120 U.S. 630

Before proceeding to consider the rulings and instructions at the trial as applied to the facts of the case, it will be convenient to refer to the general rules of law, and to the statute and decisions in Pennsylvania, which bear upon the subject. When a dealer contracts to sell goods which he deals in, to be applied to a particular purpose, and the buyer has no opportunity to inspect them before delivery, there is an implied warranty that they shall be reasonably fit for that purpose. Jones v. Just, L. R. 3 Q. B. 197, 203, 9 Best & S. 141, 150; Kellogg Bridge Co. v. Hamilton, 110 U.S. 108, 3 Sup. Ct. Rep. 537. In such a case, in Pennsylvania, as at common law, the action upon the warranty may be either in contract or in tort. Vanleer v. Earle, 26 Pa. St. 277; Schuchardt v. Allens, 1 Wall, 359, 368. If the seller falsely represents to the buyer that the goods are of a certain quality, or fit for a certain purpose, he is liable to an action for the fraudulent representations, although they are not in a form to constitute a warranty; and in such a case the action must be in tort, in the nature of an action of deceit, and must be supported by proof that he knew the representations to be false when he made them. Kimmel v. Lichty, 3 Yeates, 262; McFarland v. Newman, 9 Watts, 55; King v. Eagle Mills, 10 Allen, 548.

The damages recoverable for a breach of warranty, or for a false representation, include all damages which, in the contemplation of the parties, or according to the natural or usual course of things, may result from the wrongful act. For instance, if a man sells hay or grain for the purpose of being fed to cattle, or such as is ordinarily used to feed cattle, and it contains a substance which poisons the buyer's cattle, the seller is responsible for the injury. French v. Vining, 102 Mass. 132; Wilson v. Dunville, L. R. 4 Ir. 249, and L. R. 6 Ir. 210. So, if one sells an animal warranting or representing it to be sound, which is in fact infected with disease, he is responsible for the damages resulting from a communication of the disease to the buyer's other animals, either in an action of tort for the false representation,—Mullett v. Mason, L. R. 1 C. P. 559; Jeffrey v. Bigelow, 13 Wend. 518; Faris v. Lewis, 2 B. Mon. 375; Sherrod v. Langdon, 21 Iowa, 518; Marsh v. Webber, 16 Minn. 418, (Gil. 375;) or in an action on the warranty, either in tort (Packard v. Slack, 32 Vt. 9; Smith v. Green, 1 C. P. Div 92) or even in contract, (Black v. Elliot, 1 Fost. & F. 595.) See, also, Randall v. Newson, 2 Q. B. Div. 102.

In an action for the price of goods sold or of work done, the defendant may set up a breach of warranty, or a false representation as to the goods, or a defective performance of the work, by way of recoupment of the sum that the plaintiff may recover. In England this is only allowed so far as it affects the value of the goods sold, or of the work done. Davis v. Hedges, L. R. 6 Q. B. 687, and cases there cited. But in this country the courts, in order to avoid circuity of action, have gone further, and have allowed the defendant to recoup damages suffered by him from any fraud, breach of warranty, or negligence of the plaintiff, growing out of and relating to the transaction in question. It will be enough to cite a few cases in which the extent and the reason of the doctrine have been clearly brought out.

In a leading Massachusetts case, in which fraudulent representations as to the soundness of a horse sold were allowed to be set up in defense of an action on a promissory note given for the price, although the horse had not been returned to the seller, Mr. Justice DEWEY, after reviewing the previous decisions in England and in New York, said: 'The strong argument for the admission of such evidence in reduction of damages in cases like the present is that it will avoid circuity of action. It is always desirable to prevent a cross-action where full and complete justice can be done to the parties in a single suit, and it is upon this ground that the courts have of late been disposed to extend to the greatest length compatible with the legal rights of the parties, the principle allowing evidence in defense or in reduction of damages to be introduced, rather than to compel the defendant to resort to his cross-action.' Harrington v. Stratton, 22 Pick, 510, 517. And in a later case in that state, Chief Justice BIGELOW observed that the essential elements on which the application of the principle of recoupment depended, were two only: 'The first is that the damages which the defendant seeks to set off shall have arisen from the same subject-matter, or sprung out of the same contract or transaction, as that on which the plaintiff relies to maintain his action. The other is that the claim for damages shall be against the plaintiff, so that their allowance by way of set-off or defense to the contract declared on shall operate to avoid circuity of action, and as a substitute for a distinct action against the plaintiff to recover the same damages as those relied on the defeat the action.' Sawyer v. Wiswell, 9 Allen, 39, 42. In Bradley v. Rea, 14 Allen, 20, in an action to recover the price of a number of pigs sold in one lot, it was held that the defendant might set up in defense that the pigs sold were warranted or fraudulently represented by the plaintiff to be sound, and free from infectious or contagious diseases, and prove the existence of such a disease in some of the pigs at the time of the sale, which afterwards spread to the others, and of which they died. Mr. Justice HOAR, delivering judgment, after referring to Mullett v. Mason, L. R. 1 C. P. 559, above cited, in which it was held that, in an action for fraudulently misrepresenting that a cow sold was free from infectious disease, the buyer, if he placed the cow with others which thereby caught the disease and died, could recover as damages the value of all the cows, said: 'The nature of the subject-matter of the warranty or deceit is such that when animals are sold in one lot together, the warranty or representation as to the whole being single, we can have no doubt that the same principle should apply to the extent of a recoupment; and that the right to recoup in damages should not be confined to the diminished value of those which are proved to have the disease at the time of the sale.' 14 Allen, 23. A similar decision was made in Rose v. Wallace, 11 Ind. 112.

The later decisions of this court, modifying the earlier decision in Thornton v. Wynn, 12 Wheat. 183, affirm the same doctrine. Withers v. Greene, 9 How. 213; Van Buren v. Digges, 11 How, 461; Winder v. Caldwell, 14 How. 434; Lyon v. Bertram, 20 How. 149, 154; Railroad Co. v. Smith, 21 Wall. 255; Marsh v. McPherson, 105 U.S. 709, 717. In Winder v. Caldwell, Mr. Justice GRIER, who was equally familiar with the common law and with the Pennsylvania practice, said: 'Although it is true, as a general rule, that unliquidated damages cannot be the subject of set-off, yet it is well settled that a total or partial failure of consideration, acts of non-feasance or misfeasance immediately connected with the cause of action, or any equitable defense arising out of the same transaction, may be given in evidence in mitigation of damages or recouped, not strictly by way of defalcation or set-off, but for the purpose of defeating the plaintiff's action in whole or in part, and to avoid circuity of action.' 14 How. 443. In Railroad Co. v. Smith, which was an action against a railroad corporation by a contractor to recover the price of a draw-bridge, it was held that the defendant might show that the construction of the bridge was so defective as to make it unfit for its purpose, and the draw worked so imperfectly as to hinder and delay the running of the cars over it, and might prove the number of hands required to work the bridge as it was built, and the number that would be necessary if it had been properly constructed. Mr. Justice FIELD, delivering judgment, said: 'All damages directly arising from the imperfect character of the structure, which would have been avoided had the structure been made pursuant to the contract, and for which the defendant might have instituted a separate action against the contractors, were provable against their demand in the present action. The law does not require a party to pay for imperfect and defective work the price stipulated for a perfect structure, and, when the price is demanded, will allow him to deduct the difference between that price and the value of the inferior work, and also the amount of any direct damages flowing from existing defects, not exceeding the demand of the plaintiffs. This is a rule of strict justice, and the deduction is allowed in a suit upon the contract, to prevent circuity of action.' 21 Wall. 261.

The courts of Pennsylvania, having originally had no jurisdiction in equity, have always allowed equitable defenses in actions at law, under what is there known as a 'plea of payment with leave;' that is to say, with leave to prove any special matter. Swift v. Hawkins, (1768,) 1 Dall. 21; Lewis v. Morgan, (1824,) 11 Serg. & R. 234; Light v. Stoever, (1825,) 12 Serg. & R. 431, 433; Mackey v. Brownfield, (1825,) 13 Serg. & R. 239; Howk v. Geddis, (1827,) 16 Serg. & R. 23; McConnel v. Hall, (1831,) 3 Pen. & W. 53; Uhler v. Sanderson, (1861,) 38 Pa. St. 128. And the practice was long ago recognized and acted on by Mr. Justice WASHINGTON in the circuit court. Latapee v. Pecholier, 2 Wash. C. C. 180, 184; Webster v. Warren, Id. 456, 458.

In matters of contract, the defendant's right of set-off, with the additional right to recover judgment against the plaintiff for any sum proved in excess of his claim, is given and regulated by a statute which has been in force in Pennsylvania since 1705, and is there commonly known as the 'Defalcation Act,' by which 'if two or more, dealing together, be indebted to each other upon bonds, bills, bargains, promises, accounts, or the like, and one of them commence an action in any court of this province, if the defendant cannot gainsay the deed, bargain, or assumption upon which he is sued, it shall be lawful for such defendant to plead payment of all or part of the debt or sum demanded, and give any bond, bill, receipt, account, or bargi n in evidence; and, if it shall appear that the defendant hath fully paid or satisfied the debt or sum demaned, the jury shall find for the defendant, and judgment shall be entered that the plaintiff shall take nothing by his writ, and shall pay the costs. And, if it shall appear that any part of the sum demanded be paid, then so much as is found to be paid shall be defalked, and the plaintiff shall have judgment for the residue only, with costs of suit. But, if it appear to the jury that the plaintiff is overpaid, then they shall give in their verdict for the defendant, and withal certify to the court how much they find the plaintiff to be indebted or in arrears to the defendant, more than will answer the debt or sum demanded;' and the sum so certified shall be recorded with the verdict, and be deemed a debt of record, and may be recovered by scire facias, or, under an act of 1848, by judgment and execution therefor. 1 Dall. Laws Pa. p. 65; 1 Purd. Dig. (11th Ed.) 603, 604.

This statute, in its very terms, embraces all matters of contract, and no matter of tort; and so it has always been construed. A breach of warranty is a breach of contract, and may be sued on as such; and for that reason, and that only, has been allowed to be given in evidence by the defendant, under the statute, not only in an action on the same contract, (in which it might be admissible by way of recoupment only, without the aid of the statute,) but even in an action upon a distinct contract. Steigleman v. Jeffries, 1 Serg. & R. 477; Nickle v. Baldwin, 4 Watts & S. 290; Phillips v. Lawrence, 6 Watts & S. 150; Carman v. Franklin Ins Co., Id. 155; Ellmaker v. Franklin Ins. Co., Id. 439; Hunt v. Gilmore, 59 Pa. St. 450; Seigworth v. Leffel, 76 Pa. St. 476; Halfpenny v. Bell, 82 Pa. St. 128. But from the earliest to the latest times it has been uniformly held that a claim of damages for a mere tort is not within the statute. Kachlin v. Mulhallon, (1795,) 2 Dall. 237; S. C. nom. Kachlein v. Ralston, 1 Yeates, 571; Heck v. Shener, (1818,) 4 Serg. & R. 249; Gogel v. Jacoby, (1819,) 5 Serg. & R. 117; Cornell v. Green, (1823,) 10 Serg. & R. 14; Light v. Stoever, (1825,) 12 Serg. & R. 431; Hubler v. Tamney, (1836,) 5 Watts, 51, 53; Peterson v. Haight, (1838,) 3 Whart. 150; Hunt v. Gilmore, (1868,) 59 Pa St. 450, 452; Ahl v. Rhoads, (1877,) 84 Pa St. 319, 325.

The distinction between the right of equitable defense or recoupment, independent of any statute, which may arise even out of a tortious act of the plaintiff immediately connected with the contract sued on, and by which the defendant can do no more than defeat the plaintiff's claim, in whole or in part; and the right of counter-claim under this statute, which can be based only on contract, and by which the defendant may not only defeat the plaintiff's action, but recover an affirmative judgment against him,—has been clearly brought out in the judgments of Chief Justice TILGHMAN.

In assumpsit to recover for services as a housekeeper, the defendant pleaded non assumpsit, and payment, with leave to give the special matters in evidence; and offered to prove that the plaintiff, while in his service, clandestinely took and sent away goods of his from the house. Chief Justice TILGHMAN, after observing that it was contended for the defendant 'that the evidence was proper, either by way of set-off, or, under the plea of non assumpsit, as a defense to the action,' expressed the opinion that it was not admissible by way of set-off, because it had been settled that the statute did not comprehend matters of a tortious nature; but that, considering the impolicy of multiplying suits, and the hardship of not permitting the defendant to avail himself of matters arising out of the very transaction on which the plaintiff founds his suit, the evidence offered was admissible, under the pla of non assumpsit, to show that the plaintiff's services were ill performed, and thus to affect the amount which she could recover; and on this ground alone the judgment below, which excluded the evidence, was reversed Herk v. Shener, 4 Serg. & R. 249.

So, in assumpsit for goods sold and delivered, it was held that the defendant could not give in evidence, by way of set-off, that the goods had been detained by the plaintiff, and conveyed by him to third persons; and the same eminent judge said: 'Without undertaking, at present, to draw the line which limits the right of defalcation, it may be safely affirmed that defalcation is not permitted by reason of any demand against the plaintiff for an act done by him of a tortious nature.' 'But there are cases in which the defendant is permitted to give evidence of act of non-feasance or misfeasance by the plaintiff, where these acts are immediately connected with the plaintiff's cause of action, although, perhaps, such evidence is not so properly a defalcation as a defeating, in whole or in part, the plaintiff's action.' Gogel v. Jacoby, 5 Serg. & R. 117, 122.

Again, in debt against principal and surety on a bond given for the purchase money of a mill sold by the plaintiff to the principal defendant, the defendant proved that at the time of the sale the grantee supposed the dam was at its lawful height, whereas it was in fact, as the plaintiff knew, so high as to overflow and injure the land and mill of a neighbor without his consent; and that, if the grantee should lower his dam to its lawful height, the value of his mill would be greatly reduced; and then offered to show how much the value of his mill would be diminished by so lowering the dam. It was held that the evidence, though going to prove unliquidated damages, was admissible, for reasons thus stated by Chief Justice TILGHMAN: 'It is very true that these damages were not in the nature of a debt which can be set off. But they were not offered as a set-off. It was an equitable defense, showing that the plaintiff ought not to be permitted to recover the whole purchase money; and, if not, then it was necessary to show what would be a reasonable abatement. Such defenses have always been admitted in our courts. Having no court of chancery, we could not get along without them. To permit the plaintiff to recover the whole purchase money, and leave the defendants to their remedy by an action for fraudulent concealment, would be most unjust. The purchase money and damages arise out of the same transaction, and the proper time for inquiry was before the money was taken from the pocket of the defendants. It might be too late afterwards. And certainly the plaintiff has no right to complain if the whole business is settled at once. What he is not, in good conscience, entitled to receive, he should not be permitted to receive. Light v. Stoever, 12 Serg. & R. 431, 433.

The result of the Pennsylvania decisions may be summed up thus: First. Independently of the statute, any matter, either of contract or of tort, immediately connected with the plaintiff's cause of action, (which would seem to include everything that could be set up by way of recoupment under the law as generally understood and administered in the American courts,) may be set up by way of defense to the action, and in abatement of the plaintiff's damages only. Second. Any matter of contract may be set up by way of counter-claim, under the statute, not only to defeat the plaintiff's action, in whole or in part, but also, if the defendant proves that the plaintiff owes him more than he owes the plaintiff, for the purpose of recovering the excess against the plaintiff. Third. No mere matter of tort can be availed of by the defendant under the statute.

The defendants in the present case pleaded 'payment with leave,' etc., and the special matter stated in the affidavits of defense previously filed, with a counter-claim upon the cause of action stated i those affidavits. Their purpose in so pleading apparently was to give notice to the plaintiff both of the special matter to defeat his claim, and also of a defalcation or set-off on which the defendants would ask for a certificate and judgment against the plaintiff, under the statute, for any balance due from him. In the words of Chief Justice BLACK: 'A notice of special matter must state the facts upon which the defendant relies, and not either the evidence by which they are to be established, or the inferences to be drawn from them.' Hartman v. Keystone Ins. Co., 21 Pa. St. 466, 475. The plaintiff might perhaps have objected to the admission of any other evidence than of payment, for want of any notice to him, independently of the affidavits, of the matters intended to be relied on by way of defense and of counter-claim. Finlay v. Stewart, 56 Pa. St. 183. But, no such objection having been made at the trial, it could not be taken for the first time in this court. Calvin v. McClure, 17 Serg. & R. 385; Rearich v. Swinehart, 11 Pa. St. 233; Partridge v. Insurance Co., 15 Wall. 573, 580. Indeed, no objection to the sufficiency of the notice of special matter was taken in argument here.

The special matter stated in the affidavits of defense was that the plaintiff came to the defendants' mill, and there solicited and obtained an order for good merchantable rags, free from infection; that the defendants had no opportunity to inspect the rags before delivery; that the rags sent were infected with the small-pox before the plaintiff shipped them; that when some of them were unpacked, and used at the defendant's mill, the infection in the rags caused the small-pox to break out in the mill, in consequence of which some of the workmen died, others were disabled from working, it became impossible to hire new ones at the usual rates, and customers were deterred from buying the defendants' paper; that by reason of the interruption and injury to the defendants' business thereby occasioned, and the money paid by the defendants to those disabled by the disease, they were put to loss and expense far exceeding the amount of the plaintiff's bill; that the plaintiff shipped the rags knowing them to be infected, and intending to deceive, cheat, and defraud the defendants; and that the defendants, as soon as they discovered the infection, informed the plaintiff of the fact, and held those which had not been consumed subject to his order, until their foreman, by mistake, used them up. The affidavits concluded by submitting that the defendants ought not to pay the prices charged, but such amount only as the rags were reasonably worth, if anything; and by asking for a certificate for the amount of their damages in excess of what the plaintiff might be entitled to. In short, the matter stated in the affidavits of defense was a sale of rags upon a warranty or a fraudulent representation that they were clean and free from infection, and a delivery by the plaintiff, under that contract of sale, of rags infected with the small-pox, causing the breaking out of the disease in the defendants' mill, and consequent injuries to their workmen and their business. The plaintiff, by counter-affidavit of claim, met all the issues so notified to him by the defendant's plea and affidavits.

At the trial, the defendants, as appears by the answer of their counsel to an inquiry of the court after the arguments to the jury, and by the statement thereupon made by the court in its charge, did not deny the sale and delivery of the rags at the prices sued for, but relied on their counter-claim for damages on the cause of action growing out of the infected condition of the rags, both by way of a full defense to the plaintiff's action, and also as a ground for obtaining a cartificate and judgment for the damages sustained by them in excess of his claim. The defendants offered evidence tending to show that the contract was for clean rags; that the rags delivere were filthy, and infected with the small-pox; and that their infected condition caused the breaking out of the disease in the defendants' mill. This was of itself sufficient evidence to be submitted to the jury of a warranty, and a breach of it. A warranty, express or implied, that rags sold are fit to be manufactured into paper, is broken not only if they will not make good paper, but equally if they cannot be made into paper at all without killing or sickening those employed in the manufacture.

Upon the question whether the plaintiff, when he shipped the rags, knew them to be infected with the small-pox, and fraudulently represented to the defendants that they were clean and free from infection, the evidence was as follows: The plaintiff, having been called as a witness in his own behalf, admitted on cross-examination that the rags were collected by him in Pittsburgh and Allegheny City and the country round about, where he knew that the small-pox was then epidemic, and that he bought rags from any and all dealers, not knowing where they were collected; and further testified that the rags were assorted and baled up under his instructions in his establishment, and had been baled up and laid in his warehouse for a year or more before; that to the best of his knowledge and belief they were clean and free from infection, and there was no sulphur, carbolic acid, or other disinfectant in the bales; and that he never used disinfectants in his establishment. In contradiction of this testimony the defendants produced a letter sent to them by him with the first invoice of rags, showing that he did not then have all the rest on hand; and introduced the testimony of three work-women in the mill that the rags, when opened, smelt strongly of sulphur and carbolic acid. This evidence, taken in connection with that already mentioned, was, in our opinion, sufficient to be submitted to the jury as tending to prove that the plaintiff knew that the rage which he sold and shipped as clean rags, fit to be used in the manufacture of paper, were in fact infected with the small-pox, and that he fraudulently represented them to be clean, intending to deceive and defraud the defendants.

Upon the question of damages there was distinct proof, not only of the rags being so infected with the small-pox that they could not be made into paper without injury to the workmen, but also of sums paid by the defendants to support those workmen who had been disabled by the disease, besides evidence that the defendants, in consequence of the injury to their business by the small-pox introduced in the rags, were obliged to run their mill short-handed, and lost a considerable part of a profitable country trade. This evidence was competent for the consideration of the jury; and the want of more full and definite proof of the amount of damages resulting to the defendants from the unfitness of the rags to be manufactured into paper, while it might lessen the sum which the jury could find in the defendants' favor, did not justify the court in withdrawing the defendants' claim from the jury.

In the rulings excluding evidence offered by the defendants in the course of the trial, there was no error. The court might properly decline to permit one of the defendants to testify in general terms what he estimated the amount of their damages to be, when he had not testified to the items of damages, or to any facts upon which his opinion was based. The testimony of workmen, not shown to be experts, that the infected rags were the cause of small-pox, which they or their children had taken, was clearly incompetent.

But, for the reasons above stated, we are of opinion that the court erred in instructing the jury that the evidence admitted would not justify them in finding that the plaintiff knowingly and fraudulently shipped to the defendants rags infected with the small-pox, as well as in instructing them that there was no evidence which would enable the jury to estimate the amount of damage, if any which the defendants had sustained, and in directing the jury to return a verdict for the plaintiff for the whole amount of his claim. The defendants' exceptions to these instructions must therefore be sustained, and a new trial had.

For the guidance of the parties and their counsel, it may be well to restate exactly what will be open to the defendants upon another trial. By way of recoupment or equitable defense, which is limited to defeating the plaintiff's action, in whole or in part, the defendants may avail themselves of any evidence tending to show that be reason, either of a breach of warranty, or of a fraudulent representation, the goods were worth less than they would have been if they had been such as they were warranted or represented to be, as well as of any evidence tending to show that the defendants suffered damages which, in the contemplation of the parties, or according to the natural or usual course of things, were the consequences of the breach of warranty, or the fraudulent representation. But under their counter-claim, seeking, as permitted by the statute of Pennsylvania, not only to defeat the plaintiff's action, but also to recover an affirmative judgment against him, they can avail themselves only of claim sounding in contract in the nature of an action of assumpsit upon the supposed warranty. If they fail to prove a warranty, express or implied, the statute can have no application, because it extends to no claim sounding in tort only, whether in the nature of an action of deceit or of such an action as these defendants might maintain against a person with whom they never had any contract, who willfully or negligently introduced the small-pox into their mill.