, James Hugh Ray, Tupelo, Miss. (Lumpkin, Holland & Ray, Tupelo, Miss., Townley, Updike, Carter & Rodgers, New York City, of counsel), for appellant.

James McClure, Herbert M. Fant, Sardis, Miss., Lester G. Fant, Jr., Holly Springs, Miss. (McClure, Fant & McClure, Sardis, Miss., of counsel, for Los Angeles Chargers Football Club, Inc.; R. P. Crutcher, Jr., Holly Springs, Miss., of counsel, for Charles Flowers) for appellees.

Before TUTTLE, Chief Judge, RIVES, Circuit Judge, and DE VANE, District Judge.

TUTTLE, Chief Judge.

In the case of Detroit Football Company v. Robinson, 186 F. Supp. 933, 934, Judge Wright, of the District Court for the Eastern District of Louisiana, said:

"This case is but another round in the sordid fight for football players, a fight which begins before these athletes enter college and follows them through their professional careers. It is a fight characterized by deception, double dealing, campus jumping, secret alumni subsidization, semi-professionalism and professionalism. It is a fight which has produced as part of its harvest this current rash of contract jumping suits. It is a fight which so conditions the minds and hearts of these athletes that one day they can agree to play football for a stated amount for one group, only to repudiate that agreement the following day or whenever a better offer comes along. So it was with Johnny Robinson."

We have read cases cited in Judge Wright's opinion and we share his disgust at the sordid picture too often presented in this kind of litigation. So much so, in fact, that we conclude that in an appropriate case the federal equity court, which is the tribunal usually appealed to for a decree of specific performance or injunction, must decline to lend its aid to either party to a transaction that in its inception offends concepts of decency and honest dealing, such as the case before us.

In the fall of 1959 Flowers was an outstanding football player on the University of Mississippi team. His team was to play a post-season game on January 1, 1960, at the Sugar Bowl in New Orleans against a traditional rival, Louisiana State University.

The well understood rules of the Southeastern Conference (SEC) and the National Collegiate Athletic Association (NCAA)¹  made ineligible from further participation in intercollegiate games any player who had signed a contract to play with a professional team. Flowers wanted above all else to play in the Sugar Bowl game. On a trip to New York City for other purposes he was invited by the Giants' official Mara to come to his office where he was urged to sign a contract to play two seasons, beginning in 1960, with the Giants. He told Mara he wanted to retain his eligibility to play in the Sugar Bowl game. The manner in which this was made clear to Mara and the device by which Mara persuaded Flowers to sign the contract and deceive his coach, the University and the opposing team, as well as the college football public, can most satisfactorily be expressed by quoting Mara's own testimony on cross-examination:

"Q. Prior to the signing of any instrument in your office between you and Charles Flowers, Flowers made it clear to you, didn't he, that the University of Mississippi Football Team had been invited to play in the Sugar Bowl Game on January 1st in New Orleans. You knew that? A. Yes, sir.

"Q. Didn't he make it clear to you prior to the signing of the contract, or paper, in your office on December 1st, he did not want to do anything that would destroy his eligibility as a player in that game? A. We discussed that earlier.

"Q. Did he make that crystal clear he did not want to do anything, or sign any paper in your office on December 1st, that would destroy his eligibility as a player in that game? A. I certainly understood that. Yes, sir.

"Q. He made it crystal clear to you that was his attitude about it, wasn't it? A. I knew that was his attitude.

"Q. In order for you to have a binding contract with Mr. Flowers in the paper that was signed and exhibited here as # 3 to your testimony, and allow him to play in the Sugar Bowl Game, what proposal did you make to Mr. Flowers as to how he could sign the paper and play in the game?

* * * * * *

"A. That the signing of the contract would be kept confidential.

"Q. Kept confidential. So your proposal was that he could sign the paper and play in the game and you would keep it a secret. Is that correct? A. That is correct.

"Q. Why did you want to keep it a secret? A. I knew if it were revealed, that Flowers would not be permitted to play in the Sugar Bowl Game.

"Q. You knew Coach Vaught, the Head Coach at Ole Miss? A. Yes, sir.

"Q. You had known him a number of years? A. I first met him in '58, I believe.

"Q. You knew that if Coach Vaught knew this young man, Flowers, had signed a contract in your office on December 1st, obligating his service to your team, Coach Vaught would not have allowed him to play in that Sugar Bowl Game, didn't you?

* * * * * *

"A. That was my feeling.

"Q. That was your feeling. That was one reason you wanted to keep the matter a secret, wasn't it? A. That's correct."

Following such proposal by Mara, Flowers signed the standard form of contract of the National Football league, and received checks totalling $3500 as a sign-on bonus, and then returned to Mississippi. One of the terms of the contract was that: "This agreement shall become valid and binding upon each party hereto only when, as and if it shall be approved by the Commissioner." Part of the deceit agreed to between the parties was an agreement that Mara would not submit the contract to the Commissioner until after January 1st. Flowers later made some effort by telephone on or about December 5th to withdraw from the contract. Thereafter, the Giants promptly filed the contract with the Commissioner, and he "approved" it on December 15th. However, at Mara's request, he withheld announcement of his approval until after January 1st. On December 29th Flowers had negotiations with the Los Angeles Chargers, as a result of which he was offered a better contract, but which was not formally executed until after the Sugar Bowl game on January 1st. He wrote a letter to the Giants on December 29th stating that he was withdrawing from his agreement with them. He returned the uncashed checks for the bonus money. Flowers played in the game, all of his fans presumably thinking that he was still an eligible player, thanks to the deception proposed by the Giants and entered into by him.

The trial court held that until the "contract" was approved by the Commissioner it was not binding. See Detroit Football Co. v. Robinson, supra; Los Angeles Rams Football Club v. Cannon, D.C., 185 F. Supp. 717, and Chicago Cardinals Football Club, Inc. v. Etcheverry, No. 3186 Civil, D.C.N.M. It held, therefore, that when Mara, contrary to his agreement not to submit the contract to the Commissioner until after January 1st, did so, the approval by the Commissioner was not effective to make it binding and that Flowers still had the legal right to cancel until January 1st. The trial court, therefore, entered judgment for both defendants.

Without considering the legal issues on the merits, we affirm the judgment of the trial court. We do so by application of the age-old, but sometimes overlooked, doctrine that "he who comes into equity must come with clean hands." A recent discussion of this maxim by the United States Supreme Court is controlling here:

"The guiding doctrine in this case is the equitable maxim that `he who comes into equity must come with clean hands.' This maxim is far more than a mere banality. It is a self-imposed ordinance that closes the doors of a court of equity to one tainted with inequitableness or bad faith relative to the matter in which he seeks relief, however improper may have been the behavior of defendant. That doctrine is rooted in the historical concept of court of equity as a vehicle for affirmatively enforcing the requirements of conscience and good faith. This presupposes a refusal on its part to be `the abettor of iniquity.' Bein v. Heath, 6 How. 228, 247 [12 L. Ed. 416]. Thus while `equity does not demand that its suitors shall have led blameless lives, Loughran v. Loughran, 292 U.S. 216, 229 [54 S. Ct. 684, 689, 78 L. Ed. 1219], as to other matters, it does require that they shall have acted fairly and without fraud or deceit as to the controversy in issue. Keystone Driller Co. v. General Excavator Co., 290 U.S. 240, 245 [54 S. Ct. 146, 147, 78 L. Ed. 293]; Johnson v. Yellow Cab [Transit] Co., 321 U.S. 383, 387 [64 S. Ct. 622, 624, 88 L. Ed. 814]; 2 Pomeroy, Equity Jurisprudence (5th Ed.) §§ 379-399.

"This maxim necessarily gives wide range to the equity court's use of discretion in refusing to aid the unclean litigant. It is `not bound by formula or restrained by any limitation that tends to trammel the free and just exercise of discretion.' Keystone Driller Co. v. General Excavator Co., supra, [290 U.S. 240] 245, 256 [54 S. Ct. 146, 147, 148, 78 L. Ed. 293]. Accordingly one's misconduct need not necessarily have been of such a nature as to be punishable as a crime or as to justify legal proceedings of any character. Any willful act concerning the cause of action which rightfully can be said to transgress equitable standards of conduct is sufficient cause for the invocation of the maxim by the chancellor.

"Moreover, where a suit in equity concerns the public interest as well as the private interests of the litigants this doctrine assumes even wider and more significant proportions. For if an equity court properly uses the maxim to withhold its assistance in such a case it not only prevents a wrongdoer from enjoying the fruits of his transgression but averts an injury to the public. The determination of when the maxim should be applied to bar this type of suit thus becomes of vital significance. See Morton Salt Co. v. [G. S.] Suppiger Co., 314 U.S. 488, 492-494 [62 S. Ct. 402, 405, 406, 86 L. Ed. 363]." Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 814, 815, 65 S. Ct. 993, 997, 998, 89 L. Ed. 1381.

Earlier the Supreme Court said in Deweese v. Reinhard, 165 U.S. 386, 390, 17 S. Ct. 340, 341, 41 L. Ed. 757:

"* * * A court of equity acts only when and as conscience commands, and if the conduct of the plaintiff be offensive to the dictates of natural justice, then, whatever may be the rights he possesses and whatever use he may make of them in a court of law, he will be held remediless in a court of equity."

Here the plaintiff's whole difficulty arises because it admittedly took from Flowers what it claims to be a binding contract, but which it agreed with Flowers it would, in effect, represent was not in existence in order to deceive others who had a very material and important interest in the subject matter. If there had been a straightforward execution of the document, followed by its filing with the Commissioner, none of the legal problems now presented to this court to untangle would exist. We think no party has the right thus to create problems by its devious and deceitful conduct and then approach a court of equity with a plea that the pretended status which it has foisted on the public be ignored and its rights be declared as if it had acted in good faith throughout.

When it became apparent from uncontradicted testimony of Mara that this deceit was practiced in order to bring into being the "contract" sued upon, the trial court should have dismissed the suit without more on the basis of the "clean hands" doctrine.

To the extent that the final judgment of the trial court dismissed the complaint as amended, with costs adjudged against the plaintiff, the said judgment is affirmed. To the extent that the judgment proceeded to a legal determination as to the validity of the contracts between the parties, we conclude that, in the view we take of the equitable principles applicable, these judgments should not have been reached. The judgment of the trial court is, therefore, modified by striking therefrom paragraphs B and C of section 5 of the said judgment.

As thus modified the judgment is affirmed.

¹ SEC Constitution and By-Laws, 1959, Rule VIII:

"Professionalism.

Any student who signs a contract or enters into any agreement, explicit or implicit, with a professional team * * * shall not be eligible for intercollegiate athletics."

NCAA Constitution, 1958-1959, Article III:

"Principle of Amateurism. * * * One who takes or has taken pay, or has accepted the promise of pay, in any form, for participation in athletics * * * does not meet [the] definition of an amateur."

Rosenberg & Rosenberg for defendant.

Amos S. Basel for plaintiff.

EDER, J.

Motion to dismiss complaint for legal insufficiency in failing to state facts sufficient to constitute a cause of action, and upon the further ground that the alleged agreement pleaded in the complaint is against public policy and hence unenforcible.

The action is to recover damages alleged to have been sustained by reason of breach of a contract entered into between the parties, dated October 31, 1950.

The complaint alleges plaintiff is the authoress of a certain novel originally entitled "Sit Still My Soul", and presently entitled, "The Kneeling God".

Defendant, it is averred, at all times in concern, was and still is a famous comedian and theatrical performer with a vast public of admirers and fans, and has acquired great prominence in all fields of entertainment, including the legitimate stage, motion pictures, radio and television.

It is alleged by plaintiff that in February, 1950, defendant requested plaintiff to write a serious novel to be published under his name as sole author, in order to gain recognition in the literary field; that he advised plaintiff that if she agreed to write such novel, that the finished work would be published under defendant's name as the sole author thereof, "thereby insuring the likelihood of a large sale" because of defendant's vast public of admirers and fans and because of his many public appearances before huge audiences, which afforded "opportunities to exploit and sell said book" and thereby insure its success; that plaintiff and defendant agreed to divide equally all profits derived from the work; that plaintiff's share would be far greater than if the book were published under plaintiff's authorship.

The complaint alleges that plaintiff proceeded to write and complete the book; that she commenced in February, 1950, and finished the work in July, 1950, when she delivered to defendant a copy of her complete work. It is then alleged that on or about October 31, 1950, the parties entered into a written agreement, dated that day, which is made a part of the complaint, marked Exhibit "A".

It is further alleged that defendant gave interviews to the press and issued statements announcing that he was the sole author of said book and that it was soon to be published.

That in breach and violation of the agreement defendant advised plaintiff that he would not permit her work to be published and had withdrawn it from the market; that plaintiff has performed all the terms and conditions of said contract on her part to be performed, and damages are sought to be recovered because of such breach.

In sum, therefore, plaintiff seeks to recover damages allegedly sustained by her by reason of defendant's refusal to permit a book written by plaintiff to be published under defendant's name as the sole author thereof.

Defendant contends, and the court is in accord therewith, that the alleged agreement upon which plaintiff's cause of action is predicated offends public policy and is unenforcible, in that it has for its purpose and object the practicing of a fraud and deception upon the public.

It is established by abundant authority that agreements which tend to or have for their purpose to defraud the public generally, even though they may not amount to a criminal conspiracy, are illegal and void. They are denounced as contravening public policy, a declaration of principle that no one can lawfully do that which has a tendency to be injurious to the public or against the public good (Veazey v. Allen, 173 N.Y. 359, 368). Public policy is the interest of others than the parties directly concerned in the contract.

By the allegations of the complaint there is, in my opinion, apodictically shown, a scheme concocted and devised by the parties to deliberately foist a fraud on the public in the manner described; in effect and ultimate result to extract from the public the cost of the book by means of deception practiced upon it.

To urge that such a scheme and such an agreement be upheld as valid and enforcible is to ignore multitudinous rulings to the converse (see 13 C. J., Contracts, § 345, p. 414, "Agreements to Defraud the Public Generally", and numerous cases there cited. See, also, Sheridan v. Weber, 252 App. Div. 398, 402-403).

Relative to the instant situation, it is appropriate to quote from the opinion in Skinner v. Oakes (10 Mo. App. 45, 57): "Thus, if an author were to assign to another the privilege of publishing books with his name upon their title-page, * * * it cannot for a moment be supposed that any court would protect such a supposed right, even as against the original assignor. This point is absolutely clear, both upon principle and authority." The principle is applicable here.

It is not an instance of writing under a nom de plume. In such a case, regardless of the pen name employed by the writer, he is, in truth, the real author and is not exploiting the ability, talent and authorship of another, palming it off under the false pretense that it is his own. In the former instance, it is, however, the true and real author, but merely employing a pseudonym, which is permissible in the field of literature and recognized in law (Clemens v. Belford, Clark & Co., 14 F. 728, 729).

It is evident from the foregoing that the agreement in concern is void as against public policy.

What has been said (supra) expresses the policy of the law as it is conceived and enforced by and under decisional law. The same denouncement manifests itself in terms of positive law (see Penal Law, §§ 421, 964), castigating fraudulent and deceptive practices upon the public.

But, assuming, ar guendo, only the parties hereto were affected by the agreement under consideration, as pleaded in the complaint, it would, nonetheless, still be denied recognition by the courts, both at law and in equity.

No action can arise out of an immoral or unlawful consideration, and it is also a well-established rule of law that where a contract has its genesis in fraud, deceit or violation of law, or violates accepted standards of right conduct, the contract is unenforcible and void (Finkelman v. Stuyvesant Town Corp., 85 N. Y. S. 2d 593). In other words, where the cause of action arises ex turpi causa, the courts deny relief.

In the situation disclosed by the complaint, the court is of opinion that the agreement pleaded and relied on by plaintiff is void and unenforcible as against public policy.

There is a further reason why the complaint should be dismissed, and it is that it is legally insufficient in that it does not state facts sufficient to constitute a cause of action.

Paragraph "Seventh" of the complaint alleges that the contract which the parties entered into is that set forth as Exhibit "A", annexed to the complaint and made a part thereof.

Paragraph "Eighth" alleges that "pursuant to the terms of the aforesaid agreement", plaintiff agreed to allow said book to be published under the defendant's name as the sole author thereof, but there is no allegation, it is to be observed, that defendant agreed to publish plaintiff's book under his name as the sole author thereof. The written agreement, Exhibit "A", annexed to the complaint, imposes no obligation upon the defendant with respect to the publication of the book.

Where a writing is annexed to a pleading and made part thereof, the writing prevails over the allegations and conclusions of the pleader; where there is a variance between the allegations and the writing, the instrument prevails (Kobert v. National Mach. Co., 233 App. Div. 234, affd. 258 N.Y. 586; New Amsterdam Cas. Co. v. Mobinco Brokerage Co., 219 App. Div. 486; Kucker v. Gates Container Corp., 263 App. Div. 1006).

There being nothing in the writing, Exhibit "A", that defendant agreed to publish plaintiff's book under his name as the sole author thereof, and the allegations of the complaint being to the converse, and at variance with the writing, the writing controls and thereunder no maintainable cause of action is set forth so far as the instrument is concerned.

The motion is granted and the complaint is dismissed. Settle order.

380 N.E.2d 454
62 Ill.App.3d 861, 20 Ill.Dec. 476

Victoria L. HEWITT, Plaintiff, and Victoria Eve Hewitt,
Elizabeth Zoe Hewitt, and Wendy Mills Hewitt,
minors, by Victoria L. Hewitt, their
mother and next friend,
Plaintiffs-Appellants,
v.
Robert M. HEWITT, Defendant-Appellee.

No. 14548.
Appellate Court of Illinois, Fourth District.
Aug. 11, 1978.

[380 N.E.2d 455] [20 Ill.Dec. 477] Burt Greaves, Champaign, for plaintiffs-appellants.

Auler Law Offices, Robert I. Auler, Urbana, for defendant-appellee.

TRAPP, Justice.

Plaintiff appeals from the order of the trial court dismissing her complaint which prayed that the court grant to her a just, fair share of the property, earnings, and profits of the defendant, order a proper provision for support and maintenance of plaintiff and their minor children, or, in the alternative, divide the joint tenancy property of the parties and impress a trust on other property acquired through the joint efforts of plaintiff and defendant.

Plaintiff's initial pleading was a complaint for divorce alleging a marriage in Iowa in June 1960, their subsequent cohabitation as husband and wife until September 1975, and the birth of three children. The trial court heard evidence on defendant's motion to dismiss. His memorandum opinion found that plaintiff conceded that there was no marriage ceremony as alleged in the complaint, that the parties had never lived together in the State of Iowa and that there was no common law marriage which the court might recognize.

[380 N.E.2d 456] [20 Ill.Dec. 478] The trial court also found that defendant admitted the paternity of the children, that the only question upon that issue was that of child support, [62 Ill.App.3d 862] and that it was unnecessary to require a separate action to be brought under the Paternity Act. (Ill.Rev.Stat.1975, ch. 1063/4, par. 51 Et seq.) The court further found that certain property was held in joint tenancy and plaintiff was directed to amend her pleadings to make her complaint more definite and certain as to the nature of the property in joint tenancy.

The order on appeal was directed to an amended count which contained the following allegations: That prior to June 1960, the parties were residents of Illinois attending Grinnell College in Iowa, that plaintiff became pregnant, and that on or about such date the defendant told plaintiff that they were husband and wife and that they would thereafter live together as such; that no formal marriage ceremony was necessary and that defendant stated that he would thereafter share his life, future earnings, and property with plaintiff; that the parties immediately announced their marriage to their respective parents, thereafter lived together as husband and wife and that in reliance upon defendant's representations she devoted her entire efforts to assisting in the completion of defendant's professional education and the establishing of his successful practice of pedodontia; that such professional education was assisted financially by the parents of plaintiff; that plaintiff assisted defendant in the practice of his profession by virtue of her special skills and that although plaintiff was given a payroll check for such services the monies were placed in the family funds and used for family purposes. It is further alleged that defendant is a successful professional man with an income of $80,000 per year who has acquired property both in joint tenancy and as separate property, and that the assistance and encouragement and industry of the plaintiff were directed to the acquiring of such property and professional pecuniary advancement of defendant.

It is alleged that plaintiff furnished defendant with every assistance that a wife and mother could give, including social activities designed to enhance defendant's social and professional reputation. Plaintiff further alleges that for 17 years defendant represented to her and to all the world that they were husband and wife and that she has relied upon such representations to her detriment, and that she should be entitled to equal division of the property whether in joint tenancy or in the sole name of defendant.

It is alleged that the court should enforce the implied contract evidenced by the conduct of the parties; that plaintiff relied upon defendant's representation that they were partners within the family relationship; and that defendant knowing that the alleged marriage was not legal nevertheless continued to assure plaintiff that she was his wife and continued to hold himself out as husband of the plaintiff to secure the benefits to be gained through the services, devotion, thrift, and industry [62 Ill.App.3d 863] of plaintiff invested in the family relationship so that the property of the defendant should be impressed with a trust to protect plaintiff from the frauds and deception of the defendant.

The order of the trial court on appeal found that the law and public policy of the State requires the claims of plaintiff to be based upon a valid legal marriage; that there was no such legal marriage shown by the facts alleged; and that the allegations failed to state a cause of action recognized in Illinois upon a theory of implied contract, joint venture, or partnership. The order does not expressly speak to the allegation of an express oral contract, but we will presume that the ruling would be the same.

In argument, defendant has referred to plaintiff as a meretricious spouse living in a meretricious relationship. The adjective should be examined in its precise meaning, i. e., "Of, pertaining to, befitting or of a character of a harlot" (Shorter Oxford English Dictionary, 1934), or, "Of or relating to a prostitute." (Webster's New Collegiate Dictionary, 1973.) Neither is it correct to refer to plaintiff as a concubine which is [380 N.E.2d 457] [20 Ill.Dec. 479] defined as "1: a woman living in a Socially recognized state of concubinage, 2: MISTRESS." (Emphasis supplied.) Webster's New Collegiate Dictionary, 1973.

The well-pleaded facts contradict the terms in showing that the parties lived, and for a time, enjoyed a most conventional, respectable and ordinary family life. The single flaw is that for reasons not explained, the parties failed to procure a license, a ceremony, and a registration of a marriage. Upon the present pleading nothing discloses a scandal, an affront to family living or society, or anything other than that the parties were known as husband and wife. We refuse to weigh defendant's claim in the context of such epithets.

All parties agreed that no court of review in Illinois has examined claims arising under comparable circumstances. See cases collected in Annotation, 31 A.L.R.2d 1255, and its supplements.

Defendant argues that plaintiff's claims must be defeated upon the grounds of public policy in that all rights must rest upon a valid marriage contract within the provisions of the Illinois Marriage and Marriage Dissolution Act, effective October 1, 1977. Section 102 of that Act (Ill.Rev.Stat.1977, ch. 40, par. 102) states that:

"(I)ts underlying purposes, which are to:

(1) provide adequate procedures for the solemnization and registration of marriage;

(2) strengthen and preserve the integrity of marriage and safeguard family relationships; * * *."

The provisions of the Act do not undertake to prohibit cohabitation without such solemnization of marriage. Its section 201 provides:

[62 Ill.App.3d 864] "A marriage between a man and a woman licensed, solemnized and registered as provided in this Act is valid in this State."

Upon the facts pleaded, plaintiff has for more than 15 years lived within the legitimate boundaries of a marriage and family relationship of a most conventional sort. The record does not suggest that the parties' relationship came within the proscription of prohibited marriages. Ill.Rev.Stat.1977, ch. 40, par. 212.

Public policy suggests inquiry within the criminal statutes. The Criminal Code, article 11, section 11-7, makes adultery an offense. (Ill.Rev.Stat.1977, ch. 38, par. 11-7.) Since neither party has had a living spouse, that statute has no significance. The statute defines as an offense:

"(a) Any person who cohabits or has sexual intercourse with another not his spouse commits fornication if the behavior is open and notorious." (Ill.Rev.Stat.1977, ch. 38, par. 11-8(a).)

The Committee Comments (S.H.A., p. 290) state that the basic premise of the Article which includes the statute penalizing fornication includes as its purpose:

"(3) (P)rotection of the public from open and notorious conduct which disturbs the peace, tends to promote breaches of the peace, or openly flouts accepted standards of morality in the community; and,

(4) protection of the institution of marriage and normal family relationships from sexual conduct which tends to destroy them. * * *."

Such Comments further state:

"The Article is not intended to proscribe any sexual conduct between consenting adults unless such conduct adversely affects one of the key interests sought to be protected." (S.H.A., p. 291.)

In The People v. Cessna (1976), 42 Ill.App.3d 746, 1 Ill.Dec. 433, 356 N.E.2d 621, the court had occasion to delimit behavior which was "(O)pen and notorious." The court stated:

"Clearly the adulterous conduct proscribed by this provision is not that which is essentially private or discreet. (People v. Potter, 319 Ill.App. 409, 49 N.E.2d 307.) Behavior which is 'open and notorious' by definition means that such behavior is prominent, conspicuous and generally known and recognized by the public. The prohibition of open and notorious adultery is meant to protect the public from conduct which disturbs the peace, tends [380 N.E.2d 458] [20 Ill.Dec. 480] to promote breaches of the peace, and openly flouts accepted standards of morality in the community. (See Ill.Ann.Stat., ch. 38, par. 11-1 Et seq., Committee Comments 1961, at 290 (Smith-Hurd (1972).) What is of marked interest is the scandalous effect of [62 Ill.App.3d 865] the behavior and its affront to public decency and the marital institution. Notoriety of the adultery must extend not only to the sexual intercourse or the cohabitation but also to the fact of the absence of a marital relationship between the parties where one party is known to be married. * * *." (42 Ill.App.3d 746, 749, 356 N.E.2d 621, 623.)

Within such standards the facts pleaded do not suggest a criminal offense which offends public policy. Rather, the family relationship was conventional without an open flouting of accepted standards. From the facts pleaded and the evidence heard it may reasonably be inferred that the want of a marriage ceremony was first disclosed by defendant's motions to plaintiff's complaint for divorce.

Plaintiff has alleged that she was induced and persuaded to live and cohabit with the defendant as an adult by reason of his assurances that a marriage ceremony was not required, and the representations and promises that they would live as husband and wife sharing the benefits resulting from his professional career which she aided through procuring financial assistance, as well as her role and services as companion, housewife and mother. The practical question is whether she should be denied all claims by reason of the absence of a marriage ceremony.

Plaintiff urges that this court adopt the rationale of the Supreme Court of California stated in its well-publicized opinion, Marvin v. Marvin (1976), 18 Cal.3d 660, 134 Cal.Rptr. 815, 557 P.2d 106. Under the name Michelle Marvin that plaintiff alleged that she had lived with defendant for seven years without a marriage ceremony under an express oral contract that they would share equally in any property accumulated by their efforts while living together; that they should be known as husband and wife; that defendant would provide for plaintiff's needs for life and that plaintiff would forego her career to devote her time to defendant as a companion, homemaker and cook, and that she had so performed her duties until defendant forced her to leave. Plaintiff prayed a declaratory judgment to determine her contract and property rights and the declaration of a constructive trust in one-half of the property accumulated while the parties lived together. Of the cases examined, Marvin includes facts most clearly comparable to those present here, although Marvin was known to be married to another during the first three years of the relationship with Michelle.

That trial court entered a judgment for defendant upon the pleadings without assigning reasons.

As here, Marvin argued that the character of their relationship was immoral and violated public policy. While no courts of review in Illinois have considered such relationship, California courts had examined a number of instances concerning agreements to share accumulated [62 Ill.App.3d 866] property by unmarried persons cohabiting together. Reviewing such cases, the court said:

"Although the past decisions hover over the issue in the somewhat wispy form of the figures of a Chagall painting, we can abstract from those decisions a clear and simple rule. The fact that a man and woman live together without marriage, and engage in a sexual relationship, does not in itself invalidate agreements between them relating to their earnings, property, or expenses. Neither is such an agreement invalid merely because the parties may have contemplated the creation or continuation of a nonmarital relationship when they entered into it. Agreements between nonmarital partners fail only to the extent that they rest upon a consideration of meretricious sexual services. Thus the rule asserted by defendant, that a contract fails if it is 'involved in' or made 'in contemplation' of a nonmarital relationship, cannot be reconciled with the decisions." [380 N.E.2d 459] [20 Ill.Dec. 481] 134 Cal.Rptr. 815, 822, 557 P.2d 106, 113.

The court continued:

"The principle that a contract between nonmarital partners will be enforced unless expressly and inseparably based upon an illicit consideration of sexual services not only represents the distillation of the decisional law, but also offers a far more precise and workable standard than that advocated by defendant." 134 Cal.Rptr. 815, 823, 557 P.2d 106, 114.

The court said that the authorities demonstrate:

"(T)hat a contract between nonmarital partners, even if expressly made in contemplation of a common living arrangement, is invalid only if sexual acts form an inseparable part of the consideration for the agreement. In sum, a court will not enforce a contract for the pooling of property and earnings if it is explicitly and inseparably based upon services as a paramour. * * *." 134 Cal.Rptr. 815, 823, 557 P.2d 106, 114.

The court concluded:

"So long as the agreement does not rest upon illicit meretricious consideration, the parties may order their economic affairs as they choose, and no policy precludes the courts from enforcing such agreements." 134 Cal.Rptr. 815, 825, 557 P.2d 106, 116.

Defendant argues that plaintiff has engaged in improper conduct, and in effect, should be punished by denial of relief. This argument may be answered as in Marvin:

"Indeed, to the extent that denial of relief 'punishes' one partner, it necessarily rewards the other by permitting him to retain a [62 Ill.App.3d 867] disproportionate amount of the property. Concepts of 'guilt' thus cannot justify an unequal division of property between two equally 'guilty' persons." 134 Cal.Rptr. 815, 830, 557 P.2d 106, 121.

He also argues that any claim of plaintiff to equity should be barred by the doctrine of "unclean hands." However, as stated in West v. Knowles (1957), 50 Wash.2d 311, 316, 311 P.2d 689, 692-93:

"Under such circumstances (the dissolution of a nonmarital relationship), this court and the courts of other jurisdictions have, in effect, sometimes said 'We will wash our hands of such disputes. The parties should and must be left to their own devices, just where they find themselves.' To me, such pronouncements seem overly fastidious and a bit fatuous. They are unrealistic and, among other things, ignore the fact that an unannounced (but nevertheless effective and binding) rule of law is inherent in any such terminal statements by a court of law. The unannounced but inherent rule is simply that a party who has title, or in some instances who is in possession, will enjoy the rights of ownership of the property concerned. The rule often operates to the great advantage of the cunning and the shrewd, who wind up with possession of the property, or title to it in their names, at the end of a so-called meretricious relationship. So, although the courts proclaim that they will have nothing to do with such matters, the proclamation in itself establishes, as to the parties involved, an effective and binding rule of law which tends to operate purely by accident or perhaps by reason of the cunning, anticipatory designs of just one of the parties." (Finley, conc. opn.)

Here, plaintiff prays relief not only under allegations of an express oral contract, but also seeks recovery upon allegations supporting implied contract, equitable relief upon allegations of misrepresentation, and as constructive trust. Upon determination that plaintiff states a cause of action upon an express oral contract we observe no reasons of public policy to conclude that other forms of relief framed upon appropriate allegations of fact and proved before the trier of fact should not be available to plaintiff.

In Marvin, the court unanimously determined that the plaintiff's complaint stated a cause of action upon an express contract. The court continued, with one dissent expressing belief that it was unnecessary, to [380 N.E.2d 460] [20 Ill.Dec. 482] examine in Dicta those other forms of relief which might be available to plaintiff and upon consideration of the existing authorities in that State said:

"But, although parties to a nonmarital relationship obviously cannot have based any expectations upon the belief that they were [62 Ill.App.3d 868] married, other expectations and equitable considerations remain. The parties may well expect that property will be divided in accord with the parties' own tacit understanding and that in the absence of such understanding the courts will fairly apportion property accumulated through mutual effort. We need not treat nonmarital partners as putatively married persons in order to apply principles of implied contract, or extend equitable remedies; we need to treat them only as we do any other unmarried person." (134 Cal.Rptr. 815, 830, 557 P.2d 106, 121.)

And continued:

"We conclude that the judicial barriers that may stand in the way of a policy based upon the fulfillment of the reasonable expectations of the parties to a nonmarital relationship should be removed. As we have explained, the courts now hold that express agreements will be enforced unless they rest on an unlawful meretricious consideration. We add that in the absence of an express agreement, the courts may look to a variety of other remedies in order to protect the parties' lawful expectations.

The courts may inquire into the conduct of the parties to determine whether that conduct demonstrates an implied contract or implied agreement of partnership or joint venture (see Estate of Thornton (1972) 81 Wash.2d 72, 499 P.2d 864), or some other tacit understanding between the parties. The courts may, when appropriate, employ principles of constructive trust (see Omer v. Omer (1974) 11 Wash.App. 386, 523 P.2d 957) or resulting trust (see Hyman v. Hyman (Tex.Civ.App.1954) 275 S.W.2d 149). Finally, a nonmarital partner may recover in quantum meruit for the reasonable value of household services rendered less the reasonable value of support received if he can show that he rendered services with the expectation of monetary reward." 134 Cal.Rptr. 815, 831-32, 557 P.2d 106, 122-23.

We conclude that the reasoning followed in Marvin is particularly persuasive upon the allegations here pleaded wherein plaintiff has alleged facts which demonstrate a stable family relationship extending over a long period of time.

It would be superficial to conclude that by this determination this court has revived or restored a form of common law marriage now forbidden by statute. It is apparent that the matters to be alleged and the facts to be proved here are substantially, if not enormously, different.

The value of a stable marriage remains unchallenged and is not denigrated by this opinion. It is not realistic to conclude that this determination will "discourage" marriage for the rule for which defendant contends can only encourage a partner with obvious income- [62 Ill.App.3d 869] producing ability to avoid marriage and to retain all earnings which he may acquire. One cannot earnestly advocate such a policy.

It has been documented that:

"The 1970 census figures indicate that today perhaps eight times as many couples are living together without being married as cohabited ten years ago." Comment, In re Cary: A Judicial Recognition of Illicit Cohabitation (1974) 25 Hastings L.J. 1226.

It has been concluded that reasons for such way of life include the economic forces of loss of pension or welfare rights and the impact of income taxes, as well as personal reasons. While the court cannot now predict what the evidence will prove, the courts should be prepared to deal realistically and fairly with the problems which exist in the life of the day.

We conclude that upon the record it neither can be said that plaintiff participated in a meretricious relationship nor that her conduct so affronted public policy that she should be denied any and all relief.

[380 N.E.2d 461] [20 Ill.Dec. 483] The judgment of the trial court is reversed and the cause remanded for further proceedings not inconsistent with the views expressed.

Reversed and remanded.

MILLS, P. J., and CRAVEN, J., concur.

Harold J. Cassidy and Alan J. Karcher argued the cause for appellants, Mary Beth and Richard Whitehead (Cassidy, Foss & San Filippo, attorneys; Harold J. Cassidy, Alan J. Karcher, Robert W. Ruggieri, Randolph H. Wolf, and Louis N. Rainone, on the briefs).

Gary N. Skoloff argued the cause for respondents, William and Elizabeth Stern (Skoloff & Wolfe, attorneys; Gary N. Skoloff, Francis W. Donahue, and Edward J. O'Donnell, on the brief).

Lorraine A. Abraham, Guardian ad litem, argued the cause pro se (Lorraine A. Abraham, attorney; Lorraine A. Abraham and Steven T. Kearns, on the brief).

Annette M. Tobia submitted a brief on behalf of amicus curiae Dr. Betsy P. Aigen, (Spivak & Tobia, attorneys).

George B. Gelman submitted a brief on behalf of amicus curiae American Adoption Congress (Gelman & McNish, attorneys).

Steven N. Taieb and Steven F. McDowell, a member of the Wisconsin bar, submitted a brief on behalf of amicus curiae Catholic League for Religious and Civil Rights.

Steven P. Weissman submitted a brief on behalf of amicus curiae Communications Workers of America, AFL-CIO.

John R. Holsinger, Merrill O'Brien, Mary Sue Henifin, and John H. Hall, and Terry E. Thornton, members of the New York bar, submitted a brief on behalf of amicus curiae Concerned United Birthparents, Inc. (Ellenport & Holsinger, attorneys).

David H. Dugan, III, and Joy R. Jowdy, a member of the Texas bar, submitted a brief on behalf of amici curiae Concerned Women for America, Eagle Forum, National Legal Foundation, Family Research Council of America, United Families Foundation, and Judicial Reform Project.

Alfred F. Russo and Andrew C. Kimbrell, a member of the Pennsylvania bar, and Edward Lee Rogers, a member of the District of Columbia bar, submitted a brief on behalf of amici curiae The Foundation on Economic Trends, Jeremy Rifkin, Betty Friedan, Gloria Steinem, Gena Corea, Barbara Katz-Rothman, Lois Gould, Marilyn French, Hazel Henderson, Grace Paley, Evelyn Fox Keller, Shelly Mindin, Rita Arditti, Dr. Janice Raymond, Dr. Michelle Harrison, Dr. W.D. White, Sybil Shainwald, Mary Daly, Cathleen Lahay, Karen Malpede, Phylis Chesler, Kristen Golden, Letty Cottin Pogrebin, and Ynestra King (Russo & Casey, attorneys).

Louis E. Della Torre, Jr., submitted a brief on behalf of amicus curiae The Gruter Institute for Law and Behavioral Research, Inc. (Schumann, Hession, Kennelly & Dorment, attorneys).

Kathleen E. Kitson, Sharon F. Liebhaber, and Myra Sun, a member of the Washington bar, submitted a brief on behalf of amici curiae Hudson County Legal Services Corporation and National Center on Women and Family Law, Inc. (Timothy K. Madden, Director, Hudson County Legal Services Corporation, attorney).

Priscilla Read Chenoweth submitted a brief on behalf of amici curiae Committee for Mother and Child Rights, Inc. and Origins.

Herbert D. Hinkle submitted a brief on behalf of amicus curiae National Association of Surrogate Mothers.

Joseph M. Nardi, Jr., and Edward F. Canfield, a member of the District of Columbia bar, submitted a brief on behalf of amicus curiae The National Committee for Adoption, Inc. (Lario, Nardi & Gleaner, attorneys).

Charlotte Rosin, pro se, submitted a letter in lieu of brief on behalf of amicus curiae National Infertility Network Exchange.

William F. Bolan, Jr., submitted a brief on behalf of amicus curiae New Jersey Catholic Conference.

Paul J. McCurrie and Cyril C. Means, Jr., a member of the Michigan bar, with whom Priscilla Read Chenoweth and Cathleen M. Halko were on the brief, submitted a brief on behalf of amici curiae Odyssey Institute International, Inc., Odyssey Institute of Connecticut, Inc., Florence Fisher, Judianne Densen-Gerber, Senator Connie Binsfeld, and Angela Holder.

Merrilee A. Scilla, pro se, submitted a letter in lieu of brief on behalf of amicus curiae RESOLVE of Central New Jersey.

Jerrold N. Kaminsky submitted a brief on behalf of amicus curiae RESOLVE, Inc.

Richard J. Traynor and John W. Whitehead, a member of the Virginia bar, and David A. French, a member of the Michigan bar, submitted a brief on behalf of amicus curiae The Rutherford Institute (Traynor and Hogan, attorneys).

Nadine Taub submitted a brief on behalf of amici curiae Women's Rights Litigation Clinic at Rutgers Law School, The New York State Coalition on Women's Legislative Issues, and the National Emergency Civil Liberties Committee.

Table of Contents     

Introduction 410

I.Facts 411

II.Invalidity and Unenforceability of Surrogacy Contract 421

A. Conflict with Statutory Provisions 423

B. Public Policy Considerations 434

III. Termination 444

IV. Constitutional Issues 447

V. Custody 452

VI. Visitation 463

Conclusion 468

The opinion of the Court was delivered by WILENTZ, C.J.

In this matter the Court is asked to determine the validity of a contract that purports to provide a new way of bringing children into a family. For a fee of $10,000, a woman agrees to be artificially inseminated with the semen of another woman's husband; she is to conceive a child, carry it to term, and after its birth surrender it to the natural father and his wife. The intent of the contract is that the child's natural mother will thereafter be forever separated from her child. The wife is to adopt the child, and she and the natural father are to be [411] regarded as its parents for all purposes. The contract providing for this is called a "surrogacy contract," the natural mother inappropriately called the "surrogate mother."

We invalidate the surrogacy contract because it conflicts with the law and public policy of this State. While we recognize the depth of the yearning of infertile couples to have their own children, we find the payment of money to a "surrogate" mother illegal, perhaps criminal, and potentially degrading to women. Although in this case we grant custody to the natural father, the evidence having clearly proved such custody to be in the best interests of the infant, we void both the termination of the surrogate mother's parental rights and the adoption of the child by the wife/stepparent. We thus restore the "surrogate" as the mother of the child. We remand the issue of the natural mother's visitation rights to the trial court, since that issue was not reached below and the record before us is not sufficient to permit us to decide it de novo.

We find no offense to our present laws where a woman voluntarily and without payment agrees to act as a "surrogate" mother, provided that she is not subject to a binding agreement to surrender her child. Moreover, our holding today does not preclude the Legislature from altering the current statutory scheme, within constitutional limits, so as to permit surrogacy contracts. Under current law, however, the surrogacy agreement before us is illegal and invalid.

I.

FACTS

In February 1985, William Stern and Mary Beth Whitehead entered into a surrogacy contract. It recited that Stern's wife, Elizabeth, was infertile, that they wanted a child, and that Mrs. Whitehead was willing to provide that child as the mother with Mr. Stern as the father.

The contract provided that through artificial insemination using Mr. Stern's sperm, Mrs. Whitehead would become pregnant, carry the child to term, bear it, deliver it to the Sterns, and thereafter do whatever was necessary to terminate her maternal rights so that Mrs. Stern could thereafter adopt the child. Mrs. Whitehead's husband, Richard,^[1] was also a party to the contract; Mrs. Stern was not. Mr. Whitehead promised to do all acts necessary to rebut the presumption of paternity under the Parentage Act. N.J.S.A. 9:17-43a(1), -44a. Although Mrs. Stern was not a party to the surrogacy agreement, the contract gave her sole custody of the child in the event of Mr. Stern's death. Mrs. Stern's status as a nonparty to the surrogate parenting agreement presumably was to avoid the application of the baby-selling statute to this arrangement. N.J.S.A. 9:3-54.

Mr. Stern, on his part, agreed to attempt the artificial insemination and to pay Mrs. Whitehead $10,000 after the child's birth, on its delivery to him. In a separate contract, Mr. Stern agreed to pay $7,500 to the Infertility Center of New York ("ICNY"). The Center's advertising campaigns solicit surrogate mothers and encourage infertile couples to consider surrogacy. ICNY arranged for the surrogacy contract by bringing the parties together, explaining the process to them, furnishing the contractual form,^[2] and providing legal counsel.

The history of the parties' involvement in this arrangement suggests their good faith. William and Elizabeth Stern were married in July 1974, having met at the University of Michigan, where both were Ph.D. candidates. Due to financial considerations and Mrs. Stern's pursuit of a medical degree and residency, they decided to defer starting a family until 1981. Before then, however, Mrs. Stern learned that she might have multiple sclerosis and that the disease in some cases renders pregnancy a serious health risk. Her anxiety appears to have exceeded the actual risk, which current medical authorities assess as minimal. Nonetheless that anxiety was evidently quite real, Mrs. Stern fearing that pregnancy might precipitate blindness, paraplegia, or other forms of debilitation. Based on the perceived risk, the Sterns decided to forego having their own children. The decision had special significance for Mr. Stern. Most of his family had been destroyed in the Holocaust. As the family's only survivor, he very much wanted to continue his bloodline.

Initially the Sterns considered adoption, but were discouraged by the substantial delay apparently involved and by the potential problem they saw arising from their age and their differing religious backgrounds. They were most eager for some other means to start a family.

The paths of Mrs. Whitehead and the Sterns to surrogacy were similar. Both responded to advertising by ICNY. The Sterns' response, following their inquiries into adoption, was the result of their long-standing decision to have a child. Mrs. Whitehead's response apparently resulted from her sympathy with family members and others who could have no children (she stated that she wanted to give another couple the "gift of life"); she also wanted the $10,000 to help her family.

Both parties, undoubtedly because of their own self-interest, were less sensitive to the implications of the transaction than they might otherwise have been. Mrs. Whitehead, for instance, appears not to have been concerned about whether the Sterns would make good parents for her child; the Sterns, on their part, while conscious of the obvious possibility that surrendering the child might cause grief to Mrs. Whitehead, overcame their qualms because of their desire for a child. At any rate, both the Sterns and Mrs. Whitehead were committed to the arrangement; both thought it right and constructive.

Mrs. Whitehead had reached her decision concerning surrogacy before the Sterns, and had actually been involved as a potential surrogate mother with another couple. After numerous unsuccessful artificial inseminations, that effort was abandoned. Thereafter, the Sterns learned of the Infertility Center, the possibilities of surrogacy, and of Mary Beth Whitehead. The two couples met to discuss the surrogacy arrangement and decided to go forward. On February 6, 1985, Mr. Stern and Mr. and Mrs. Whitehead executed the surrogate parenting agreement. After several artificial inseminations over a period of months, Mrs. Whitehead became pregnant. The pregnancy was uneventful and on March 27, 1986, Baby M was born.

Not wishing anyone at the hospital to be aware of the surrogacy arrangement, Mr. and Mrs. Whitehead appeared to all as the proud parents of a healthy female child. Her birth certificate indicated her name to be Sara Elizabeth Whitehead and her father to be Richard Whitehead. In accordance with Mrs. Whitehead's request, the Sterns visited the hospital unobtrusively to see the newborn child.

Mrs. Whitehead realized, almost from the moment of birth, that she could not part with this child. She had felt a bond with it even during pregnancy. Some indication of the attachment was conveyed to the Sterns at the hospital when they told Mrs. Whitehead what they were going to name the baby. She apparently broke into tears and indicated that she did not know if she could give up the child. She talked about how the baby looked like her other daughter, and made it clear that she was experiencing great difficulty with the decision.

Nonetheless, Mrs. Whitehead was, for the moment, true to her word. Despite powerful inclinations to the contrary, she turned her child over to the Sterns on March 30 at the Whiteheads' home.

The Sterns were thrilled with their new child. They had planned extensively for its arrival, far beyond the practical furnishing of a room for her. It was a time of joyful celebration — not just for them but for their friends as well. The Sterns looked forward to raising their daughter, whom they named Melissa. While aware by then that Mrs. Whitehead was undergoing an emotional crisis, they were as yet not cognizant of the depth of that crisis and its implications for their newly-enlarged family.

Later in the evening of March 30, Mrs. Whitehead became deeply disturbed, disconsolate, stricken with unbearable sadness. She had to have her child. She could not eat, sleep, or concentrate on anything other than her need for her baby. The next day she went to the Sterns' home and told them how much she was suffering.

The depth of Mrs. Whitehead's despair surprised and frightened the Sterns. She told them that she could not live without her baby, that she must have her, even if only for one week, that thereafter she would surrender her child. The Sterns, concerned that Mrs. Whitehead might indeed commit suicide, not wanting under any circumstances to risk that, and in any event believing that Mrs. Whitehead would keep her word, turned the child over to her. It was not until four months later, after a series of attempts to regain possession of the child, that Melissa was returned to the Sterns, having been forcibly removed from the home where she was then living with Mr. and Mrs. Whitehead, the home in Florida owned by Mary Beth Whitehead's parents.

The struggle over Baby M began when it became apparent that Mrs. Whitehead could not return the child to Mr. Stern. Due to Mrs. Whitehead's refusal to relinquish the baby, Mr. Stern filed a complaint seeking enforcement of the surrogacy contract. He alleged, accurately, that Mrs. Whitehead had not only refused to comply with the surrogacy contract but had threatened to flee from New Jersey with the child in order to avoid even the possibility of his obtaining custody. The court papers asserted that if Mrs. Whitehead were to be given notice of the application for an order requiring her to relinquish custody, she would, prior to the hearing, leave the state with the baby. And that is precisely what she did. After the order was entered, ex parte, the process server, aided by the police, in the presence of the Sterns, entered Mrs. Whitehead's home to execute the order. Mr. Whitehead fled with the child, who had been handed to him through a window while those who came to enforce the order were thrown off balance by a dispute over the child's current name.

The Whiteheads immediately fled to Florida with Baby M. They stayed initially with Mrs. Whitehead's parents, where one of Mrs. Whitehead's children had been living. For the next three months, the Whiteheads and Melissa lived at roughly twenty different hotels, motels, and homes in order to avoid apprehension. From time to time Mrs. Whitehead would call Mr. Stern to discuss the matter; the conversations, recorded by Mr. Stern on advice of counsel, show an escalating dispute about rights, morality, and power, accompanied by threats of Mrs. Whitehead to kill herself, to kill the child, and falsely to accuse Mr. Stern of sexually molesting Mrs. Whitehead's other daughter.

Eventually the Sterns discovered where the Whiteheads were staying, commenced supplementary proceedings in Florida, and obtained an order requiring the Whiteheads to turn over the child. Police in Florida enforced the order, forcibly removing the child from her grandparents' home. She was soon thereafter brought to New Jersey and turned over to the Sterns. The prior order of the court, issued ex parte, awarding custody of the child to the Sterns pendente lite, was reaffirmed by the trial court after consideration of the certified representations of the parties (both represented by counsel) concerning the unusual sequence of events that had unfolded. Pending final judgment, Mrs. Whitehead was awarded limited visitation with Baby M.

The Sterns' complaint, in addition to seeking possession and ultimately custody of the child, sought enforcement of the surrogacy contract. Pursuant to the contract, it asked that the child be permanently placed in their custody, that Mrs. Whitehead's parental rights be terminated, and that Mrs. Stern be allowed to adopt the child, i.e., that, for all purposes, Melissa become the Sterns' child.

The trial took thirty-two days over a period of more than two months. It included numerous interlocutory appeals and attempted interlocutory appeals. There were twenty-three witnesses to the facts recited above and fifteen expert witnesses, eleven testifying on the issue of custody and four on the subject of Mrs. Stern's multiple sclerosis; the bulk of the testimony was devoted to determining the parenting arrangement most compatible with the child's best interests. Soon after the conclusion of the trial, the trial court announced its opinion from the bench. 217 N.J. Super. 313 (1987). It held that the surrogacy contract was valid; ordered that Mrs. Whitehead's parental rights be terminated and that sole custody of the child be granted to Mr. Stern; and, after hearing brief testimony from Mrs. Stern, immediately entered an order allowing the adoption of Melissa by Mrs. Stern, all in accordance with the surrogacy contract. Pending the outcome of the appeal, we granted a continuation of visitation to Mrs. Whitehead, although slightly more limited than the visitation allowed during the trial.

Although clearly expressing its view that the surrogacy contract was valid, the trial court devoted the major portion of its opinion to the question of the baby's best interests. The inconsistency is apparent. The surrogacy contract calls for the surrender of the child to the Sterns, permanent and sole custody in the Sterns, and termination of Mrs. Whitehead's parental rights, all without qualification, all regardless of any evaluation of the best interests of the child. As a matter of fact the contract recites (even before the child was conceived) that it is in the best interests of the child to be placed with Mr. Stern. In effect, the trial court awarded custody to Mr. Stern, the natural father, based on the same kind of evidence and analysis as might be expected had no surrogacy contract existed. Its rationalization, however, was that while the surrogacy contract was valid, specific performance would not be granted unless that remedy was in the best interests of the child. The factual issues confronted and decided by the trial court were the same as if Mr. Stern and Mrs. Whitehead had had the child out of wedlock, intended or unintended, and then disagreed about custody. The trial court's awareness of the irrelevance of the contract in the court's determination of custody is suggested by its remark that beyond the question of the child's best interests, "[a]ll other concerns raised by counsel constitute commentary." 217 N.J. Super. at 323.

On the question of best interests — and we agree, but for different reasons, that custody was the critical issue — the court's analysis of the testimony was perceptive, demonstrating both its understanding of the case and its considerable experience in these matters. We agree substantially with both its analysis and conclusions on the matter of custody.

The court's review and analysis of the surrogacy contract, however, is not at all in accord with ours. The trial court concluded that the various statutes governing this matter, including those concerning adoption, termination of parental rights, and payment of money in connection with adoptions, do not apply to surrogacy contracts. Id. at 372-73. It reasoned that because the Legislature did not have surrogacy contracts in mind when it passed those laws, those laws were therefore irrelevant. Ibid. Thus, assuming it was writing on a clean slate, the trial court analyzed the interests involved and the power of the court to accommodate them. It then held that surrogacy contracts are valid and should be enforced, id. at 388, and furthermore that Mr. Stern's rights under the surrogacy contract were constitutionally protected. Id. at 385-88.

Mrs. Whitehead appealed. This Court granted direct certification. 107 N.J. 140 (1987). The briefs of the parties on appeal were joined by numerous briefs filed by amici expressing various interests and views on surrogacy and on this case. We have found many of them helpful in resolving the issues before us.

Mrs. Whitehead contends that the surrogacy contract, for a variety of reasons, is invalid. She contends that it conflicts with public policy since it guarantees that the child will not have the nurturing of both natural parents — presumably New Jersey's goal for families. She further argues that it deprives the mother of her constitutional right to the companionship of her child, and that it conflicts with statutes concerning termination of parental rights and adoption. With the contract thus void, Mrs. Whitehead claims primary custody (with visitation rights in Mr. Stern) both on a best interests basis (stressing the "tender years" doctrine) as well as on the policy basis of discouraging surrogacy contracts. She maintains that even if custody would ordinarily go to Mr. Stern, here it should be awarded to Mrs. Whitehead to deter future surrogacy arrangements.

In a brief filed after oral argument, counsel for Mrs. Whitehead suggests that the standard for determining best interests where the infant resulted from a surrogacy contract is that the child should be placed with the mother absent a showing of unfitness. All parties agree that no expert testified that Mary Beth Whitehead was unfit as a mother; the trial court expressly found that she was not "unfit," that, on the contrary, "she is a good mother for and to her older children," 217 N.J. Super. at 397; and no one now claims anything to the contrary.

One of the repeated themes put forth by Mrs. Whitehead is that the court's initial ex parte order granting custody to the Sterns during the trial was a substantial factor in the ultimate "best interests" determination. That initial order, claimed to be erroneous by Mrs. Whitehead, not only established Melissa as part of the Stern family, but brought enormous pressure on Mrs. Whitehead. The order brought the weight of the state behind the Sterns' attempt, ultimately successful, to gain possession of the child. The resulting pressure, Mrs. Whitehead contends, caused her to act in ways that were atypical of her ordinary behavior when not under stress, and to act in ways that were thought to be inimical to the child's best interests in that they demonstrated a failure of character, maturity, and consistency. She claims that any mother who truly loved her child might so respond and that it is doubly unfair to judge her on the basis of her reaction to an extreme situation rarely faced by any mother, where that situation was itself caused by an erroneous order of the court. Therefore, according to Mrs. Whitehead, the erroneous ex parte order precipitated a series of events that proved instrumental in the final result.^[3]

The Sterns claim that the surrogacy contract is valid and should be enforced, largely for the reasons given by the trial court. They claim a constitutional right of privacy, which includes the right of procreation, and the right of consenting adults to deal with matters of reproduction as they see fit. As for the child's best interests, their position is factual: given all of the circumstances, the child is better off in their custody with no residual parental rights reserved for Mrs. Whitehead.

Of considerable interest in this clash of views is the position of the child's guardian ad litem, wisely appointed by the court at the outset of the litigation. As the child's representative, her role in the litigation, as she viewed it, was solely to protect the child's best interests. She therefore took no position on the validity of the surrogacy contract, and instead devoted her energies to obtaining expert testimony uninfluenced by any interest other than the child's. We agree with the guardian's perception of her role in this litigation. She appropriately refrained from taking any position that might have appeared to compromise her role as the child's advocate. She first took the position, based on her experts' testimony, that the Sterns should have primary custody, and that while Mrs. Whitehead's parental rights should not be terminated, no visitation should be allowed for five years. As a result of subsequent developments, mentioned infra, her view has changed. She now recommends that no visitation be allowed at least until Baby M reaches maturity.

Although some of the experts' opinions touched on visitation, the major issue they addressed was whether custody should be reposed in the Sterns or in the Whiteheads. The trial court, consistent in this respect with its view that the surrogacy contract was valid, did not deal at all with the question of visitation. Having concluded that the best interests of the child called for custody in the Sterns, the trial court enforced the operative provisions of the surrogacy contract, terminated Mrs. Whitehead's parental rights, and granted an adoption to Mrs. Stern. Explicit in the ruling was the conclusion that the best interests determination removed whatever impediment might have existed in enforcing the surrogacy contract. This Court, therefore, is without guidance from the trial court on the visitation issue, an issue of considerable importance in any event, and especially important in view of our determination that the surrogacy contract is invalid.

II.

INVALIDITY AND UNENFORCEABILITY OF SURROGACY CONTRACT

We have concluded that this surrogacy contract is invalid. Our conclusion has two bases: direct conflict with existing statutes and conflict with the public policies of this State, as expressed in its statutory and decisional law.

One of the surrogacy contract's basic purposes, to achieve the adoption of a child through private placement, though permitted in New Jersey "is very much disfavored." Sees v. Baber, 74 N.J. 201, 217 (1977). Its use of money for this purpose — and we have no doubt whatsoever that the money is being paid to obtain an adoption and not, as the Sterns argue, for the personal services of Mary Beth Whitehead — is illegal and perhaps criminal. N.J.S.A. 9:3-54. In addition to the inducement of money, there is the coercion of contract: the natural mother's irrevocable agreement, prior to birth, even prior to conception, to surrender the child to the adoptive couple. Such an agreement is totally unenforceable in private placement adoption. Sees, 74 N.J. at 212-14. Even where the adoption is through an approved agency, the formal agreement to surrender occurs only after birth (as we read N.J.S.A. 9:2-16 and -17, and similar statutes), and then, by regulation, only after the birth mother has been offered counseling. N.J.A.C. 10:121A-5.4(c). Integral to these invalid provisions of the surrogacy contract is the related agreement, equally invalid, on the part of the natural mother to cooperate with, and not to contest, proceedings to terminate her parental rights, as well as her contractual concession, in aid of the adoption, that the child's best interests would be served by awarding custody to the natural father and his wife — all of this before she has even conceived, and, in some cases, before she has the slightest idea of what the natural father and adoptive mother are like.

The foregoing provisions not only directly conflict with New Jersey statutes, but also offend long-established State policies. These critical terms, which are at the heart of the contract, are invalid and unenforceable; the conclusion therefore follows, without more, that the entire contract is unenforceable.

A. Conflict with Statutory Provisions

The surrogacy contract conflicts with: (1) laws prohibiting the use of money in connection with adoptions; (2) laws requiring proof of parental unfitness or abandonment before termination of parental rights is ordered or an adoption is granted; and (3) laws that make surrender of custody and consent to adoption revocable in private placement adoptions.

(1) Our law prohibits paying or accepting money in connection with any placement of a child for adoption. N.J.S.A. 9:3-54a. Violation is a high misdemeanor. N.J.S.A. 9:3-54c. Excepted are fees of an approved agency (which must be a non-profit entity, N.J.S.A. 9:3-38a) and certain expenses in connection with childbirth. N.J.S.A. 9:3-54b.^[4]

Considerable care was taken in this case to structure the surrogacy arrangement so as not to violate this prohibition. The arrangement was structured as follows: the adopting parent, Mrs. Stern, was not a party to the surrogacy contract; the money paid to Mrs. Whitehead was stated to be for her services — not for the adoption; the sole purpose of the contract was stated as being that "of giving a child to William Stern, its natural and biological father"; the money was purported to be [424] "compensation for services and expenses and in no way ... a fee for termination of parental rights or a payment in exchange for consent to surrender a child for adoption"; the fee to the Infertility Center ($7,500) was stated to be for legal representation, advice, administrative work, and other "services." Nevertheless, it seems clear that the money was paid and accepted in connection with an adoption.

The Infertility Center's major role was first as a "finder" of the surrogate mother whose child was to be adopted, and second as the arranger of all proceedings that led to the adoption. Its role as adoption finder is demonstrated by the provision requiring Mr. Stern to pay another $7,500 if he uses Mary Beth Whitehead again as a surrogate, and by ICNY's agreement to "coordinate arrangements for the adoption of the child by the wife." The surrogacy agreement requires Mrs. Whitehead to surrender Baby M for the purposes of adoption. The agreement notes that Mr. and Mrs. Stern wanted to have a child, and provides that the child be "placed" with Mrs. Stern in the event Mr. Stern dies before the child is born. The payment of the $10,000 occurs only on surrender of custody of the child and "completion of the duties and obligations" of Mrs. Whitehead, including termination of her parental rights to facilitate adoption by Mrs. Stern. As for the contention that the Sterns are paying only for services and not for an adoption, we need note only that they would pay nothing in the event the child died before the fourth month of pregnancy, and only $1,000 if the child were stillborn, even though the "services" had been fully rendered. Additionally, one of Mrs. Whitehead's estimated costs, to be assumed by Mr. Stern, was an "Adoption Fee," presumably for Mrs. Whitehead's incidental costs in connection with the adoption.

Mr. Stern knew he was paying for the adoption of a child; Mrs. Whitehead knew she was accepting money so that a child might be adopted; the Infertility Center knew that it was being paid for assisting in the adoption of a child. The actions of all three worked to frustrate the goals of the statute. It strains credulity to claim that these arrangements, touted by those in the surrogacy business as an attractive alternative to the usual route leading to an adoption, really amount to something other than a private placement adoption for money.

The prohibition of our statute is strong. Violation constitutes a high misdemeanor, N.J.S.A. 9:3-54c, a third-degree crime, N.J.S.A. 2C:43-1b, carrying a penalty of three to five years imprisonment. N.J.S.A. 2C:43-6a(3). The evils inherent in baby-bartering are loathsome for a myriad of reasons. The child is sold without regard for whether the purchasers will be suitable parents. N. Baker, Baby Selling: The Scandal of Black Market Adoption 7 (1978). The natural mother does not receive the benefit of counseling and guidance to assist her in making a decision that may affect her for a lifetime. In fact, the monetary incentive to sell her child may, depending on her financial circumstances, make her decision less voluntary. Id. at 44. Furthermore, the adoptive parents^[5] may not be fully informed of the natural parents' medical history.

Baby-selling potentially results in the exploitation of all parties involved. Ibid. Conversely, adoption statutes seek to further humanitarian goals, foremost among them the best interests of the child. H. Witmer, E. Herzog, E. Weinstein, & M. Sullivan, Independent Adoptions: A Follow-Up Study 32 (1967). The negative consequences of baby-buying are potentially present in the surrogacy context, especially the potential for placing and adopting a child without regard to the interest of the child or the natural mother.

(2) The termination of Mrs. Whitehead's parental rights, called for by the surrogacy contract and actually ordered by the court, 217 N.J. Super. at 399-400, fails to comply with the stringent requirements of New Jersey law. Our law, recognizing the finality of any termination of parental rights, provides for such termination only where there has been a voluntary surrender of a child to an approved agency or to the Division of Youth and Family Services ("DYFS"), accompanied by a formal document acknowledging termination of parental rights, N.J.S.A. 9:2-16, -17; N.J.S.A. 9:3-41; N.J.S.A. 30:4C-23, or where there has been a showing of parental abandonment or unfitness. A termination may ordinarily take one of three forms: an action by an approved agency, an action by DYFS, or an action in connection with a private placement adoption. The three are governed by separate statutes, but the standards for termination are substantially the same, except that whereas a written surrender is effective when made to an approved agency or to DYFS, there is no provision for it in the private placement context. See N.J.S.A. 9:2-14; N.J.S.A. 30:4C-23.

N.J.S.A. 9:2-18 to -20 governs an action by an approved agency to terminate parental rights. Such an action, whether or not in conjunction with a pending adoption, may proceed on proof of written surrender, N.J.S.A. 9:2-16, -17, "forsaken parental obligation," or other specific grounds such as death or insanity, N.J.S.A. 9:2-19. Where the parent has not executed a formal consent, termination requires a showing of "forsaken parental obligation," i.e., "willful and continuous neglect or failure to perform the natural and regular obligations of care and support of a child." N.J.S.A. 9:2-13(d). See also N.J.S.A. 9:3-46a, -47c.

Where DYFS is the agency seeking termination, the requirements are similarly stringent, although at first glance they do not appear to be so. DYFS can, as can any approved agency, accept a formal voluntary surrender or writing having the effect of termination and giving DYFS the right to place the child for adoption. N.J.S.A. 30:4C-23. Absent such formal written surrender and consent, similar to that given to approved agencies, DYFS can terminate parental rights in an action for guardianship by proving that "the best interests of such child require that he be placed under proper guardianship." N.J.S.A. 30:4C-20. Despite this "best interests" language, however, this Court has recently held in New Jersey Div. of Youth & Family Servs. v. A.W., 103 N.J. 591 (1986), that in order for DYFS to terminate parental rights it must prove, by clear and convincing evidence, that "[t]he child's health and development have been or will be seriously impaired by the parental relationship," id. at 604, that "[t]he parents are unable or unwilling to eliminate the harm and delaying permanent placement will add to the harm," id. at 605, that "[t]he court has considered alternatives to termination," id. at 608, and that "[t]he termination of parental rights will not do more harm than good," id. at 610. This interpretation of the statutory language requires a most substantial showing of harm to the child if the parental relationship were to continue, far exceeding anything that a "best interests" test connotes.

In order to terminate parental rights under the private placement adoption statute, there must be a finding of "intentional abandonment or a very substantial neglect of parental duties without a reasonable expectation of a reversal of that conduct in the future." N.J.S.A. 9:3-48c(1). This requirement is similar to that of the prior law (i.e., "forsaken parental obligations," L. 1953, c. 264, § 2(d) (codified at N.J.S.A. 9:3-18(d) (repealed))), and to that of the law providing for termination through actions by approved agencies, N.J.S.A. 9:2-13(d). See also In re Adoption by J.J.P., 175 N.J. Super. 420, 427 (App. Div. 1980) (noting that the language of the termination provision in the present statute, N.J.S.A. 9:3-48c(1), derives from this Court's construction of the prior statute in In re Adoption of Children by D., 61 N.J. 89, 94-95 (1972)).

In Sees v. Baber, 74 N.J. 201 (1977) we distinguished the requirements for terminating parental rights in a private placement adoption from those required in an approved agency adoption. We stated that in an unregulated private placement, "neither consent nor voluntary surrender is singled out as a statutory factor in terminating parental rights." Id. at 213. Sees established that without proof that parental obligations had been forsaken, there would be no termination in a private placement setting.

As the trial court recognized, without a valid termination there can be no adoption. In re Adoption of Children by D., supra, 61 N.J. at 95. This requirement applies to all adoptions, whether they be private placements, ibid., or agency adoptions, N.J.S.A. 9:3-46a, -47c.

Our statutes, and the cases interpreting them, leave no doubt that where there has been no written surrender to an approved agency or to DYFS, termination of parental rights will not be granted in this state absent a very strong showing of abandonment or neglect. See, e.g., Sorentino v. Family & Children's Soc'y of Elizabeth, 74 N.J. 313 (1977) (Sorentino II); Sees v. Baber, 74 N.J. 201 (1977); Sorentino v. Family & Children's Soc'y of Elizabeth, 72 N.J. 127 (1976) (Sorentino I); In re Adoption of Children by D., supra, 61 N.J. 89. That showing is required in every context in which termination of parental rights is sought, be it an action by an approved agency, an action by DYFS, or a private placement adoption proceeding, even where the petitioning adoptive parent is, as here, a stepparent. While the statutes make certain procedural allowances when stepparents are involved, N.J.S.A. 9:3-48a(2), -48a(4), -48c(4), the substantive requirement for terminating the natural parents' rights is not relaxed one iota. N.J.S.A. 9:3-48c(1); In re Adoption of Children by D., supra, 61 N.J. at 94-95; In re Adoption by J.J.P., supra, 175 N.J. Super. at 426-28; In re N., 96 N.J. Super. 415, 423-27 (App.Div. 1967). It is clear that a "best interests" determination is never sufficient to terminate parental rights; the statutory criteria must be proved.^[6]

In this case a termination of parental rights was obtained not by proving the statutory prerequisites but by claiming the benefit of contractual provisions. From all that has been stated above, it is clear that a contractual agreement to abandon one's parental rights, or not to contest a termination action, will not be enforced in our courts. The Legislature would not have so carefully, so consistently, and so substantially restricted termination of parental rights if it had intended to allow termination to be achieved by one short sentence in a contract.

Since the termination was invalid,^[7] it follows, as noted above, that adoption of Melissa by Mrs. Stern could not properly be granted.

(3) The provision in the surrogacy contract stating that Mary Beth Whitehead agrees to "surrender custody ... and terminate all parental rights" contains no clause giving her a right to rescind. It is intended to be an irrevocable consent to surrender the child for adoption — in other words, an irrevocable commitment by Mrs. Whitehead to turn Baby M over to the Sterns and thereafter to allow termination of her parental rights. The trial court required a "best interests" showing as a condition to granting specific performance of the surrogacy contract. 217 N.J. Super. at 399-400. Having decided the "best interests" issue in favor of the Sterns, that court's order included, among other things, specific performance of this agreement to surrender custody and terminate all parental rights.

Mrs. Whitehead, shortly after the child's birth, had attempted to revoke her consent and surrender by refusing, after the Sterns had allowed her to have the child "just for one week," to return Baby M to them. The trial court's award of specific performance therefore reflects its view that the consent to surrender the child was irrevocable. We accept the trial court's construction of the contract; indeed it appears quite clear that this was the parties' intent. Such a provision, however, making irrevocable the natural mother's consent to surrender custody of her child in a private placement adoption, clearly conflicts with New Jersey law.

Our analysis commences with the statute providing for surrender of custody to an approved agency and termination of parental rights on the suit of that agency. The two basic provisions of the statute are N.J.S.A. 9:2-14 and 9:2-16. The former provides explicitly that

[e]xcept as otherwise provided by law or by order or judgment of a court of competent jurisdiction or by testamentary disposition, no surrender of the custody of a child shall be valid in this state unless made to an approved agency pursuant to the provisions of this act....

There is no exception "provided by law," and it is not clear that there could be any "order or judgment of a court of competent jurisdiction" validating a surrender of custody as a basis for adoption when that surrender was not in conformance with the statute. Requirements for a voluntary surrender to an approved agency are set forth in N.J.S.A. 9:2-16. This section allows an approved agency to take a voluntary surrender of custody from the parent of a child but provides stringent requirements as a condition to its validity. The surrender must be in writing, must be in such form as is required for the recording of a deed, and, pursuant to N.J.S.A. 9:2-17, must be such as to declare that the person executing the same desires to relinquish the custody of the child, acknowledge the termination of parental rights as to such custody in favor of the approved agency, and acknowledge full understanding of the effect of such surrender as provided by this act.

If the foregoing requirements are met, the consent, the voluntary surrender of custody

shall be valid whether or not the person giving same is a minor and shall be irrevocable except at the discretion of the approved agency taking such surrender or upon order or judgment of a court of competent jurisdiction, setting aside such surrender upon proof of fraud, duress, or misrepresentation. [N.J.S.A. 9:2-16.]

The importance of that irrevocability is that the surrender itself gives the agency the power to obtain termination of parental rights — in other words, permanent separation of the parent from the child, leading in the ordinary case to an adoption. N.J.S.A. 9:2-18 to -20.

This statutory pattern, providing for a surrender in writing and for termination of parental rights by an approved agency, is generally followed in connection with adoption proceedings and proceedings by DYFS to obtain permanent custody of a child. Our adoption statute repeats the requirements necessary to accomplish an irrevocable surrender to an approved agency in both form and substance. N.J.S.A. 9:3-41a. It provides that the surrender "shall be valid and binding without regard to the age of the person executing the surrender," ibid.; and although the word "irrevocable" is not used, that seems clearly to be the intent of the provision. The statute speaks of such surrender as constituting "relinquishment of such person's parental rights in or guardianship or custody of the child named therein and consent by such person to adoption of the child." Ibid. (emphasis supplied). We emphasize "named therein," for we construe the statute to allow a surrender only after the birth of the child. The formal consent to surrender enables the approved agency to terminate parental rights.

Similarly, DYFS is empowered to "take voluntary surrenders and releases of custody and consents to adoption[s]" from parents, which surrenders, releases, or consents "when properly acknowledged ... shall be valid and binding irrespective of the age of the person giving the same, and shall be irrevocable except at the discretion of the Bureau of Childrens Services [currently DYFS] or upon order of a court of competent jurisdiction." N.J.S.A. 30:4C-23. Such consent to surrender of the custody of the child would presumably lead to an adoption placement by DYFS. See N.J.S.A. 30:4C-20.

It is clear that the Legislature so carefully circumscribed all aspects of a consent to surrender custody — its form and substance, its manner of execution, and the agency or agencies to which it may be made — in order to provide the basis for irrevocability. It seems most unlikely that the Legislature intended that a consent not complying with these requirements would also be irrevocable, especially where, as here, that consent falls radically short of compliance. Not only do the form and substance of the consent in the surrogacy contract fail to meet statutory requirements, but the surrender of custody is made to a private party. It is not made, as the statute requires, either to an approved agency or to DYFS.

These strict prerequisites to irrevocability constitute a recognition of the most serious consequences that flow from such consents: termination of parental rights, the permanent separation of parent from child, and the ultimate adoption of the child. See Sees v. Baber, supra, 74 N.J. at 217. Because of those consequences, the Legislature severely limited the circumstances under which such consent would be irrevocable. The legislative goal is furthered by regulations requiring approved agencies, prior to accepting irrevocable consents, to provide advice and counseling to women, making it more likely that they fully understand and appreciate the consequences of their acts. N.J.A.C. 10:121A-5.4(c).

Contractual surrender of parental rights is not provided for in our statutes as now written. Indeed, in the Parentage Act, N.J.S.A. 9:17-38 to -59, there is a specific provision invalidating any agreement "between an alleged or presumed father and the mother of the child" to bar an action brought for the purpose of determining paternity "[r]egardless of [the contract's] terms." N.J.S.A. 9:17-45. Even a settlement agreement concerning parentage reached in a judicially-mandated consent conference is not valid unless the proposed settlement is approved beforehand by the court. N.J.S.A. 9:17-48c and d. There is no doubt that a contractual provision purporting to constitute an irrevocable agreement to surrender custody of a child for adoption is invalid.

In Sees v. Baber, supra, 74 N.J. 201, we noted that a natural mother's consent to surrender her child and to its subsequent adoption was no longer required by the statute in private placement adoptions. After tracing the statutory history from the time when such a consent had been an essential prerequisite to adoption, we concluded that such a consent was now neither necessary nor sufficient for the purpose of terminating parental rights. Id. at 213. The consent to surrender custody in that case was in writing, had been executed prior to physical surrender of the infant, and had been explained to the mother by an attorney. The trial court found that the consent to surrender of custody in that private placement adoption was knowing, voluntary, and deliberate. Id. at 216. The physical surrender of the child took place four days after its birth. Two days thereafter the natural mother changed her mind, and asked that the adoptive couple give her baby back to her. We held that she was entitled to the baby's return. The effect of our holding in that case necessarily encompassed our conclusion that "in an unsupervised private placement, since there is no statutory obligation to consent, there can be no legal barrier to its retraction." Id. at 215. The only possible relevance of consent in these matters, we noted, was that it might bear on whether there had been an abandonment of the child, or a forsaking of parental obligations. Id. at 216. Otherwise, consent in a private placement adoption is not only revocable but, when revoked early enough, irrelevant. Id. at 213-15.

The provision in the surrogacy contract whereby the mother irrevocably agrees to surrender custody of her child and to terminate her parental rights conflicts with the settled interpretation of New Jersey statutory law.^[8] There is only one irrevocable consent, and that is the one explicitly provided for by statute: a consent to surrender of custody and a placement with an approved agency or with DYFS. The provision in the surrogacy contract, agreed to before conception, requiring the natural mother to surrender custody of the child without any right of revocation is one more indication of the essential nature of this transaction: the creation of a contractual system of termination and adoption designed to circumvent our statutes.

B. Public Policy Considerations

The surrogacy contract's invalidity, resulting from its direct conflict with the above statutory provisions, is further underlined when its goals and means are measured against New Jersey's public policy. The contract's basic premise, that the natural parents can decide in advance of birth which one is to have custody of the child, bears no relationship to the settled law that the child's best interests shall determine custody. See Fantony v. Fantony, 21 N.J. 525, 536-37 (1956); see also Sheehan v. Sheehan, 38 N.J. Super. 120, 125 (App.Div. 1955) [435] ("Whatever the agreement of the parents, the ultimate determination of custody lies with the court in the exercise of its supervisory jurisdiction as parens patriae."). The fact that the trial court remedied that aspect of the contract through the "best interests" phase does not make the contractual provision any less offensive to the public policy of this State.

The surrogacy contract guarantees permanent separation of the child from one of its natural parents. Our policy, however, has long been that to the extent possible, children should remain with and be brought up by both of their natural parents. That was the first stated purpose of the previous adoption act, L. 1953, c. 264, § 1, codified at N.J.S.A. 9:3-17 (repealed): "it is necessary and desirable (a) to protect the child from unnecessary separation from his natural parents...." While not so stated in the present adoption law, this purpose remains part of the public policy of this State. See, e.g., Wilke v. Culp, 196 N.J. Super. 487, 496 (App.Div. 1984), certif. den., 99 N.J. 243 (1985); In re Adoption by J.J.P., supra, 175 N.J. Super. at 426. This is not simply some theoretical ideal that in practice has no meaning. The impact of failure to follow that policy is nowhere better shown than in the results of this surrogacy contract. A child, instead of starting off its life with as much peace and security as possible, finds itself immediately in a tug-of-war between contending mother and father.^[9]

The surrogacy contract violates the policy of this State that the rights of natural parents are equal concerning their child, the father's right no greater than the mother's. "The parent and child relationship extends equally to every child and to every parent, regardless of the marital status of the parents." N.J.S.A. 9:17-40. As the Assembly Judiciary Committee noted in its statement to the bill, this section establishes "the principle that regardless of the marital status of the parents, all children and all parents have equal rights with respect to each other." Statement to Senate No. 888, Assembly Judiciary, Law, Public Safety and Defense Committee (1983) (emphasis supplied). The whole purpose and effect of the surrogacy contract was to give the father the exclusive right to the child by destroying the rights of the mother.

The policies expressed in our comprehensive laws governing consent to the surrender of a child, discussed supra at 429-434, stand in stark contrast to the surrogacy contract and what it implies. Here there is no counseling, independent or otherwise, of the natural mother, no evaluation, no warning.

The only legal advice Mary Beth Whitehead received regarding the surrogacy contract was provided in connection with the contract that she previously entered into with another couple. Mrs. Whitehead's lawyer was referred to her by the Infertility Center, with which he had an agreement to act as counsel for surrogate candidates. His services consisted of spending one hour going through the contract with the Whiteheads, section by section, and answering their questions. Mrs. Whitehead received no further legal advice prior to signing the contract with the Sterns.

Mrs. Whitehead was examined and psychologically evaluated, but if it was for her benefit, the record does not disclose that fact. The Sterns regarded the evaluation as important, particularly in connection with the question of whether she would change her mind. Yet they never asked to see it, and were content with the assumption that the Infertility Center had made an evaluation and had concluded that there was no danger that the surrogate mother would change her mind. From Mrs. Whitehead's point of view, all that she learned from the evaluation was that "she had passed." It is apparent that the profit motive got the better of the Infertility Center. Although the evaluation was made, it was not put to any use, and understandably so, for the psychologist warned that Mrs. Whitehead demonstrated certain traits that might make surrender of the child difficult and that there should be further inquiry into this issue in connection with her surrogacy. To inquire further, however, might have jeopardized the Infertility Center's fee. The record indicates that neither Mrs. Whitehead nor the Sterns were ever told of this fact, a fact that might have ended their surrogacy arrangement.

Under the contract, the natural mother is irrevocably committed before she knows the strength of her bond with her child. She never makes a totally voluntary, informed decision, for quite clearly any decision prior to the baby's birth is, in the most important sense, uninformed, and any decision after that, compelled by a pre-existing contractual commitment, the threat of a lawsuit, and the inducement of a $10,000 payment, is less than totally voluntary. Her interests are of little concern to those who controlled this transaction.

Although the interest of the natural father and adoptive mother is certainly the predominant interest, realistically the only interest served, even they are left with less than what public policy requires. They know little about the natural mother, her genetic makeup, and her psychological and medical history. Moreover, not even a superficial attempt is made to determine their awareness of their responsibilities as parents.

Worst of all, however, is the contract's total disregard of the best interests of the child. There is not the slightest suggestion that any inquiry will be made at any time to determine the fitness of the Sterns as custodial parents, of Mrs. Stern as an adoptive parent, their superiority to Mrs. Whitehead, or the effect on the child of not living with her natural mother.

This is the sale of a child, or, at the very least, the sale of a mother's right to her child, the only mitigating factor being that one of the purchasers is the father. Almost every evil that prompted the prohibition on the payment of money in connection with adoptions exists here.

The differences between an adoption and a surrogacy contract should be noted, since it is asserted that the use of money in connection with surrogacy does not pose the risks found where money buys an adoption. Katz, "Surrogate Motherhood and the Baby-Selling Laws," 20 Colum.J.L. & Soc.Probs. 1 (1986).

First, and perhaps most important, all parties concede that it is unlikely that surrogacy will survive without money. Despite the alleged selfless motivation of surrogate mothers, if there is no payment, there will be no surrogates, or very few. That conclusion contrasts with adoption; for obvious reasons, there remains a steady supply, albeit insufficient, despite the prohibitions against payment. The adoption itself, relieving the natural mother of the financial burden of supporting an infant, is in some sense the equivalent of payment.

Second, the use of money in adoptions does not produce the problem — conception occurs, and usually the birth itself, before illicit funds are offered. With surrogacy, the "problem," if one views it as such, consisting of the purchase of a woman's procreative capacity, at the risk of her life, is caused by and originates with the offer of money.

Third, with the law prohibiting the use of money in connection with adoptions, the built-in financial pressure of the unwanted pregnancy and the consequent support obligation do not lead the mother to the highest paying, ill-suited, adoptive parents. She is just as well-off surrendering the child to an approved agency. In surrogacy, the highest bidders will presumably become the adoptive parents regardless of suitability, so long as payment of money is permitted.

Fourth, the mother's consent to surrender her child in adoptions is revocable, even after surrender of the child, unless it be to an approved agency, where by regulation there are protections against an ill-advised surrender. In surrogacy, consent occurs so early that no amount of advice would satisfy the potential mother's need, yet the consent is irrevocable.

The main difference, that the unwanted pregnancy is unintended while the situation of the surrogate mother is voluntary and intended, is really not significant. Initially, it produces stronger reactions of sympathy for the mother whose pregnancy was unwanted than for the surrogate mother, who "went into this with her eyes wide open." On reflection, however, it appears that the essential evil is the same, taking advantage of a woman's circumstances (the unwanted pregnancy or the need for money) in order to take away her child, the difference being one of degree.

In the scheme contemplated by the surrogacy contract in this case, a middle man, propelled by profit, promotes the sale. Whatever idealism may have motivated any of the participants, the profit motive predominates, permeates, and ultimately governs the transaction. The demand for children is great and the supply small. The availability of contraception, abortion, and the greater willingness of single mothers to bring up their children has led to a shortage of babies offered for adoption. See N. Baker, Baby Selling: The Scandal of Black Market Adoption, supra; Adoption and Foster Care, 1975: Hearings on Baby Selling Before the Subcomm. On Children and Youth of the Senate Comm. on Labor and Public Welfare, 94th Cong.1st Sess. 6 (1975) (Statement of Joseph H. Reid, Executive Director, Child Welfare League of America, Inc.). The situation is ripe for the entry of the middleman who will bring some equilibrium into the market by increasing the supply through the use of money.

Intimated, but disputed, is the assertion that surrogacy will be used for the benefit of the rich at the expense of the poor. See, e.g., Radin, "Market Inalienability," 100 Harv.L.Rev. 1849, 1930 (1987). In response it is noted that the Sterns are not rich and the Whiteheads not poor. Nevertheless, it is clear to us that it is unlikely that surrogate mothers will be as proportionately numerous among those women in the top twenty percent income bracket as among those in the bottom twenty percent. Ibid. Put differently, we doubt that infertile couples in the low-income bracket will find upper income surrogates.

In any event, even in this case one should not pretend that disparate wealth does not play a part simply because the contrast is not the dramatic "rich versus poor." At the time of trial, the Whiteheads' net assets were probably negative — Mrs. Whitehead's own sister was foreclosing on a second mortgage. Their income derived from Mr. Whitehead's labors. Mrs. Whitehead is a homemaker, having previously held part-time jobs. The Sterns are both professionals, she a medical doctor, he a biochemist. Their combined income when both were working was about $89,500 a year and their assets sufficient to pay for the surrogacy contract arrangements.

The point is made that Mrs. Whitehead agreed to the surrogacy arrangement, supposedly fully understanding the consequences. Putting aside the issue of how compelling her need for money may have been, and how significant her understanding of the consequences, we suggest that her consent is irrelevant. There are, in a civilized society, some things that money cannot buy. In America, we decided long ago that merely because conduct purchased by money was "voluntary" did not mean that it was good or beyond regulation and prohibition. West Coast Hotel Co. v. Parrish, 300 U.S. 379, 57 S.Ct. 578, 81 L.Ed. 703 (1937). Employers can no longer buy labor at the lowest price they can bargain for, even though that labor is "voluntary," 29 U.S.C. § 206 (1982), or buy women's labor for less money than paid to men for the same job, 29 U.S.C. § 206(d), or purchase the agreement of children to perform oppressive labor, 29 U.S.C. § 212, or purchase the agreement of workers to subject themselves to unsafe or unhealthful working conditions, 29 U.S.C. §§ 651 to 678. (Occupational Safety and Health Act of 1970). There are, in short, values that society deems more important than granting to wealth whatever it can buy, be it labor, love, or life. Whether this principle recommends prohibition of surrogacy, which presumably sometimes results in great satisfaction to all of the parties, is not for us to say. We note here only that, under existing law, the fact that Mrs. Whitehead "agreed" to the arrangement is not dispositive.

The long-term effects of surrogacy contracts are not known, but feared — the impact on the child who learns her life was bought, that she is the offspring of someone who gave birth to her only to obtain money; the impact on the natural mother as the full weight of her isolation is felt along with the full reality of the sale of her body and her child; the impact on the natural father and adoptive mother once they realize the consequences of their conduct. Literature in related areas suggests these are substantial considerations, although, given the newness of surrogacy, there is little information. See N. Baker, Baby Selling: The Scandal of Black Market Adoption, supra; Adoption and Foster Care, 1975: Hearings on Baby Selling Before the Subcomm. on Children and Youth of the Senate Comm. on Labor and Public Welfare, 94th Cong. 1st Sess. (1975).

The surrogacy contract is based on, principles that are directly contrary to the objectives of our laws.^[10] It guarantees the separation of a child from its mother; it looks to adoption regardless of suitability; it totally ignores the child; it takes the child from the mother regardless of her wishes and her maternal fitness; and it does all of this, it accomplishes all of its goals, through the use of money.

Beyond that is the potential degradation of some women that may result from this arrangement. In many cases, of course, surrogacy may bring satisfaction, not only to the infertile couple, but to the surrogate mother herself. The fact, however, that many women may not perceive surrogacy negatively but rather see it as an opportunity does not diminish its potential for devastation to other women.

In sum, the harmful consequences of this surrogacy arrangement appear to us all too palpable. In New Jersey the surrogate mother's agreement to sell her child is void.^[11] Its irrevocability infects the entire contract, as does the money that purports to buy it.

III.

TERMINATION

We have already noted that under our laws termination of parental rights cannot be based on contract, but may be granted only on proof of the statutory requirements. That conclusion was one of the bases for invalidating the surrogacy contract. Although excluding the contract as a basis for parental termination, we did not explicitly deal with the question of whether the statutory bases for termination existed. We do so here.

As noted before, if termination of Mrs. Whitehead's parental rights is justified, Mrs. Whitehead will have no further claim either to custody or to visitation, and adoption by Mrs. Stern may proceed pursuant to the private placement adoption statute, N.J.S.A. 9:3-48. If termination is not justified, Mrs. Whitehead remains the legal mother, and even if not entitled to custody, she would ordinarily be expected to have some rights of visitation. Wilke v. Culp, supra, 196 N.J. Super. at 496.

As was discussed, supra at 425-429, the proper bases for termination are found in the statute relating to proceedings by approved agencies for a termination of parental rights, N.J.S.A. 9:2-18, the statute allowing for termination leading to a private placement adoption, N.J.S.A. 9:3-48c(1), and the statute authorizing a termination pursuant to an action by DYFS, N.J.S.A. 30:4C-20. The statutory descriptions of the conditions required to terminate parental rights differ; their interpretation in case law, however, tends to equate them. Compare New Jersey Div. of Youth and Family Servs. v. A.W., supra, 103 N.J. at 601-11 (attempted termination by DYFS) with In re Adoption by J.J.P., supra, 175 N.J. Super. at 426-28 (attempted termination in connection with private placement adoption).

Nothing in this record justifies a finding that would allow a court to terminate Mary Beth Whitehead's parental rights under the statutory standard. It is not simply that obviously there was no "intentional abandonment or very substantial neglect of parental duties without a reasonable expectation of reversal of that conduct in the future," N.J.S.A. 9:3-48c(1), quite the contrary, but furthermore that the trial court never found Mrs. Whitehead an unfit mother and indeed affirmatively stated that Mary Beth Whitehead had been a good mother to her other children. 217 N.J. Super. at 397.

Although the question of best interests of the child is dispositive of the custody issue in a dispute between natural parents, it does not govern the question of termination. It has long been decided that the mere fact that a child would be better off with one set of parents than with another is an insufficient basis for terminating the natural parent's rights. See New Jersey Div. of Youth and Family Servs. v. A.W., supra, 103 N.J. at 603; In re Adoption of Children by D., supra, 61 N.J. at 97-98; In re Adoption by J.J.P., supra, 175 N.J. Super. at 428. Furthermore, it is equally well settled that surrender of a child and a consent to adoption through private placement do not alone warrant termination. See Sees v. Baber, supra, 74 N.J. 201. It must be noted, despite some language to the contrary, that the interests of the child are not the only interests involved when termination issues are raised. The parent's rights, both constitutional and statutory, have their own independent vitality. See New Jersey Div. of Youth and Family Servs. v. A.W., supra, 103 N.J. at 601.

Although the statutes are clear, they are not applied rigidly on all occasions. The statutory standard, strictly construed, appears harsh where the natural parents, having surrendered [446] their child for adoption through private placement, change their minds and seek the return of their child and where the issue comes before the court with the adoptive parents having had custody for years, and having assumed it quite innocently.

These added dimensions in Sees v. Baber, supra, 74 N.J. 201, failed to persuade this Court to vary the termination requirements. The natural parent in that case changed her mind two days after surrendering the child, sought his return unequivocally, and so advised the adoptive parents. Since she was clearly fit, and clearly had not abandoned the child in the statutory sense, termination was denied, despite the fact that the adoptive parents had had custody of the child for about a year, and the mother had never had custody at all.

A significant variation on these facts, however, occurred in Sorentino II, supra, 74 N.J. 313. The surrender there was not through private placement but through an approved agency. Although the consent to surrender was held invalid due to coercion by the agency, the natural parents failed to initiate the lawsuit to reclaim the child for over a year after relinquishment. By the time this Court reached the issue of whether the natural parents' rights could be terminated, the adoptive parents had had custody for three years. These circumstances ultimately persuaded this Court to permit termination of the natural parents' rights and to allow a subsequent adoption. The unique facts of Sorentino II were found to amount to a forsaking of parental obligations. Id. at 322.

The present case is distinguishable from Sorentino II. Mary Beth Whitehead had custody of Baby M for four months before the child was taken away. Her initial surrender of Baby M was pursuant to a contract that we have declared illegal and unenforceable. The Sterns knew almost from the very day that they took Baby M that their rights were being challenged by the natural mother. In short, the factors that persuaded this Court to terminate the parental rights in Sorentino II are not found here.

There is simply no basis, either in the statute or in the peculiar facts of that limited class of case typified by Sorentino II, to warrant termination of Mrs. Whitehead's parental rights. We therefore conclude that the natural mother is entitled to retain her rights as a mother.

IV.

CONSTITUTIONAL ISSUES

Both parties argue that the Constitutions — state and federal — mandate approval of their basic claims. The source of their constitutional arguments is essentially the same: the right of privacy, the right to procreate, the right to the companionship of one's child, those rights flowing either directly from the fourteenth amendment or by its incorporation of the Bill of Rights, or from the ninth amendment, or through the penumbra surrounding all of the Bill of Rights. They are the rights of personal intimacy, of marriage, of sex, of family, of procreation. Whatever their source, it is clear that they are fundamental rights protected by both the federal and state Constitutions. Lehr v. Robertson, 463 U.S. 248, 103 S.Ct. 2985, 77 L.Ed.2d 614 (1983); Santosky v. Kramer, 455 U.S. 745, 102 S.Ct. 1388, 71 L.Ed.2d 599 (1982); Zablocki v. Redhail, 434 U.S. 374, 98 S.Ct. 673, 54 L.Ed.2d 618 (1978); Quilloin v. Walcott, 434 U.S. 246, 98 S.Ct. 549, 54 L.Ed.2d 511 (1978); Carey v. Population Servs. Int'l, 431 U.S. 678, 97 S.Ct. 2010, 52 L.Ed.2d 675 (1977); Roe v. Wade, 410 U.S. 113, 93 S.Ct. 705, 35 L.Ed.2d 147 (1973); Stanley v. Illinois, 405 U.S. 645, 92 S.Ct. 1208, 31 L.Ed.2d 551 (1972); Griswold v. Connecticut, 381 U.S. 479, 85 S.Ct. 1678, 14 L.Ed.2d 510 (1965); Skinner v. Oklahoma, 316 U.S. 535, 62 S.Ct. 1110, 86 L.Ed. 1655 (1942); Meyer v. Nebraska, 262 U.S. 390, 43 S.Ct. 625, 67 L.Ed. 1042 (1923). The right asserted by the Sterns is the right of procreation; that asserted by Mary Beth Whitehead is the right to the companionship of her child. We find that the right of procreation does not extend as far as claimed by the Sterns. As for the right asserted by Mrs. Whitehead,^[12] since we uphold it on other grounds (i.e., we have restored her as mother and recognized her right, limited by the child's best interests, to her companionship), we need not decide that constitutional issue, and for reasons set forth below, we should not.

The right to procreate, as protected by the Constitution, has been ruled on directly only once by the United States Supreme Court. See Skinner v. Oklahoma, supra, 316 U.S. 535, 62 S.Ct. 1110, 86 L.Ed. 1655 (forced sterilization of habitual criminals violates equal protection clause of fourteenth amendment). Although Griswold v. Connecticut, supra, 381 U.S. 479, 85 S.Ct. 1678, 14 L.Ed.2d 510, is obviously of a similar class, strictly speaking it involves the right not to procreate. The right to procreate very simply is the right to have natural children, whether through sexual intercourse or artificial insemination. It is no more than that. Mr. Stern has not been deprived of that right. Through artificial insemination of Mrs. Whitehead, Baby M is his child. The custody, care, companionship, and nurturing that follow birth are not parts of the right to procreation; they are rights that may also be constitutionally protected, but that involve many considerations other than the right of procreation. To assert that Mr. Stern's right of procreation gives him the right to the custody of Baby M would be to assert that Mrs. Whitehead's right of procreation does not give her the right to the custody of Baby M; it would be to assert that the constitutional right of procreation includes within it a constitutionally protected contractual right to destroy someone else's right of procreation.

We conclude that the right of procreation is best understood and protected if confined to its essentials, and that when dealing with rights concerning the resulting child, different interests come into play. There is nothing in our culture or society that even begins to suggest a fundamental right on the part of the father to the custody of the child as part of his right to procreate when opposed by the claim of the mother to the same child. We therefore disagree with the trial court: there is no constitutional basis whatsoever requiring that Mr. Stern's claim to the custody of Baby M be sustained. Our conclusion may thus be understood as illustrating that a person's rights of privacy and self-determination are qualified by the effect on innocent third persons of the exercise of those rights.^[13]

Mr. Stern also contends that he has been denied equal protection of the laws by the State's statute granting full parental rights to a husband in relation to the child produced, with his consent, by the union of his wife with a sperm donor. N.J.S.A. 9:17-44. The claim really is that of Mrs. Stern. It is that she is in precisely the same position as the husband in the statute: she is presumably infertile, as is the husband in the statute; her spouse by agreement with a third party procreates with the understanding that the child will be the couple's child. The alleged unequal protection is that the understanding is honored in the statute when the husband is the infertile party, but no similar understanding is honored when it is the wife who is infertile.

It is quite obvious that the situations are not parallel. A sperm donor simply cannot be equated with a surrogate mother. The State has more than a sufficient basis to distinguish the two situations — even if the only difference is between the time it takes to provide sperm for artificial insemination and the time invested in a nine-month pregnancy — so as to justify automatically divesting the sperm donor of his parental rights without automatically divesting a surrogate mother. Some basis for an equal protection argument might exist if Mary Beth Whitehead had contributed her egg to be implanted, fertilized or otherwise, in Mrs. Stern, resulting in the latter's pregnancy. That is not the case here, however.

Mrs. Whitehead, on the other hand, asserts a claim that falls within the scope of a recognized fundamental interest protected by the Constitution. As a mother, she claims the right to the companionship of her child. This is a fundamental interest, constitutionally protected. Furthermore, it was taken away from her by the action of the court below. Whether that action under these circumstances would constitute a constitutional deprivation, however, we need not and do not decide. By virtue of our decision Mrs. Whitehead's constitutional complaint — that her parental rights have been unconstitutionally terminated — is moot. We have decided that both the statutes and public policy of this state require that that termination be voided and that her parental rights be restored. It therefore becomes unnecessary to decide whether that same result would be required by virtue of the federal or state Constitutions. See Ashwander v. Tennessee Valley Auth., 297 U.S. 288, 341, 346-48, 56 S.Ct. 466, 482-83, 80 L.Ed. 688, 707, 710-12 (1936) (Brandeis, J., concurring). Refraining from deciding such constitutional issues avoids further complexities involving the full extent of a parent's right of companionship,^[14] or questions involving the fourteenth amendment.^[15]

Having held the contract invalid and having found no other grounds for the termination of Mrs. Whitehead's parental rights, we find that nothing remains of her constitutional claim. It seems obvious to us that since custody and visitation encompass practically all of what we call "parental rights," a total denial of both would be the equivalent of termination of parental rights. Franz v. United States, 707 F.2d 582, 602 (D.C. Cir.1983). That, however, as will be seen below, has not occurred here. We express no opinion on whether a prolonged suspension of visitation would constitute a termination of parental rights, or whether, assuming it would, a showing of unfitness would be required.^[16]

V.

CUSTODY

Having decided that the surrogacy contract is illegal and unenforceable, we now must decide the custody question without regard to the provisions of the surrogacy contract that would give Mr. Stern sole and permanent custody. (That does not mean that the existence of the contract and the circumstances under which it was entered may not be considered to the extent deemed relevant to the child's best interests.) With the surrogacy contract disposed of, the legal framework becomes a dispute between two couples over the custody of a child produced by the artificial insemination of one couple's wife by the other's husband. Under the Parentage Act the claims of the natural father and the natural mother are entitled to equal weight, i.e., one is not preferred over the other solely because he or she is the father or the mother. N.J.S.A. 9:17-40.^[17] The applicable rule given these circumstances is clear: the child's best interests determine custody.

We note again that the trial court's reasons for determining what were the child's best interests were somewhat different from ours. It concluded that the surrogacy contract was valid, but that it could not grant specific performance unless to do so was in the child's best interests. The approach was that of a Chancery judge, unwilling to give extraordinary remedies unless they well served the most important interests, in this case, the interests of the child. While substantively indistinguishable from our approach to the question of best interests, the purpose of the inquiry was not the usual purpose of determining custody, but of determining a contractual remedy.

We are not concerned at this point with the question of termination of parental rights, either those of Mrs. Whitehead or of Mr. Stern. As noted in various places in this opinion, such termination, in the absence of abandonment or a valid surrender, generally depends on a showing that the particular parent is unfit. The question of custody in this case, as in practically all cases, assumes the fitness of both parents, and no serious contention is made in this case that either is unfit. The issue here is which life would be better for Baby M, one with primary custody in the Whiteheads or one with primary custody in the Sterns.

The circumstances of this custody dispute are unusual and they have provoked some unusual contentions. The Whiteheads claim that even if the child's best interests would be served by our awarding custody to the Sterns, we should not do so, since that will encourage surrogacy contracts — contracts claimed by the Whiteheads, and we agree, to be violative of important legislatively-stated public policies. Their position is that in order that surrogacy contracts be deterred, custody should remain in the surrogate mother unless she is unfit, regardless of the best interests of the child. We disagree. Our declaration that this surrogacy contract is unenforceable and illegal is sufficient to deter similar agreements. We need not sacrifice the child's interests in order to make that point sharper. Cf. In re Adoption of Child by I.T. and K.T., 164 N.J. Super. 476, 484-86 (App.Div. 1978) (adoptive parents' participation in illegal placement does not mandate denial of adoption); In the Matter of the Adoption of Child by N.P. and F.P., 165 N.J. Super. 591 (Law Div. 1979) (use of unapproved intermediaries and the payment of money in connection with adoption is insufficient to establish that the would-be adoptive parents are unfit or that adoption would not be in child's best interests).

The Whiteheads also contend that the award of custody to the Sterns pendente lite was erroneous and that the error should not be allowed to affect the final custody decision. As noted above, at the very commencement of this action the court issued an ex parte order requiring Mrs. Whitehead to turn over the baby to the Sterns; Mrs. Whitehead did not comply but rather took the child to Florida. Thereafter, a similar order was enforced by the Florida authorities resulting in the transfer of possession of Baby M to the Sterns. The Sterns retained custody of the child throughout the litigation. The Whiteheads' point, assuming the pendente award of custody was erroneous, is that most of the factors arguing for awarding permanent custody to the Sterns resulted from that initial pendente lite order. Some of Mrs. Whitehead's alleged character failings, as testified to by experts and concurred in by the trial court, were demonstrated by her actions brought on by the custody crisis. For instance, in order to demonstrate her impulsiveness, those experts stressed the Whiteheads' flight to Florida with Baby M; to show her willingness to use her children for her own aims, they noted the telephone threats to kill Baby M and to accuse Mr. Stern of sexual abuse of her daughter; in order to show Mrs. Whitehead's manipulativeness, they pointed to her threat to kill herself; and in order to show her unsettled family life, they noted the innumerable moves from one hotel or motel to another in Florida. Furthermore, the argument continues, one of the most important factors, whether mentioned or not, in favor of custody in the Sterns is their continuing custody during the litigation, now having lasted for one-and-a-half [456] years. The Whiteheads' conclusion is that had the trial court not given initial custody to the Sterns during the litigation, Mrs. Whitehead not only would have demonstrated her perfectly acceptable personality — the general tenor of the opinion of experts was that her personality problems surfaced primarily in crises — but would also have been able to prove better her parental skills along with an even stronger bond than may now exist between her and Baby M. Had she not been limited to custody for four months, she could have proved all of these things much more persuasively through almost two years of custody.

The argument has considerable force. It is of course possible that the trial court was wrong in its initial award of custody. It is also possible that such error, if that is what it was, may have affected the outcome. We disagree with the premise, however, that in determining custody a court should decide what the child's best interests would be if some hypothetical state of facts had existed. Rather, we must look to what those best interests are, today, even if some of the facts may have resulted in part from legal error. The child's interests come first: we will not punish it for judicial errors, assuming any were made. See Wist v. Wist, 101 N.J. 509, 513-14 (1986); see also In re J.R. Guardianship, 174 N.J. Super. 211 (App.Div.), certif. den., 85 N.J. 102 (1980) (although not explicitly mentioned, natural mother's loss of parental rights based substantially on failures of DYFS to arrange visitation with her child). The custody decision must be based on all circumstances, on everything that actually has occurred, on everything that is relevant to the child's best interests. Those circumstances include the trip to Florida, the telephone calls and threats, the substantial period of successful custody with the Sterns, and all other relevant circumstances. We will discuss the question of the correctness of the trial court's initial orders below, but for purposes of determining Baby M's best interests, the correctness of those initial orders has lost relevance.

There were eleven experts who testified concerning the child's best interests, either directly or in connection with matters related to that issue. Our reading of the record persuades us that the trial court's decision awarding custody to the Sterns (technically to Mr. Stern) should be affirmed since "its findings... could reasonably have been reached on sufficient credible evidence present in the record." Beck v. Beck, 86 N.J. 480, 496 (1981) (quoting State v. Johnson, 42 N.J. 146, 161 (1964)); see Palermo v. Palermo, 164 N.J. Super. 492, 498 (App.Div. 1978) (noting that family court judge was experienced in dealing with such matters and had opportunity to observe parties and become immersed in details of case). More than that, on this record we find little room for any different conclusion. The trial court's treatment of this issue, 217 N.J. Super. at 391-400, is both comprehensive and, in most respects, perceptive. We agree substantially with its analysis with but few exceptions that, although important, do not change our ultimate views.

Our custody conclusion is based on strongly persuasive testimony contrasting both the family life of the Whiteheads and the Sterns and the personalities and characters of the individuals. The stability of the Whitehead family life was doubtful at the time of trial. Their finances were in serious trouble (foreclosure by Mrs. Whitehead's sister on a second mortgage was in process). Mr. Whitehead's employment, though relatively steady, was always at risk because of his alcoholism, a condition that he seems not to have been able to confront effectively. Mrs. Whitehead had not worked for quite some time, her last two employments having been part-time. One of the Whiteheads' positive attributes was their ability to bring up two children, and apparently well, even in so vulnerable a household. Yet substantial question was raised even about that aspect of their home life. The expert testimony contained criticism of Mrs. Whitehead's handling of her son's educational difficulties. Certain of the experts noted that Mrs. Whitehead perceived herself as omnipotent and omniscient concerning her children. She knew what they were thinking, what they wanted, and she spoke for them. As to Melissa, Mrs. Whitehead expressed the view that she alone knew what that child's cries and sounds meant. Her inconsistent stories about various things engendered grave doubts about her ability to explain honestly and sensitively to Baby M — and at the right time — the nature of her origin. Although faith in professional counseling is not a sine qua non of parenting, several experts believed that Mrs. Whitehead's contempt for professional help, especially professional psychological help, coincided with her feelings of omnipotence in a way that could be devastating to a child who most likely will need such help. In short, while love and affection there would be, Baby M's life with the Whiteheads promised to be too closely controlled by Mrs. Whitehead. The prospects for wholesome, independent psychological growth and development would be at serious risk.

The Sterns have no other children, but all indications are that their household and their personalities promise a much more likely foundation for Melissa to grow and thrive. There is a track record of sorts — during the one-and-a-half years of custody Baby M has done very well, and the relationship between both Mr. and Mrs. Stern and the baby has become very strong. The household is stable, and likely to remain so. Their finances are more than adequate, their circle of friends supportive, and their marriage happy. Most important, they are loving, giving, nurturing, and open-minded people. They have demonstrated the wish and ability to nurture and protect Melissa, yet at the same time to encourage her independence. Their lack of experience is more than made up for by a willingness to learn and to listen, a willingness that is enhanced by their professional training, especially Mrs. Stern's experience as a pediatrician. They are honest; they can recognize error, deal with it, and learn from it. They will try to determine rationally the best way to cope with problems in their relationship with Melissa. When the time comes to tell her about her origins, they will probably have found a means of doing so that accords with the best interests of Baby M. All in all, Melissa's future appears solid, happy, and promising with them.

Based on all of this we have concluded, independent of the trial court's identical conclusion, that Melissa's best interests call for custody in the Sterns. Our above-mentioned disagreements with the trial court do not, as we have noted, in any way diminish our concurrence with its conclusions. We feel, however, that those disagreements are important enough to be stated. They are disagreements about the evaluation of conduct. They also may provide some insight about the potential consequences of surrogacy.

It seems to us that given her predicament, Mrs. Whitehead was rather harshly judged — both by the trial court and by some of the experts. She was guilty of a breach of contract, and indeed, she did break a very important promise, but we think it is expecting something well beyond normal human capabilities to suggest that this mother should have parted with her newly born infant without a struggle. Other than survival, what stronger force is there? We do not know of, and cannot conceive of, any other case where a perfectly fit mother was expected to surrender her newly born infant, perhaps forever, and was then told she was a bad mother because she did not. We know of no authority suggesting that the moral quality of her act in those circumstances should be judged by referring to a contract made before she became pregnant. We do not countenance, and would never countenance, violating a court order as Mrs. Whitehead did, even a court order that is wrong; but her resistance to an order that she surrender her infant, possibly forever, merits a measure of understanding. We do not find it so clear that her efforts to keep her infant, when measured against the Sterns' efforts to take her away, make one, rather than the other, the wrongdoer. The Sterns suffered, but so did she. And if we go beyond suffering to an evaluation of the human stakes involved in the struggle, how much weight should be given to her nine months of pregnancy, the labor of childbirth, the risk to her life, compared to the payment of money, the anticipation of a child and the donation of sperm?

There has emerged a portrait of Mrs. Whitehead, exposing her children to the media, engaging in negotiations to sell a book, granting interviews that seemed helpful to her, whether hurtful to Baby M or not, that suggests a selfish, grasping woman ready to sacrifice the interests of Baby M and her other children for fame and wealth. That portrait is a half-truth, for while it may accurately reflect what ultimately occurred, its implication, that this is what Mary Beth Whitehead wanted, is totally inaccurate, at least insofar as the record before us is concerned. There is not one word in that record to support a claim that had she been allowed to continue her possession of her newly born infant, Mrs. Whitehead would have ever been heard of again; not one word in the record suggests that her change of mind and her subsequent fight for her child was motivated by anything other than love — whatever complex underlying psychological motivations may have existed.

We have a further concern regarding the trial court's emphasis on the Sterns' interest in Melissa's education as compared to the Whiteheads'. That this difference is a legitimate factor to be considered we have no doubt. But it should not be overlooked that a best-interests test is designed to create not a new member of the intelligentsia but rather a well-integrated person who might reasonably be expected to be happy with life. "Best interests" does not contain within it any idealized lifestyle; the question boils down to a judgment, consisting of many factors, about the likely future happiness of a human being. Fantony v. Fantony, supra, 21 N.J. at 536. Stability, love, family happiness, tolerance, and, ultimately, support of independence — all rank much higher in predicting future happiness than the likelihood of a college education. We do not mean to suggest that the trial court would disagree. We simply want to dispel any possible misunderstanding on the issue.

Even allowing for these differences, the facts, the experts' opinions, and the trial court's analysis of both argue strongly in favor of custody in the Sterns. Mary Beth Whitehead's family life, into which Baby M would be placed, was anything but secure — the quality Melissa needs most. And today it may be even less so.^[18] Furthermore, the evidence and expert opinion based on it reveal personality characteristics, mentioned above, that might threaten the child's best development. The Sterns promise a secure home, with an understanding relationship that allows nurturing and independent growth to develop together. Although there is no substitute for reading the entire record, including the review of every word of each experts' testimony and reports, a summary of their conclusions is revealing. Six experts testified for Mrs. Whitehead: one favored joint custody, clearly unwarranted in this case; one simply rebutted an opposing expert's claim that Mary Beth Whitehead had a recognized personality disorder; one testified to the adverse impact of separation on Mrs. Whitehead; one testified about the evils of adoption and, to him, the probable analogous evils of surrogacy; one spoke only on the question of whether Mrs. Whitehead's consent in the surrogacy agreement was "informed consent"; and one spelled out the strong bond between mother and child. None of them unequivocally stated, or even necessarily implied, an opinion that custody in the Whiteheads was in the best interests of Melissa — the ultimate issue. The Sterns' experts, both well qualified — as were the Whiteheads' — concluded that the best interests of Melissa required custody in Mr. Stern. Most convincingly, the three experts chosen by the court-appointed guardian ad litem of Baby M, each clearly free of all bias and interest, unanimously and persuasively recommended custody in the Sterns.

Some comment is required on the initial ex parte order awarding custody pendente lite to the Sterns (and the continuation of that order after a plenary hearing). The issue, although irrelevant to our disposition of this case, may recur; and when it does, it can be of crucial importance. When father and mother are separated and disagree, at birth, on custody, only in an extreme, truly rare, case should the child be taken from its mother pendente lite, i.e., only in the most unusual case should the child be taken from its mother before the dispute is finally determined by the court on its merits. The probable bond between mother and child, and the child's need, not just the mother's, to strengthen that bond, along with the likelihood, in most cases, of a significantly lesser, if any, bond with the father — all counsel against temporary custody in the father. A substantial showing that the mother's continued custody would threaten the child's health or welfare would seem to be required.

In this case, the trial court, believing that the surrogacy contract might be valid, and faced with the probable flight from the jurisdiction by Mrs. Whitehead and the baby if any notice were served, ordered, ex parte, an immediate transfer of possession of the child, i.e., it ordered that custody be transferred immediately to Mr. Stern, rather than order Mrs. Whitehead not to leave the State. We have ruled, however, that the surrogacy contract is unenforceable and illegal. It provides no basis for either an ex parte, a plenary, an interlocutory, or a final order requiring a mother to surrender custody to a father. Any application by the natural father in a surrogacy dispute for custody pending the outcome of the litigation will henceforth require proof of unfitness, of danger to the child, or the like, of so high a quality and persuasiveness as to make it unlikely that such application will succeed. Absent the required showing, all that a court should do is list the matter for argument on notice to the mother. Even her threats to flee should not suffice to warrant any other relief unless her unfitness is clearly shown. At most, it should result in an order enjoining such flight. The erroneous transfer of custody, as we view it, represents a greater risk to the child than removal to a foreign jurisdiction, unless parental unfitness is clearly proved. Furthermore, we deem it likely that, advised of the law and knowing that her custody cannot seriously be challenged at this stage of the litigation, surrogate mothers will obey any court order to remain in the jurisdiction.

VI.

VISITATION

The trial court's decision to terminate Mrs. Whitehead's parental rights precluded it from making any determination on visitation. 217 N.J. Super. at 399, 408. Our reversal of the trial court's order, however, requires delineation of Mrs. Whitehead's rights to visitation. It is apparent to us that this factually sensitive issue, which was never addressed below, should not be determined de novo by this Court. We therefore remand the visitation issue to the trial court for an abbreviated hearing and determination as set forth below.^[19]

For the benefit of all concerned, especially the child, we would prefer to end these proceedings now, once and for all. It is clear to us, however, that it would be unjust to do so and contrary to precedent.

The fact that the trial court did not address visitation is only one reason for remand. The ultimate question is whether, despite the absence of the trial court's guidance, the record before us is sufficient to allow an appellate court to make this essentially factual determination. We can think of no issue that is more dependent on a trial court's factual findings and evaluation than visitation.

When we examine the record on visitation, the only testimony explicitly dealing with the issue came from the guardian ad litem's experts. Examination of this testimony in light of the complete record, however, reveals that it was an insignificant part of their opinions. The parties, those with a real stake in the dispute, offered no testimony on the issue. The cause for this insufficiency of guidance on the visitation issue was unquestionably the parties' concentration on other, then seemingly much more important, questions: custody, termination of parental rights, and the validity of the surrogacy contract.

Even if we were willing to rely solely on the opinions of the guardian ad litem's experts, their testimony was not fully developed because the issue was not the focus of the litigation. Moreover, the guardian's experts concentrated on determining "best interests" as it related to custody and to termination of parental rights. Their observations about visitation, both in quality and quantity, were really derivative of their views about custody and termination. The guardian's experts were concerned that given Mrs. Whitehead's determination to have custody, visitation might be used to undermine the Sterns' parental authority and thereby jeopardize the stability and security so badly needed by this child. Two of the experts recommended suspension of visitation for five years and the other suspension for an undefined period. None of them fully considered the factors that have led our courts ordinarily to grant visitation in other contexts, with no suspension, even where the non-custodial parent was less than a paragon of virtue. See, e.g., Wilke v. Culp, supra, 196 N.J. Super. at 496; In re Adoption by J.J.P., supra, 175 N.J. Super. at 430. Based on the opinions of her experts, the guardian ad litem recommended suspension of Mrs. Whitehead's visitation rights for five years, with a reevaluation at that time. The basis for that recommendation, whether one regards it as the right or the wrong conclusion, was apparently bolstered when it was learned that Mrs. Whitehead had become pregnant, divorced Richard Whitehead, and then married the father of her new child-to-be. Without any further expert testimony, the guardian ad litem revised her position. She now argues that instead of five years, visitation should be suspended until Melissa reaches majority. This radical change in the guardian ad litem's position reinforces our belief that further consideration must be given to this issue.

The foregoing does not fully describe the extent to which this record leaves us uninformed on the visitation issue. No one, with one exception, included a word about visitation in the final briefs before the trial court. The exception was Mrs. Whitehead's parents who argued for their own visitation. This claim was denied by the trial court and is not now before us. The oral summations of counsel before the trial court were almost equally bereft of even a reference to the visitation issue. Mrs. Whitehead's counsel did not mention visitation. The Sterns' counsel referred to the guardian ad litem's expert testimony about visitation, not to argue for or against visitation but only to support his argument in favor of termination of Mrs. Whitehead's parental rights. The guardian ad litem did argue the visitation issue, devoting a minimal portion of her summation to it. Only the grandparents dealt with visitation, but with their visitation, not with the issue of Mrs. Whitehead's visitation. Finally, on appeal before this Court the record on visitation is inadequate — especially when compared to the treatment of other issues.

We join those who want this litigation to end for the benefit of this child. To spare this two-year-old another sixty to ninety days of litigation, however, at the risk of wrongly deciding this matter, which has life-long consequences for the child and the parties, would be unwise.

We also note the following for the trial court's consideration: First, this is not a divorce case where visitation is almost invariably granted to the non-custodial spouse. To some extent the facts here resemble cases where the non-custodial spouse has had practically no relationship with the child, see Wilke v. Culp, supra, 196 N.J. Super. 487; but it only "resembles" those cases. In the instant case, Mrs. Whitehead spent the first four months of this child's life as her mother and has regularly visited the child since then. Second, she is not only the natural mother, but also the legal mother, and is not to be penalized one iota because of the surrogacy contract. Mrs. Whitehead, as the mother (indeed, as a mother who nurtured her child for its first four months — unquestionably a relevant consideration), is entitled to have her own interest in visitation considered. Visitation cannot be determined without considering the parents' interests along with those of the child.

In all of this, the trial court should recall the touchstones of visitation: that it is desirable for the child to have contact with both parents; that besides the child's interests, the parents' interests also must be considered; but that when all is said and done, the best interests of the child are paramount.

We have decided that Mrs. Whitehead is entitled to visitation at some point, and that question is not open to the trial court on this remand. The trial court will determine what kind of visitation shall be granted to her, with or without conditions, and when and under what circumstances it should commence. It also should be noted that the guardian's recommendation of a five-year delay is most unusual — one might argue that it begins to border on termination. Nevertheless, if the circumstances as further developed by appropriate proofs or as reconsidered on remand clearly call for that suspension under applicable legal principles of visitation, it should be so ordered.

In order that the matter be determined as expeditiously as possible, we grant to the trial court the broadest powers to reach its determination. A decision shall be rendered in no more than ninety days from the date of this opinion.

The trial court shall, after reviewing the transcripts and other material, determine in its discretion whether further evidence is needed and through what witnesses it shall be presented. The trial court should consider limiting the witnesses to the experts who testified and to Mr. and Mrs. Stern and Mr. and Mrs. Whitehead, using its own judgment in deciding which of them, if any, shall be called on to give further evidence. The trial court, in its discretion, may either hear testimony or receive verified written submissions, relaxing the Rules of Evidence to the extent compatible with reliable fact-finding and desirable for an expeditious decision.^[20] Many significant facts bearing on visitation have already been adduced. Although additional evidence may be important, we believe that fairness does not necessarily require that it be produced with all of the procedural safeguards implicit in the Evidence Rules. When it comes to custody matters, application of rules, including those concerning evidence, must on some occasions be flexible, New Jersey Div. of Youth & Family Servs. v. S.S., 185 N.J. Super. 3 (App.Div.), certif. den., 91 N.J. 572 (1982), especially in view of the child's interests in this unique situation.

Any party wishing to appeal from the trial court's judgment on visitation shall file a notice of appeal within ten days thereafter, the Court hereby reducing the ordinary time to appeal pursuant to Rule 2:12-2. Any such appeal is hereby certified to this Court.

Any further proceedings in this matter, or related thereto, if made by application to the trial court shall be made to the judge to whom the matter is assigned on remand. That direction applies to applications related to this matter in any way: whether made before, during, or after proceedings on remand, and regardless of the nature of the application. Any applications for appellate review shall be made directly to this Court.

We would expect that after the visitation issue is determined the trial court, in connection with any other applications in the future, will attempt to assure that this case is treated like any other so that this child may be spared any further damaging publicity.

While probably unlikely, we do not deem it unthinkable that, the major issues having been resolved, the parties' undoubted love for this child might result in a good faith attempt to work out the visitation themselves, in the best interests of their child.

CONCLUSION

This case affords some insight into a new reproductive arrangement: the artificial insemination of a surrogate mother. The unfortunate events that have unfolded illustrate that its unregulated use can bring suffering to all involved. Potential victims include the surrogate mother and her family, the natural father and his wife, and most importantly, the child. Although surrogacy has apparently provided positive results for some infertile couples, it can also, as this case demonstrates, cause suffering to participants, here essentially innocent and well-intended.

We have found that our present laws do not permit the surrogacy contract used in this case. Nowhere, however, do we find any legal prohibition against surrogacy when the surrogate mother volunteers, without any payment, to act as a surrogate and is given the right to change her mind and to assert her parental rights. Moreover, the Legislature remains free to deal with this most sensitive issue as it sees fit, subject only to constitutional constraints.

If the Legislature decides to address surrogacy, consideration of this case will highlight many of its potential harms. We do not underestimate the difficulties of legislating on this subject. In addition to the inevitable confrontation with the ethical and moral issues involved, there is the question of the wisdom and effectiveness of regulating a matter so private, yet of such public interest. Legislative consideration of surrogacy may also provide the opportunity to begin to focus on the overall implications of the new reproductive biotechnology — in vitro fertilization, preservation of sperm and eggs, embryo implantation and the like. The problem is how to enjoy the benefits of the technology — especially for infertile couples — while minimizing the risk of abuse. The problem can be addressed only when society decides what its values and objectives are in this troubling, yet promising, area.

The judgment is affirmed in part, reversed in part, and remanded for further proceedings consistent with this opinion.

For affirmance in part, reversal in part and remandment — Chief Justice WILENTZ and Justices CLIFFORD, HANDLER, POLLOCK, O'HERN, GARIBALDI and STEIN — 7.

Opposed — None.

[1] Subsequent to the trial court proceedings, Mr. and Mrs. Whitehead were divorced, and soon thereafter Mrs. Whitehead remarried. Nevertheless, in the course of this opinion we will make reference almost exclusively to the facts as they existed at the time of trial, the facts on which the decision we now review was reached. We note moreover that Mr. Whitehead remains a party to this dispute. For these reasons, we continue to refer to appellants as Mr. and Mrs. Whitehead.

[2] The Stern-Whitehead contract (the "surrogacy contract") and the Stern-ICNY contract are reproduced below as Appendices A and B respectively. Other ancillary agreements and their attachments are omitted.

[3] Another argument advanced by Mrs. Whitehead is that the surrogacy agreement violates state wage regulations, N.J.S.A. 34:11-4.7, and the Minimum Wage Standard Act, N.J.S.A. 34:11-56a to -56a30. Given our disposition of the matter, we need not reach those issues.

[4] N.J.S.A.9:3-54 reads as follows:

a. No person, firm, partnership, corporation, association or agency shall make, offer to make or assist or participate in any placement for adoption and in connection therewith

(1) Pay, give or agree to give any money or any valuable consideration, or assume or discharge any financial obligation; or

(2) Take, receive, accept or agree to accept any money or any valuable consideration.

b. The prohibition of subsection a. shall not apply to the fees or services of any approved agency in connection with a placement for adoption, nor shall such prohibition apply to the payment or reimbursement of medical, hospital or other similar expenses incurred in connection with the birth or any illness of the child, or to the acceptance of such reimbursement by a parent of the child.

c. Any person, firm, partnership, corporation, association or agency violating this section shall be guilty of a high misdemeanor.

[5] Of course, here there are no "adoptive parents," but rather the natural father and his wife, the only adoptive parent. As noted, however, many of the dangers of using money in connection with adoption may exist in surrogacy situations.

[6] Counsel for the Sterns argues that the Parentage Act empowers the court to terminate parental rights solely on the basis of the child's best interests. He cites N.J.S.A.9:17-53c, which reads, in pertinent part, as follows:

The judgment or order may contain any other provision directed against the appropriate party to the proceeding concerning the duty of support, the custody and guardianship of the child, visitation privileges with the child, the furnishing of bond or other security for the payment of the judgment, the repayment of any public assistance grant, or any other matter in the best interests of the child. [Emphasis supplied].

We do not interpret this section as in any way altering or diluting the statutory prerequisites to termination discussed above. Termination of parental rights differs qualitatively from the matters to which this section is expressly directed, and, in any event, we have no doubt that if the Legislature had intended a substantive change in the standards governing an area of such gravity, it would have said so explicitly.

[7] We conclude not only that the surrogacy contract is an insufficient basis for termination, but that no statutory or other basis for termination existed. See infra at 444-447.

[8] The surrogacy situation, of course, differs from the situation in Sees, in that here there is no "adoptive couple," but rather the natural father and the stepmother, who is the would-be adoptive mother. This difference, however, does not go to the basis of the Sees holding. In both cases, the determinative aspect is the vulnerability of the natural mother who decides to surrender her child in the absence of institutional safeguards.

[9] And the impact on the natural parents, Mr. Stern and Mrs. Whitehead, is severe and dramatic. The depth of their conflict about Baby M, about custody, visitation, about the goodness or badness of each of them, comes through in their telephone conversations, in which each tried to persuade the other to give up the child. The potential adverse consequences of surrogacy are poignantly captured here — Mrs. Whitehead threatening to kill herself and the baby, Mr. Stern begging her not to, each blaming the other. The dashed hopes of the Sterns, the agony of Mrs. Whitehead, their suffering, their hatred — all were caused by the unraveling of this arrangement.

[10] We note the argument of the Sterns that the sperm donor section of our Parentage Act, N.J.S.A. 9:17-38 to -59, implies a legislative policy that would lead to approval of this surrogacy contract. Where a married woman is artificially inseminated by another with her husband's consent, the Parentage Act creates a parent-child relationship between the husband and the resulting child. N.J.S.A. 9:17-44. The Parentage Act's silence, however, with respect to surrogacy, rather than supporting, defeats any contention that surrogacy should receive treatment parallel to the sperm donor artificial insemination situation. In the latter case the statute expressly transfers parental rights from the biological father, i.e., the sperm donor, to the mother's husband. Ibid.Our Legislature could not possibly have intended any other arrangement to have the consequence of transferring parental rights without legislative authorization when it had concluded that legislation was necessary to accomplish that result in the sperm donor artificial insemination context.

This sperm donor provision suggests an argument not raised by the parties, namely, that the attempted creation of a parent-child relationship through the surrogacy contract has been preempted by the Legislature. The Legislature has explicitly recognized the parent-child relationship between a child and its natural parents, married and unmarried, N.J.S.A. 9:17-38 to -59, between adoptive parents and their adopted child, N.J.S.A. 9:3-37 to -56, and between a husband and his wife's child pursuant to the sperm donor provision, N.J.S.A. 9:17-44. It has not recognized any others — specifically, it has never legally equated the stepparent-stepchild relationship with the parent-child relationship, and certainly it has never recognized any concept of adoption by contract. It can be contended with some force that the Legislature's statutory coverage of the creation of the parent-child relationship evinces an intent to reserve to itself the power to define what is and is not a parent-child relationship. We need not, and do not, decide this question, however.

[11] Michigan courts have also found that these arrangements conflict with various aspects of their law. See Doe v. Kelley, 106 Mich. App. 169, 307 N.W.2d 438 (1981), cert. den., 459 U.S. 1183, 103 S.Ct. 834, 74 L.Ed.2d 1027 (1983) (application of sections of Michigan Adoption Law prohibiting the exchange of money to surrogacy is constitutional); Syrkowski v. Appleyard, 122 Mich. App. 506, 333 N.W.2d 90 (1983) (court held it lacked jurisdiction to issue an "order of filiation" because surrogacy arrangements were not governed by Michigan's Paternity Act), rev'd, 420 Mich. 367, 362 N.W.2d 211 (1985) (court decided Paternity Act should be applied but did not reach the merits of the claim).

Most recently, a Michigan trial court in a matter similar to the case at bar held that surrogacy contracts are void as contrary to public policy and therefore are unenforceable. The court expressed concern for the potential exploitation of children resulting from surrogacy arrangements that involve the payment of money. The court also concluded that insofar as the surrogacy contract may be characterized as one for personal services, the thirteenth amendment should bar specific performance. Yates v. Keane, Nos. 9758, 9772, slip op. (Mich.Cir.Ct. Jan. 21, 1988).

The Supreme Court of Kentucky has taken a somewhat different approach to surrogate arrangements. In Surrogate Parenting Assocs. v. Commonwealth ex. rel. Armstrong, 704 S.W.2d 209 (Ky. 1986), the court held that the "fundamental differences" between surrogate arrangements and baby-selling placed the surrogate parenting agreement beyond the reach of Kentucky's baby-selling statute. Id. at 211. The rationale for this determination was that unlike the normal adoption situation, the surrogacy agreement is entered into before conception and is not directed at avoiding the consequences of an unwanted pregnancy. Id. at 211-12.

Concomitant with this pro-surrogacy conclusion, however, the court held that a "surrogate" mother has the right to void the contract if she changes her mind during pregnancy or immediately after birth. Id. at 212-13. The court relied on statutes providing that consent to adoption or to the termination of parental rights prior to five days after the birth of the child is invalid, and concluded that consent before conception must also be unenforceable. Id. at 212-13.

The adoption phase of an uncontested surrogacy arrangement was analyzed in Matter of Adoption of Baby Girl, L.J., 132 Misc.2d 972, 505 N.Y.S.2d 813 (Sur. 1986). Although the court expressed strong moral and ethical reservations about surrogacy arrangements, it approved the adoption because it was in the best interests of the child. Id. at 815. The court went on to find that surrogate parenting agreements are not void, but are voidable if they are not in accordance with the state's adoption statutes. Id. at 817. The court then upheld the payment of money in connection with the surrogacy arrangement on the ground that the New York Legislature did not contemplate surrogacy when the baby-selling statute was passed. Id. at 818. Despite the court's ethical and moral problems with surrogate arrangements, it concluded that the Legislature was the appropriate forum to address the legality of surrogacy arrangements. Ibid.

In contrast to the law in the United States, the law in the United Kingdom concerning surrogate parenting is fairly well-settled. Parliament passed the Surrogacy Arrangements Act, 1985, ch. 49, which made initiating or taking part in any negotiations with a view to making or arranging a surrogacy contract a criminal offense. The criminal sanction, however, does not apply to the "surrogate" mother or to the natural father, but rather applies to other persons engaged in arranging surrogacy contracts on a commercial basis. Since 1978, English courts have held surrogacy agreements unenforceable as against public policy, such agreements being deemed arrangements for the purchase and sale of children. A. v. C., [1985] F.L.R. 445, 449 (Fam. & C.A. 1978). It should be noted, however, that certain surrogacy arrangements, i.e., those arranged without brokers and revocable by the natural mother, are not prohibited under current law in the United Kingdom.

[12] Opponents of surrogacy have also put forth arguments based on the thirteenth amendment, as well as the Peonage Act, 42 U.S.C. § 1994 (1982). We need not address these arguments because we have already held the contract unenforceable on the basis of state law.

[13] As a general rule, a person should be accorded the right to make decisions affecting his or her own body, health, and life, unless that choice adversely affects others. Thus, the United States Supreme Court, while recognizing the right of women to control their own bodies, has rejected the view that the federal constitution vests a pregnant woman with an absolute right to terminate her pregnancy. Instead, the Court declared that the right was "not absolute" so that "at some point the state interests as to protection of health, medical standards, and prenatal life, become dominant." Roe v. Wade, supra, 410 U.S. at 155, 93 S.Ct. at 728, 35 L.Ed.2d at 178. The balance struck in Roe v. Wade recognizes increasing rights in the fetus and correlative restrictions on the mother as the pregnancy progresses. Similarly, in the termination-of-treatment cases, courts generally have viewed a patient's right to terminate or refuse life-sustaining treatment as constrained by other considerations including the rights of innocent third parties, such as the patient's children. Matter of Farrell, 108 N.J. 335, 352 (1987); Matter of Conroy, 98 N.J. 321, 353 (1985). Consistent with that approach, this Court has directed a mother to submit to a life-saving blood transfusion to protect the interests of her unborn infant, even though the mother's religious scruples led her to oppose the transfusion. Raleigh-Fitkin Paul Morgan Hosp. v. Anderson, 42 N.J. 421, 423 (1964); see also Application of President & Directors of Georgetown College, 331 F.2d 1000, 1008 (D.C. Cir.), cert. den., 377 U.S. 978, 84 S.Ct. 1883, 12 L.Ed.2d 746 (1964) (ordering blood transfusion because of mother's "responsibility to the community to care for her infant").

In the present case, the parties' right to procreate by methods of their own choosing cannot be enforced without consideration of the state's interest in protecting the resulting child, just as the right to the companionship of one's child cannot be enforced without consideration of that crucial state interest.

[14] This fundamental right is not absolute. The parent-child biological relationship, by itself, does not create a protected interest in the absence of a demonstrated commitment to the responsibilities of parenthood; a natural parent who does not come forward and seek a role in the child's life has no constitutionally protected relationship. Lehr v. Robertson, supra, 463 U.S. at 258-62, 103 S.Ct. at 2991-93, 77 L.Ed.2d at 624-27; Quilloin v. Walcott, supra, 434 U.S. at 254-55, 98 S.Ct. at 554, 54 L.Ed.2d at 519-20. The right is not absolute in another sense, for it is also well settled that if the state's interest is sufficient the right may be regulated, restricted, and on occasion terminated. See Santosky v. Kramer, supra, 455 U.S. 745, 102 S.Ct. 1388, 71 L.Ed.2d 599.

[15] Were we to find such a constitutional determination necessary, we would be faced with the question of whether it was state action — essential in triggering the fourteenth amendment — that deprived her of that right i.e., whether the judicial decision enforcing the surrogacy contract should be considered "state action" within the scope of the fourteenth amendment. See Shelley v. Kraemer, 334 U.S. 1, 68 S.Ct. 836, 92 L.Ed. 1161 (1948); Cherminsky, "Rethinking State Action," 80 Nw.U.L.Rev. 503 (1985).

[16] If the Legislature were to enact a statute providing for enforcement of surrogacy agreements, the validity of such a statute might depend on the strength of the state interest in making it more likely that infertile couples will be able to adopt children. As a value, it is obvious that the interest is strong; but if, as plaintiffs assert, ten to fifteen percent of all couples are infertile, the interest is of enormous strength. This figure is given both by counsel for the Sterns and by the trial court, 217 N.J. Super.at 331. We have been unable to find reliable confirmation of this statistic, however, and we are not confident of its accuracy. We note that at least one source asserts that in 1982, the rate of married couples who were both childless and infertile was only 5.8%. B. Wattenberg, The Birth Dearth 125 (1987).

On such quantitative differences, constitutional validity can depend, where the statute in question is justified as serving a compelling state interest. The quality of the interference with the parents' right of companionship bears on these issues: if a statute, like the surrogacy contract before us, made the consent given prior to conception irrevocable, it might be regarded as a greater interference with the fundamental right than a statute that gave that effect only to a consent executed, for instance, more than six months after the child's birth. There is an entire spectrum of circumstances that strengthen and weaken the fundamental right involved, and a similar spectrum of state interests that justify or do not justify particular restrictions on that right. We do not believe it would be wise for this Court to attempt to identify various combinations of circumstances and interests, and attempt to indicate which combinations might and which might not constitutionally permit termination of parental rights.

We will say this much, however: a parent's fundamental right to the companionship of one's child can be significantly eroded by that parent's consent to the surrender of that child. That surrender, if voluntarily and knowingly made, may reduce the strength of that fundamental right to the point where a statute awarding custody and all parental rights to an adoptive couple, especially one that includes a parent of the child, would be valid.

[17] At common law the rights of women were so fragile that the husband generally had the paramount right to the custody of children upon separation or divorce. State v. Baird, 21 N.J. Eq. 384, 388 (E. & A. 1869). In 1860 a statute concerning separation provided that children "within the age of seven years" be placed with the mother "unless said mother shall be of such character and habits as to render her an improper guardian." L. 1860, c. 167. The inequities of the common-law rule and the 1860 statute were redressed by an 1871 statute, providing that "the rights of both parents, in the absence of misconduct, shall be held to be equal." L. 1871, c. 48, § 6 (currently codified at N.J.S.A. 9:2-4). Under this statute the father's superior right to the children was abolished and the mother's right to custody of children of tender years was also eliminated. Under the 1871 statute, "the happiness and welfare of the children" were to determine custody, L. 1871, c. 48, § 6, a rule that remains law to this day. N.J.S.A.9:2-4.

Despite this statute, however, the "tender years" doctrine persisted. See, e.g., Esposito v. Esposito, 41 N.J. 143, 145 (1963); Dixon v. Dixon, 71 N.J. Eq. 281, 282 (E. & A. 1906); M.P. v. S.P., 169 N.J. Super. 425, 435 (App.Div. 1979). This presumption persisted primarily because of the prevailing view that a young child's best interests necessitated a mother's care. Both the development of case law and the Parentage Act, N.J.S.A. 9:17-40, however, provide for equality in custody claims. In Beck v. Beck, 86 N.J. 480, 488 (1981), we stated that it would be inappropriate "to establish a presumption ... in favor of any particular custody determination," as any such presumption may "serve as a disincentive for the meticulous fact-finding required in custody cases." This does not mean that a mother who has had custody of her child for three, four, or five months does not have a particularly strong claim arising out of the unquestionable bond that exists at that point between the child and its mother; in other words, equality does not mean that all of the considerations underlying the "tender years" doctrine have been abolished.

[18]Subsequent to trial, and by the time of oral argument, Mr. and Mrs. Whitehead had separated, and the representation was that there was no likelihood of change. Thereafter Mrs. Whitehead became pregnant by another man, divorced Mr. Whitehead, and remarried the other man. Both children are living with Mrs. Whitehead and her new husband. Both the former and present husband continue to assert the desire to have whatever parental relationship with Melissa that the law allows, Mrs. Whitehead continuing to maintain her claim for custody.

We refer to this development only because it suggests less stability in the Whiteheads' lives. It does not necessarily suggest that Mrs. Whitehead's conduct renders her any less a fit parent. In any event, this new development has not affected our decision.

[19] As we have done in similar situations, we order that this matter be referred on remand to a different trial judge by the vicinage assignment judge. The original trial judge's potential "commitment to its findings," New Jersey Div. of Youth & Family Servs. v. A.W., supra, 103 N.J. at 617, and the extent to which a judge "has already engaged in weighing the evidence," In re Guardianship of R., 155 N.J. Super. 186, 195 (App.Div. 1977), persuade us to make that change. On remand the trial court will consider developments subsequent to the original trial court's opinion, including Mrs. Whitehead's divorce, pregnancy, and remarriage.

[20] Ordinarily relaxation of the Rules of Evidence depends on specific authority, either within the Rules or in statutes. See N.J.Rules of Evidence, Comment 2 to Evid.R. 2(2), 72-76 (1987). There are numerous examples, however, of relaxation of these Rules in judicial proceedings for reasons peculiar to the case at hand. We regard the circumstances of the visitation aspect of this case as most unusual. In addition to the ordinary risks to the stability of an infant caused by prolonging this type of litigation, here there are risks from publicity that we simply cannot quantify. We have no doubt that these circumstances justify any sensible means of abbreviating the remand hearing.